Marketing for

Latin American Managers

in the 21st Century

Wessex Press, Inc.

www.wessexlearning.com
 Wessex Press, Inc.
www.wessexlearning.com

Noel Capon founded Wessex Press Inc. in 2007. Wessex is a small publisher with global reach focusing predominantly
on marketing, management, and other higher-education textbooks. Wessex’s goal is to provide top-quality learning
materials at affordable prices. Publishing under the Wessex Press and AxcessCapon brands, Wessex Press, Inc. offers
titles in multiple print and digital formats. Wessex also offers video books. Wessex books are available in English,
Chinese, Portuguese, Russian, and Spanish.

Library of Congress Cataloging-in-Publication Data

Capon, Noel
Marketing for Latin American Managers in the 21st Century / Noel Capon
p. cm.

ISBN 000-0-0000000-0-0
Copy Editor: Christy Goldfinch
Book Design: Anna Botelho
Index: Judi Gibbs—Write Guru®

Copyright © 2018 by Wessex Press, Inc., New York, NY, USA. All rights reserved. This publication is protected by copyright.
Permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or
transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information
regarding permission, write to Wessex, Inc. at [email protected].
 Marketing for
Latin American Managers
in the 21st Century

César J. Sepúlveda
Chair, Marketing and Statistics Department, Tecnológico de Monterrey, Monterrey, México

Noel Capon
R.C. Kopf Professor of International Marketing, Graduate School of Business, Columbia University, New York

Gloria Camacho
Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Eva Guerra
Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Beatriz González-Cavazos
Director of the Marketing Program, Tecnológico de Monterrey, Monterrey, México

Flor Morton
Associate Professor, UDEM, Monterrey, México

Teresa Treviño
Associate Professor, UDEM, Monterrey, México

Silvia González-García
Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Rosa Elena Lara-Estrada

Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Salvador Treviño-Martínez
Director of International Relations at Tecnológico de Monterrey in Canada
 Dedication
To our families and colleagues
 About the Authors
César Javier Sepúlveda-Martínez Manager Certification program in conjunction with St.
is Chair of the Marketing and Gallen University (Switzerland). He is a director of the
Statistics Department at ITESM. Dr. Strategic Account Management Association (SAMA).
Sepúlveda earned his Ph.D. and He founded the Advanced Marketing Management
Master in Management from Tulane Program in conjunction with CEIBS. Professor Capon
University, MBA from University of also designs, directs, and teaches in numerous custom
Notre Dame, B.A. in Marketing — programs for major corporations globally. In 2001,
ITESM. His areas of expertise are sales, services Professor Capon cofounded The Chief Sales Executive
marketing, and strategic marketing. Professor Sepúlveda Forum, offering multiple educational opportunities for
has published in Journal of Digital & Social Media sales and account management leaders. Capon is Chair
Marketing, Global Business and Organizational of Wessex Press, Comply First, and the venture capital
Excellence, and Journal of Euromarketing. Professor firm LunaCap Ventures.
Sepúlveda has taught in Argentina, Belgium, Bolivia,
Colombia, France, Germany, Guatemala, Honduras, Gloria Camacho is a marketing
Nicaragua, Peru, the United States, Venezuela. professor at ITESM. Dr. Camacho
earned her Ph.D. in Management
Noel Capon is R.C. Kopf Professor of Sciences and Master in Marketing
International Marketing; past Chair from EGADE Business School,
of the Marketing Division, Graduate Tecnológico de Monterrey. Dr.
School of Business, Columbia Camacho’s research interests are
University; and Honorary Dean, sustainable marketing, responsible consumption, and
Marketing and Innovation College corporate sustainability.
(MIC), China. Educated primarily in
Great Britain, Professor Capon earned B.Sc. (First Class Eva María Guerra-Leal is marketing
[special]), Ph.D. degrees in Chemistry from University professor at Tecnológico de
College, London University. He also received degrees in Monterrey. Dr. Guerra earned her
Business Administration from Manchester (Dip. BA), Ph.D. in Business Management
Harvard (MBA), Columbia Business Schools (Ph.D.). and Master in Organizational
Professor Capon joined the Columbia Business Communication from ITESM.
School faculty in 1979. Previously he served on the Previously, Dr. Guerra worked in
faculty of and received tenure from University of the banking industry where she acquired expertise in
California – Graduate School of Management, UCLA. electronic banking marketing and sales management.
He has taught and/or held faculty positions at Har- She recently published a paper on service climate in
vard Business School; Australia — Monash University; Global Business and Organizational Excellence. Her main
England — Bradford Management Centre, London academic interests are in branding, marketing research,
Business School, Manchester Business School; France product development, price strategy, endomarketing,
— INSEAD; Hong Kong — Hong Kong University of services marketing.
Science and Technology (HKUST); China — China
European International Business School (CEIBS — Beatriz Adriana González-Cavazos
Shanghai); India — Indian School of Business (ISB — is Director of Marketing at
Hyderabad); Mexico — TEC Monterrey. Tecnológico de Monterrey; active
Professor Capon has published more than 60 member of Association for Con-
refereed articles and book chapters. He has published sumer Research. Ms. González
more than 30 books plus three video books. earned an MBA (Human Resources
Professor Capon teaches on Columbia’s full-time concentration) at ITESM. Ms.
MBA and Executive MBA (EMBA) programs and González has expertise in big data, marketing research,
its partner program with Hong Kong University, multivariate analysis, social marketing. She co-authored
London Business School. He is a pioneer in developing Statistics Multivariate Analysis: A Theoretical and
video teaching materials and teaching via the flipped Practical Approach Book.
classroom. Professor Capon was Founding Director of
Managing Strategic Accounts and the Global Account

v
vi MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Flor Morton is associate professor at Universities of EAP-ESCP, Lille 2 University, Adolfo

of marketing at University of Ibaeñez University, University del Pacifico, University
Monterrey. Dr. Morton earned San Ignacio de Loyola. She has consulted for CEMEX,
her Ph.D. in Management Sciences Vitro, Grupo Soriana, Grupo Fragua. Dr. González-
from EGADE Business School, García served as chair of Marketing and International
Tecnológico de Monterrey. Dr. Business, and admission director at ITESM. Dr.
Morton was a marketing consultant González-García’s research, focusing on consumer
for seven years previous to her professorial appoint- well-being, consumer co-creation, and transformative
ment. Her primary research is in consumer behavior. services. Her work is published in International Journal
Professor Morton has published in book and interna- of Consumer Marketing, Association for Consumer
tional journals. She is an accredited Researcher by the Research (ACR) Proceedings, and book chapters. She is
Mexican National Science Council, and received an active member of the ACR, where she fosters ACR
recognition for the Best of Business in Beta Gamma Latin America. Dr. González-García is on the board of
Sigma Honor Society. the Mexican Association of Marketing Research and
Public Opinion Agencies.
Teresa Treviño is an Accredited
Researcher by the Mexican National Rosa Elena Lara-Estrada is
Science Council, and an associate professor of marketing and
professor of marketing at Univer- international business at ITESM.
sidad de Monterrey. She earned her Professor Lara earned her Master in
Ph.D. in Management Sciences and International Business at Thunder-
Master in Marketing from EGADE bird School of Global Management
Business School, Tecnológico de Monterrey. Dr. Treviño (Arizona State University), and
has participated in courses at Stanford University, Bachelor in Marketing at ITESM. Her areas of expertise
Hankuk University of Foreign Studies, University of St. are international marketing, business marketing,
Gallen, Switzerland. Her research interests focus on sustainability in business. She has published in Centro
online consumer behavior and digital marketing. Dr. Internacional de Casos. Professor Lara also teaches
Treviño has published her research in books and in continuing education courses throughout Mexico and
national and international journals. She has presented Central America.
her research at several international academic confer-
ences — Academy of Marketing Science (AMS), Salvador Treviño-Martinez is
American Marketing Association (AMA), American Director of International Relations at
Collegiate Retailing Association (ACRA). ITESM in Canada. Dr. Treviño-
Martinez earned his Ph.D. in
Silvia González-García is professor Business Administration at
of marketing at ITESM. Dr. University of Memphis, MBA from
González-García earned her Ph.D. in State University of New York at
marketing at EGADE Business Buffalo, B.S. in Marketing at ITESM Monterrey Campus.
School, Tecnológico de Monterrey, He has been awarded Best Professor four times while
and University of Texas at Austin. teaching the Global MBA Program. Other awards
Her areas of expertise include include best online course at ITESM Virtual University,
marketing strategy, marketing channels, business Research Fellow award from University of Memphis,
analytics in retail, and health marketing services. She two best-paper awards at national and international
earned several teaching awards at ITESM. Her areas of journals. His areas of interest are global market strategy,
expertise include marketing strategy, marketing digital marketing, business education administration
channels, business analytics in retail, health marketing models.
services. She also has benefited from teaching students
 Foreword

In total, the authors have been active participants in Please do not misunderstand; many conventional
business education for many decades. They believe marketing textbooks published for a Latin American
the traditional textbook system must change, and audience have fine content, but many of them were
must change radically. Marketing for Latin American written for a North American audience and are mere
Managers in the 21st Century is one attempt to usher translations. Marketing for Latin American Managers
in a new model and bring considerable additional in the 21st Century is different; many co-authors are
value to both marketing instructors and their Latin American, and the book contains significant
students. Furthermore, Marketing for Latin American local content.
Managers in the 21st Century is written especially for
This state-of-the-art marketing textbook is
students and managers in the region. The book con-
available to you as a printed book or an e-book —
tains a host of case studies from firms headquartered
www.wessexlearning.com. Just go to the website and
in many Latin American countries.
you will find out how to secure the version that best
The authors also firmly believe they have a suits your needs.
professional responsibility to deliver the intellectual
capital expressed in this volume to faculty, students,
and managers throughout the region.

vii
viii SECTION 1 MARKETING AND THE FIRM

Marketing for Latin American Managers in the 21st Century

SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 Table of Contents

Preface x Section 4: Implementing the Market Strategy

Imperative 4 — Design the Market Offer
Section 1: Marketing and the Firm
Part A: Providing Customer Value
Chapter 1 Introduction to Managing Marketing 1
Chapter 11 Managing the Product Line 99
Chapter 2 The Value of Customers 8
Chapter 12 Managing Services, Customer
Service 108
Section 2: Fundamental Insights for
Strategic Marketing Chapter 13 Developing New Products 117
Chapter 3 Market Insight 17 Part B: Communicating Customer Value

Chapter 4 Customer Insight 26 Chapter 14 Integrated Marketing

Communications 129
Chapter 5 Insight about Competitors,
Company, Complementers 37 Chapter 15 Mass Communications,
Digital Marketing 137
Transition to Strategic Marketing 46
Chapter 16 Directing, Managing
Section 3: Strategic Marketing Field Sales Efforts 150

Imperative 1 — Determine, Recommend Part C: Delivering Customer Value

Which Markets to Address Chapter 17 Distribution, Retailing, Wholesaling 163

Chapter 6 Identifying, Choosing Opportunities 49 Part D: Getting Paid for Customer Value

Imperative 2 — Identify, Target Market Segments Chapter 18 Critical Underpinnings

Chapter 7 Market Segmentation, Targeting 57 of Pricing Decisions 176

Imperative 3 — Set Strategic Direction, Positioning Imperative 5 — Secure Support

Chapter 8 Market Strategy – Integrating Firm from Other Functions

Efforts for Marketing Success 66 Chapter 19 Ensuring the Firm Implements
the Market Offer as Planned 189
Chapter 9 Managing through the Life Cycle 75
Chapter 10 Managing Brands 85 Imperative 6 — Monitor, Control
Execution/Performance
Chapter 20 Monitoring, Controlling Firm
Performance, Functioning 198

Glossary GL1

Index IN1

ix
 Preface

In Marketing for Latin American Managers in the 21st plementers, the business environment in general.
Century you will learn about marketing language, Marketing is concerned with the firm’s long-run rela-
logic, strategy, implementation. To get us off to tionships with customers as well as short-run sales
a good start, we’ll begin by telling you the book’s activity. Marketing must be a major organizational
purpose. thrust, not just a responsibility assigned to a single
functional department. For this reason, Marketing
for Latin American Managers in the 21st Century
Purpose emphasizes the role of marketing in creating value
for customers — leading to the creation of value for
Marketing for Latin American Managers in the 21st other firm stakeholders, including employees and
Century is about understanding how to develop shareholders.
market strategy, implement market offers, manage
the marketing process. This is not a book that
attempts to describe all there is to know about
marketing, but focuses on what the prospec-
Special Features
tive manager needs to know. Marketing for Latin
Axcess Vids Codes
American Managers in the 21st Century differs from
An innovative feature of Marketing for Latin
other undergraduate, introductory marketing texts.
American Managers in the 21st Century is easy-
The authors take positions on what they believe
to-use Axcess Vids codes. Their purpose is to link
should provide guidance for good marketing
items in the text to additional material you may find
practice.
interesting. Axcess Vids codes act as hot-links in the
Furthermore, Marketing for Latin American book’s digital versions. Perhaps more importantly,
Managers in the 21st Century focuses on the manager, Axcess Vids codes are simple links between the
not just the marketer. For readers committed to a printed version and the Internet. With Axcess Vids
career in marketing (we hope there are many), this codes, you enter a simple 4-digit alphanumeric code
book forms a solid foundation as you study mar- on your PC, tablet, smartphone, at www.axcessvids.
keting further/deeper. But the vast majority of you com. If you’re reading the printed book, we suggest
will not work in marketing departments, but will you bookmark www.axcessvids.com; then you’ll be
instead become senior executives, general managers, able to access the item you require with just four
CFOs, CEOs. Indeed, we expect many readers keystrokes. Codes:
already hold these positions. This book is also for • Videos — three figures, ends with the letter v.
you, because understanding and appreciating mar-
• Audios — three figures, ends with the letter a.
keting is central to virtually every important decision
that senior managers make. This may be the only • Documents — three figures, ends with the letter p.
marketing course many of you will take, so Marketing • References — three figures, ends with the letter e.
for Latin American Managers in the 21st Century
provides what every general manager and senior Videos, Audios
executive must know about marketing. Many chapters offer links to publicly available
material on the Internet. They also provide links to
Marketing activity lies at the core of managing a
video interviews with marketing leaders, and audio
business by providing the focus for interfacing with
interviews with co-author Capon. Students may
customers. Marketing is also the source of insight
access these materials via PC, tablet, smartphone —
about the market, customers, competitors, com-
www.axcessvids.com.

x
 PREFACE xi

• Videos. Links to interviewing marketing experts A Note about the Endnotes

appear alongside Key Messages (below). We note An asterisk (*) denotes this reference is a more recent
these files with a video icon and an Axcess publication of the original version.
Vids code. Within the chapters, we provide links to
publicly available videos.* Supplemental Material for Instructors
• Audios. The author speaks with Dave Basarab Marketing for Latin American Managers in the 21st
about marketing mastery. We list these files with Century is a standalone book, but several additional
an audio icon alongside Key Messages (below), materials can help instructors design courses and
noted by Axcess Vids codes. make the learning experience more meaningful for
students. Instructors can access these materials in a
Key Messages protected area at www.wessexlearning.com.
This section concisely identifies key learning points • Instructor’s manual. The manual employs a con-
in the chapter. Key messages appear following sistent format, chapter by chapter. Essentially, the
Sections 1, 2, 3; they also appear in Section 4 — manual summarizes critical learning points in each
after Parts A, B, C/D, Chapter 20. chapter and offers suggestions for managing class
discussion.
Questions** • Test item file. Prepared by experienced test
Students may test themselves on material in each developer Andrew Yap, this file contains well over
chapter. Several true/false and multiple-choice 1,000 multiple-choice and essay questions for
questions are available per chapter — 724p. use by instructors in setting tests, examinations.
Organized by chapter, this material is available in
Financial Analysis for Marketing Decisions Word, for Blackboard/Respondus.
A good understanding of financial analysis is critical
• PowerPoint files. Each chapter comes with a set of
for sound marketing decision-making. Financial
teaching materials in the form of PowerPoint files.
analysis comes in many shapes and forms; students
should understand the specific issues that concern
marketers. We discuss financial issues throughout
Marketing for Latin American Managers in the 21st Acknowledgments
Century, but do not have space to lay the ground- To TEC Monterrey and all those who supported
work. Hence, we have prepared Marketing Enrich- the authors’ efforts to enhance the knowledge
ment FM.1 [308p] that we hope you will find useful. and practice of marketing among Latin American
Feel free to download the file and use it as a handy managers and business students.
reference.

* Codes for some publicly available material may become

inactive by the time you read this book; other public sites show
advertisements before the identified content. We regret any
inconvenience.
** For placement, see Key Messages.
xii MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Concluding Statement
The extensive experience the authors bring to general managers, CEOs. All those who have helped
Marketing for Latin American Managers in the bring this book to fruition wish you well as you
21st Century has infused the book with the very develop your careers.
real marketing challenges that face corporations
Marketing for Latin American Managers in the 21st
daily in Latin America. The authors write from
Century is also a reference for future use. If you
the standpoint of marketing academics with deep
become an entrepreneur, this book will help you
commitment to helping corporations improve their
launch and manage your new business. If you join
marketing practice, and imparting their knowledge/
a firm’s marketing department, you will never have
expertise to students at the dawn of their careers.
enough books on the subject; hopefully this will be
The material in Marketing for Latin American one of your favorite reference guides. And, if you
Managers in the 21st Century will help you to learn find yourself in another function, where you work
about marketing. It will equip you to survive, prosper with marketing, you will be equipped to ask your
in your careers as marketers, senior executives, marketing colleagues the right questions.

Good luck!

César J. Sepúlveda
Chair, Marketing and Statistics Department, Tecnológico de Monterrey, Monterrey, México

Noel Capon
R.C. Kopf Professor of International Marketing, Graduate School of Business, Columbia University, New York

Gloria Camacho
Marketing Professor, Tecnológico de Monterrey, Monterrey, México
Eva Guerra
Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Beatriz González-Cavazos
Director of the Marketing Program, Tecnológico de Monterrey, Monterrey, México

Flor Morton
Research Assistant Professor, UDEM, Monterrey, México

Teresa Treviño
Associate Professor, UDEM, Monterrey, México
Silvia González-García
Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Rosa Elena Lara-Estrada

Marketing Professor, Tecnológico de Monterrey, Monterrey, México

Salvador Treviño-Martínez
Director of International Relations at Tecnológico de Monterrey in Canada
 SECTION 1

Marketing and the Firm

CHAPTER 1

Introduction to Managing Marketing

CHAPTER 2

The Value of Customers

For key messages from Section 1, see page 16.

Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 1

Introduction to
Managing Marketing
For complimentary material, see Axcess Vids codes at www.axcessvids.com

What Does Marketing Mean Today? Marketers must possess the tools/decision-making
skills to get the marketing job done. Effective
Marketing plays a critical role in modern business marketers focus on six marketing imperatives.
practice, where maximizing shareholder value is
an increasingly important goal. The essence of Marketing Imperatives describe the specifics of
marketing focuses on how firms attract, retain, grow the marketing job. For executives with marketing/
customers — critical firm assets — by enhancing product-management titles, these imperatives are the
relationships with them. Success in delivering cus- must-dos of marketing. We identify two groups:
tomer value leads directly to improving shareholder
Strategic Marketing
value and long-run firm prosperity. In Marketing
for Latin American Managers in the 21st Century, we Imperative 1: Determine, recommend which markets
explore both the strategic aspects of marketing and to address.
the tactical implementation decisions marketers Imperative 2: Identify, target market segments.
make every day. But first, we investigate two quite
Imperative 3: Set strategic direction, positioning.
different but related meanings of marketing.

Marketing as a Philosophy embraces the view that Implementing Market Strategy

marketing is the guiding force/orientation for Imperative 4: Design the market offer.
the entire corporation. Firms with a marketing
Imperative 5: Secure support from other functions.
philosophy operate with an external orientation.
Such firms focus attention, resources outside the Imperative 6: Monitor and control execution/
corporation — to acquire, retain, grow customers performance.
— but take careful account of a range of external
environmental forces. By contrast, internally oriented To broaden this framework, four marketing princi-
firms focus on internal issues — products, services, ples form the basis for marketing decision-making.
processes. Marketing for Latin American Managers These principles act as guidelines for executing the
in the 21st Century embraces the marketing-as- six imperatives:
philosophy perspective. The author believes, and has
Principle 1: Selectivity, Concentration.
seen in his own career, how powerful and effective
a business can be when the entire organization is Principle 2: Customer Value.
attuned to the external world. Such agile firms not Principle 3: Differential Advantage.
only sense critical environmental factors, but also Principle 4: Integration.
adapt to address them.
Chapter 1’s discussion of these issues sets the stage
for the entire book.

1
2 SECTION 1 MARKETING AND THE FIRM

What Is Marketing? is only one valid definition of any business purpose

— to create a customer. It is the customer who
Marketing is often confused with advertising and determines what a business is. For it is the customer,
sales. Even many executives are unclear. It seems so and he alone, who through being willing to pay
intuitive; can’t anybody be a marketer? Marketing for a good or service, converts economic resources
is the firm’s fundamental activity. When marketing into wealth, things into goods. … Because it is [the
delivers value to satisfy customer needs, the firm purpose of a business] to create a customer, [the]
attracts, retains, grows customers, in the face of business enterprise has two — and only these two —
competitors trying to do the same thing. If costs are basic functions: marketing and innovation.”1
in line, profits follow. Profits help the firm survive
as an independent entity, secure resources to grow,
enhance shareholder value —Figure 1.1. Marketing and Shareholder Value
Marketing’s role includes identifying opportunities; The central focus on shareholder value is deeply
figuring out customer needs; understanding com- rooted in many capitalist countries. The shareholder-
petition; developing appealing products/services; value perspective defines management’s job as
communicating/distributing value to potential maximizing returns for firm owners — shareholders.
customers. When the firm does a good job of
completing these tasks, shareholder value increases. In addition to shareholders, the firm has many other
stakeholders — management, labor, public at large. In
The critical weapon in the battle for customers is some capitalist countries, these stakeholders are more
straightforward in concept, but may be complex/ favored than shareholders. Indeed, in these countries
difficult in execution. The firm must deliver to regulations generally favor managers, and protect
customers greater value than competitors deliver. them from unwelcome mergers/acquisitions. Regard-
Customers reward such firms by purchasing their less, in recent years, developing global capital markets
products/services, today and tomorrow. This have favored the shareholder-value perspective.
exchange is the basis of all markets.
Customers are the sole source of firm revenues;
The late Peter Drucker, preeminent management all firm activities are costs of attracting, retaining,
theorist, is generally credited with developing the growing customers. Unfortunately, managers
customer orientation and modern marketing per- sometimes forget this fundamental truth. Customers
spective. Drucker stated, “If we want to know what a provide revenues/cash flow when they believe firm
business is, we have to start with its purpose. There products/services offer better value than competitive

Figure 1.1 The Fundamental Business Model

Shareholder Value

Organizational Survival, Growth

Current, Potential Profits

Attract, Retain, Grow Customers

Customer Value

Company
 [466t]

Mexico Grupo ICA CHAPTER 1 INTRODUCTION TO MANAGING MARKETING 3

Grupo ICA (Ingenieros Civiles Asociados) (GICA) (founded in three years. Emblematic of GICA’s problems were
1947), comprising 11 individual units, is a Mexican legal issues related to unfinished, poor-quality projects.
infrastructure firm. GICA’s stated mission is to create value Example: Marina 385 — Mexico City apartment building
for stakeholders by developing sustainable infrastructure (312 units) — target completion, 2013. In 2016, GICA
solutions — airports, apartment buildings, bridges, secretly sold Marina 385 to a private investment fund;
manufacturing plants, subways. GICA has successfully GICA refunded customers their apartment payments,
completed many infrastructure projects in Mexico. made five years earlier. In 2017, GICA filed for insolvency
Since 2014, GICA faced financial crises. Proximate with a preliminary debt-restructuring plan. Observers
causes: Foreign competition, poor management, wondered if GICA had created value for customers,
excessive debt. In 2015, GICA was the least valued firm shareholders, and other stakeholders!
on the Mexican Stock Exchange — lost 90 percent value

alternatives. This basic concept of creating share- External Orientation

holder value, along with customer value, is central to The externally oriented firm knows its current
every discussion in the remainder of this book. products/services/processes are the reasons for past/
present success. This firm also knows that, as the
external environment evolves, its products/services/
Marketing as a Philosophy: processes must also change. The externally oriented
External, Internal Orientations firm does not fear change. This firm goes beyond a
customer focus; it works hard to understand compet-
The firm enhances shareholder value by attracting, itors, markets, other environmental forces. This firm
retaining, growing customers. At a philosophical level, invests in new capabilities/competencies to exploit
each employee has some responsibility; marketing opportunities for attracting, retaining, growing
is everybody’s business. To quote Drucker again, customers. P&G spends over $400 million annually
“Marketing is so basic that it cannot be considered seeking customer/market insight.
a separate function within the business … it is, first,
a central dimension of the entire business. It is the In difficult economic times, when profits are under
whole business … seen from the customer’s point pressure, many firms cut spending/investment; but
of view. Concern and responsibility for marketing the externally oriented firm increases investments
must, therefore, permeate all areas of the enterprise.”2 — human capital, marketing budgets, mergers,
David Haines, former brand czar at Vodafone, acquisitions. Example: In recent recessions, Amazon,
echoed Drucker: “Marketing is too important to Cisco, Intel invested heavily; they swept past more
be left to the marketers. It’s the obligation of every internally oriented competitors.
single individual in the company, whether you’re
a phone operator, the CEO, or anyone else in the Internal Orientations
company.”3 To put it more crassly: If marketing is Internally oriented firms place internal business
unsuccessful, nobody gets a paycheck! considerations ahead of customer focus.
• Operations orientation — overemphasizes
Marketing as a philosophy concerns the firm’s entire
improving efficiency, reducing costs. There is
orientation; such firms operate with an external
nothing inherently wrong with such actions; by
orientation. The externally oriented firm looks
contrast, cost reduction should not be a priority
outward to the environment; it knows that customers
when the firm offers new products/services, enters
are central to its future. Other firms focusing on
new markets, or otherwise should invest to attract,
internal business drivers have one of several internal
retain, grow customers.
orientations; delivering customer value takes a back
seat. • Sales orientation — focuses on short-term sales
revenues. The firm is less concerned with profits.
4 SECTION 1 MARKETING AND THE FIRM

Characteristic actions to secure sales: Prices set too explicit responsibility to focus attention externally
low, unsustainable discounts, loose credit terms, on the market, customers, competitors — outside
excessive product variations. The firm spends little the firm. Marketing personnel should research the
effort on marketing research, planning; targets environment to identify potential opportunities,
customers indiscriminately. then bring these to top management for go/no-go
• Finance orientation — focuses too heavily on decisions.
short-term profits. When a firm manages by the Second, advise on proposed strategic actions. Many
numbers, it tends to avoid expenditures for long- parts of the firm develop strategic initiatives.
term payoff. The finance-oriented firm mortgages Marketing has the responsibility to insert itself into
its future by indiscriminately cutting back — key decisions — collecting, analyzing relevant data —
advertising, capital investment, R&D, talent. bearing on market entry/exit. Marketing should fully
• Technology orientation — focuses on R&D, but explore the ramifications of potential firm actions, or
pays insufficient attention to customer value. First- disaster may ensue.
class products are critical for attracting, retaining,
growing customers, but for this firm technology is Imperative 2: Identify, Target
more important than customers. Market Segments
Marketing must identify market segments — groups
of customers with similar needs that value similar
The Six Marketing Imperatives benefits with similar priority orders. Once the firm
has identified market segments, it must decide
The job of putting the firm’s marketing philosophy which to target for effort. Effective segmentation and
into practice normally falls to marketing profes- targeting are critical for delivering customer value
sionals. These people engage in many activities; they and driving sales, profits.
must make decisions on how to allocate their time/
other resources. The critical question: Are we doing Imperative 3: Set Strategic Direction,
the right things to attract, retain, grow customers? Positioning
Put another way: Are we implementing the six The firm decides how to compete in those market
marketing imperatives — the firm’s must-dos. These segments it has targeted. For each target segment,
imperatives are the core elements of Marketing for marketing must formulate performance objectives,
Latin American Managers in the 21st Century — then decide on firm positioning in each segment —
actionable decisions marketers must make that carry target customers, target competitors, value propo-
through the entire book. Imperatives 1, 2, 3 focus sition, reasons to believe. Together with Marketing
on strategic marketing; imperatives 4, 5, 6 zero in on Imperative 2, positioning completes the STP trium-
implementing market strategy. virate — segmentation, targeting, positioning.

Imperative 1: Determine, Recommend Typically, individual market segments are at different

Which Markets to Address developmental stages; hence they require different
The firm must answer critical questions about its approaches. Finally, decisions about strategic direc-
business, market portfolios: tion must include questions about branding. The
firm must continually assess strategic direction and
• In which new businesses/markets shall we invest —
make necessary course corrections.
people, time, dollars?
• From which businesses/markets shall we withdraw? Imperative 4: Design the Market Offer
• In which current businesses/markets shall we The market offer is the total benefit package the
continue to invest? firm provides customers. Tools for designing offers
• How much investment shall we make in these are the most well-known part of marketing. The
various businesses/markets? marketing-mix elements — aka 4Ps — comprise the
basic building blocks:
Marketing plays two key advisory roles. First, identify
opportunities. Marketing is the only function with
 [534t]

• Product. Generally, the product embodies major

benefits the firm offers to satisfy customer needs
— these benefits provide customer value. Product
comprises both physical products and intangible
Mexico H-E-B Grocery
services.
Florence Butt opened H-E-B’s first grocery store in
• Promotion. Embraces various ways the firm Kerrville, TX (1905); in 1924, H-E-B began expanding
communicates with customers — informing, per- to various U.S. cities. In 1997, H-E-B opened its first
suading customers to purchase (or recommend) its Mexican supermarket. By 2017, H-E-B — private
products. Core promotional elements include mass company (revenues exceed US$1 billion) — operated
communications — advertising, publicity & public a 52-store chain in northern Mexican states —
relations; digital marketing; personal communica- Aguascalientes, Coahuila, Guanajuato, Nuevo León,
tions — sales force. Tamaulipas. H-E-B Mexico offers low prices; it
• Distribution. Focuses on how, where customers introduced Mi Tienda del Ahorro — limited high-quantity
secure the product (aka place). purchases. H-E-B Mexico continues to innovate online
• Price. The firm establishes its feasible price by the — relaunched its store, then developed a mobile app.
equivalent amount of value it offers customers via
product, promotion, distribution.

Imperative 5: Secure Support

from Other Functions
Functional areas must work together to ensure the
firm designs and executes the right market offer. [292v]
The Four Principles of Marketing
Marketing requires two very different support types:
• Support for design — relates to technical, opera- Four marketing principles serve as guidelines for
tional, economic feasibility. This support requires executing the six imperatives.
keeping the firm focused on satisfying customer
needs and pushing specific functions to encourage Principle 1: Selectivity, Concentration
evolving their capabilities. Providing advice on market selection — Imperative
1 — and deciding which market segments to target
• Support for implementation — assumes the firm
— Imperative 2 — are among marketing’s primary
has agreed upon/fixed the design. Marketers must
responsibilities. Underlying these imperatives is the
possess the leadership/interpersonal skills to secure
Principle 1: Selectivity, Concentration:
cooperation across multiple functions — internal
marketing, getting buy-in. • Selectivity. Carefully choose targets for firm efforts.
• Concentration. Concentrate resources against
Imperative 6: Monitor and Control those targets.
Execution/Performance
This principle is about choosing the firm’s battles. It
Is the firm achieving desired results? If results are
is dangerous to dissipate limited resources over too
not on track, what changes should the firm make?
many alternatives by trying to do too much. No orga-
Marketing is a key stakeholder in securing answers to
nization, no matter how large or how successful, has
three questions; it should act appropriately based on
infinite resources. Some experts relabel this principle
the answers:
Concentration and Concession. Not only must the
• Are various functions/departments implementing firm concentrate resources, it should affirmatively
the market offer? decide where it does not want to compete.
• Is market/financial performance reaching planned
objectives? Principle 2: Customer Value
• Based on current environmental realities, are Market success depends on providing value to
objectives, strategies, implementation plans on customers. This principle is central to the mar-
track? Should the firm make changes? keting job. Customer insight should drive design,
6 SECTION 1 MARKETING AND THE FIRM

implementation of market offers, product/invest- • Erosion. Competition will eventually erode even
ment decisions, performance evaluations. The firm the apparently most sustainable differential
develops, produces, delivers products/services, but advantage. Maintaining differential advantage is
customers perceive value only in the benefits these marketing’s most fundamental challenge; the search
products/services provide. for differential advantage must be continuous.

Customer value is a moving target. As the environ- • Cannibalization. To stay ahead of competition, the
ment evolves, customers accumulate experience; the firm must be willing to cannibalize its own offers.
needs and benefits they seek evolve also. World-class Many firms will not do so — in part because of
companies continuously invest in marketing research strong political constituencies for the status quo;
to probe deeply into customer needs, priorities, in part because profit margins may be lower. Such
expectations, experiences. They feed these results into unwillingness to act runs the risk of missing oppor-
the product development process to generate greater tunities, passing market initiative to a competitor.
value for customers. • Differential advantage and difference. A differ-
ential advantage is not the same as a difference.
Firms that take their eye off the customer ball
Developing a different market offer may not
can get into serious trouble. Sears, Kmart (U.S.);
be difficult. Differential advantage must create
Sainsbury’s, Marks & Spencer (Great Britain) were
benefits/values customers recognize, and are willing
once powerful/successful retailers. In recent years,
to pay for.
each has been in crisis.

Principle 4: Integration
Principle 3: Differential Advantage
This principle has two dimensions:
Closely related to the Principle of Customer Value;
differential advantage lies at the heart of every • Customer. The firm must carefully integrate and
successful market strategy —the firm should offer coordinate all design and execution elements it
customers something they value, but cannot get offers customers. Poor advertising can ruin an
elsewhere. [164v] Differential advantage is similar to excellent product; delayed promotional materials
competitive advantage, unique selling proposition, can doom product launch; improper pricing can
having an edge. cause havoc with sales forecasts.
• Firm. The firm must carefully integrate/coordinate
To implement this principle, the firm must
all internal activities. Different functions/depart-
develop well-designed market offers, based on the
ments must work together; they must avoid squab-
marketing-mix elements, and secure buy-in from
bles over priorities, turf wars, ambiguous messages
other functions.
by senior managers.
• Competition. Offering customer value is not
enough. To avoid competitive parity, the firm must Firms with an external orientation are more likely
offer greater value than competitors. The firm to achieve integration; employees, departments,
must create/recreate differential advantage to beat businesses share a common purpose — serving cus-
competitors. tomers. Sharing responsibility for designing, imple-
menting market offers drives agreement on priorities
• Superiority. Some differential advantages are
and close/cooperative working relationships.
better than others. Differential advantage based on
proprietary intellectual property, unique product
design, product availability may be more sustain-
Endnotes
able than differential advantage based on com-
1 P.F. Drucker, The Practice of Management, New York: Harper and
munications. A differential advantage based on an Row, 1954, pp. 37–38. [867e]
organizational process like parts delivery, qualified 2 P.F. Drucker, Management: Tasks, Responsibilities, Practices, New
technicians may be even more sustainable. Brunswick: Transaction, 2007*. [849e]
3 Personal communication from David Haines, former Director of
Global Branding, Vodafone.
 [463t]
CHAPTER 1 INTRODUCTION TO MANAGING MARKETING 7

Peru Grupo AJE

Grupo AJE (GAJE) (formed 1988) is a Peruvian GAJE’s best-known brand is Big Cola. In Peru,
multinational beverage firm. GAJE’s mission — to Big Cola competes directly with Coca-Cola, Inca Kola
offer consumers high-quality products at affordable (Coca-Cola-owned), Pepsi (PepsiCo), and Perú Cola
prices. GAJE’s founding: The Añaños family identified and Guaraná (Peruvian-owned). GAJE sells Big Cola in
an opportunity for carbonated beverages offered to various sizes/flavors in different country markets.
low-income inhabitants of Peru’s Ayacucho region. The By 2014, GAJE enjoyed 35 percent Peruvian market
Añaños-created Kola Real — later Big Cola — was share in carbonated beverages. Product diversification
priced 20 to 30 percent below existing cola brands. commenced in 2013 — Volt (energy drink), then Free
In 1991, GAJE entered other Peruvian cities; in Tea-Black Tea (2016) in various package sizes. GAJE
1999, it commenced international operations. GAJE relaunched Volt (2015) in six-pack format, targeting
now operates in 23 Latin American countries — Costa young, higher-income consumers, to compete with Red
Rica, Ecuador, Guatemala, Mexico, Peru; Asia — India, Bull, Monster.
Indonesia, Thailand, Vietnam; Africa — Egypt, Nigeria. In
some countries, GAJE manufactures; elsewhere, GAJE QUESTIONS
works with local bottlers, under exclusive licenses to 1. How do you think GAJE chooses which markets to
produce/distribute GAJE brands. GAJE brands comprise address?
several product classes: soft drinks — Big Cola; bottled 2. If GAJE decides to serve high-income consumers:
water — Cielo; energy drinks — Volt; fruit drink — Cifrut; a. What will be the impact on its positioning?
juice — Pulp; sports drink — Sporade; ready-to-drink b. Should GAJE modify its market offers? If yes, how?
iced tea — Cool Tea.
 CHAPTER 2

The Value of Customers

For complimentary material, see Axcess Vids codes at www.axcessvids.com

Success is getting the right customers … and keeping them.

— Charles Cawley, founder of credit card giant MBNA

Chapter 1 discusses the critical role customers play In calculating CLV, we must also consider customer
for firm well-being. More precisely, customers are retention and defection. Retention rate is simply the
core assets because of two sides of the value con- number of customers at the end of the year (who
cept. When the firm creates value for customers, it were customers at the start of the year), divided
successfully attracts, retains, grows those customers. by the number of customers at the start of the
When the firm attracts, retains, grows customers, it year. Defection (churn) is the inverse of retention.
creates value for shareholders. Understanding CLV allows the firm to better manage,
forecast the value of its customer base.
The first part of Chapter 2 moves beyond the
customers-as-assets concept to measure the value
customers bring to the firm. The critical concept is
customer lifetime value (CLV) — what the customer Calculating CLV
is worth. CLV is the discounted future stream of In each year, the firm earns a portion of CLV. In the
profits the customer will generate over the life of its first year, the firm earns CLV (1):
relationship with the firm. In the second part of the
CLV (1) = m1 × r1 / (1 + d)
chapter, we examine practical ways of using CLV
— customer relationship management (CRM) and Restating this simple expression for CLV (1):
customer loyalty programs. • Profit margin (m1) the firm earns in year 1.
• Multiplied by retention rate (r1) — the probability
that a customer at the start of year 1 will still be a
WHY CUSTOMERS ARE SO customer at the end of year 1 (similarly for r2, r3
IMPORTANT FOR THE FIRM below).
• Discounted to the start of the year, using the term
Customer Lifetime Value (CLV) 1/(1+d). Discount rate (d) is the firm’s cost of capital
When customers purchase its products/services, the — typically provided by the chief financial officer
firm earns revenues; it also incurs costs. If revenues (CFO).
are greater than costs, the firm earns profits. The To calculate a customer’s total CLV, we simply sum
profit earned from an individual customer during a the CLV contributions for each successive year.
single time period (year) is the profit margin — the
CLV = CLV (1) + CLV (2) + CLV (3) + …
annual value of the customer to the firm. Of course,
many B2B and B2C customers — consumers, distrib- where
utors, manufacturers, partners, resellers — purchase CLV (2) = m2 × r1 × r2 / (1 + d)2
firm products for several successive years. CLV
CLV (3) = m3 × r1 × r2 × r3 / (1 + d)3
accounts for profit margins earned over these several
years by using a discount rate. etc.

This calculation can be complicated mathematically.

We simplify by assuming that profit margin (m), dis-

8
 CHAPTER 2 THE VALUE OF CUSTOMERS 9

count rate (d), retention rate (r) are constant year to • Pricing. If customer satisfaction is high, the firm
year. Then CLV equals profit margin (m), multiplied may be able to set higher prices.
by a term we call the margin multiple (MM). • Operating costs. As proficiency in serving
MM = r/(1 + d – r), so that: customers increases, the firm reduces operating
costs; may reap scale economies with individual
CLV = m × r/(1 + d – r) = m × MM
customers.
Estimating CLV is quite straightforward using this
Satisfied customers may also help the firm secure
formula. Table 2.1 presents MM for various r and d
revenues from other customers:
values.
• Learning. The firm learns by working closely with
Table 2.1 Margin Multiple = r/(1 + d – r)
customers; it becomes better able to attract new
Discount Rate (d) customers.
Retention Rate (r) 8% 12% 16% 20% • Network externalities. In some markets, customers
60% 1.25 1.15 1.07 1.00 bring value to other customers. Consider auction
sites: When eBay attracts more buyers, it becomes
70% 1.84 1.67 1.52 1.40
more valuable to sellers; when eBay attracts more
80% 2.86 2.50 2.22 2.00
sellers, it becomes more valuable to buyers.
90% 5.00 4.09 3.46 3.00
• Positive word of mouth, referrals. Satisfied
95% 7.31 5.59 4.52 3.80 customers generate positive word of mouth,
provide referrals to potential customers. Example:
Increasing CLV Lexus secures more new customers from referrals
The firm has just three ways to improve CLV — than from any other source. Social media is a
increase profit margin (m), increase customer critical word-of-mouth driver.
retention rate (r), reduce discount rate (d). Reducing • Signals. Securing a high-profile customer may
d is a job for the CFO. We focus on m and r. provide credibility among potential customers.

Increase Profit Margin (m) Earned from Increase Customer Retention Rate (r)
Customers Increased profit margin (m) leads to increased CLV.
The firm has several options: But profit margin is only relevant if the customer
• Customer selection. Well-selected customers remains a customer! Firms continually lose cus-
provide base-level profit margin. tomers — defection is greater at 80 percent retention
• Customer satisfaction, loyalty. Well-served rate than at 90 percent. Regardless, at constant reten-
customers increase purchases over time. tion rate, the number of customers defecting reduces
year by year — Table 2.2.
• Customization. Targeted offers to defined segments
provide greater customer value.

Example: Lifetime Value of a FedEx Customer

These data apply to FedEx customers in the market segment the firm is addressing:
Assumptions Customer lifetime value calculation
• Total FedEx letters shipped per month = 2,285 • Number of FedEx letters per customer per annum
• Number of FedEx customers = 140 = 2,285 × 12/140 = 195.8
• FedEx profit margin per letter (m) = $8.25 • FedEx profit margin per customer per annum =
• Discount rate (d) = 12% $8.25 × 195.8 = $1,616
• Annual retention rate (r) = 90% • Discount rate (d) = 12%
• Retention rate (r) = 90%
We assume these numbers remain constant year to
year. • Margin multiple = 4.09 (Table 2.1)
CLV = m × MM = $1,616 × 4.09 = $6,609
10 SECTION 1 MARKETING AND THE FIRM

Table 2.2 Customer Retention/Defection Patterns

90% retention 80% retention

Year Start 1,000 customers 1,000 customers

Year 1 900 remain; 100 customers lost 800 remain; 200 customers lost

Year 2 810 remain; 90 customers lost 640 remain; 160 customers lost

Year 3 729 remain; 81 customers lost 512 remain; 128 customers lost

These data show customer retention rate has an Options for Addressing Customers
important impact on CLV. Indeed, an empirical study
in several U.S. industries showed that a 5 percent Much of Marketing for Latin American Managers
increase in customer retention rate enhanced CLV in the 21st Century focuses on increasing CLV from
more than 50 percent. current customers and on approaches to acquire
profitable new customers. From Chapter 6 onwards,
we elaborate on the six marketing imperatives
that encapsulate approaches for achieving these
Acquiring New Customers
goals. Here, we identify a broad set of options for
So far, we have used CLV to focus on current firm addressing current/potential customers.
customers. Increasing profit margin (m)/customer
When asked to divide promotional expenses into
retention rate (r) enhances CLV. But what about
two buckets — retain current customers, attract
potential customers? How valuable are they? Right
new customers — most executives report a focus
now, the firm earns no revenues from these potential
on attracting new customers. Of course, new
customers; to attract them, the firm must incur an
customers are critical for firm growth; the issue is
acquisition cost (AC). Using the same approach as
one of balance. Far too often, the firm takes current
before:
customers for granted; it spends too little effort on
CLV = m × MM – AC customer retention. Furthermore, retaining current
We now have a useful way to think about potential customers is generally less costly than acquiring new
customers. All things equal, the firm should acquire customers. To be clear, we do not suggest current
a customer if the first term in the CLV expression — customers are more important than new customers.
m × MM — is greater than AC. If AC is greater, the But we do believe the firm should make customer
firm loses money. investment decisions carefully, deliberately.

[###t]

Cuba Nestlé
Switzerland-based Nestlé is the world’s largest food and Cuba imports almost 80 percent of food requirements
beverage firm — more than 2,000 brands, operations in – $US 2 billion annually. In 2017, the Cuban government
191 countries — entered Cuba in 1999 when the Cuban prepared more than 20 projects, open to foreign firms, to
government relaxed regulations on foreign investment. increase food production. Nestlé is interested in building
Nestlé acquired San Pellegrino’s share of Los Portales — on its history of doing business in Cuba, and enhancing
joint venture with Coralsa, state-run by Ministry of Food relationship with the Cuban government, and with Cuban
Industry (MINAL). Later, Nestlé (with Coralsa) formed customers by investing US$60 million.
Coralac to invest in ice cream Nestlé initially imported
from Mexico, later (2003) produced locally.
 CHAPTER 2 THE VALUE OF CUSTOMERS 11

Current Customers about other potential customers — what they pur-

Figure 2.1 shows three options for addressing current chased previously; what they spent; how they make
customers — retain, grow, delete. decisions; why they left. The firm can use these data
to help winback, then serve these former customers
Retain. The customer base is like a leaky bucket; the
better.
firm must plug the holes. Astute CRM, updating
products/services to meet evolving customer needs, Acquire. To reach sales, profit goals, most firms must
better customer service, and other actions bind acquire profitable new customers. The firm should
customers more closely to the firm. Customer satis- be selective, by acquiring only the right customers
faction increases, defection reduces, loyalty increases. — those whose potential CLV is positive. Specific
In the insurance and mutual fund industries, firms approaches for acquiring new customers: Direct
use sophisticated approaches to sell extra products communications to potential customers; affiliations
to existing single-product customers; this approach with individuals/organization that feed customers to
increases customer stickiness, creates lock-in. Some the firm; adding new channels; acquiring other firms/
firms implement early warning systems to identify businesses (and their customers).
potential defectors, then take appropriate action.
Ignore. The firm should ignore potential customers
Grow. Satisfied customers may increase cur- that do not conform to its market strategy, and
rent purchases. The firm may enhance revenues whose AC is greater than potential CLV. Bottom line:
by cross-selling — additional products/services, The firm must be selective in making investments to
higher-value offers. Example: Amazon, Groupon, secure new customers.
iTunes, 800Flowers implement these approaches via
personalized communications.

Delete. Some customers are unprofitable or other-

Being Selective about Customers
wise not worth having. The firm should evaluate Many customers bring value to the firm, but some do
its customer base to make careful retain/delete not. The firm must identify the customers it wants to
decisions. (We address customer deletion later in the serve, then develop options for addressing unwel-
chapter.) come customers.

Potential Customers Customer Profitability

Returning to Figure 2.1, the firm has three broad Most firms understand/measure product profitability
options for addressing potential customers — — revenues minus costs — for individual products.
retrieve, acquire, ignore. By contrast, few firms understand customer profit-
Retrieve. These potential customers are a special
ability. This failure is especially critical in large global
category; previously they were customers. Hence, the firms comprising multiple businesses, operating
firm often has more information about them than in multiple geographies, serving global customers.

Figure 2.1 Approaches to Improving Customer Lifetime Value

All Customers

Current Potential
Customers Customers

Retain Grow Delete Retrieve Acquire Ignore

(Stop Defections)
 12 SECTION 1 MARKETING AND THE FIRM
[###t]

• Large — may require expensive customization/

service support. They may also bargain down prices
Mexico Farmacias below sustainable levels.

Guadalajara The firm should address critical yet related questions

to these 20 percent of customers:
Farmacias Guadalajara (FG) (founded 1942), initially • What does it cost to serve them?
a local drugstore, expanded throughout Mexico. As • Is it profitable to serve them? If not, what action
new stores opened and new opportunities emerged, should the firm take?
FG became the main subsidiary of Fragua Corporation
• What are future projections for them?
(PC) (1983). In 1989, PC created a new retail model
— SUPERFARMACIA — integration of a pharmacy and A critical firm challenge is to correctly identify
convenience store, now Super Farmacias Guadalajara the right customers. After all, today’s unprofit-
(SFG). Favorable consumer reaction to convenience able customers could be tomorrow’s big winners;
and new products/services led to fast expansion. PC unprofitable large customers may carry significant
achieved SFG’s expansion goals for 19 consecutive overhead allocations. Eliminating large customers
years. By end 2016, SFG (annual revenues more than lowers overall profits because revenues from other
Mexican $40 billion) had 1,685 stores; SFG opens customers must absorb the overhead if they depart.2
one new store every two days, and servers more than
500 million customers annually. PC faces significant Customer Suitability
competition from other pharmacy chains — Farmacia Current/future profitability generally drives customer
del Ahorro, Farmacia Similares, Farmacias Benavides selection decisions. But the firm may cease doing
(Walgreens Boots Alliance). Well-established convenience business with current customers/forgo potential
store chains like Oxxo (18,000 stores) are also entering customers for other reasons:
the pharmacy sector — acquired more than 2,000 • Capacity constraints. The firm has insufficient
pharmacies in Mexico and Chile during 2015–2016. ability — expertise, financial resources, physical
capacity — to serve all current customers.
• Competition. The customer is a current/potential
competitor; it could reverse-engineer firm prod-
ucts, then launch its own. Hi-tech firms often refuse
Profitability data typically reside in individual to sell to competitors; they also stop customers
businesses/geographies, whose financial systems may from reselling their products.
not always interface with one another.1 • Evolving strategy. The firm shifts direction, drops
products, divests a business — and sheds customers
The difficulty in measuring customer profitability
as a by-product.
stands in sharp contrast to treating customers as
assets, and understanding CLV. Firms use various • Impact on the firm’s reputation. A firm–customer
methods to gather/assess data relevant to customer relationship may negatively affect the firm’s brand
activity, profitability. When firms examine revenues, image. Can you find Gucci in Kmart? Or the
operating costs, profits by customer, they often find customer may use firm products inappropriately,
an 80:20 rule: 80 percent of revenues result from leading to aggravation and negative word of mouth.
20 percent of customers. Many firms have installed • Impact on the offer. In many service businesses,
strategic/key account management systems to serve bad behavior by some customers reduces value for
their most important customers. all customers, and may impact employee morale —
rowdy sports fans in expensive restaurants; unruly
The converse analogue is the 20:80 rule: 20 percent
airline passengers.
of revenues result from 80 percent of customers.
Unprofitable customers may be small or large: • Instability. The customer may be profitable but too
unstable. Alternating high/low purchases cause too
• Small — typically provide insufficient revenues to
many organizational dislocations.
offset costs to serve.
 CHAPTER 2 THE VALUE OF CUSTOMERS 13

• Nonpayer. This customer would be profitable only about technology; paper and pencil may
if it paid, but collection costs — money, human work just fine for a small business. To repeat, CRM
resources, aggravation — are too high. is the holistic approach firms use when forming
• Potential costs. Future costs of doing business are long-run, mutually beneficial relationships with
too high. The customer may require costly customi- customers.
zation; the firm believes future servicing costs will
be prohibitive. Developing a CRM System
Customer databases for effective CRM systems must
be accessible, accurate, complete, consistent, current,
relevant, secure, structured. According to one expert,
HOW TO BIND CUSTOMERS
“To implement CRM, a firm must have an integrated
CLOSER TO THE FIRM database available at every customer touch point, and
analyze that data well. … [CRM] allows compa-
Customer Relationship Management nies to automate the way they interact with their
A customer relationship comprises the series of over- customers, and to communicate with relevant, timely
time interactions/touch points between customer messages.”3 A large firm’s database contains longi-
and firm. Customer relationship management (CRM) tudinal (over time) data on millions of customers.
helps manage touch points. CRM synthesizes Adding state-of-the-art data-mining technology
relationship marketing, customer insight, customer in the context of a test-and-learn culture secures,
service, quality management. More precisely, CRM manipulates these data to yield customer, market
is the ongoing process of identifying and creating new insight — Chapters 3, 4.
value with individual customers and sharing these The firm must identify each customer. B2C firms
benefits over a lifetime of association with them. often use indirect methods — customer-get-
CRM helps the firm know its current/future cus- customer campaigns, customer value cards, factory
tomers better. CRM helps large firms build/foster warranties, loyalty cards, mail inserts, social media,
relationships with customers in a systematic way; it special events, syndicated questionnaires, telephone
leverages qualitative, quantitative data to synchronize help lines, third-party lifestyle databases, websites —
marketing activities. (What is CRM? [407v]) supplemented by data from marketing information
The underlying purpose of a CRM system is under- firms. Types of data include:
standing, improving CLV. CRM systems are only • Customer characteristics. Demographic data:
really successful in firms committed to a true external B2C — name, gender, age, family size (birth
orientation. Three issues are crucial for success when dates), address; B2B — sales revenues, number
implementing CRM: of employees, organization age, industry, deci-
• Objectives. The firm must be clear about objectives. sion-makers, influencers.
The firm requires good direction to select from • Customer contact history. B2C — phone calls for
myriad CRM initiatives. Costs can easily spiral out product information, customer service requests;
of control, and the firm does not meet objectives. B2B — deliveries, sales calls, technical service.
• Customer benefits. The CRM system must provide B2C, B2B — website visits, behavior at the website
benefits/values to customers — delightful new instant chats, audio/video conversations.
products/services, attractive offers, high customer • Customer purchase history. Items purchased;
service levels. Many firms focus on value to the firm, when; how — cash, credit; through what inter-
by cutting costs and giving short shrift to customer mediary (if any); at what price — discounts; how,
value. The CRM system must drive mutually when delivered. Include firm profit margins per
beneficial relationships with customers. purchase.
• Technology. Many people think complex databases, • Customer responses to firm offers. Patterns
analytic engines, data mining, other technologies following sales promotions, direct marketing offers,
are critical components of an effective CRM system. free delivery, price changes — also perceptions/
Of course, these elements may play an important preferences (from research).
role in gaining customer insight. But CRM is not
14 SECTION 1 MARKETING AND THE FIRM

• Customer value received. Value delivered over and should products/services be limited to firm offer-
above purchased items — especially in B2B. ings, or embrace many different providers?
• Customer value to the firm. Data for assessing CLV, • Deterministic or probabilistic rewards.
— purchase history, cost to serve. Deterministic: Customers accumulate points,
then collect rewards. Probabilistic: Customers
The database should be sufficiently flexible to follow
win large rewards, or nothing.
individuals/track life changes. Every customer
response, contact, purchase deserves an entry. But • Ease of collecting. Should be straightforward to
the firm should not limit itself to data on its own redeem rewards. Airlines face criticism for blocking
customer relationships; it should also seek data on its rewards on some flights/routes.
customers’ relationships with its competitors. • Time to earn. Many consumers engage in hyper-
bolic discounting — the tendency to increasingly
Assessing the Value of Customers, choose a smaller-sooner reward, versus a larger-
Designing Firm Actions later reward. [649p] Hence: Should the program
Good CRM implementation allows the firm to act have smaller rewards earned frequently, or larger,
with greater focus. The firm estimates profitability, delayed rewards? Airlines, AmEx alleviate the
CLV by customer, anticipates key customer events — problem by providing data/motivational messages
birthday, child’s graduation — then initiates action. on progress toward the reward.
The more comprehensive the customer database, • Hard versus soft rewards. Hard rewards: Denom-
the more creative the firm, the more valuable will inated in dollars and cents, points. Soft rewards:
be its initiatives. The firm can offer new products/ Toll-free information numbers, premium restau-
services and give greater customer service to its more rant seating, hotel/airline upgrades.
valuable/loyal customers. • Program entry rewards. Should entry to the
program be free? A fee may discourage entry, but
encourage commitment — Amazon Prime.
Customer Loyalty Programs
Value of the Rewards Program: Firm
Loyalty is a customer’s sustained commitment to A well-designed loyalty program increases customer
the firm, demonstrated by repeat purchase/positive retention (decreases defection), and enhances share
word of mouth. Loyalty programs, designed to retain of wallet. Specific firm benefits:
customers/improve loyalty, are central to many CRM
• Creates barriers for competitors.
systems. [884v] All loyalty programs have a similar
structure: Customers earn rewards by purchasing • Gains insight into customer behavior.
products/services. Some programs are simple; others • Lowers costs to serve loyal customers.
— airlines, credit cards, hotels — drive loyalty • Makes loyal customers less price sensitive.
through complex, multitiered incentives.
• Encourages loyal customers to spend more
(Amazon Prime customers spend twice as much as
Value of Rewards Programs: Customers
regular customers).
Design considerations:
• Stimulates positive word of mouth.
• Rate of earning. Should reward earnings be equal,
or accelerated? Should customers earn the same • Increases sales via purchase acceleration as
points for each dollar spent or more points per customers approach the goal.
dollar as they near the program goal? The firm should assess loyalty programs, but this can
• Aspirational value. Two rewards can have the same be difficult:
cash value, but different psychological value — • Forecasting potential revenues is complex.
groceries versus vacation travel. Consumers engage
• Some costs — launching, creating, maintaining the
in mental accounting by placing funds/resources in
database; issuing status reports on earned rewards;
different mental accounts. [649p]
cost of rewards — are highly visible. But opportu-
• Cash or cash value. Rewards should offer real eco- nity costs versus other potential activities are less
nomic value. Some programs pay cash; airline fre- easy to identify.
quent-flier programs provide free travel. Relatedly,
 CHAPTER 2 THE VALUE OF CUSTOMERS 15

When evaluating loyalty programs, the firm should

Endnotes
consider both purchase quantity and loyalty — loyal
1 Advances in CRM systems (discussed below) like www.salesforce.
customers who buy infrequently may not be very com have eased this problem somewhat.
valuable. The firm should evaluate loyalty programs 2 For this discussion, overhead comprises costs not directly
versus alternative spending — increased advertising, assigned to customers — corporate assessments for advertising,
better customer service, lower prices. government relations, legal, R&D.
3 Peter Heffring, former President CRM Division, Teradata.
Loyalty programs have great value, but are just one of
many revenue-generating tools the firm may use.

[###t]

Mexico Mujer Banorte

Banco Mercantil de Monterrey (founded 1899), originally a In recent years, BN has focused on improving service
regional bank, grew rapidly by acquisition in the 1980s and quality. Example: Credit applicants receive responses within
1990s, then changed its name to Banco Mercantil del Norte, 48 hours, a significant improvement. In 2003, BN launched
later to Banorte (BN). BN is a subsidiary of Grupo Financiero the Mujer Banorte Credit Card Program, and other services
Banorte, and Mexico’s third largest financial institution — 1,270 exclusively for women —
branches; BN is the only domestically-owned major bank, and checking accounts, savings
a top-10 Latin American bank — consolidates assets, US $63 accounts, life insurance,
billion. BN offers retail banking, insurance, investment services, medical insurance — added
and wholesale products; BN is Mexico’s largest retirement-fund to credit card services.
administrator. BN also offered non-
In the 1990s, BN managed more than 350,000 payroll traditional banking services
cards (tarjeta de nómina), used by firms to pay employees. — handyman services. BN also addressed social causes: It
Instead of using cash or check, firms deposit wages onto the donated part of commissions earned on credit cards to ONG
debit card. Close to 50,000 businesses were BN’s customers — fighting AIDS, Cancer, victims of domestic violence.
for this service; and potential customers for other BN products. BN’s gender segmentation and banking innovation has
BN had several major competitors: Bancomer — US$100 been successful. From 2013 to 2017, BN grew its high-
billion assets, 1,820 branches — Mexico’s largest bank, income/women business by 131 percent. Competitors also
subsidiary of BBVA Group, Spain, around 20 percent market launched programs to support and empower businesswomen
share; CitiBanamex — Citibank (US) acquired (2001) Banco — handyman services, homework tutoring for kids, nutrition,
Nacional de Mexico (Banamex) — US$61 assets, 1,730 health services, talks and conferences through apps aimed
branches. Banco Santander Mexico (BSM) (founded 1991) to foster women development/empowerment. Santander
is the Mexican subsidiary of Spanish bank Banco Santander. boasts it’s the only Mexican bank with women on its board
BSM has US$67 billion assets, 1,076 branches. of directors. Message: Santander is trying to be the only real
Mexico, population of 130 million, is the world’s 13th bank for women.
largest economy. Approximately, 52 million Mexicans are
considered economically active — 32 million men, 20 QUESTIONS
million women. In recent decades, increasing numbers of 1. Is it profitable to serve the female segment? What are the future
women have become economically active. The majority of projections for this segment?
economically active women are employed, but approximately 2. What strategies could BN use for addressing current female
25 percent are entrepreneurs. Women entrepreneurs are in customers?
several industries: services — 41 percent; commerce, hotels, 3. How can the Mujer Banorte Program compete with other banks,
restaurants — 27 percent; manufacturing — 16 percent; retain and grow market share in the female market segment?
communications/transportation — 7 percent; construction — 7
percent; agriculture — 2 percent
16

SECTION 1 KEY MESSAGES

Chapter 1 Chapter 2
• Customers are critical firm assets. • Customer lifetime value (CLV) is the critical link
• Firms that deliver greater customer value than between delivering value to customers and creating
competitors are more successful in attracting, value for the firm/shareholders.
retaining, growing customers. • The firm improves CLV by increasing profit margin
• Firms that successfully attract, retain, grow (m), customer retention rate (r); decreasing
customers earn profits. They are more likely to discount rate (d).
survive, grow; enhance shareholder value. • The firm has three broad options for addressing
• Value has two sides. When firms deliver customer current customers — retain, grow, delete.
value, they attract, retain, grow customers. When • The firm has three broad options for addressing
firms attract, retain, grow customers, they create potential customers — retrieve, acquire, ignore.
shareholder value. • The firm should strive to understand the reasons
• Marketing as a philosophy embraces an external for customer retention/defection and act
orientation — all organizational members have a accordingly.
responsibility for delivering customer value. • Some of the firm’s current customers are probably
• Six marketing imperatives — three strategic unprofitable — but a fraction may present
marketing, three implementing market strategy — opportunities.
are must-dos for the firm. • The firm may forgo a customer relationship for
• Four marketing principles provide the guiding reasons other than poor profitability.
framework within which the firm implements the • A well-designed CRM system deepens firm
six marketing imperatives. knowledge about customers.
• Understanding customer value to the firm,
Videos related to Chapter 1
customer loyalty allows the firm to design effective
• Marketing Careers [402v] loyalty programs.
(Ellen — Columbia Business School)
• Pharmaceutical Marketing [588v] Video related to Chapter 2
(Robert Essner — Wyeth; Columbia Business School) • Loyalty Programs [199v]
(Ran Kivetz — Columbia Business School)
Audios related to Chapter 1
• The Role of Marketing [771a]
(Noel Capon — Columbia Business School)
• The Externally Oriented Firm [263a]
(Noel Capon — Columbia Business School)
• Four Marketing Principles [971a]
(Noel Capon — Columbia Business School)
 SECTION 2

Fundamental Insights for

Strategic Marketing

CHAPTER 3

Market Insight

CHAPTER 4

Customer Insight

CHAPTER 5

Insight about Competitors, Company, Complementers

For key messages from Section 2, see page 47.

Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 3

Market Insight
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Why am I a great player? Because I go to where the puck will be.

— Wayne Gretzky, ice hockey legend

Defining the market is a fundamental but tricky When seeking market insight via these four aspects,
marketing challenge: Too narrowly — the firm risks the firm must keep two things squarely in mind:
being blindsided by competitors; too broadly — the • State of nature — aka current market factors.
firm will not allocate resources effectively. The firm Examples: What competitors does the firm face
must also understand the market’s evolutionary today? How many baby boomers are in its target
patterns, and the forces driving this process. Because market?
most forces are external, the firm embracing an
• Trends — evolutionary patterns. Examples: What
external orientation generally understands markets
additional direct competitors will appear in two
better than firms with internal orientations —
years? How will demographic changes affect the
Chapter 1.
market?
Figure 3.1 highlights the four aspects of market
Good market insight can put the firm ahead of
insight. Each aspect provides a different window on
competitors. Market insight provides the basis for
the market. Together, these aspects lay the founda-
securing differential advantage in the quest to attract,
tion for developing market strategy by anticipating
retain, grow customers.
market change. This foundation also helps identify,
size new opportunities.

Figure 3.1 Critical Building Blocks for Securing Market Insight

Market,
Market Structure
Product Evolution

Market Insight

Industry Forces Environmental Forces

17
18 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Market Structure class: Comedy, science fiction, romance, action/

adventure, horror. Generally, individual products
We use three separate concepts to describe market within a single product form are more similar to
structure: the market; products/services serving the each other than to individual products in different
market; the firm’s products/services. We also discuss product forms. Competition is typically more
factors affecting market size. intense among product forms than among product
classes.
The Market
Markets comprise customers — people, organizations Product classes and product forms provide a useful
— who require products/services to satisfy needs. framework for thinking about markets, but things
Basic customer needs — food, clothing, shelter — are are not always straightforward. Competitive changes/
enduring; many offerings satisfy these needs. Other technological evolution often blur product-class/
needs — entertainment, travel — are more transi- product-form boundaries. Example: In the entertain-
tory. Of course, to be in the market, customers must ment market, Netflix changed movie-rental dynamics
possess sufficient interest, purchasing power to buy by introducing online ordering, home delivery;
what firms are offering. streaming video caused another market change.

The concept of a market is slippery because we can Firm Products

identify markets at several different levels. The trans- Product classes/product forms embrace products
portation market concerns the basic need to move from all competitors. Some firms offer products in
people/things from point A to point B. In turn, the multiple product classes; other firms specialize in
passenger transportation market comprises several just one or two product forms. When we consider
more narrowly defined markets — ground, air, water. individual firms, we speak of product lines and
More narrowly, we can define the automobile market; product items.
even more narrowly still are markets for particular
• Product line — a group of related products.
types of automobiles — SUVs, hybrids, electric cars.
• Product item — a subset of the product line. A
When defining a market, it’s best to start broad, then product item is uniquely identified — specific size,
focus as necessary. This approach ensures against color — often termed a stock-keeping unit (sku).
marketing myopia1 — the risk of defining a market
too narrowly, because of biases or insufficient data.
Conversely, a broad definition provides greater scope
in searching for opportunities.

Products Serving the Market

[451t]
Both the firm and competitors provide products/
services to serve market needs. A useful categoriza-
tion: Product class, product form, product line, product
item.* These distinctions help identify opportunities,
and emerging competitors.
• Product class — group of products offered by com-
peting firms; they serve a subset of customer needs Mexico Sabritas
in a roughly similar manner. Examples in consumer
entertainment: Home video, live music, movies, Sabritas (PepsiCo subsidiary) offers 14 product lines,
television, theater. Each product class provides most with several product items, for various customer
distinct customer benefits/values. preferences/tastes — more than 30 items in total.
• Product form — several product forms comprise Examples: Sabritas, Cheetos, Doritos, Ruffles, Tostitos.
each product class. Examples in the movies product Sabritas product flavors: original flavor, lemon, flaming
hot, cream and onion, adobadas. Doritos product
* In this classification, product embraces both physical products and flavors: nacho, pizzerola, rainbow. Sabritas continually
intangible services. adds/withdraws product items.
 CHAPTER 3 MARKET INSIGHT 19

Factors Affecting Market Size Large numbers of retirement-age consumers (baby

Current and potential market sizes are important boomers) are active; have significant discretionary
for evaluating opportunities. Since B2C market income; are sophisticated buyers. Cruises, assisted-
demand drives B2B market demand, we focus on key living facilities are growth markets. By contrast,
indicators of B2C market size. countries with median ages in (and below) the
mid-20s — Brazil, Indonesia, Mexico — offer
Population Size. World population exceeds 7 billion.
opportunities for Coke, Pepsi, KFC, McDonald’s, and
Increasing by 200,000 daily, population will exceed
other marketers whose products appeal to younger
8 billion by 2030. Population is unevenly distrib-
consumers.
uted across nations: On the high end, China — 1.3
billion, India — 1.2 billion; on the low end: Tuvalu
Market, Sales Potentials, Forecasts
— 10,000, Nauru — 9,000. Population growth rates
A key firm challenge is translating market insight
differ across nations — generally low in developed
into market demand measures. Reflecting the state
countries, higher in less-developed countries.
of nature and trends distinction, two concepts —
Population Mix. In many developed countries, potentials, forecasts — are key for understanding
immigration drives population-mix changes. Of market demand and firm sales. Unfortunately, these
the world’s 200 million immigrants (foreign-born terms confuse many managers.
residents), the U.S. leads with 35 million. Other
Potential embraces having a capability/future-state
countries with large immigrant populations —
view of products/markets:
Russia (13 million); Germany, Ukraine (7 million);
France, India, Canada (6 million); Saudi Arabia (5 • Market potential — what total market sales could
million). Most labor migration — legal, illegal — is become.
from less-developed countries to more-developed • Sales potential — what firm sales could become.
countries. Reduced mobility barriers — European
By contrast, forecast concerns expectations:
Union (EU) — increase population shifts. The long-
standing pattern of Asian workers in Middle Eastern • Forecast market size — expected market sales in a
countries continues apace. In recent years, Middle given time period.
Eastern conflicts have caused EU immigration to • Sales forecast — expected firm sales in a given time
spike. Foreign workers have a major impact on period.
home-country economies via remittances.

Domestic Population Shifts. Generally, as national

income grows, people leave rural areas for towns/ Market, Product Evolution
cities. Then urban areas become overcrowded: Life cycles are the most common way to describe the
Mumbai (India) — 14 million; Sao Paulo (Brazil) — evolution of markets, products — product class,
11 million. China predicts 500 million people will product form, product line, product item. [662v]
move from rural to urban areas by 2050. In advanced Figure 3.2 shows the classic S-shaped curve depicting
economies, people also move from cities to rural sales trajectory. Understanding life cycles helps the
areas and follow the sun to warmer climates. firm predict future market conditions and develop
Income, Income Distribution. For many years, the U.S.
robust market strategies. Typically, we partition life
was the world’s richest country in per capita income. cycles into five stages (phases) — introduction, early
Today, Qatar, Luxembourg, Singapore, Norway, UAE growth, late growth, maturity, decline.
surpass the U.S. Economic development/demo-
graphic changes are shifting opportunities from The Family of Life Cycles
traditional markets to emerging markets. Especially The several life cycles fall into a simple hierarchy
important growing markets are BRICI countries — based on longevity/demand. Market life cycles last
Brazil, Russia, India, China, Indonesia. longest — generally, the firm has little impact.
Product-class and product-form life cycles are each
Age Distribution. Age distribution shifts have shorter than market life cycles.
enormous implications for B2C marketers. Example:
20 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Figure 3.2 Classic Life-Cycle Diagram

Sales

Introduction Early Late Maturity Decline

Growth Growth
Time

Product line and product item life cycles significantly do customers require? Which competitors will enter?
influence product line and product item perfor- When? What resources are necessary to succeed?
mance. Firm actions greatly impact these life cycles; What are our chances of success?
they are shorter than product-class and product-
In the introduction stage, firms struggle to build
form life cycles; furthermore, they come in many
profitable sales. Typically, the firm offers a single
different shapes. But, because they provide little
product design, but prices may not cover total costs.
insight into competitor activity, they are not very
Managers expect unit costs to fall as sales increase,
helpful for drawing strategic implications.
so the firm ultimately earns profits. Introduction
requires significant market education. Firms use
Product-Form Life Cycles
advertising/personal selling to show product value
The firm gains greatest insight into market, product
to consumers/end users/distributors. But produc-
evolution by examining product forms. Product
tion problems, product failures, inability to expand
classes compete with one another, but competition
capacity may cause delays. Sometimes the first
within/across product forms is typically more
product version has quality issues, and performs
intense. Whereas actual life-cycle curves often depart
poorly; yet it may possess the seeds of an important
from the idealized shape — Figure 3.2 — across
breakthrough. Smartphones, iPads, other hand-
product forms, life-cycle stages follow one another
held electronic devices are now widely popular, but
in a remarkably consistent fashion. Hence, product-
owe success, in part, to the Apple Newton — failed
form life-cycle stages can provide important strategic
pioneer (launched 1993/withdrawn 1998). The
insights.
introduction stage may last many years, but fierce
Stage 1: Introduction. Sales are initially low. Product competition, increased innovation, customer willing-
introduction frequently follows many years of R&D; ness to try new products are shortening this stage.
it reflects the first market entry/entries by leading
Stage 2: Early Growth. Sales grow at an increasing
firms. Example: Honda launched the first gasoline/
rate. Many products do not reach early growth,
electric hybrid car in 1999, but modern-day research
but survivor sales revenues grow quickly. Hybrid
started in the mid-1970s! Uncertainty characterizes
cars, taxi service apps — Uber, Lyft — are in early
introduction. The firm explores questions like: Will
growth. Increasing sales, high profit margins attract
the product perform adequately? What is the best
new entrants. These players often bring capacity,
technology? What segment(s) should we target?
resources, loyal customers to fuel market growth.
What market strategy is optimal? Will customer
As competitors struggle for market position, new
demand be sufficient? What specific benefits/values
 CHAPTER 3 MARKET INSIGHT 21

distribution channels open up; promotional efforts barriers, regulation, diverse market needs, high
remain high. Previous advertising/promotion transportation costs. Examples: Personal services
emphasized generating primary demand — buy — dentistry, education, home plumbing, electrical
a hybrid car. Now, focus shifts to differentiation, contracting.
selective demand based on customer perceptions,
Stage 5: Decline. Maturity may last many years, but
features, functionality — buy a Ford Fusion hybrid.
eventually sales turn downward. Products in decline:
Firms secure production/marketing efficiencies; price
Carbon paper, chemical-film cameras, videotape.
becomes a competitive weapon. Many firms increase
Sometimes decline is slow, but may be precipitous —
sales revenues; they also work at managing costs.
overcapacity often leads to fierce price competition.
Caution: Firm sales may increase, but market share
Managing costs is a high priority — firms prune
decreases if competitors grow faster!
product lines, reduce inventories, cut marketing
Stage 3: Late Growth. Sales grow but at a decreasing expenses.
rate. By late growth, the many uncertainties from
Strong firms may increase sales as weaker compet-
introduction/early growth are largely resolved. Sales
itors exit. Firms often raise prices to cover costs as
continue to increase, but growth rate slows. Strong
sales drop, but sales decline further, in a vicious cycle.
competitors initiate tough actions to force weaker
Firms with good cost management and a core of
entrants to withdraw. Firms differentiate products by
loyal price-insensitive buyers can be quite profitable.
introducing, promoting design/packaging variants.
The distribution infrastructure is usually well devel- Summary. The product-form life cycle is a useful
oped, but outlets are more selective about brands/ framework, but two points are important:
product items. Price is a major competitive weapon, • Life-cycle shape. A product form’s sales trajectory
squeezing distributor margins. Purchase terms — depends on several factors — underlying customer
credit, customer service, warranties — become more demand, product quality/consistency, overall
favorable to purchasers. resource commitment by participating firms.
Stage 4: Maturity. Sales grow similarly to GNP. Most Generally, life cycles are shortening.
sales are to repeat customers/loyal users. Examples: • Profit curves. Profit curves do not mirror sales
everyday products/services — detergents, many curves. On average, profit margins are greatest in
consumer packaged goods. Because competitive early growth — then drop in late growth/maturity.
situations vary widely, the firm must secure deep But gross profit may be greater later in the cycle —
market insight. Some markets are concentrated; lower profit margins, but higher sales.
others are fragmented:
• Concentrated markets — aka oligopolies. A
few major players enjoy most sales; niche firms Industry Forces
make up the rest. Market leaders often enjoy entry
The five-forces model — Figure 3.3 — identifies
barriers — scale economies, brand preference,
several industry forces firms face.2 [756v] Some forces
distribution-channel dominance. Firms that
affect the firm specifically; others may impact the
become market leaders by early maturity often
entire industry — fuel prices for airlines. Strong
survive for many years. Examples: IBM — main-
industry forces may drive profitability downward for
frame computers; GE — steam turbine generators;
all players — worldwide paper industry. The firm
Gillette — shaving products. Increasingly, firms
must develop a good understanding of these forces,
focus on value-added services. They streamline
and their implications.
operations/distribution to reduce costs, then price
competitively. Leaders get in trouble when they fail
Current Direct Competitors
to innovate new products/processes, and to reduce
The firm’s current direct competitors offer
costs.
customers similar benefits/values with similar
• Fragmented markets. No firm has large market products, technology, business models. Current
share. Fragmentation generally results from some direct competitors are the competitive status quo,
combination of low entry barriers, high exit traditional rivalry between established players.
22 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Figure 3.3 Industry Forces — The Five-Forces Model

Suppliers

Current Direct
New Indirect
Direct The Firm Competitors
Entrants
Competitors

Buyers

Typically, managers in rival firms know these to entry hinder market entry, but new direct entrants
competitors well. They have good insight into can emerge from many sources:
strengths/weaknesses, and likely strategic moves. • Firm employees — a significant competitive threat
They may even have worked for them! in some industries. Employees may develop new
Current direct competitors come in several forms: business ideas/technologies the firm chooses not
to fund; they resign to pursue them. Famously,
• Traditional. These competitors fight according to
several former Fairchild Semiconductor employees
established rules of the game. In mature markets,
founded Intel. This competitive form is greatest
one firm rarely gains advantage quickly; rather,
when the firm’s core asset is intellectual capital held
improved positions typically result from long-run
by employees — technology, advertising, con-
sustained effort. Establishing differential advantage
sulting, financial services.
is difficult. Globalization, industry concentration
affect direct competition in many markets. • Geographic expansion — often profitable,
well-capitalized firms from a different geography
• Acquisition, divestiture. Suppose a direct com-
— Asian firms entering U.S., European markets.
petitor or an industry outsider acquires a rival
These competitors have solid strengths/cost
— independent firm or via a divestiture. The
advantages, but lack market knowledge, customer
competitor has changed: Objectives, strategy, action
relationships. They may use superior cost positions
programs, resources are likely all different.
to support low-price strategies and aggressively
• Merger. Two entities combine as equal partners seek market share.
to create a stronger firm. By pooling strengths/
• Networks — a group of firms/individuals using
mitigating weaknesses, the new entity may be a
their combined talents/resources to collaborate.
tougher competitor; capabilities outstrip either
Networks are very flexible, changing composition
former firm.
as requirements evolve.
• Private equity. Hedge funds borrow extensively
• New sales, distribution channels — can pose
to acquire firms/businesses. The resulting heavy
significant challenges to traditional players, like
debt-reduction focus often makes these entities
the Internet. Strong firms that add channels also
more nimble, tougher competitors.
heighten competition.

New Direct Entrants • Startup entry — has flexibility, unencumbered

These firms offer products/services similar to the by the status quo. Flexibility and talent can make
firm, but were previously not competitors. Barriers startups potent competitors; incumbent may suffer
 CHAPTER 3 MARKET INSIGHT 23

from overhead allocations, old facilities, old tech- developed countries that supply U.S., European
nology, old processes. firms; they may develop the skills for future forward
• Strategic alliances — lacking critical assets like integration.
capital, skills, technology, market access; one firm
may pool resources with another firm. The new Buyers
entity is stronger than either firm separately. Buyers purchase firm products/services. Buyer
pressure typically increases as market share increases.
Indirect Competitors Firm profit margins shrink when powerful customers
Indirect competitors offer customers similar benefits/ demand price discounts, expensive services.
values as the firm, but provide them in significantly Example: Walmart demands (and receives) many
different ways. These functional substitutes often supplier concessions. The most severe buyer threat
appear as different product forms/product classes. is backward integration; the buyer becomes a new
Examples: Taxi firms — Uber, Lyft; hotels — Airbnb; direct competitor by conducting operations the firm
digital imaging — Xerox; supermarkets — Amazon, currently performs.
Jet; steel — high-performance plastics.

Suppliers Environmental Forces

Suppliers provide firm inputs. Typically, supplier
Environmental forces affect the firm and other
pressure on the firm increases as importance
industry participants. Figure 3.4 shows how these
increases — providing a critical capability, large
PESTLE forces — political, economic, sociocultural,
percentage of purchases. Supplier pressure may also
technological, legal/regulatory, environmental
arise if its brand is attractive to firm customers.
(physical) — and industry forces impact the firm.
Example: PC buyers value Intel Inside. PC manu-
facturers feel pressure from Intel; Intel commands
Political
high prices. Pressure is strongest when the supplier
Governments set the frameworks for regulators to
is a monopoly — local telephone firms, government
develop rules for business. Typically, governments
services, railroads. Sometimes several suppliers form
intervene in economies via fiscal, monetary policy.
cartels — oil (OPEC), diamonds (De Beers) — to
Governments pursue political ends; encourage
manage production levels, prices.
investment; seek to enhance consumer welfare by
The most severe supplier threat is forward integration creating a level playing field. In recent years, many
— the supplier becomes a direct competitor by national governments realized that regulations
conducting operations the firm currently performs. designed to protect consumers actually lock in
Example: Outsourcing manufacturers in less- competitive structures, restrict competitive entry,

Figure 3.4 The PESTLE Model — Environmental Forces Acting on the Industry

l Ec
lit ica on
om
Po i c

Suppliers

Current Direct
Environmental New
Direct
Indirect
Sociocultural
The Firm Competitors
(Physical) Entrants
Competitors

Buyers

l
Le
ga ica
l/R log
eg no
ula ch
tor Te
y
24 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

stifle innovation — contrary to intended results. and globalization. Many individuals/groups resist
Deregulation/regulation (reregulation) is a con- globalization; they also resist U.S., Western influence
tinuing political tug-of-war. in particular. Global/local trends have a profound
impact on firm actions, performance.
Economic
A country’s economic well-being strongly influences Technological
market demand. High inflation, high/rising interest Since World War II, technological innovation has
rates, falling share prices, depreciating currency produced many products/services we now take for
point to an unhealthy economy. High inflation rates granted. These innovations changed individual,
are generally a negative indicator, but very low/ household, organizational life; restructured
below zero inflation rates are also negative. Because industries; continue to drive economic growth, as the
expectations influence spending patterns, evaluating pace of technological change continues to accelerate.
direction/rate of change of economic indicators is In the 20 years 1970–1990, six product classes in
crucial. consumer electronics achieved mass acceptance —
video recorders, video cameras, videogame con-
Sociocultural soles, CD players, telephone answering machines,
Culture is the distinctive customs, achievements, cordless telephones. Since 1990, digitization and the
products, and outlook of a society or group; the way of Internet have launched entire new industries; today,
life of a society or group. People learn culture early in companies compete in different ways, offering previ-
life, largely from family, school, religious institutions. ously unimaginable customer benefits/values.
Cultural norms are resistant to change, but do evolve.
Two categories of technological change4:
Cultural Groups. A cultural group may inhabit a • Sustaining technologies are often incremental.
nation-state — Brazil, Iran; geographic region within They improve performance for existing/traditional
a nation — South, Midwest U.S.; or a multinational products on dimensions current customers value.
region — Latin America, Southeast Asia. A cultural Examples: Cordless vacuum cleaners, power drills.
group may also comprise a people, regardless of
• Disruptive technologies bring new, very different
geographic location — Armenian, Jewish, Kurdish
benefits/values. They change customer behavior;
diasporas. A cultural group may comprise different
new products/applications attract new-to-the-
subcultures, each reflecting both group culture and
market customers. Disruptive technologies
subcultural elements. Important U.S. subcultures:
spawn products that threaten, and change, entire
Baby boomers, generation X, millennials.3 Religious,
industries. When disruptive technology becomes
gender, ethnic groups each represent different market
mainstream, it threatens old technology firms that
opportunities.
do not adapt. Examples: The Internet, streaming
Localization, Globalization. An important contempo- video.
rary cultural issue is the tension between localization

[106t] [452t]

Brazil Regulatory Failure

Brazilian research and industrial innovator Embrapii firms to allocate 1
selects public/private technological and scientific percent corporate
research institutions to tackle industrial innovation revenues for R&D, yet no concrete innovations have
projects. Embrapii cooperates with business firms; in emerged. Observers believe that regardless of positive
2015, Embrapii helped raise US$29 million for 62 R&D intent, this failure results from lack of process planning
projects. Embrapii’s success sharply contrasts with and integration with research institutions like universities.
Brazil’s oil and gas industry. Brazilian law requires these
 CHAPTER 3 MARKET INSIGHT 25

Legal/Regulatory [644t]

The legal framework (LF) establishes the rules

for business. LF aims to protect societal interests,
regulate market power, hinder collusion/stop
deceptive practices. LFs differ across countries,
but generally govern mergers, acquisitions, capital
movements, consumer protection, employment
Mexico OxxoGas
conditions. Example: In the aftermath of the 2008/9
For almost 80 years, the Mexican petroleum industry
economic crisis, the U.S. placed heavy restriction on
was a government monopoly; Petroleos Mexicanos
financial-sector firms via Dodd-Frank legislation.
(Pemex) owned the rights to operate all gas stations.
The U.S. and EU countries have well-developed legal The industry comprised Pemex-owned stations plus
systems; by contrast, poorly developed/implemented Pemex’s franchisees. In 2014, believing increased
systems of commercial law in other countries cause competition would bring customer benefits, Mexico
major problems for foreign firms — copyright privatized gas stations. Many firms entered/plan to
infringements, patents, trademarks. enter the gas station business. New entrants: Two
Pemex brands — Grupo Hidrosina, Grupo Lodemo;
Environmental (Physical) independents; Grupo Eco, Grupo FEMSA — OxxoGas,
Natural and man-made forces coexist in an uneasy La Gas y Combured, Nexum, Petro-7. Announced
equilibrium. Global environmental forces: Hurricane future entrants from the U.S. — Chevron-Texaco,
Sandy – U.S.; tsunami – Japan; volcanic ash – Chile, Costco, Gulf.
Iceland; floods – Thailand; wildfires – Alberta OxxoGas (OG) was formerly a Pemex franchisee.
(Canada) highlight the fragility of increasingly After Pemex, OG has the most gas stations —
decentralized yet tightly integrated global supply more than 330 (acquired from Pemex). Anticipating
chains. Production of many products, global privatization, several years earlier, OG began
commerce suffered from these events. Firms face differentiating its gas stations; OG earned an enviable
increasing pressure from governments, environ- service reputation, in part by hiring more qualified
mentalists, advocacy groups, the public at large people. OG also offers complementary products
to provide increased transparency, and to assume (engine oil additives) and engages in cross-promotions
greater environmental responsibility — products, with movie theaters/parks. OG strongly advertises its
packaging, production systems. Some firms have brand.
enacted green strategies.
QUESTIONS

1. Identify industry forces that new entrants face in

Endnotes Mexico’s gas station industry.
1 T. Levitt, “Marketing Myopia,” Harvard Business Review, June 2. What environmental forces affect competitive entry?
2008*. [755e]
3. As a senior executive with Gulf, what issues concern
2 M. E. Porter, Competitor Strategy: Techniques for Analyzing
Industries and Competitors, New York: Free Press, 1980. [663e] you about a possible market entry?

3 Baby boomers — 77 million persons born in the U.S. 1946–1965;

generation X — 50 million persons born 1966–1980; millennials
— 77 million persons born 1981–1999.
4 C. M. Christensen, The Innovator’s Dilemma: When New
Technologies Cause Great Firms to Fail, Boston, MA: Harvard
Business School, 2013*. [405e]
 CHAPTER 4

Customer Insight
For complimentary material, see Axcess Vids codes at www.axcessvids.com

When the firm does a good job of delivering competitors), whose actions can affect the purchase of
customer value, it attracts, retains, grows customers; firm products/services.
makes profits today, tomorrow; survives, grows;
This definition is purposely broad; identifying
enhances shareholder value. To succeed in the
customers is often like a detective’s job. When
customer-value challenge, the firm must develop
identifying customers, the firm should consider
good customer insight — this chapter’s topic — based
several key distinctions:
on deep customer understanding.

To deliver customer value, the firm must answer Macro-Level Customers,

three core questions — Figure 4.1. Micro-Level Customers
To gain customer insight, the firm must understand
Figure 4.1 Customer Insight
how various customer types fit into the buying
Macro, Micro
process. Macro-level customers are the organizational
Roles in the Purchase Process
Who are the
customers? Current, Potential
units — producers, wholesalers, retailers, govern-
Direct, Indirect ment entities (B2B); families (B2C) — that purchase
products/services. Micro-level customers are individ-
uals within the macro-level customer who influence
What do Attributes/Features
customers Needs/Wants
purchases/have decision-making authority. Let’s
need/want?
Benefits/Values be very clear: Organizations do not make purchase
decisions; people in organizations make purchase
decisions. When micro-level customers jointly make
How do Decision-Making Process a purchase decision, they act as a decision-making
customers buy? Influences on Purchase Decisions unit (DMU).

Roles in the Purchase Decision

Both macro-level and micro-level customers play
several different roles in purchase decisions. Macro-
Who Are the Customers?
level customers — distributors, retailers — purchase
Identifying customers is the crucial first step in firm products; they also sell, deliver, store, service.
securing customer insight. This is more complicated Other macro-level customers — governments,
than it may seem. The customer pays for products/ standards bodies, consultants — may influence what
services. Right? This answer is often wrong, and is other macro-level customers buy.
almost always inadequate. Figure 4.2 shows the firm
Micro-level customers play similar roles in both B2B
must cast a wide net for customers. We prefer this
and B2C purchase decisions:
definition:
• Initiator. Recognizes a problem; starts the purchase
A customer is any person or organization, in the process.
channel of distribution or decision (excluding

26
 CHAPTER 4 CUSTOMER INSIGHT 27

Figure 4.2 Identifying Customers

Firm or
Business Unit

Other Firm Influencer/

Producer Advisor
Business Units
Organizations

Distributor

Retailer

Final
Consumer/
End User

• Gatekeeper. Has power to impede access to • User. Has little direct role in the decision-making
influencers/decision-makers. Secretaries, process (DMP), but may have veto power.
administrative assistants, purchasing agents often Examples: Young children — breakfast cereal;
play this role. factory worker — “I’m not working with that red
• Information provider. Provides the firm with stuff.”
important information about the customer.
Current Customers, Potential Customers
• Coach. Helps the firm navigate the customer
Current customers provide revenues/profits today.
organization; advises how to address influencers/
Retaining these customers has important impli-
decision-makers.
cations for CLV — Chapter 2. The firm must also
• Specifier. Exercises influence indirectly by pro- identify potential customers. Example: Alcoa works
viding expertise — setting specifications. Examples: with universities to train students in metalworking
Architect for family house purchase, firm’s design design; McKinsey happily places their employees at
engineer. senior positions at client firms.
• Influencer. Decision-makers value influencer
opinions. B2C — friend, colleague, spouse, child, Direct Customers, Indirect Customers
grandparent; B2B — operations, engineering, Typically, direct customers exchange money for
marketing. Two special types: firm products/services. Indirect customers buy firm
• Champions/Sponsors promote the firm’s products from these direct customers, or from
interests — previous positive experiences, other indirect customers. Some direct customers
personal relationships. — distributors, retailers, consumers/end users —
buy, use finished products. In other cases, direct
• Spoilers try to prevent purchases from
customers incorporate firm products into their own
the firm — disgruntled former employees,
products.
relationships with other suppliers.
• Decision-maker. Has formal power to make the The direct versus indirect distinction is crucial.
purchase decision. The firm has a business relationship with direct
customers, but may not know its indirect customers
• Buyer. Has formal power to execute the purchase —
— hence it has little day-by-day insight into the
company purchasing agent.
benefits/values they seek (only from marketing
28 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

research). Before CRM technology became wide- Hierarchies — Needs, Features,

spread, FMCG firms typically could not identify Benefits, Values
their indirect customers — consumers. A senior UPS Psychologists have studied individual needs exten-
executive emphasized the importance of indirect sively, notably Abraham Maslow. Maslow’s ideas form
customers: “As a company we are very focused, the basis of the feature/benefit/value ladder.*
not just on our (direct) customers and what we do
Maslow’s Hierarchy of Needs. Maslow’s classic
that helps them, but on what we do that helps their
framework identifies five major need groups
customer. We’re always looking through our (direct)
— physiological; safety, security; social; ego; self-
customer to their customer.”1
actualization — from low to high. Generally, we
expect individuals to satisfy lower-level needs —
physiological; safety, security — before higher-level —
What Do Customers Need/Want? ego; self-actualization.
The firm attracts, retains, grows customers by deliv- Satisfying both higher-level and lower-level needs
ering benefits/values to satisfy their needs/wants. should provide greater customer value than satisfying
Customer value is the value in the firm’s offer less only lower-level needs. Example: A consumer is more
customer costs — money, time, effort, emotional. likely to buy a shampoo she believes will make her
Two firm actions are crucial: attractive (ego) than one that just cleans her hair
• Make offers of value to satisfy customer needs. (physiological). Table 4.1 applies Maslow’s frame-
• Communicate the value of those offers. work to two purchasing decisions.

Laddering Features, Benefits, Values. Many

Customer Needs: Recognized versus Latent marketers meld Maslow’s hierarchical approach
Sometimes customers understand their needs — with feature/benefit/value distinctions to form a
recognized; sometimes they don’t — latent. Some feature/benefit/value ladder. The ladder:
recognized needs are expressed — discuss/ask advice;
• Focuses attention on providing benefits/values.
others are non-expressed — maintained privately.
Firms typically design attributes/features into
Customers are not consciously aware of latent needs. products/services. The feature/benefit/value ladder
These needs may surface as technological innovation forces translation into customer benefits/values.
raises awareness; customers require benefits/values • Provides communications options. The variety
they could not previously articulate. Example: A few of benefits/values broadens firm communication
years ago, few consumers could have articulated a options. The best communications depend on
need for smartphones. But widespread availability several factors — market development stage,
surfaced a latent need of staying in constant contact, competitive threats.
and accessing the Internet on the go.
• Broadens the view of competition. When the
firm focuses on attributes/features, competition
Attributes/Features versus Benefits/Values
derives from direct competitors. Focus on customer
Many firms define products/services in terms
benefits/values broadens competitive scope to
of attributes/features. Now read very carefully.
indirect competitors.
Customers do not care about your products/services
— they are not interested in attributes/features. Generally, customers using firm products/services
Customers do care about satisfying their needs, and focus on the benefits/values they provide. By con-
the benefits/values your products/services provide: trast, resellers — distributors, retailers, wholesalers
• Attributes/features. Design elements/functions the — are more interested in economic benefits — profit
firm builds into products/services — typically of margins, net profit, return on investment.
great concern to design engineers.
• Benefits. Something the product/service delivers to
satisfy customer needs.
• Values. Something the product/service provides — * For simplicity, we omit the term attributes when discussing the
has broader scope than benefits. ladder.
 CHAPTER 4 CUSTOMER INSIGHT 29

Table 4.1 Using Maslow’s Hierarchy of Needs to Gain Insight into Two Consumer Purchases

Product
Need High-Quality Coffee Tasty Cream-Filled Donut
Self-Actualization (self-fulfillment) Savoring A cultural phenomenon
Ego (prestige, Confidence, achievement Be in vogue
success, self-respect) (especially among Gen-Xers)
Social (love, affection, Togetherness, freshness, taste Eating donuts is a group experience,
friendship, belonging) creates sense of togetherness
Safety, Security Easy on stomach, no jitters Safe, easy for kids — no mess
(protection, order, security)
Physiological Satisfies thirst, keeps you alert, keeps Satisfies hunger, the sweet tooth
(food, drink, air, shelter, sex) you warm

Functional, Psychological, The maximum price an economically rational

Economic Benefits/Values customer would pay for the firm’s product is called
Customers base purchase decisions on a need hier- the economic value for the customer (EVC) — Figure
archy. The firm must translate the offer’s attributes/ 4.3. Comprises:
features into a hierarchy of benefits/values that align • Reference value — competitor price
with these needs. But we must go one step further to
• Positive differentiation value — additional value
explore three types of benefits/values.
from the firm’s product/service
Functional Benefits/Values satisfy lower-level • Negative differentiation value — additional cost
customer needs. Examples: Food products satisfy for using the firm’s product/service
hunger needs; disc brakes stop automobiles. Some-
times customers, firms discover functional benefits EVC calculations can be quite complex. Economic
serendipitously: Pfizer developed Viagra to address factors for EVC calculations: customer financing,
heart disease, but discovered it treated erectile maintenance costs, revenue changes. (See p. 27 for a
dysfunction. simple illustration.)

Psychological Benefits/Values typically satisfy needs Conclusion. The firm’s challenge: Deliver the right

for status, affiliation, reassurance, security. Customers combination of functional, psychological, economic
receive benefits/values after purchase; but brands benefits/values to those customers it wants to attract,
may provide risk-reduction benefits before purchase. retain, grow.
Firms often offer psychological and functional
benefits together. Example: Fine-dining restaurants Characteristics of Benefits/Values
provide high-quality food, ambience (functional), In many cases, firm attributes/features provide
but also prestige (psychological). Generally, psycho- customers with benefits/values at (or soon after)
logical benefits/values transcend functional benefits/ purchase in a straightforward manner. But some-
values; they appear higher up the feature/benefit/ times benefits/values are not so clear cut. We examine
value ladder. several situations:

Economic Benefits/Values concern financial aspects Deferred Benefits and Values. Customers may receive

— price, credit terms. Price is often the primary benefits/values in the future:
purchase driver, especially in tough economies when • Defined value if and when required. The core
customers trade off functional and psychological benefit is the ability to secure value if and when
benefits/values for low price. In B2B, price is often needed. Example: AmEx Platinum Card Concierge
critical, but firms may deliver cost-cutting economic program locates hard-to-find items, delivers gifts,
benefits at higher prices. Example: GE strengthens provides secretarial services in remote areas, offers
customer relationships by improving customer secure reservations in upscale restaurants. Most
operational effectiveness. cardholders rarely use these services, but their
availability has high value.
30 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

EVC Illustration
Industrial-strength conveyor belts comprise a textile fabric core covered with rubber. Textile fiber strength is cru-
cial for conveyor belt life. Traditional core — sevens* cotton yarn; potential replacement — 750 denier polyester
yarn. Critical data for calculating polyester EVC:
• Price of sevens (7s) cotton (competitive product) — 90 cents per lb.
• 750 denier polyester yarn — 4× stronger than cotton — 8 versus 2 grams per denier (g.p.d.)
• Extra cost of processing polyester versus cotton — 30 cents per lb.
• Customers use 4 lbs. 7s cotton, 1 lb. polyester.
Figure 4.3 shows:
• Reference value — 7s cotton yarn = 90 cents per lb.
• Polyester equivalence — 1 lb. 750 denier polyester yarn, or 4 lbs. 7s cotton = 90 cents × 4 = $3.60 — reference
value plus positive differentiation value
• Extra cost to process polyester yarn — 30 cents per lb. — negative differentiation value
• Net polyester equivalence — $3.60 less $0.30 = $3.30 — EVC
Based on this EVC analysis, a rational conveyor belt manufacturer should be indifferent between:
a. 7s cotton @ 90 cents per lb., and
b. 750 denier polyester @ $3.30 per lb.
Hence, maximum polyester price = $3.30 per lb. At any price above $3.30 per lb., conveyor belt manufacturers
would be better off sticking with cotton.
* Sevens cotton is the standard cotton yarn used in industrial applications.

Figure 4.3 EVC Illustration

Negative $3.60 Maximum polyester price excluding extra processing

differentiation $0.30 extra processing cost
value EVC — maximum price customers will pay for polyester
$3.30

Positive
differentiation
value Total
economic
value

$0.90 Cotton price

Reference
value
$0.00
Price (per lb.)

• Potential but uncertain future value. The core is acceptable, the weak supplier’s presence keeps
purchase driver may be expectation of as-yet- the strong supplier honest — inhibits exercise of
unknown potential future benefits/values. Example: monopoly power.
Dell buys most computer chips from Intel (versus
Scarcity Value. Customers realize value from limited
AMD) — Intel gives Dell early insight into new
product/service availability. Example: Nike launches
technologies.
new running shoes every couple of months, but
Presence Value. Suppose a customer has one strong deliberately keeps supplies tight to develop scarcity
and one weak supplier. So long as product/price and create pent-up demand.
 CHAPTER 4 CUSTOMER INSIGHT 31

When Customers Recognize Value. Sometimes How Do Customers Buy?

customers have good data about product/service
benefits/values. Other times they are uncertain; The purchase decision-making process (DMP) ranges
they cannot assess benefits/values until long after from relatively simple — buying a midmorning
purchase. Three categories: snack — to highly complex — U.S. government
purchasing a new fighter jet. The DMP can be as
• Search — significant data available before
quick as an impulse purchase, or take months, even
purchase, even ability for inspection/trial —
years. Marketers must understand how customers
test-driving a car.
move through the DMP, then identify influence
• Use — value recognized at product/service con- options.
sumption. Examples: concert performance, expen-
sive restaurant meals. Purchase-Decision Stages
• Credence — cannot assess value until long after Figure 4.4 shows the DMP as a robust purchase
purchase. Examples: Economic benefits from model with six stages. Any DMP may involve
investments, health benefits from some medical multiple feedback loops — within/among stages.
procedures. The customer may identify a need/problem early on,
then elaborate as she secures information/evaluates
Beyond Customer Benefits/Values — alternatives. Purchases may be planned, or unplanned
Customer Experiences — made spontaneously during a shopping trip, or in
As competition grows, firms increasingly focus on response to an online offer.
providing customer experiences — conditions, events,
Stage 1 – Recognize Problems. Some customer needs
states — that consciously affect buying behavior. A
are critical to system functioning: individuals —
single event may create many different experiences.
food, drink; firms — raw materials, capital equip-
Example: New York City ballet aficionados experi-
ment. Other needs are discretionary.
ence a touring Bolshoi performance differently from
ballet first-timers. Starbucks coffee — several dollars Stage 2 – Acquire Information. Customers generally
per cup — offers a personal, memorable experience. seek information to help identify:
Five customer experience modes2: • Features/attributes that satisfy individual needs —
• Sense. Creates sensory experiences through sight, feature set; criteria to evaluate satisfactory attribute/
smell, sound, taste, touch. feature performance.
• Feel. Appeals to inner feelings, emotions. • Alternatives that satisfy related needs — awareness
• Think. Appeals to the intellect. Creates problem- set ; degree to which each alternative meet attribute/
solving experiences that engage creatively. feature criteria.
• Act. Enriches by showing alternative ways of doing Customers bring a knowledge base to the purchase
things. decision. The extent of external search depends on
• Relate. Contains aspects of sense, feel, think, act, factors like purchase involvement, perceived risk.
but reaches beyond personal, private feelings to External sources:
something outside the individual’s private state. • Personal — colleagues, family, friends, salespeople,
social media
This framework offers a methodical way of deter-
mining those experiences the firm wants customers • Impersonal — advertising, blogs, online reviews,
to associate with its products/services. press

Figure 4.4 Purchase-Decision Process

1 2 3 4 5 6
Purchase,
Recognize Acquire Evaluate Make a Postpurchase
Secure
Problems Information Alternatives Choice Processes
Product
 [757t]
32 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Mexico Bodas Helps Couples

Plan Their Wedding Day
In Mexico, as elsewhere, weddings are aspirational, At evaluate alternatives (stage 3), couples may
social, emotional celebrations. The engagement-ring be overwhelmed by the plethora of options. Bodas
ritual — recognize problems (stage 1) — launches developed the annual Wedding Awards, recognizing the
wedding planning and the related purchase-decision top 5 percent of firms in the industry — for quality, price,
process. Decision-makers/influencers comprise bride, service, flexibility — identified and valued by newlyweds.
groom, nuclear and extended family, and friends. The key This information helps couples make a choice (stage 4)
decision-makers — bride, groom — are typically first-time and purchase, secure product (stage 5). At postpurchase
consumers, searching for products/services they will only processes (stage 6), Bodas encourages couples to post
use once. online reviews of the wedding-day suppliers they used.
Bodas (bodas.com.mx) has become a leader in the Not only does Bodas offer significant value to
wedding-day industry by helping couples through the couples, it also offers value to firms. As couples explore
purchase-decision process. At acquire information (stage its website, Bodas captures significant information that
2), Bodas provides couples with personalized to-do enables it to enhance the value it offers. These data
lists, an invitation manager, and couple-based-wedding- are also extremely valuable for firms offering products/
supplier recommendations. To serve mobile couples, services to newly married couples — baby showers,
Bodas launched an app for downloading to smartphones/ birthdays, graduations — by starting, developing, and
tablets. All Bodas services are free for couples. Its building relationships.
business model involves charging companies to promote
themselves throughout its different platforms.

Stages 3, 4 – Evaluate Alternatives, Make a Choice. • Add important new attributes/features.

Customers evaluate alternatives based on informa- • Show customers the firm performs better than
tion they possess, or acquire in Stage 2. Frequently, competitors on important attributes/features.
customers exclude several alternatives in the aware-
• Show customers the attributes/features where it
ness set with little evaluation, by forming a short list
performs really well are highly important.
— consideration set — based on purchase criteria.
Customer choices from the consideration set may be B. Deviations from rationality. Behavioral decision
rational, or deviate from rationality. By understanding theory (behavioral economics) researchers have
customer evaluation processes, the firm can influence identified many purchase processes that seem
the purchase decision in its favor. irrational — B2C, B2B. Examples: You are in a store
about to buy a $25 book. Your friend walks by and
A. Rational approach. We assume the customer:
says you can buy the same book a couple of blocks
• Identifies attributes/features that deliver required away for $10. Would you walk two blocks to save $15
benefits/values. ($25 – $10)? Now, suppose you are in a store about
• Decides relative importance of these benefits/ to buy a home entertainment system for $765. Your
values. friend appears. He says you can buy the same system
• Forms a belief about how well each alternative’s a couple of blocks away for $750. Would you walk
attributes/features deliver these benefits/values. two blocks to save $15 ($765 – $750)? Many people
would walk two blocks for the book, but not for the
The firm can take several actions to enhance the home entertainment system. But it’s the same $15!
value it offers customers:
• Compromise effect. Customers tend to avoid
• Improve perceived performance on important extreme price/value options — favor intermediates.
attributes/features.
 CHAPTER 4 CUSTOMER INSIGHT 33

• Decoy effect. Just adding another option can shift Influences on Consumer
customer preference/choice.
Purchase Decisions
Stage 5 – Purchase, Secure Product. For many cus-
Deep understanding of environmental and individual
tomer needs, product choice does not conclude the
factors helps the firm be proactive in developing
process; the customer must decide where to purchase
market strategy.
— offline/online — and from which supplier. Pur-
chasing may still not be easy — the product may be
Environmental
unavailable; there may be a queue. Time delay may
Figure 4.5 shows the range of environmental
cause reevaluation, and a different purchase decision.
influences — broad to narrow:
Stage 6 – Postpurchase Processes. Customers • Culture. Cultural and subcultural norms condi-
typically engage in several postpurchase processes tion product preferences, consumer purchasing
that may affect future purchases — for customers behavior. The firm must be careful not to violate
and those they influence. these norms, especially abroad.3
• Use. Especially critical for some products — credit • Social class. All societies have hierarchically
cards; pharmaceuticals — compliance failure causes ordered groupings — social classes. Wealth, income
125,000 U.S. deaths annually. are key discriminators; education, occupation,
• Use experience. The customer may be satisfied/ residential location also matter. Interests, values,
dissatisfied; hence, develop/diminish the firm/ purchases — clothing, leisure activities — are often
brand-customer relationship. similar within a social class.
• Dissonance reduction. If the product/service • Other people. Individuals have frequent face-to-
does not meet expectations, the customer seeks face contact with primary reference groups —
information to recalibrating product performance. family, organizational work groups; secondary
• Communications with current and potential reference groups — club/church members, pro-
customers. Word of mouth (WOM)/social media is fessional organizations. Aspirational groups — a
an influential postpurchase process. person would like to join/belong to, for prestige,
other reasons.
• Product/packaging disposal. Environmental
advocacy and regulations increasingly impact • Family. Nuclear family influence predominates
disposal decisions. in the West. Extended family influence is very
important in many Asian countries.
• Repurchase. All things equal, high customer
satisfaction increases customer loyalty, repurchase.
[391v]

Figure 4.5 Environmental Influences on Consumers’ Purchasing Decisions

 34 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

• Situation. Consumers face situational influences Influences on Organizational

daily — presentations/displays (real, virtual), time
Purchase Decisions
constraints. Purchase location aesthetics are also
important. Organizational buying (procurement) generally
concerns larger sums of money than consumer
Individual purchases. Procurement is often more protracted/
Individual factors influence consumer purchase complex; engages more people; frequently rule-
decisions — cognitive/economic resources, techno- bound; may involve company politics. Procurement
logical competence, time, physical/mental health. organizations interface with suppliers.4 [202v]
Should/want conflicts, life-cycle stage, lifestyle are
other important individual factors. Changes in the Procurement Process
Important changes include:
• Broader scope of procurement responsibilities.
Historically, purchasing departments focused on
buying factory inputs. Today, procurement is often
[356t]
also responsible for negotiating many spending
categories — auto rental, consulting services, travel.
• Centralization. Technological advances in tele-
communications/computers, the Internet provide
corporate buyers with greater leverage. Corporate
secures complete, accurate, timely purchasing data
on individual suppliers from the firm’s decentral-
ized units; it tracks purchasing performance against
Mexico El Buen Fin – benchmark databases.
• Globalization. The centralizing trend (above)
The Best Time to Buy is expanding globally as multinational firms
broaden supplier searches. These firms want global
El Buen Fin (The Good Weekend) (inaugurated 2011) is contracts; they are increasingly ready to switch
an annual shopping event created by Mexico’s federal suppliers as price differentials appear/disappear.
government and retailers nationwide. The objective: • Internet. Using reverse auctions, Internet-based B2B
Encourage consumption by offering products/services exchanges significantly affect purchases of standard
at very low prices. During one long weekend each products. Buyers have better, cheaper access to
November, retailers offer attractive one-time promotions, information; they drive out market inefficiencies/
significant discounts (up to 70 percent), and extended price differentials.
credit terms. Promotion for El Buen Fin focuses on the • Procurement expertise. Skilled procurement staff
best time of the year to buy products. introduce new strategies — strategic sourcing — to
El Buen Fin highlights several environmental influences reduce costs, improve quality, increase efficiency.
on consumer purchase decisions. Culture — Mexicans To become a preferred supplier, the firm must
expect to shop for gifts in the weeks prior to Christmas. complete an extensive request for information (RFI);
(El Buen Fin was also an attempt to change shopping only then can it respond to a detailed request for
habits by encouraging consumers to plan ahead.) In proposal (RFP). Long-standing relationships mean
addition, Mexicans would shop at home, rather than little as procurement personnel gain deep insight
travel to the U.S. for Black Friday (day after Thanksgiving). into supplier cost structures, aggressively negotiate
Social class, family and friends, and other people play prices.
important influence roles — reference-group members
often shop together; they also exchange information
on good deals. Finally, El Buen Fin illustrates situational
influence; consumers frequently spend more than they
had planned.
 CHAPTER 4 CUSTOMER INSIGHT 35

Evolution in Buyer-Seller Relationships • Outsourcing. Outsourcing allows firms to reduce

Firms increasingly evolve relationships with selected balance-sheet assets, fixed costs, while increasing
customers: flexibility, functional expertise, productivity.
• Vendor. Customer, supplier operate at arm’s length
in this traditional adversarial relationship. Reducing the Number of Suppliers
Traditional purchasing departments sent speci-
• Quality supplier. Supplier, customer each believe
fications to many potential suppliers, then chose
they receive value — acceptable profit margins,
on criteria like price and delivery. Because stream-
high-quality products, great service — from a
lined supply-chain systems improve efficiency and
close long-term relationship. Each firm plans for
effectiveness in converting raw materials to finished
continuous quality improvement.
products, many firms are forging closer relationships
• Partner. Both firms share/jointly develop resources, with fewer suppliers.
strategies, technologies. They focus on the entire
value chain. Each firm is deeply involved in the
other’s product-development cycles. Sensitive Endnotes
information flows freely as the supplier learns 1 Personal communication from Dale Hayes, former Vice President
about/solves important customer problems. Brand Management and Customer Communications, UPS.
2 B. Schmitt, Experiential Marketing: How to Get Customers to
Sense, Feel, Think, Act and Relate to Your Company and Brands,
Increased Corporate Attention
New York: Free Press, 1999 [979e]; B. Schmitt, “Experience
to Procurement Marketing: Concepts, Frame works, and Consumer Insights,”
At many firms, the procurement spend/company- Foundations and Trends in Marketing, 5 (2010), pp. 55–112, for a
review. [940e]
revenue ratio has increased dramatically. Traditional
3 E. Hall, The Silent Language, Garden City, NY: Anchor, 1999*.
purchasing is evolving from an unimportant manage-
[652e]
rial backwater to highly strategic procurement. Several
4 Chapter 3 discusses broad environmental influences —
factors are responsible: globalization, industry concentration, increased competition.
This section is based on N. Capon, Key Account Management and
• Branding. The rising importance of branding
Planning, New York: Free Press, 2001 [992e]; N. Capon, D. Potter,
allows many firms to resell products made by F. Schindler, Managing Global Accounts, Bronxville, NY: Wessex,
others. Example: Apple did not manufacture the 2008. [973e]
author’s MacBook Pro, carrying case, power cord
— but the complete package arrived ready to use.
• Organizational downsizing. Many firms downsize
by replacing labor with capital. Equipment, raw
material, supply expenses thus increase relative to
other costs.
36 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Ecuador Editorial Televisa

[122t]

Ecuador — Repositioning via

Customer Insight

Editorial Televisa Ecuador (ETE) (Grupo Televisa concerned about themselves; they wanted to receive
subsidiary) is dedicated to editing, commercializing, the latest information on how to achieve and/or
and distributing Spanish-language magazines in maintain overall well-being.
Ecuador. ETE is a market leader, distributing several ETE repositioned Men’s Health to focus on this
major global magazines — Vanidades, Cosmopolitan, specific need. ETE dropped content for single men
Caras, Seventeen, Tú, National Geographic. Despite that featured female models, and added more health,
its leadership position, in 2010, ETE posted significant sports, and content for married men, regarding
losses, based on declining sales. Management relationships. The repositioned Men’s Health offered
assessed the problem as unclear positioning of individual mostly functional benefits — information about topics
magazines. The challenge: Seek consumer insight. related to personal healthcare.
Two examples illustrate the problem ETE faced, and its
ETE also sought insight on where readers purchased
solution:
magazines. Key finding: Customers for different
• Caras — mainly focused on the social life of Ecuador magazines preferred different outlets, hence ETE
and the world. Readers could find pictures and news required different distribution strategies. ETE made
about Ecuadorian social events — weddings, birthday agreements to distribute some low-end magazines
parties, along with news and pictures of local and bundled in newspapers; it sold some magazines only
international celebrities. Caras also featured sections by subscription; still others reached consumers via
on beauty, entertainment, fashion, travel. Ecuadorian supermarket chain Supermaxi.
ETE determined Caras’ positioning was too diffuse. ETE s customer insight allowed it to successfully
Furthermore, Caras’ owners were demanding readers reposition its magazine portfolio. Each magazine then
with sophisticated and cosmopolitan lifestyles. Based delivered unique value to readers. ETE answered critical
on extensive consumer research, ETE refocused questions: Who are our customers? What do they need
Caras to provide the most select news on social and want? How do our customers buy? As a result, ETE
life in Ecuador and around the world. ETE sought to was able to offer unique value to attract, retain, grow
satisfy both social and ego needs (Maslow) by offering customers.
psychological benefits related to status, affiliation,
reassurance. QUESTIONS
• Men’s Health — targeted high socioeconomic status, 1. How has Maslow’s hierarchy of needs helped ETE shape
mostly married male readers. Topics in this high-priced content for its new magazines?
magazine (versus other men’s offerings) included 2. How does consumer research help determine reposition
exercise, health, sports, work, stress management. for ETE’s magazine portfolio and the distribution strategy?
ETE’s consumer research showed readers were
 CHAPTER 5

Insight about Competitors,

Company, Complementers
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 5 builds on the five-forces model — Chapter competitive insight is not easy. Regardless, most
3 — to discuss the firm’s competitive challenges. We leading firms — Citibank, IBM, Shell, Toyota —
identify specific competitors, then present a process deploy significant effort. Competitive insight efforts
for gaining competitor insight. Deep competitive fail when the firm:
insight provides a unique strategic perspective. • Relies on out-of-date data from tired sources.
Marketers want to know:
• Claims data-gathering costs are too high, does not
• What competitors cannot do. commit necessary resources.
• What competitors will not do. • Fails to go beyond basic competitor description.
• What competitor actions will put them at a • Ignores potential competitors.
disadvantage.
• Gains good insight but does not take action.
As the firm gains competitor insight, it also gains
Figure 5.1 shows a competitor-insight framework.
insight into itself — company insight. We also explore
complementers — organizations that can help the
firm achieve its objectives — to achieve complementer
insight. Identify Competitors – Step 1
A competitor is any organization whose products/
services provide similar/superior benefits/values to
COMPETITORS the same customers the firm seeks to attract, retain,
grow. Chapter 5 argues for a broad view of com-
Developing Competitive Insight petitors, just as Chapter 4 argues for a broad view
of customers. Many firms view competition too
Competitive intensity is increasing across the narrowly, focusing only on firms like themselves.
board in virtually all industries; this is a global Example: Paper cup manufacturers focused on paper
phenomenon. Competition is especially tough cup competitors, not on competition from plastic
where: industries deregulate; rapid changes occur in cups. The narrow view often ignores many medium-/
product/process technology; state-owned enterprises long-term threats. Three key areas:
privatize; governments reduce/remove tariffs, quotas,
• Structure of competition
other competitive barriers. Competition is also chal-
lenging in industries where regulatory restrictions • Competitive dynamics
increase — financial services, pharmaceuticals. The • The firm as competitor
firm must work harder/smarter; it must secure deep
competitive insight, so it makes the right strategic Structure of Competition
marketing decisions to secure differential advantage. Figure 3.3 — Chapter 3, p. 24 — presents the five-
forces model. Three forces represent competition:
Good competitor insight reduces decision-making
current direct competitors, new direct entrants, indirect
uncertainty. Unfortunately, many firms place too
competitors. Extreme pressure from the other two
little emphasis on this task — after all, securing good

37
38 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Figure 5.1 Framework for Gaining Competitive Insight

IDENTIFY Step 1: Who are competitors today? Who will they be tomorrow?

DESCRIBE Step 2: What are competitors’ capabilities, difficulties?

EVALUATE Step 3: What are competitors’ strategic options?

Step 4: What do we expect competitors to do — short term, medium term,

PROJECT
long term?

MANAGE Step 5: How can we get competitors to do what we want them to do?

forces — forward integration (suppliers), backward Competitive Dynamics

integration (buyers) — produces additional direct Figure 5.3 shows competitive evolution. Dramatic
competitors — Chapter 3, p. 25. We simplify the five- changes may occur: New competitors enter; local/
forces approach into two identifying dimensions: regional competitors become national/multinational/
global. Competitors can take various paths; they help
Direct versus Indirect Competitors. Direct competitors
the firm forecast eight competitive-threat transitions:
target similar customers to the firm. They offer
similar benefits/values, with similar products, tech- Transition I — potential direct competitor (C) to
nology, business models. Indirect competitors target current direct competitor (A).
the same customers with similar benefits/values, but Transition II — potential indirect competitor (D) to
have different products, technology, business models. current indirect competitor (B).
Current versus Potential Competitors. Today the Transition III — potential direct competitor (C) to
firm faces current competitors; tomorrow it may withdrawal — no longer a threat.
face today’s potential competitors — some potential Transition IV — potential indirect competitor (D) to
competitors may not even be around today. withdrawal — no longer a threat.
Figure 5.2 identifies four competitive threat types. Transition V — current direct competitor (A) to
This framework helps the firm decide which threats withdrawal — no longer a threat.
are most serious and where to deploy resources: Transition VI — current indirect competitor (B) to
• Current direct competitors — cell A. The competi- withdrawal — no longer a threat.
tive status quo — traditional interfirm rivalry. Transition VII — current direct competitor (A) to
• Current indirect competitors — cell B. More current indirect competitor (B) — the direct com-
difficult to identify than cell A — act differently, petitor developed some new approach to satisfy
develop customer benefits/values differently. customer needs.
• Potential direct competitors — cell C. Behave Transition VIII. From current indirect competitor (B)
like Cell A competitors, but emerge from different to current direct competitor (A) — the indirect com-
industries, geographies. petitor competes on an apples-to-apples basis.
• Potential indirect competitors — cell D. The
The Firm as a Competitor
most difficult to identify — do not compete today;
Our unstated assumption is that all competitors are
unclear when and from where they will emerge.
other firms. But for product/brand managers, the
 CHAPTER 5 INSIGHT ABOUT COMPETITORS, COMPANY, COMPLEMENTERS 39

[566t] [742t]

Peru LATAM Airlines

The Latin American airline industry is highly competitive, flights: LATAM — 61 percent; Peruvian Airline — 12
particularly in Peru. After entering Peru (1999), LAN (Chile) percent; Taca Peru (Avianca) — 12 percent; LC Peru —
transported around 35 million passengers. In 2015, LAN 8 percent; Star Perú — 5 percent. Various small airlines
merged with TAM (Brazil); LATAM Airlines has strong comprised the remainder. Airlines compete on service
presence in Argentina, Brazil, Chile, Peru. The domestic quality, price. Low-price airlines have shown interest in
Peruvian market is roughly 11 million passengers Peru; GOL Linhas Áreas entered in the early 2000s, but
annually; growth around 10 percent. In 2016, national withdrew a few years later. In 2017, Viva Airlines Peru
destinations with most traffic were Arequipa, Cusco, started flights among Arequipa, Cusco, Iquitos, Lima,
Iquitos, Lima, Piura. Market shares (2016) for domestic Trujillo.

Figure 5.2 Framework for Figure 5.3 Framework for

Identifying Competitive Threats Tracking Competitive Threats

III VIII IV
VII
Current A B Current A B
Competition

Competition
Timing of

Timing of

I II
Potential C D Potential C D
V VI
Direct Indirect Direct Indirect
Type of Competitor Type of Competitor

toughest competition may be internal. Different individual businesses target two separate market
businesses always compete for financial, human/ segments. Over time, each business expands product
system resources, perhaps also for sales force time. scope to become more similar. Two originally
They may also compete for customers. The firm may independent approaches now become competitive.
encourage intrafirm competition (deliberate), or it
occurs by happenstance.

Deliberately Induced Internal Competition. Some

Describe Competitors – Step 2
firms foster Darwinian internal competition so as to We require answers to four key questions:
improve effectiveness against external competitors.
• What competitor data should the firm collect?
These firms believe increased competitiveness more
than compensates for resource duplication, especially • What sources of competitor data are available?
if customers tend to switch purchases among • What data-gathering processes should the firm use?
products/brands. • What frameworks generate competitor insight?
Internal Competition by Happenstance. Internal
competition often simply evolves. Suppose two
40 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Collecting Competitor Data data on costing systems, financial strength, logistics,

To describe competitors effectively, the firm must operations, R&D, speed of action, business philos-
decide what it wants to know, based on decisions it ophy — including willingness to innovate, take risks.
must make. We hear a lot about big data, but good
competitor insight requires the right data: Competitive Data Sources
The firm probably already has some access to com-
Level of Data. The firm should consider several
petitive data internally; it requires a process to make
organizational levels — corporate, business, market,
these data available to competitor analysts. The firm
market segment. Typical questions:
should also seek external sources for competitor data.
• Corporate. How does the competitor allocate Key general approaches:
resources across its major businesses?
• Secondary data — located in various reports,
• Business. How does the competitor allocate publications, the Internet. The firm must collect,
resources across various product lines in the sort, give these data meaning — based on the
businesses where the firm competes? questions it wants answered.
• Market. For each product line where the firm • Primary data — require a focused acquisi-
competes: How does the competitor segment the tion effort — customer interviews, surveys. For
market? Which segments does it target? What is its important questions, the analyst should seek
production capacity/utilization? Where are R&D multiple sources, filter for reliability, cross-validate.
efforts focused?
• Market segment. What brand(s) does the com- Processes to Secure Competitive Data
petitor offer? How does the competitor position Many competitive data-gathering efforts fail because
these brands? What models? What prices? What of poor processes — too few sources, no cross-
credit terms? What promotional emphasis — validation, short-term focus when a longer-term
advertising, direct marketing, sales force, social view is important. Options differ by focus/required
media? What is the core message? How do target resources:
customers evaluate offers? How profitable are its • Competing. The best way to learn about competi-
products/brands? tors may be just to compete with them. Day by day,
Competitor data-gathering responsibility varies by an observant firm can gain significant insight.
organizational level/data type. Typically: • Competitive intelligence department (CID). The
• Corporate/business — competitive intelligence CID is responsible for collecting, analyzing, dis-
group with direct access to industry analysts, tributing competitive information — can be highly
consultants. focused, but expensive.

• Market/market segment — product/market • Competitive intelligence system. The firm builds a

managers. culture where employees are responsible for com-
petitive intelligence. They come across competitive
Type of Data. Both quantitative and qualitative data data daily; the critical step is to share these data
are important. with a competitor intelligence group.
• Quantitative data — market share, profitability: • Formal development of strategic plans. When the
SEC filings often provide these data for public firm has few major competitors, it can gain signifi-
companies; business data services supply profiles cant insight by developing strategic plans from the
for private firms. point of view of a competitor.
• Qualitative data — competitor manager expertise, • Gaming with multifunctional teams. Executive
commitment to various businesses, anticipated teams play one of two roles — firm, competitor.
strategic moves. The Internet offers many ways to Each team develops/presents its strategies/action
secure qualitative data. plans and creates counterstrategies/action plans.
Competitive data-gathering should not focus solely These war games often generate important insights.
on marketing issues. Information about products/ • Business lost, business gained reviews. In
services is crucial, but the firm should also seek well-managed firms, this process is standard
 CHAPTER 5 INSIGHT ABOUT COMPETITORS, COMPANY, COMPLEMENTERS 41

operating procedure. Typically, customers are • Infrastructure. The line organization — basic
willing to share these data. responsibilities/reporting relationships.
• Shadow system. Individual executives/teams • Processes. Accounting, information, monitor and
shadow specific competitors, as a full-/part-time control, reward systems.
job. Shadowing is an effective way of focusing
Strengths, Vulnerabilities (Failings).
attention on specific competitors.
• Assets. Financial, human, knowledge, organi-
Managers are often concerned about the ethics/ zational, perceptual, physical, political assets;
legality of competitive data-gathering. Our position brand equity, customer loyalty; proprietary/
is clear: There are many ethical/legal approaches nonproprietary assets. Also important: Emotional
to securing competitor data. The firm should not commitments, blind spots — these compromise
use unethical/illegal methods — bribery, covert hard-headed business judgments.
recording, knowingly jeopardizing someone’s job,
• Capabilities/competences. Activities the competitor
misrepresentation, placing moles at competitors.
does well — local expertise, broad-scale abilities
Some methods are not illegal, but may be unethical —and areas where it does poorly. Specific product-
— setting up job interviews to trawl for competitor related abilities, approach to risk, speed of action
data when no jobs are available; searching through may also be important competences.
competitors’ garbage placed on the street.
Firm in the Environment. Embraces relationships with
Firms can secure good competitive data without other organizations:
breaking rules; most organizations are leaky. But if • Value chain. Major work activities the competitor
competitors are leaky, your firm may also be leaky! conducts and how they connect to external entities
The message: Take affirmative steps to protect data: like suppliers, customers — Figure 5.4. Four core
• Classify information by degree of secrecy. questions of the competitor:
• Execute noncompete, nondisclosure agreements to • Where does it have a cost advantage?
safeguard firm interests. • Where is it at a cost disadvantage?
• Train employees to avoid loose tongues, especially • Where does it have a value advantage?
at industry meetings/social events.
• Where does it have a value disadvantage?
Framework to Describe Competitors • Alliances/special relationships. Alliances —
To gain competitor insight, the firm must organize formal economic relationships with other entities
competitive data into a useful framework. Good (partners) — customers, distributors, suppliers.
competitive insight often results from differential Special relationships are informal; may embrace
diagnosis of the firm versus competitors. We use government agencies, political parties, public
several basic building blocks.1 interest groups, customers, suppliers.

Competitor Organization. How it functions: • Networks. Interconnected sets of alliances/

relationships; each fulfills a unique role.
• Culture. Behaviors, norms, beliefs, values —
describe what the competitor stands for; how its
members operate/behave.

Figure 5.4 The Value Chain

Infrastructure
Supporting Human resource management
activities Product and process development
Procurement
Primary Inbound Production Outbound Sales and Service
activities logistics logistics marketing
42 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

Mind-Set. How the competitor thinks; the bases project competitor actions — the building blocks of
for its decisions. Assumptions — what does the competitive insight. The firm can justify competitive
competitor take for granted? Givens — outcomes of intelligence efforts only if they provide insight into
analyst judgments, inferred from competitive data. future competitor actions. Competitor assessment
analysis helps answer three competitor questions:
Current Strategy, Performance. How the competitor
behaves, its results: • What are its core options?

• Market strategy. Objectives, segment choices, • What actions would be required for each option?
strategies inferred by reverse engineering from • Does the competitor have the capabilities/resources
competitor actions. to implement each option?
• Major resource commitments. Build new factories,
expand existing plants, spend extensively on spe- Competitor Assessment Analysis (CAA)
cific R&D. This powerful tool focuses on an individual
competitor/group of similar competitors in a market/
• Performance. Market measures — market share,
market segment. CAA maps customer perspectives
customer satisfaction. Financial measures —
into required supplier resources. The firm identifies
product-line profitability; operating margin, share
where it possesses a differential advantage, where
price.
competitors have differential advantages. Table 5.2
Won’t this framework require a tremendous amount illustrates CAA for a single competitor.
of data? Right! Describing competitors is not for the Stage 1 – Identify Customer Requirements — Needs/
faint-hearted. Remember: Competitors are trying to Benefits/Values. Brainstorm/use marketing research.
attract, retain, grow the same customers. If they are
Stage 2 – Rank in Order of Importance. Reduce Stage
successful, they will survive, grow; your firm will not!
1 items to a manageable number, typically six to 10.
Rank items on customer importance — columns A,
Putting It All Together
B.
Sometimes the firm gains competitive insight directly
from data; other times it must integrate several data Stage 3 – Determine Necessary Capabilities/
items, then make inferences. Table 5.1 illustrates. Resources. What any firm would require to satisfy
customer requirements — column A. Capabilities/
resources map directly into customer needs/bene-
fits/values. Example: To satisfy the most important
Evaluate Competitors – Step 3
item — easy product availability — requires efficient
Competitor evaluation generates competitor strategic manufacturing, good distribution; enter as capabili-
options. Knowing these options allows the firm to ties/resources — section C.

Table 5.1 Drawing Inferences from Competitor Data

Indicators Inferences
Hires new customer service manager Competitor will upgrade service quality

Reorganizes customer support, service (CSS) Initial confirmation of alerting signal

CSS now reports to marketing VP (versus sales VP) Signals increased service importance

Initiates new training programs for sales force Enhancing service for all key customer segments

Emphasizes customer service in advertising Service is valuable to attract, retain, grow customers
CEO comments: “Customers expect quality in Service becoming part of competitor mind-set — will be
services as well as in the product.” institutionalized
Customer to our salesperson: “ABC is now Confirms competitor is institutionalizing and leveraging
doing things for us they never did before.” service
 CHAPTER 5 INSIGHT ABOUT COMPETITORS, COMPANY, COMPLEMENTERS 43

Table 5.2 Illustration: Competitor Assessment Analysis

Customer Customer Necessary Capabilities / Resources C

Requirements: Importance
Needs/Benefits/ Rank B Efficient Good Just-in-Time Well-Funded Access to Low-
Values A Manufacturing Distribution Delivery R&D Cost Materials

Easy product 1 * YN * YYY

availability
Low prices 2 * YN * YYN

Low inventories 3 * YN *N

Access to cutting- 4 * YYN

edge technology
Etc.

Stage 4 – Identify Matches. Place an asterisk (*) in Project Competitor Actions – Step 4
each matrix cell where a customer need/benefit/value
— column A — intersects with a firm capability/ The evaluation step generates a set of competitor
resource — section C. options. The firm must assess option(s) the com-
petitor will likely pursue — continue current
Stage 5 – Examine Matches. Ask up to three ques-
strategy; make a strategic change — short term,
tions of each asterisked cell. Whether or not to ask a
medium term, long term? What specific change(s)
subsequent question depends on the answer to the
will the competitor make? Begin with what the
previous question:
competitor is trying to achieve. Specific questions:
1. Relevance. Does the firm have the capabilities/
• What are competitor objectives? Understanding
resources to address the customer need/benefit/
objectives helps predict resource allocations.
value? If yes, enter Y; if no, enter N — stop.
• What market segments will the competitor address?
2. Superiority. For each Y cell: Are firm capabil-
How will it try to achieve objectives — distribution
ities/resources superior to competition? If yes,
strength, operational excellence, price leadership,
enter Y; if no, enter N — stop.
product leadership?
3. Sustainability. For each YY cell: Would it be
• What is the competitor’s staying power? Is it
difficult for the competitor to match/exceed firm
committed for the long run? Will it withdraw if the
capabilities/resources? If yes, enter Y; if no, enter
going gets tough? Could a competitor’s divested
N.
unit become a stronger/more difficult competitor?
Entries:
• YYY. The firm has a sustainable differential
advantage. Capabilities/resources match customer Manage Competitors – Step 5
needs/benefits/values, and are superior to competi-
Identifying competitor options, projecting com-
tion; it would be difficult to match/exceed the firm.
petitor strategies puts the firm in good position.
• YYN. Firm capabilities/resources match customer But managing (shaping) competitor actions is even
needs/benefits/values; the firm has an advantage, better! Before trying to get competitors to behave in
but the competitor could catch up relatively easily. beneficial ways, the firm must answer two questions:
• YN. Firm capabilities/resources match customer • What actions do we want the competitor(s) to take?
needs/benefits/values, but offer no advantage.
• What actions do we prefer the competitor(s) not
• N. The firm has a significant weakness/gap. take?
CAA enables the firm to project those options the
competitor will likely pursue. The firm should repeat
CAA for each serious competitor.
44 SECTION 2 FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CAA provides the firm invaluable insight into itself

Generally, the firm influences competitor behavior by
versus competitors. The firm simply reinterprets
signaling — sending intentional messages. Types:
findings from its perspective.
• Preemptive — what the firm will do encourages
competitors to act in ways favorable to the firm,
prohibiting competitor gains.
COMPLEMENTERS
• Warning — preannouncing responses to possible
competitor action. A complementer is any organization whose actions
affect firm sales. Complementer types:

THE COMPANY
Independent Organizations
Self-assessment does not require a separate
analytic framework. By developing good competitor When independent organizations develop mutually
insight, the firm secures good company insight as a beneficial strategies, they help each other generate
by-product. We focus on CAA. sales, but frustrate competitors. Example: Micro-
soft, Nintendo, Sony successfully persuade comple-
menters to develop games for their consoles. Apple’s
iPhone has well over one million complementary
Company Assessment Analysis applications/accessories, produced by thousands of
Revisit competitor assessment analysis — Table 5.2. developers.
CAA provides significant insight on competitors, but • Customers act as complementers when they
also on the firm. We reproduce CAA findings but enhance firm offers. Google’s advantage over Bing,
focus interpretation on the firm. Yahoo! relates in part to greater market share —
• YYY. The firm has a sustainable differential more data to test hypotheses/improve search.
advantage; it should make deliberate investments to • Suppliers often complement firm actions to
sustain/enhance its position. increase sales. Example: Car makers expect
• YYN. The firm leads, but should keep a close eye on suppliers to conduct R&D to improve automobile
the competitor, make the necessary investments to performance. McDonald’s expects suppliers —
maintain leadership. McPartners — to contribute ideas/concepts to help
• YN. The firm has a significant vulnerability; effec- grow its business.
tive investment could put the competitor ahead.
The firm cannot afford to allow this to happen.
• N. The competitor dominates; no doubt it Competitors
emphasizes its good performance with customers. Generally, competitors are the firm’s nemesis —
The firm may find it difficult to achieve parity. try to attract, retain, grow the same customers as

[734t] [234t]

Mexico Competitors as Complementers

More than 20 major, global automobile producers clusters provide opportunities for cost reduction,
manufacture in Mexico as members of automotive technology transfer; they motivate cooperation among
clusters — car and parts producers. The goal: Increase competitors/suppliers. Resulting alliances — Getrag
competitiveness. Mexico’s largest cluster — Guanajuato (German transmission specialist), Ford joint venture —
(formed 2013) — comprises General Motors, Honda, enable added value, and scale economies across supply
Mazda, and several component producers. Automotive chains, new vehicle development.
 [###t]

the firm. But competitors can also act as comple-

menters, without getting into antitrust problems.
We distinguish among strong, weak, unwelcome
complementarity.

Strong Complementarity
Front Office (Marketplace). Competitors work
Mexico AXA Seguros
together to better satisfy customer needs — agree on The Mexican insurance market, second largest in Latin
technological standards to reduce costs, speed intro- America, is on a 5 percent annual growth trajectory.
duction by reducing customer uncertainty about Regardless, insurance purchases severely lag more
which technology will succeed. developed economies — less than 10 percent of
Back Office (Operations). Competitors front offices families insure homes; less than 30 percent of Mexican
may compete fiercely, but back offices collaborate automobiles are insured.
extensively. Back-office cooperation reduces costs, AXA Seguros (AS) is a leading player in Mexico’s
improves efficiency for all firms. Examples: insurance market. AS’s French parent operates in 64
• Italian tile manufacturers jointly purchase freight to countries under the single AXA brand. AXA’s vision:
reduce international shipping costs. To become the preferred supplier for stakeholders, via
innovative services, to ensure long-term relationships
• Major airlines collaborate in interline arrangements
based on trust. AXA’s mission: To support clients in
to move luggage.
preparing for the future; make them feel safe by offering
• Retail brokerage houses work closely with products to protect various life aspects. AXA offers
competitors to clear trades. diverse insurance products: B2C — car, health, home,
life; B2B — liability, material damages, car.
Unwelcome Complementarity AS faces severe competition — market leaders
Sometimes firms do not want their products associ- Seguros GNP, Seguros Monterrey, ABA Seguros.
ated with other firms — unwelcome complementers. These competitors (and AS) have good reputations for
Example: Automobile/aircraft manufacturers fight security, service quality; products/services are roughly
fiercely against unauthorized parts manufacturers; comparable. AS competes with other traditional insurers
they believe these parts degrade their products. — Mapfre, MetLife, Plan Seguro, Qualitas, Seguros
Atlas. AS also competes with insurance companies
created by financial services firms — Bancomer,
Endnotes Seguros BBVA, Seguros Inbursa.
1 Based on a competitor analysis framework in L. Fahey,
Outwitting, Outmaneuvering and Outperforming Competitors,
New York: Wiley, 1999, by permission. [459e] QUESTIONS

1. Identify AXA competitors in your country.

2. What companies are AXA’s indirect competitors?
3. What companies are AXA’s potential direct competitors?
 TRANSITION TO

Strategic Marketing
Chapters 3 through 5 focus on securing market, then turn these assumptions into “We believe…”
customer, competitor, company, complementer statements:
insight. Some insight is fairly broad — factors 1. We believe consumers will not accept price
driving market growth, anticipated technological increases greater than one percent annually.
change; other insight is much narrower — identi-
2. We believe new textile fibers will gain greater than
fying new competitor entry, a specific competence
10 percent market share by 20XY+1.
the firm may secure. Regardless, the material in
these chapters forms the basis for the situation A useful metaphor for illustrating the role of
analysis — the foundation for the market plan. We planning assumptions in the market plan is the
address market planning issues in Strategic Marketing bridge — Figure T.1. The bridge represents market
— Section 3, Implementing the Market Strategy — strategy/implementation, taking the firm from today
Section 4. toward tomorrow. The bridge is built on pillars
— planning assumptions — supported by a foun-
The best way to build a solid superstructure is to
dation — situation analysis. If the pillars are weak/
transition from insight in the situation analysis to
foundation is insecure, the bridge will collapse when
assumptions about the future. Planning assumptions
the water becomes turbulent, rises. Correspondingly,
help the firm identify forces for change, and outline
if the situation analysis is weak/planning assump-
expected business conditions; they are critical sup-
tions are ill developed, the market strategy/imple-
porting elements for market plans. Drawing from the
mentation will collapse. But if the situation analysis/
various insight elements, marketers should identify
planning assumptions are strong, the market
candidate planning assumptions. Examples:
strategy/implementation will be robust, and form a
1. Consumers will not accept price increases greater strong bridge. [112v] Section 2 teaches how to develop
than 1 percent annually. insight to construct a solid foundation of situation
2. New textile fibers will gain greater than 10 percent analysis; planning assumptions transition from that
market share by 20XY+1. foundation into critical support for market strategy/
implementation.
To complete the process, marketers should identify
implications of each key assumption for the firm,

Figure T.1 Planning Assumptions: The Bridge Metaphor

RATEGY/IMPLEMENTA
KET ST TION
MAR

TODAY TOMORROW

PLANNING PLANNING
ASSUMPTIONS ASSUMPTIONS

SITUATION ANALYSIS

46
 47

SECTION 2 KEY MESSAGES

Chapter 3 Chapter 4
To gain market insight, the firm should focus on four To attract, retain, grow customers, the firm gains
broad areas — market structure, market and product deep customer insight by answering three critical
evolution, industry forces, environmental forces: questions:
Market Structure: Who are the customers? The firm should explore
• The market comprises customers willing to pay for several issues:
products/services to satisfy their needs. • Macro-level customers — organizations; micro-
• The firm should define the market at several levels. level customers — individuals.

• Product class, product form refer to products that all • Direct customers — exchange money for firm
competitors offer. Product class is a broader level of products/services; indirect customers — receive
aggregation than product form. value from firm products/services through
intermediaries.
• Firms offer product items to the market — a product
line comprises multiple product items. • Current customers, potential customers.

• Fundamental drivers of market size are population, • Roles in the purchase decision.
purchasing power. What do customers need/want? The firm satisfies
Market, Product Evolution: customer needs by making value offers. The firm
should gain customer insight into:
• The life-cycle framework is a good way to think
about market, product evolution. • Recognized needs — expressed or nonexpressed,
versus latent needs.
• Life cycles have several stages — introduction, early
growth, late growth, maturity, decline — each with • Who receives the firm’s value — customer
distinguishing characteristics. organization/individual(s) in the organization.

• Profit-margin life cycles do not mirror sales life • Attributes/features versus benefits/values.
cycles. • Hierarchies of needs, attributes/features, benefits/
values.
Industry Forces:
• Different types of value — functional,
• The five-forces model is a useful way of examining
psychological, economic.
pressures on the firm.
• Customer experiences — sense, feel, think, act,
• The five forces — current direct competitors, new
relate.
direct entrants, indirect competitors, suppliers, buyers
— affect the firm in different ways. How do customers buy? The firm gains insight from
the customer’s purchase-decision process:
Environmental Forces:
• Six stages — recognizing problems, acquiring infor-
• Environmental forces impact the firm, other
mation, evaluating alternatives, making a choice,
industry players.
purchasing and securing the product, engaging in
• Environmental forces are political, economic, postpurchase processes.
sociocultural, technological, legal/regulatory,
• Customers may deviate from rationality in their
environmental (physical) — PESTLE.
purchase decisions.
• PESTLE forces are in a continuous state of flux; are
• Environmental factors influence consumer
increasingly interconnected.
purchase decisions — culture, social class, other
people, family, the situation.
Audio related to Chapter 3
• Market Insight [826a]
(Noel Capon — Columbia Business School)
48

Chapter 5
• Important individual factors influence consumer • In pursuit of differential advantage, the firm must
purchase decisions — various resource types, gain deep competitor insight.
physical/mental health, should/want conflicts, life- • A structured competitor-insight process asks
cycle stage, lifestyle. several questions:
• Key factors influence organizational purchase • Identify. Who are competitors:
decisions — changes in the procurement process, • Current competitors — today?
evolution in buyer-seller relationships, increased • Potential competitors — tomorrow?
corporate attention to procurement, reduction in • Direct competitors?
the number of suppliers. • Indirect competitors?
• Describe. What are competitors’ capabilities,
Videos related to Chapter 4
difficulties?
• Procurement at Merck [747v]
• Evaluate. What are competitors’ strategic options?
(Howard Richman — Merck)
• Project. What do we expect competitors to do —
• Behavioral Economics [216v]
short term, medium term, long term?
(Itamar Simonson — Stanford Business School)
• Manage. How can we get competitors to do what
• Behavioral Economics [154v]
we want them to do?
(Dan Ariely — Fuqua School of Business,
Duke University) • Answering these questions is not simple but, for
each question, several approaches help improve
• Investment in Customer Insight [508v]
competitor insight.
(Walmart)
• The firm must know itself.
• Customer Insight [360v]
(Mohan Sawhney — Kellogg School of Management, • The firm must understand its complementary
Northwestern University) relationships. Complementers can help the firm
achieve its objectives.
Audio related to Chapter 4 • Both independent organizations and competitors
• Customer Insight [615a] can be complementers, each in different ways.
(Noel Capon — Columbia Business School)
Audio related to Chapter 5
• Competitor Insight [393a]
(Noel Capon — Columbia Business School)
 SECTION 3

Strategic Marketing

IMPERATIVE 1
Determine, Recommend Which Markets to Address

CHAPTER 6

Identifying, Choosing Opportunities

IMPERATIVE 2
Identify, Target Market Segments

CHAPTER 7

Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8

Market Strategy – Integrating

Firm Efforts for Marketing Success

CHAPTER 9

Managing through the Life Cycle

CHAPTER 10

Managing Brands

For key messages from Section 3, see page 95.

Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 6

Identifying, Choosing Opportunities

For complimentary material, see Axcess Vids codes at www.axcessvids.com

I am going to wait for the next big thing.

— Steve Jobs, Founder and CEO, Apple

Chapters 3 through 5 focus on developing insight Opportunities may originate in many places. R&D
into the M4Cs — markets, customers, competitors, develops new technologies/product ideas it believes
company, complementers. Then we made the have market viability. Sales, engineering may propose
transition to form planning assumptions. Now strategic alliances; buying, selling, licensing tech-
we shift direction to making decisions; we delve nology. When opportunities have marketing impli-
into the six marketing imperatives. The first, and cations, marketing should be part of the discussion.
arguably most important, imperative is to influence The firm should make go/no-go decisions with the
firm decisions about what markets to address. best available market insight — including voice-of-
Market-choice decisions are typically strategic for the the-customer input. Unfortunately, in many firms,
firm/business. finance drives acquisition/divestiture decisions, with
little or no marketing input.
Growth is critical for injecting vigor into the firm,
providing resources/rewards, keeping management Figure 6.1 presents a systematic three-stage approach
on its toes, retaining talent. Marketing should for identifying, generating, selecting, implementing
identify growth opportunities by systematically growth opportunities:
screening many alternatives. These opportunities 1. Strategy for growth — provides guidance/analysis
may be in the firm’s core business areas; in for generating opportunities.
adjacencies close to the core; or in unrelated areas 2. Screening criteria — to evaluate/select individual
with unsatisfied customer needs — white spaces. opportunities for investment.
Marketing should also play a key role in developing 3. Implementation — specific actions the firm may
screening criteria for individual opportunities, and take to achieve objectives.
helping make the business case for firm investments.
We revisit Figure 6.1 throughout this chapter.

Figure 6.1 Comprehensive Approach for Securing Higher Growth

Strategy for Growth Screening Criteria Implementation

Vision Objectives Internal development

Mission Compatibility (fit) Insourcing
Growth path Core competence Outsourcing
Timing of entry Synergy Acquisition
Contribution to the Strategic alliance
venture portfolio
Licensing,
technology
purchase/sale
Equity investment

49
50 SECTION 3 STRATEGIC MARKETING

Strategy for Growth opportunities. A well-developed mission keeps the

firm focused in a limited arena where success is likely.
Some pizza restaurant chains are highly profitable, Mission provides a valuable focus for shareholders,
but IBM does not make pizzas. Smartphones are fast employees, customers, financiers; it avoids dispersing
growing, profitable, but Walmart does not manufac- firm energy, resources in multiple directions.
ture them. Each opportunity seems attractive, but
many firms did not invest. Why not? Articulating the Mission. Mission states what the
firm/business will do; and by what it omits, what the
The simple reason: Each firm has a unique strategy firm/business will not do! (What business shall we be
for growth. Using a set of frameworks, the firm can in? What business shall we not be in?) Three internal
evaluate current businesses, decide which businesses resource (IR) dimensions, two externally focused
to be in, and which businesses not to be in. (EF) dimensions are critical:
Figure 6.1 (left column) shows the four components • IR1 — use core ingredient/natural resource — make/
for creating a growth strategy — vision, mission, sell products to many markets, but must be based
growth path, timing of entry. on the core ingredient/natural resource. We are a
forest products firm.
Vision • IR2 — based on a product/service. We are a car firm.
Vision is a description of the firm’s ideal future
• IR3 — related to a core intellectual property/core
state — not too broad, nor too specific, nor easily
technology. We are an electronics firm.
achieved. Corporate vision concerns the firm as
a whole; business vision focuses on an individual • EF1 — serve specific customer needs — with any
business. Vision can be very powerful. Example: product, using any technology. We serve people’s
Ford’s corporate vision led to the production line global transportation needs.
system; its Model T captured more than 50 percent • EF2 — serve a specific market/market segment —
U.S. market share by the mid-1920s.1 with many products, using any raw materials/
technology, targeted at a single segment. We serve
Current Visions families with household, personal-care products.
Amazon – To be the world’s most customer-centric
company The firm/business can choose among/combine these
Disney – To make people happy dimensions to develop mission.
Google – To organize the world’s information and make it Evolving Mission. Typically, successful firms evolve
universally accessible and useful missions. If opportunities are scarce, or a new target
Salesforce.com – The end of software opportunity appears, the firm should consider
broadening its mission.
Marketing should make sure the vision is outward-
looking; firm actions must support the vision. Vision Some firms narrow missions by dropping products,
should be aspirational, yet realistic; but not raise divesting businesses, breaking up into two or
customer expectations beyond the firm’s ability more businesses. Examples: DuPont exited oil and
to deliver. Finally, firm employees should actively textile fibers; Corning divested healthcare services,
embrace the vision, ideally by participating in its consumer products. Some firms — Guinness (Irish
development. Consider Howard Schultz’s (Starbucks brewer) — narrow product scope but place major
founder) perspective: “People want to be part of effort on expanding geographic scope.
something larger than themselves. They want to be
part of something they’re really proud of, that they’ll Growth Path
fight for, sacrifice for, and that they trust.”2 Mission provides a broad approach to identify
potential opportunities. Growth path is more
Mission focused. Growth path is specifically concerned with
Vision provides a lofty aspirational view of overall the trade-off between risk and expected financial
firm/business direction. Mission guides the search for
 CHAPTER 6 IDENTIFYING, CHOOSING OPPORTUNITIES 51

return. The firm should consider three factors in newness. Generally, market expansions are more
evaluating growth opportunities: risky than market extensions. Geographic expansion
• Revenue/profit potential versus required is a popular market growth option.
investment. Product/Market Diversification (E, F, H, I). For
• Core competencies from its portfolio of businesses, market penetration, product growth, market growth,
technologies, products, markets. at least one growth dimension remains constant.
• Risk. For product/market diversification, both market
and product/technology change to related or new.
Figure 6.2 shows the growth-path matrix’s two Opportunities are more risky; the business as a whole
dimensions — market, product/technology — to shifts direction.
analyze opportunities. We trisect each dimension
— existing, related, new — to develop nine matrix Business extension (E) requires moderate change
cells — A through I. By collapsing, we identify four for both market and product/technology. Example:
broad approaches to growth: market penetration — Nike made a product extension when it added
A; product growth — B, C; market growth — D, G; athletic apparel to its core footwear line. By con-
product/market diversification — E, F, H, I. trast, adding sporty street apparel was a business
extension — related product/related market.
Market Penetration (A). Most firms spend significant Business expansion requires new products, related
resources pursuing market penetration strategies. markets (concentric markets — F), or new markets,
The firm focuses effort on existing (or slightly related products (concentric products — H). Risk is
modified) products in existing markets. The firm greatest in conglomeration (I) — new products, new
bases growth on core competencies; it has relatively markets. Conglomeration by acquisition is generally
low knowledge risk. Of course, it may face significant less risky than by internal development, but many
risk from competitors. conglomerate acquisitions also fail. Example: Quaker
Product Growth (B, C). The firm brings new products purchased Snapple from Triarc for $1.7 billion, but
to existing markets. Product growth 1 (product exten- made significant distribution, promotion errors.
sion — B), product growth 2 (product expansion — C) Three years later, Triarc repurchased Snapple for
differ in degree of product newness. Product exten- $300 million. [706v]
sions relate to current products; product expansions
are unrelated, hence more risky.

Market Growth (D, G). The firm sells existing prod-

ucts to new markets via market development. Market
[750t]
growth 1 (market extension — D), market growth 2
(market expansion — G) differ in degree of market

Figure 6.2 Growth-Path Matrix

Market Growth 2: Business Expansion:

Brazil Havaianas
Conglomeration
New Market Expansion Concentric Products (I)
(G) (H)
Historically, Brazilian flip-flop sandals manufacturer
Market Growth 1: Business Expansion: Havaianas targeted low-income Brazilian consumers.
Market

Business Extension
Related Market Extension Concentric Markets
(D)
(E)
(F)
In the mid-1990s, as sales dropped, Havaianas
implemented a geography-driven strategy for growth,
Product Growth 1: Product Growth 2:
Existing
Market Penetration
Product Extension Product Expansion
entering more than 60 countries. Havaianas’ transition
(A)
(B) (C) to a fashion brand — same products, minor design
Existing Related New (to firm) modifications — sold to related/new country markets
Product/Technology globally. Since that success, Havaianas has grown
along a product axis by adding bags, sunglasses,
towels.
 52 SECTION 3 STRATEGIC MARKETING

Choosing the Right Growth Path. To identify/separate Timing of Entry

worthwhile opportunities from others typically Timing of entry complements growth path as a
requires significant marketing research/analysis. The key criterion for selecting among opportunities.
firm should identify opportunity scope, competition, Chapter 3 discusses five product life-cycle stages
then assess its ability to deliver customer value/secure — introduction, early growth, late growth, maturity,
differential advantage. More generally, the firm decline. Early stages have high uncertainty;
should evaluate its ability to be successful in various uncertainty decreases as the life cycle evolves.
growth paths. As a starting point for developing Correspondingly, competitive pressures typically
decision rules regarding new opportunities, the firm increase. Figure 6.3 explores links between the first
should conduct a five-year retrospective growth- four life-cycle stages and specific strategic options
path analysis —examine success/failure of pursued for timing of entry — pioneer, follow-the-leader,
opportunities classified by the various growth paths. segmenter, me-too.
The firm may discover some growth paths where it
Pioneer — blazes trails; creates new markets via
generally performs well; others where it performs
consistent, extensive R&D. Pioneers accept risk;
poorly.
they understand failure often accompanies success.
Pioneers possess R&D skills and internal processes
to consistently develop new products/services, and
marketing capabilities to open up new markets.
Pioneers have sufficient resources to support heavy
[911t] [701t] R&D expenditures and fund market development.
Of course, pioneers are not always successful. Apple
pioneered personal digital assistants (PDAs) with
Newton, but Palm became market leader.

Follow-the-Leader — enters rapidly growing markets

on the heels of the pioneer. Pioneers make large
research investments to develop innovative new
Brazil Toyota products/services; follow-the-leader firms focus on
development. This bad apple policy lets the pioneer
take the first bite. If the experience is positive, the
Toyota (Japan) (founded 1937) is a world-leading
follower enters; if not, it passes. Successful follow-
automobile manufacturer, recognized for high product
the-leaders should have:
quality (especially durability), security. Toyota’s growth
strategy encompasses geographic expansion into • Vision to serve a mass market.
Latin America, especially Brazil — established first • Good competitive intelligence — to develop
manufacturing plant outside Japan (São Paulo 1959). products/services asap.
In Latin America, Toyota continues its practice of • Good developmental engineers — to leverage/
launching products that are successful elsewhere. enhance the pioneer’s successful research.
Toyota’s entry and progress in Latin America impacted
• Good customer insight — about evolving needs.
other automobile firms. Over the years, Toyota (and
others) has faced difficult economic times, driven in part • Proactive patent lawyers — to identify weak spots
by political instability. Example: 2016 — total Brazilian in pioneer patents.
car sales 2.2 million, lowest since 2004. Regardless, • Financial strength, commitment — to outspend
now with four factories, including an engine plant — pioneers.
108,000 units annual capacity — Toyota exports to • Ability to differentiate offers, deliver superior
other Latin American countries. customer value.
• Will, persistence to succeed.3

Examples: FedEx — air package delivery; Gillette —

razors; Google — search; Intel — microprocessors;
Samsung — smartphones.
 CHAPTER 6 IDENTIFYING, CHOOSING OPPORTUNITIES 53

Figure 6.3 Timing of Market Entry

Follow-the-leader Segmenter Me-Too

Sales

Pioneer

Introduction Early Late Maturity Decline

Growth Growth
Time

Segmenter — enters established markets in late Screening Criteria:

growth; provides value for a specific market
Evaluating Opportunities
segment(s). As customers gain knowledge and
experience, preferences in maturing markets typically Growth strategy helps the firm identify opportu-
become more specific. Using insightful marketing nities; but which specific opportunities should the
research, segmenters identify unique needs of specific firm pursue? Figure 6.1 (center column) shows
customer groups, then offer specially designed five screening criteria that help the firm evaluate
products/services. opportunities, decide where to invest.

Me-Too — enters mature markets with limited

Objectives
product lines. Me-too-ers base low-price/low-cost
The crucial first criterion is to satisfy firm objectives.
strategies on value engineering, efficient production
Revenue/profit growth is critical for creating share-
systems (often in low-cost countries), low overhead,
holder value, but unmitigated growth can be a real
aggressive procurement, great attention to detail.
problem. The firm must temper growth ambitions
Me-too-ers spend little on product R&D; offer
with concern for risk, timing, stability, flexibility.
similar products as market leaders; are often leaders
in process innovation; have very focused marketing. Revenue/Profit Growth. To assess revenue/profit
potential, the firm should consider both financial and
Me-too-ers can wreak havoc in segmented markets
nonfinancial measures. Standard financial measures
where firms compete with value-added offers; many
— timing of cash flows, payback, return on invest-
Chinese firms pursue this approach.
ment (ROI), profit margin, net present value (NPV),
Choosing the Right Timing-of-Entry Strategy. Similar internal rate of return (IRR). Nonfinancial measures
to growth-path decisions, the firm should identify — leading indicators of profit performance —
which timing-of-entry strategy best fits its capabili- market size, expected market growth, market poten-
ties, then match this strategy to market opportuni- tial, forces driving market growth, number/strength
ties. Of course, as markets evolve, the firm must also of competitors, market-share forecasts. These factors
evolve capabilities. influence revenue, cost, profit forecasts.
54 SECTION 3 STRATEGIC MARKETING

Sometimes firms reject opportunities because forecast Compatibility (Fit)

performance is inferior to current/historic perfor- Can the firm be successful in the opportunity? Three
mance of an existing product(s). This comparison is core types of compatibility (fit) are crucial. The firm
incorrect: The firm should compare forecast market should possess/acquire all three types of fit before
share/revenues/profits from the new opportunity investing in an opportunity.
versus forecast market share/revenues/profits without
Product-Market Fit. Is the product appropriate for the
it. Example: Despite a significant lead in expensive
market? Restated: Does the product satisfy customer
laser printers, HP added inexpensive inkjet printers
needs in target market segments better than compet-
(lower margins) to avoid losing market share.
itors?
Risk. The firm must weigh forecast revenues/profits
Product-Company Fit. Does the firm possess financial,
versus risk, required investment. Considerations
human, other capabilities/resources to succeed? Can
include the opportunity’s return-risk profile; the
the firm successfully upgrade efforts as the market
impact of each opportunity on other opportunities.
evolves?
Generally, potential return, risk are correlated, but
many opportunities offer good returns at low risk. Company-Market Fit. Can the firm compete
effectively in the market? Does the firm have
Timing. The firm must consider timing of profit
sufficient customer insight, reputation, resources/
contributions. A moderate return opportunity
skills to defeat competitors?
delivering medium-term profits may be more
attractive than a higher return opportunity
Core Competence
promising profits later.
Core competencies are capabilities, knowledge,
Stability. Suppose the firm must choose between two resources, skills the firm possesses.4 The core-
opportunities: High growth, high profit variability, competence criterion is straightforward: Does the
versus lower growth, low profit variability. The firm bring anything to the party? Can the firm take
firm may prefer the lower growth, low variability anything from the party? More formally: Does this
— higher stability — option. Example: Schneider opportunity leverage firm core competencies, or
Electric Mexico focuses on markets it can serve allow it to develop new competencies? If the answer
through existing distributors. Schneider believes is no to both questions, the firm should probably
these revenues are more stable than revenues reject the opportunity. But one yes may be sufficient
from potentially more profitable large electricity to invest. Generally, the firm is better off pursuing
generation projects requiring major investments. opportunities that use its core competencies — it
can more easily gain differential advantage. Example:
Flexibility. All firms face increasing environmental
Coca-Cola introducing a new sports drink; Toyota
change, complexity, turbulence. No matter how good
launching a new automobile.
firm forecasting, it may be blindsided by unexpected
events. Insurance policies give the firm flexibility to Of course, an opportunity may be attractive even
deal with changed circumstances: if the firm has little competence — if it can secure
• Acquisition. Acquire firms with positions in the required competence. Many startups have little
adjacent markets. competence — just an idea — but they successfully
build/acquire the necessary competence.
• Joint technology agreements. Example: Oil
companies often form partnerships for oil-drilling
Synergy
platforms and operations.
Synergy explores how an opportunity relates to
• Partial ownership. Example: Major drug firms existing firm capabilities/resources. Positive synergy
frequently take this approach with biotechnology reflects the notion that 2+2 can be greater than
firms. 4! Synergy kicks in when the firm uses existing
• R&D. Hedge bets by investing in competing fields. resources to develop an opportunity. Distribution
• Venture capital. Provide venture capital to startup synergy: The firm sells a new product through
firms, but retain options to increase ownership. existing distributors. Manufacturing synergy: The
firm makes a new product in existing facilities. The
 CHAPTER 6 IDENTIFYING, CHOOSING OPPORTUNITIES 55

firm should not decline an opportunity for lack of • Resources. Some resources may be unavailable, too
positive synergy — but positive synergy can enhance expensive to develop/acquire.
profits. • Time. Market windows are increasingly short;
When 2+2 is less than 4, negative synergy is at work. internal development takes time.
Pursuing an opportunity may erode revenues/profits
from existing products. Example: Schering Plough’s Insourcing
(SP) allergy-relief prescription drug Claritin was very The firm captures more added value in the supply
profitable; SP launched an over-the-counter version chain by undertaking additional activities in
to reach the larger market; prescription Claritin sales developing, producing, marketing, distributing,
dropped more than 40 percent. promoting. The firm can expand upstream, by con-
ducting supplier activities — backward integration;
Contribution to the Venture Portfolio downstream, by conducting customer activities —
The firm should assess all opportunities individually, forward integration. Adjacencies (activities closely
and as elements in its venture portfolio. A firm with related to core competencies) are prime insourcing
good cash flow but few growth businesses may invest candidates; may help develop new core competencies.
heavily on longer-term, higher-risk options. Con-
servatively managed firms tend to invest in low-risk Outsourcing
opportunities that pay off quickly. Aggressive firms The firm engages other firms to undertake non-core
accept greater risk for potentially higher returns that activities previously conducted in-house. The firm
pay off in the long run. can better focus resources on delivering customer
value, securing differential advantage. Firms out-
source a wide range of activities — managing infor-
mation systems/technology infrastructure, accounts
Implementing Growth Strategies
payable, benefits management, payroll, procurement,
Figure 6.1 (right column) shows options for customer service, even manufacturing.
implementing the firm’s growth strategy.
Acquisition
Internal Development The firm can use acquisition — individual
Many firms put significant effort into internal businesses/entire firms — to gain competencies
development of new products/services. Internal that provide customer value/secure differential
development is appropriate in all cells of the growth- advantage. Generally, growth by acquisition has a
path matrix and for all timing-of-entry options. speed advantage: The firm gains immediate access to
Some evidence suggests a strong positive correlation new products/markets, supporting infrastructure —
between R&D spending and corporate profitability. human resources, operational capabilities, systems,
Internal development is not just for technologists processes. Firms that grow extensively by acquisition:
and engineers; marketing can play a major role in Cisco, GE, J&J, Microsoft, Oracle.
directing R&D efforts by infusing insight — Chapters
But acquisitions are no panacea. Acquiring successful
3, 4, 5 — at all developmental stages.
firms/businesses can be expensive — Facebook
Advantages for internal development: acquired WhatsApp for a whopping $21.8 billion;
• Control — over the entire development process. marrying the cultures of acquired/acquiring firms/
The firm secures required resources; makes all businesses may be difficult. The important question:
decisions about suppliers, distributors. Does the acquisition add value? Value creation
depends on the specific acquisition; we distinguish
• Cost — typically less than securing new products
between two very different types:
by acquisition, other means.
Major Acquisitions. These multibillion-dollar
Disadvantages:
acquisitions often make headlines. But bigger is not
• Expertise. The firm must successfully direct R&D always better. Academic studies suggest 70 percent
efforts, or the resulting products may require of major acquisitions are dilutive for the acquiring
commercialization skills the firm does not possess.
56 SECTION 3 STRATEGIC MARKETING

firm’s shareholders; in the heat of the chase, acquirers

Endnotes
overpay. Many business leaders, scholars have spoken
1 J.C. Collins, J.I. Porras, “Building Your Company’s Vision,”
out against these acquisitions. Harvard Business Review, 74 (September–October 1996), pp.
65–77. [398e]
Small Fill-in Acquisitions. These acquisitions com-
2 Quoted by Hazel Stewart, Managing Director, Wilson Learning
plement an existing strategy. Example: Amazon was Australia, “Want Successful Change Management? Get Employee
unsuccessful selling footwear online, so it acquired Buy In!,” Internet, July, 2012.
Zappos.com (leading online footwear retailer). Tech 3 G.J. Tellis, P.N. Golder, Will and Vision: How Latecomers Grow to
firms often acquire to gain technology/market access. Dominate Markets, New York: McGraw-Hill, 2006. [117e]

Research suggests that modest acquisitions are the 4 C.K. Prahalad, G. Hamel, “Core Competence of the Corporation,”
Harvard Business Review, 68 (May–June 1990), pp. 79–91.
most successful — easier to implement; acquirers [120e] K.P. Coyne, S.J.D. Hall, and P.G. Clifford, “Is Your Core
may get good deals. Competence a Mirage?” The McKinsey Quarterly, 1 (1997), pp.
40–54. [347e]

Strategic Alliance
This approach addresses poor product-company
fit/poor company-market fit, without the capital
investment/risks inherent in acquisitions. [147v] A
good alliance partner complements firm strengths/
[###t]
mitigates firm weakness; the combined entity is
stronger than either firm acting alone. Prototyp-
ical alliances: Small, innovative firms join up with
well-established firms — strong marketing, good
customer reputations, deep pockets.

Unfortunately, many strategic alliances fail due Mexico

Co’munity Business
to changed objectives by one or more partners,
incompatible organizational cultures, insufficient
resources, lack of planning/managerial attention.
What appears attractive in theory can be difficult to Co’munity Business (CB) (founded 2010) is a Mexican
execute in practice. marketing solutions firm. Since founding, CB has
offered high-quality, innovative marketing solutions at
Licensing, Technology Purchase/Sale accessible prices. CB is an outsourced provider of
These options are alternative ways to access tech- local solutions/market strategies for several multinational
nology developed by others. Licensing: The licensor firms — ARCA Continental (Mexican beverage firm —
owns the technology; the licensee typically pays min- second-largest Coca-Cola bottler/distributor in Latin
imum royalty (fixed payment regardless of use) plus America), Heineken, Sally Beauty Supply, Ragasa. CB
earned royalty based on sales (units/dollars), profits. also serves small firms with limited human/economic
Technology purchasers typically pay a fixed price to resources. CB plans to offer services to U.S. firms,
own the technology. In both cases, the acquiring firm either by opening U.S. offices or serving from Mexico.
avoids R&D risks/expenses, but may pay a high price
to access successful new technology. Conversely, the QUESTIONS

firm may secure revenues/profits by providing its 1. What do you recommend as growth path for CB?
technology to other firms by licensing or sale. 2. What criteria should CB use for deciding whether or not
to enter the U.S. market?
Equity Investment
Many firms augment internal development efforts by
making equity investments — taking partial owner-
ship in startups. Sometimes firms form/incubate
startups by spinning off successful in-house product
development. Typically, the firm retains an ability to
increase its equity stake later.
 CHAPTER 7

Market Segmentation,
Targeting
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Market segments and market segmentation are 3. Develop market-segment strategy. The firm
fundamental marketing concepts. Customers in a develops a market-segment strategy, including a
market have a variety of different needs, or similar positioning statement — Chapter 8 — for each
needs with different priorities. Either way, the target segment. Typically, the firm’s market strategy
market-segmentation task is to place customers in combines several individual market-segment
groups — market segments — so that each group is strategies.
relatively homogeneous in its needs profile.

A specifically designed market offer satisfies cus- The Market-Segmentation Process

tomers in one market segment; a different market
segment requires a different market offer. To design Market segmentation is a conceptual/analytic process
and produce effective market offers, the firm must critical for developing/implementing effective market
understand each segment’s need profile. A firm strategies. In a three-step market-segmentation
intent on serving a large market — snack foods, process — segmentation, targeting, positioning (STP)
automobiles — must make several market offers, — the firm first groups actual/potential customers in
each targeting a specific market segment. Typically, a a market into various market segments. The firm then
single offer — potato chips, SUVs — fails to satisfy chooses which segments to target for effort. Then,
the many diverse customers who purchase. the firm must position offers in each target segment
and develop market-segment strategy. When the
Because customers have different need profiles, market-segment strategy is set, the firm designs, then
Chapter 7 describes the three separate, but related, implements, a suitable market offer.
strategic marketing tasks that marketers must
complete: Figure 7.1 describes the process of designing, then
implementing market offers for each target segment.
1. Identify market segments. Figure out the best
By executing the process well, the firm:
way to group customers — based on market,
customer, competitor, complementer insight — • Secures better insight into the market, customers,
Chapters 3, 4, 5. competitors, company, complementers — partic-
ularly, customer needs; planning assumptions are
2. Target market segments. Resources are always
stronger.
scarce. The firm must decide which segments
to target for effort; rarely can a firm address all • More effectively identify market opportunities.
market segments. • Develops a clearer focus on market strategy by
targeting specific market segments.
Note an important distinction between these tasks.
Identifying market segments is creative, analytic. • Identifies opportunities to customize offers for
Targeting market segments requires a strategic target segments.
decision. Identifying, targeting the right market • Designs better offers — product, promotion,
segment(s) is a crucial strategic marketing task. distribution, price.

57
58 SECTION 3 STRATEGIC MARKETING

Figure 7.1 Segmentation, Targeting, Positioning — STP

Market, Customer, Competitor, Chapters 3, 4, 5

Company, Complementer Insight Transition to
Planning Assumptions Strategic Marketing

Identify Market Opportunities Chapter 6

Market-
Segmentation
Process
Identify Market Segments Chapter 7
Targeting
Decision
Target Selected Market Segments Chapter 7
Develop Market-
Segment Strategy,
Positioning
Formulate Market-Segment
Strategy, Positioning Chapter 8
(for each target segment)
Design the
Market Offer

Implement Market-Segment
Strategy (for each Chapters 1 to 20
target segment)

• Secures superior differential advantage; greater implementation costs. Market segmentation

customer satisfaction, loyalty. operates between these extremes. The firm targets
• Uses resources more efficiently; earns higher one or more segments, develops specific strategies,
profits. positionings, offers to satisfy needs of customers in
those segments.
The fundamental premise underlying market
segmentation: In any broadly defined market, Levels of Segmentation
customer need profiles are heterogeneous (different). Segmentation forms smaller, more discrete groups
Customers have different needs/different priorities of out of a whole. The firm chooses a broad market to
needs. They seek different benefits/values based on address — Marketing Imperative 1 (Chapter 6) —
these differing need profiles. The segmentation task then identifies several market segments. Within any
is to divide the market into several discrete groups single market segment, the firm may segment further,
of customers, each with relatively homogeneous forming customer segments. Some practitioners
(similar) need profiles. These customer need profiles define the first-level grouping as market segmenta-
differ segment by segment; an individual customer tion and the finer-grained, second-level segmenta-
falls into one, but only one, segment. tion as customer segmentation. Example:
Market segmentation is often a compromise. At • Market — pain relief;
one extreme, the firm develops one strategy, one • Market segments — backache, foot pain, headache,
positioning, one offer for the entire market — mass muscle ache, stomachache;
marketing. This one-size-fits-all approach is the
• Customer segments for headache — cluster,
most efficient, lowest-cost way to address a broad
migraine, tension.
market. But customer need profiles are typically
heterogeneous, so many customers would be
Developing Market Segments
unsatisfied. At the other extreme, the firm develops
The firm can approach the market-segmentation
a unique/specialized offer for each customer. Such
process from two directions: customer needs first,
customization ensures a good match between
candidate descriptor (segmentation) variables first.
customer needs and firm offers. But firms rarely
The firm can also use qualitative or quantitative
earn sufficient revenues to offset development/
approaches.
 CHAPTER 7 MARKET SEGMENTATION, TARGETING 59

Customer Needs First. The firm identifies differing Forming groups using geographic/demographic
customer need profiles, then uses these profiles to variables is relatively easy, but the resulting groups
form groups. Customers within each group have may not be good market segments. Behavioral,
relatively homogeneous (similar) need profiles, but sociopsychological variables are often more effective
the various groups have heterogeneous (different) — Table 7.2.
need profiles. The second task is to select descriptor
The main problem of starting with candidate
variables that identify these groups.
descriptor variables is that customer groups may not
Candidate Descriptor (Segmentation) Variables First. have distinct need profiles — descriptor variables
The firm uses candidate descriptor variables to do not produce segments at all! The marketer must
construct customer groups. The second task requires repeat the process with other descriptor variable(s).
searching for homogeneous (similar) need profiles Assigning customers to market segments formed
within each group; heterogeneous (different) need from behavioral/sociopsychological variables may be
profiles across groups. If the firm cannot find good difficult. Generally, segmentation approaches starting
need profiles — similarity within groups, differ- with customer needs are preferable.
ences across groups — it tries again with different
descriptors. Forming Market Segments:
Methodological Approaches
Table 7.1 shows various descriptor variable types.
Approaches fall into two main categories:
Geography and demography are popular categories.
Example: MTV frequently uses country/geography Qualitative. The segmentation task is highly
when tailoring customer offers: 38 separate judgmental, requiring significant conceptual skill.
nationally focused channels — MTV Romania, Raw material is creative insight, typically gained
MTV Indonesia. from marketing research, CRM systems.

Table 7.1 Examples of Candidate Descriptor (Segmentation) Variables

Variable Type Examples of Descriptor Variables

Geographic Country, region, county size, city or Standard Metropolitan Statistical Area size, population
density, climate
Demographic B2C — age, education, family life-cycle stage, family size, gender, income, language,
national origin, occupation, race, religion, social class, wealth
B2B — balance-sheet items, firm size, growth, industry, profitability, legal entity, length of
time at location, number of years in business
Behavioral Composition/type of purchase decision, decision-making practice, decision-making unit,
new or existing user, use occasion, user situation
B2B — procurement organization — centralized/decentralized; power structure — like
engineering dominated, financially dominated.
Sociopsychological B2C — attitudes; life stage; lifestyle characteristics like activities, interests, opinions;
personality (ambitiousness, authoritarianism, autonomy, compulsiveness, conservatism,
gregariousness, leadership); sexual orientation
B2B — inward/outward orientation, organizational climate/culture

Table 7.2 Examples of Descriptor (Segmentation) Variables and Groups

Variable Type Variable Examples of Groups

Demographic (B2C) Education Grade school or less, some high school, high school graduate, some college,
college graduate
Demographic (B2B) Firm size Fortune 500, Fortune 501 to 1000, sales > $100 million, sales $50 to $100
million, sales < $50 million
Sociopsychological (B2C) Life stage Single, just married, married with children, divorced with children,
empty-nester couple, empty-nesters with grandchildren, widow/widower
60 SECTION 3 STRATEGIC MARKETING

Quantitative (Data Crunching). Large-scale • Examine each customer cluster (segment) for
market-segmentation studies use extensive customer identifying characteristics.
survey data/sophisticated multivariate statistical
The fundamental segmentation task is linking each
techniques. Cluster analysis approaches include the
segment’s need profile to appropriate descriptor
following steps:
variables. If segmentation is done well, each
• Develop many statements (variables) about segment has a well-defined need profile, and is
customer needs. easily described by descriptor variables.
• Develop questions (variables) for identifying
Table 7.3 shows a proposed age-based segmentation
customers.
of the female skin-cream market. Figure 7.2 shows a
• Administer statements/questions to a random two-variable segmentation of the physician market.
sample of current/potential customers.
• Analyze customer need responses by cluster
analysis. Choose the number of clusters (segments)
that form the best grouping of customer needs.

Table 7.3 Market Segments in the Female Skin-Care Market:

Importance Rank Order of Customer Needs/Required Benefits/Values by Age-Based Market Segments

Customer Need/Required Age-Based Market Segments

Benefits and Values 14–18 19–29 30–39 40–49 50–64 65 and over
Beauty 5 4 1 2 2 3

Confidence 2 2 3 3 3 4

Economy 4 5 7 7 6 5

Health 6 6 4 4 4 2

Sexual Allure 3 1 2 5 5 6

Status 1 3 6 6 7 7

Youthfulness 7 7 5 1 1 1

Figure 7.2 Example of Two-Variable Segmentation of Physicians

Approach to Treatment
Aggressive Conservative

Relies on
scientific Risk Taker Hard Headed
evidence

Type of Data

Relies on
clinical Path Finder Tortoise
experience
 CHAPTER 7 MARKET SEGMENTATION, TARGETING 61
[559t]

Mexico Nintendo

Nintendo (Kyoto, Japan — founded 1889) is a leading Mexico. Nintendo discovered Mexican videogame users
multinational consumer electronics/video game firm. skewed younger than U.S. users. Mexico: 74 percent —
Nintendo entered the U.S. (1985) with the Nintendo less than 20 years old; 29 percent — 31 to 49 years old;
Entertainment System, then introduced Super Mario 7 percent — more than 50 years old. In Mexico, Nintendo
Brothers, the best-selling video game ever. targets the youth market segment.
Nintendo introduced its best-seller — The Legend of
United States. Industry observers consider the
Zelda — in 1986. For the recently launched The Legend
videogame market as comprising three segments:
of Zelda: Breath of the Wild, Nintendo targeted core
• Top tier (core gamers) — ages 15–40 gamers in the U.S. In Mexico, Nintendo targeted young
(95 percent male) users, reaching children age 4 to 12 by television. These
• Middle tier (broad market payers) — ages 8–50 children watch television 4.34 hours per day (more than
(50 percent male) any other country) — 30 percent have televisions in their
• Broad tier (players, not payers) — all ages, bedrooms — mostly telenovelas, reality shows, cartoons.
yet trend older (30 percent male) These data guided Nintendo’s advertising spending.

Market Segments appropriate data collection, analysis, creative insight.

They help the firm direct resources to those parts of
The market-segmentation-process task is to identify the market where success is likely.
good segments — the firm can target one or more of
these segments with a reasonable chance of success. Market Segmentation Example
So far, we focused on two important segmentation Best Buy (BB) is the leading U.S. consumer elec-
criteria: tronics retailer — revenues exceed $40 billion,
• Differentiated. Customers in different segments market share — 20 percent. Market segmentation
have different need profiles. Accordingly, they drives BB’s approach to the market. BB identifies its
should respond differently to market offers. most valuable customers, then uses sophisticated
• Identifiable. The firm can identify customers by marketing research techniques to form market
using descriptor (segmentation) variables. segments. BB’s most valued segments, described by
archetypes, are:
Good market segments satisfy four additional criteria:
• Barry — affluent tech enthusiast
• Accessible. The firm can reach the segment via
• Mr. Storefront — owns a small business
communications/distribution channels, using
appropriate/cost-effective approaches. • Buzz — young gadget fiend
• Appropriate size. Generally, large firms prefer • Ray — price-conscious family guy
large segments to justify efforts/costs. Small firms • Jill — busy suburban mom
prefer small segments; they avoid large/powerful
BB is also interested in Carrie — young single
competitors.
woman; and empty-nesters Helen and Charlie. To
• Measurable. The firm can measure important address the five core segments, BB centrizes and
characteristics — segment size, growth. remodels stores. Barry stores have expert salespeople
• Stable. Customers stay in the segment for a and a separate department for home-theater systems;
reasonable time period. Jill stores have personal shopping assistants; Buzz
stores have many video games. Some stores target
But marketers must be clear: Market segments are
more than one segment. BB trains employees to
not real, correct/incorrect, unchanging. Customers
identify customers by segment and make product/
do not have market-segment membership stamped
service offers that research shows they value.
on their foreheads! Market segments derive from
 62 SECTION 3 STRATEGIC MARKETING[###t]

Should We Target Large Segments or

Small Segments?
Large firms generally have greater resources than
Argentina Samsung small firms; a large firm that segments/targets well is
difficult to beat. But market segmentation/targeting
can even the odds for smaller firms. Many large firms
Samsung Electronics (South Korea, founded 1969)
have difficulties with market-segmentation decisions
introduced its new Galaxy S6 smartphone in Argentina
— internal constituencies disagree; decision-making
(2015). Samsung employed age-based demographic
is protracted; resources are spread too thin over
segmentation, targeting men/women aged 35 to 54.
many segments. Smaller, more focused competitors
Samsung also targeted smartphone owners and social
are able to gain advantage.
media users via advertising on Facebook, using a specific
call-to-action button — Learn More; Buy. The S6 launch Sometimes small firms win when larger firms ignore,
was successful — both brand recognition and new- reduce service to, withdraw from less attractive (for
customer acquisition exceeded targets. them) market segments. Small firms with limited
resources enjoy focus advantages; in targeting fewer
segments, they build strong customer relationships,
almost by default. But they may face other problems:
• Demand shortage. A firm addressing few segments
has little cushion against demand reduction in any
one segment.
Key Questions about Market Segments • High costs. Narrow focus typically implies higher
Some common questions managers ask: costs; high prices may not offset.

How Many Market Segments Are Enough? The firm • Too successful. Success attracts attention from
must trade off positives/negatives of many versus few major players; they enter and devastate the small
segments: firm.

• Many segments. As the number of segments Alternatively, success in a small segment may lead a
increases, the number of need profiles also large firm to acquire the small firm. Such acquisitions
increases. Customer satisfaction also increases as significantly enrich the small firm’s shareholders.
the firm targets specialized customer groups. But
Can an Individual Customer Be a Market Segment?
product development, marketing, management
Firms that address B2B markets, or sell consumer
costs, other resource requirements are high; scale
goods through large retail chains, often focus efforts
economies are few.
on individual customers — segments-of-one. The
• Few segments. Customer need profiles are less firm treats each strategic/key account as an individual
granular/more diffuse in any individual segment. market segment.
Customer satisfaction from addressing individual
segments is necessarily lower. Costs are also lower; Historically, in B2C markets, individual artisans
segment management is less difficult. — custom tailors — provided high-priced, per-
sonally designed bespoke products to individuals.
Firms experienced in market segmentation typically Today, technological advances allow firms in many
opt for relatively few segments, often between five industries to serve segments-of-one. Examples: Lens
and eight. They may develop more discrete segments Crafters, Warby Parker deliver individually fash-
during the segmentation process, but later narrow ioned spectacles within a few hours. At Callaway
down to a smaller number. and Golfsmith performance centers, golfers receive
In some industries, firms target several fine-grained computer analyses of golf swings; they purchase
segments via modular product design, using precise-length clubs, bent to a specific angle. [949v]
individual components, differentially combined, Many firms personalize products using choice board
to form multiple products serving multiple segments. models: Dell — PCs, Mattel — Barbie dolls.
 CHAPTER 7 MARKET SEGMENTATION, TARGETING 63

Do Market Segments Evolve? Yes! Customer refinement techniques to identify groups based on
need profiles constantly evolve; so must market purchasing patterns, then tailors offers based on
segmentation — based on good market, customer, those patterns. This approach is especially popular
competitor, complementer insight. In young markets, among supermarket operators.
early entrants often succeed by providing basic
functional benefits/values. As the life cycle evolves,
competitors enter; basic functional benefits/values Targeting Market Segments
become cost of entry. The firm achieves differential
advantage by identifying customers with finer- The firm never has sufficient resources/capabilities
grained needs, then delivering appropriate benefits/ to address all segments in a market; it must decide
value. where to place efforts. Some segments receive greater
effort/resources; some segments receive little or none.
How Do Customer Life Cycles Affect Market Effective targeting better addresses customer needs,
Segments? Generally, promoting/selling products to minimizes competition. The firm should implement
current customers is less expensive than seeking new the Principle of Selectivity and Concentration —
customers. B2B customers may continue indefinitely, Chapter 1.
but individual human consumers follow a predict-
• Carefully choose targets for effort.
able life cycle. B2C firms have two polar options:
• Concentrate resources on those targets.
• Focus on a fixed age group — continually add
new consumers as current customers age/leave Example: International document and package
the market segment. Magazines often favor this delivery firm DHL used successive approaches in
approach —Seventeen, Sports Illustrated for Kids. targeting three customer need segments:
• Retain consumers as they age — evolve the firm’s • Ad hoc — small irregular shippers/occasional
offer/add new benefits/values to match changing buyers.
customer need profiles. The firm reaps customer • Regular — high-volume shippers not requiring
loyalty benefits, but eventually, consumers stop supply-chain solutions.
buying. Examples: Ford, GM abandoned Mercury,
• Advantage — shippers requiring a supply-chain
Oldsmobile, respectively.
solution.
Does a Segment of Customers Differ from a Group of
The Advantage segment was attractive: Required
Customers? We take a hard line on the definition of
DHL supply-chain solutions; offered high revenue/
market segments. Within a segment, customers have
profit potential; good partnership possibilities. DHL
similar need profiles; these profiles differ from those
selected 10 industry segments where it could offer
of customers in other segments. By contrast, the firm
industry-specific knowledge, solutions. DHL focused
can form groups in many ways: Degree of use, pro-
effort on specific firms in those industries.
pensity to buy innovative products, customer loyalty.
Groups may be very important for understanding
Multifactor Matrix Approach to Targeting
buyer behavior, but they may not be segments.
(Strategic Position Analysis)
Example: McDonald’s has a heavy-user group, but
This approach helps the firm decide which market
those customers fall into quite separate segments:
segments to target. For each candidate segment, the
families with young children, and single males in
firm must answer two questions:
blue-collar jobs. In general, the firm should develop
groups before segments. • How attractive is this segment?
• Does the firm have business strengths to win in this
Can We Develop Segments Based on Just Our
segment?
Current Customers? Most firms segment the entire
market — current, potential customers. But when the Figure 7.3 shows the analysis framework — market-
firm has many current customers, it may use CRM segment attractiveness versus business strengths. We
approaches — Chapter 2 — to capture, manage trisect each axis — high, medium, low, then label the
customer analytics. The firm uses data mining/
64 SECTION 3 STRATEGIC MARKETING

nine cells A through I. We illustrate by considering framework requires careful attention to two sets of
three cells: criteria:
• A — high market attractiveness, high business Market-Segment Attractiveness. Factors that make
strengths: A segment with these characteristics is a market segments attractive differ from firm to firm
no-brainer; the firm should target this segment. — Table 7.4 lists a general set of factors from which
• F — low market attractiveness, low business the firm can choose to identify the attractiveness of
strengths: A segment with these characteristics is specific market segments. For an individual busi-
also a no-brainer; do not waste resources. ness, factors chosen should remain constant over the
• H — medium market attractiveness, medium planning horizon, but may differ from business to
business strengths: This decision is more difficult; business.
the segment is somewhat attractive, the firm has
Table 7.4 Targeting Market Segments: Typical Criteria
some strengths. for Assessing Market-Segment Attractiveness

Figure 7.3 Multifactor Matrix (Strategic Position Ability to use available Market-segment potential
Analysis) — Market-Segment Attractiveness resources
versus Business Strengths
Barriers to entry Market-segment size
1000
Barriers to exit Potential profit margins
Z
High
G B A Customer service valued Regulatory constraints
Market-Segment Attractiveness

Degree of vertical integration Social factors

700
X Y Likely competitor actions Technological change
Medium D H C Market-segment growth rate

400 Business Strengths. What any competitor would

need to be successful in the segment. Business
Low F E I strengths required to win differ from market segment
to market segment. Table 7.5 identifies a general set
100
100 Low 400 Medium 700 High 1000 of factors for assessing business strengths needed to
Business Strengths win in a particular market segment.

Table 7.5 Targeting Market Segments: Typical Criteria

Generally, the firm should seriously consider for Assessing Business Strengths Needed to Win
targeting market segments that fall in the top right Brand value Production capacity
corner — B, A, C, — and avoid the bottom left
Distribution facilities Profitability record
corner — D, F, E. Segments in diagonal cells — G, H,
I — are more questionable; each has both positive Financial leverage Raw materials position
and negative features requiring careful consideration. Government relations Sales force
Consider a market segment that falls at X — Cell H.
Liquidity Service levels
To reach the highly desirable Cell A, two movements
Market-segment share Technological expertise
are required:
Marketing skills
• Horizontal — from X to Y by improving business
strengths. Plant and equipment
modernity
• Vertical — from Y to Z. This move is more subtle
— requires deeper market insight to refine segment
The market-segment-attractiveness/business-
definition.
strengths analysis is a useful tool to create a one-time
We just discussed the strategy behind the multifactor snapshot. Both market segments and firm strengths
matrix. Now, we show how to develop the matrix. evolve; hence, the firm should update periodically.
Using the market attractiveness/business strengths
 CHAPTER 7 MARKET SEGMENTATION, TARGETING 65
[174t]

Mexico Lala

Grupo Lala (Lala) (founded 1950) is Mexico’s primary National grocery/department store chain Soriana (more
dairy firm. Lala distributes to retailers throughout Mexico; than 824 stores, headquarters Monterrey) is a major
brand leadership results from various products, targeted Lala customer. Soriana is planning three new stores
at different market segments. Addressed segments/Lala (population): Chihuahua (3.6 million), Mexico City (16.2
brands: million), Chiapas (5.2 million). Soriana must decide which
• Mass Market: Entera — whole milk; essential proteins Lala brand to order, based on store location. Population
age statistics (percent) by state:
• Lactose Intolerant: Deslactosada/Desclactosada
Light — non-lactose milk (mainly 30s/40s) Federal Entity Men
(state) 0–14 15–29 30–59 60+
• Health-Conscious: Light — reduced fat, similar flavor
Chihuahua 29.2 25.4 36.4 9.1
to whole milk; Semidescremada — low fat, similar Mexico City 23.1 24.6 40.3 12
protein to whole milk Chiapas 33.3 28.5 30.4 7.8
Women
• Aging (60+): Extra calcio — extra calcium to Federal Entity
(state) 0–14 15–29 30–59 60+
strengthen bones
Chihuahua 27 25 38 10.1
• Young Children (1–4): Desarrollo — additional nutrition Mexico City 20.3 22.8 42.2 14.7
Chiapas 30.7 28.6 32.8 7.9
• Digestive: Fibra — added fiber
Source: National Institute of Geography and Statistics (INEGI)

QUESTIONS

1. How do you assess the relationship between the various

milk market segments?
2. How should Soriana make procurement decisions for
Lala’s various milk brands?
 CHAPTER 8

Market Strategy – Integrating Firm

Efforts for Marketing Success
For complimentary material, see Axcess Vids codes at www.axcessvids.com

In earlier chapters, we discuss Imperative 1 — • Resources. Broadly, how the firm will deploy
Determine, Recommend Which Markets to resources to achieve these results.
Address; Imperative 2 — Identify, Target Market • Actions. What specific actions the firm will take.
Segments. Imperative 2 addresses two separate, but
related, strategic-level tasks: How to conduct the Well-developed market-segment/market strategies
market-segmentation process and identify market fulfill four purposes:
segments; how to decide which segments to target for
marketing effort. Provide Strategic Direction in the Market
Market-segment/market strategies provide strategic
Chapter 8 is the first of three chapters exploring direction on how to attract, retain, grow customers in
separate aspects of Imperative 3 — Set Strategic the face of competitors trying to do the same thing.
Direction, Positioning. Here we focus on developing We expect markets, customer needs, competitive
market strategy, arguably marketing’s most important challenges to evolve, become more complex. The
role/responsibility. The market-strategy goal is very market-segment/market strategy must guide the firm
simple — to attract, retain, grow customers, in the face in this changing environment. Providing direction
of competitors trying to do the same thing. is more difficult, yet more essential, the greater the
The market strategy declares what the firm will do/ complexity/change the firm faces.
will not do. Externally, a well-developed market
strategy reflects the common theme/emphasis of the Secure Differential Advantage
firm’s approach to the market. Internally, the firm Well-developed market-segment/market strategies
coordinates actions of many departments, functions, must clarify why customers should buy from the
people. An effective market strategy is crucial for firm rather than competitors. These strategies also
success. show how the firm will gain differential advantage.
Formally: A differential advantage is a net benefit or
cluster of benefits, offered to a sizable group of cus-
tomers, which they value and are willing to pay for, but
The Purpose of Market-Segment/
cannot get, or believe they cannot get, elsewhere.
Market Strategies
The firm should reject any market-segment/market
Strategy is one of the most abused/most misunder-
strategy that cannot withstand probable competitor
stood terms in business, yet very important in
responses. The firm should also develop contingency
managerial vocabulary. The market strategy builds
plans — what-if responses — to possible competitor
on planning assumptions formed from the situation
actions. Contingency planning leads to strategies
analysis — market, customer, competitor, company,
that secure differential advantage, helps the firm act
complementer insight. Market strategy is the firm’s
preemptively — before competitors.
game plan for the market, pointing the way to firm
actions. The firm must make three decision types:
• Results. What the firm wants to achieve.

66
 CHAPTER 8 MARKET STRATEGY – INTEGRATING FIRM EFFORTS FOR MARKETING SUCCESS 67

Guide Effective Allocation of should target specific segments with strategies

Scarce Resources that create differential advantage. Generally, firms
All firms have limited resources — capital, plant perform well when they focus on individual
capacity, sales force time, technological capability. segments versus the market as a whole. Example:
These limitations apply at each organizational level, Alamo, Enterprise, Hertz are major players in car
functional area. Faced with these constraints, the rental, but each focuses its major effort on a specific
firm must allocate resources to secure differential segment. Because customer need profiles differ across
advantage. Externally, the firm allocates resources market segments, the basic market-strategy unit
among target market segments. Internally, the firm is the market-segment strategy. A market strategy
allocates functional resources for securing differential frequently combines several interrelated market-
advantage in target segments. segment strategies. Figure 8.1 shows four pillars of
a market-segment strategy — performance objec-
Achieve Cross-Functional Integration tives, strategic focus, positioning, implementation
Achieving integration across different parts of the programs.
firm/business is critical, yet is often elusive. The
Performance objectives, strategic focus, positioning
market strategy must coordinate actions of various
are conceptual devices requiring creativity. Product/
parts of the firm, so they pull together to secure
brand managers, marketing/business directors
differential advantage. Without effective integration,
typically develop these elements, based on planning
significant internal conflict can arise.
assumptions formed from the situation analysis
Market-strategy owners must develop support — market, customer, competitor, company, comple-
throughout the firm. The various functions likely menter insight. Implementation programs are more
have different opinions about the market strategy. tangible. The firm secures integrated implementa-
Well-managed contention is healthy; it surfaces tion by clearly articulating, gaining commitment to,
different perspectives on key issues. But all parties performance objectives, strategic focus, positioning.
must focus on external issues; they must take a
holistic view on how the firm can win.
Performance Objectives
If you don’t know where you’re going, any road will get
Elements of the you there. — Lewis Carroll, Alice in Wonderland
Market-Segment Strategy
Before the firm figures out what it will do, it must
We can best view a market as a set of market know where it’s headed. Performance objectives
segments — Chapter 7. To be successful, the firm

Figure 8.1 Elements of Market-Segment Strategy

Performance Strategic
Objectives Operational

Unit
Sales Customer Targets
Strategic Competitor Targets
Positioning
Margins, Focus Value Proposition
Investment Reasons to Believe
Returns

Implementation
Programs

Marketing Mix (4Ps) Other

Functional
Programs
68 SECTION 3 STRATEGIC MARKETING

articulate the firm’s goals for the market segment. Operational Objectives
Two components state clearly and simply what the Strategic objectives are qualitative, directional;
firm is trying to achieve — strategic objectives, operational objectives are quantitative, time-bound.
operational objectives. Operational objectives provide the numbers, time
frame to attach to strategic objectives. What types
Strategic Objectives of numbers? Operational objectives answer the
Strategic objectives establish the types of results the following questions: How much is required? By when?
firm requires — qualitative, directional. Strategic Operational objectives should specify how much
objectives are not concerned with numbers, but growth, market share, profit, cash flow the firm
declare, in general terms, how the firm will measure should earn during a specific time frame.
success. Many people confuse strategic objectives
The firm uses operational objectives to evaluate
with mission statements. The difference is clear:
performance. Operational objectives should be
Mission states where the firm will seek opportunities
SMART— specific, measurable, achievable, realistic,
— Chapter 6; strategic objectives state the types of
timely. Operational objectives should also be
results the firm seeks.
challenging, but not out of reach, demotivating.
Three broad categories of strategic objectives: While developing the market-segment strategy, the
Growth, market share; profitability; cash flow. Each firm should continually revisit operational objectives
strategic objective is attractive, but they often in the context of budgetary implications.
conflict. Hence, the firm must make trade-offs.
The firm must set explicit priorities — primary, Setting Performance Objectives
secondary — for various market/product life-cycle Sometimes managers fail to distinguish between
stages. The firm must resist the tendency to demand strategic objectives and operational objectives. Far
increased growth, market share, profit, and cash flow too often, they state objectives in terms of profits —
all at the same time. The conditions for achieving on Our profit target for 20XY is $45 million.
all dimensions simultaneously are very rare.
In principle, setting a profit target is not wrong.
Figure 8.2 illustrates how strategic objectives evolve The problem is not asking (let alone answering)
in a product life-cycle framework. Introduction, two basic questions: How will achieving this profit
early-growth stages — firms often set priorities on objective affect the firm’s overall objectives? How shall
growth/market share. These objectives shift to profit we get there?
in late growth, for much of the maturity stage. Late in
Improving short-term profits is not difficult —
maturity, especially if decline is imminent, cash flow
cut spending on new products, advertising, sales
predominates; hence, the term cash cow — Chapter
promotion, salaries; raise prices; tighten credit terms.
11. These guidelines are not cast-iron prescriptions,
The firm will quickly increase profits, but in time will
but simply show a typical trajectory.
lose market share, profitability. To avoid such results,

Figure 8.2 Evolution of Strategic Objectives

Profit Cash flow

Sales

Growth

Time
 CHAPTER 8 MARKET STRATEGY – INTEGRATING FIRM EFFORTS FOR MARKETING SUCCESS 69

the firm must articulate trade-offs among the various customer use (C2). Sub-branch D: Secure new reve-
strategic objectives; it must secure agreement from nues by attracting customers from competitors (D3),
all functional areas. Only then should the firm insert securing new business (D4).
numbers to form operational objectives.
Improve Margins, Investment Returns –
Generally, strategic, operational objectives should not
Branch B
change during the operating period. But if significant
Two sub-branches — E, F — focus on improving
environmental change occurs/planning assumptions
margins, investment returns, holding unit sales
underlying market forecasts change substantially, then
constant. Each sub-branch provides two alternatives.
forecasts/performance objectives should change also.
Sub-branch E: Increase revenues by raising prices
(E5), improving sales mix (E6) — sell more high-
er-profit products, fewer lower-profit products. Sub-
Strategic Focus* branch F: Lower costs, assets by reducing operating
Once the firm establishes performance objectives, costs (F7), improving asset utilization (F8) — reduce
it must decide where to allocate resources. Strategic accounts receivable/inventory.
focus does exactly that. Figure 8.3 illustrates firm
options using a means/ends tree. This framework Choosing a Strategic Focus:
helps outline, assess, choose among various alter- Increase Unit Sales? Improve
natives for improving profits/return on investment Margins and Investment Returns?
(ROI).1 The tree has two main branches: Branch A Question: How should the firm trade off Branch A
— increase unit sales; Branch B — improve margins, versus Branch B alternatives? After all, many are in
investment returns. The firm must select among these conflict. Targeting competitor customers — D3 —
branches and sub-branches to create a focus that best may be a viable option for increasing unit sales, but
helps achieve performance objectives. it won’t be successful if the firm simultaneously cuts
advertising/selling expenses — F7!
Increase Unit Sales – Branch A Answer: The firm’s choice of alternative(s) should
Two sub-branches — C, D — focus on increasing closely parallel its primary strategic objective.
unit sales. Each sub-branch provides two alter-
• Growth — focus on Branch A alternatives.
natives. Sub-branch C: Enhance current revenues
by increasing customer retention (C1), increasing • Increase cash flow — focus on Branch B.

Figure 8.3 Strategic Focus – A Tree of Alternatives

Improve Profits, ROI

A B

Improve Margins,
Increase Unit Sales
Investment Returns

Current New Increase Reduce

C Revenue Base Revenues
D E Revenues Costs, Assets
F

1. Increase 3. Attract
Customer Customers 5. Raise 7. Reduce
Retention from Prices Operating Costs
Competitors

2. Increase 4. Secure 6. Improve 8. Improve Asset

Customer Use New Sales Mix Utilization
Business

* Strategic focus and positioning are sometimes referred to jointly as core strategy.
 70 SECTION 3 STRATEGIC MARKETING

• Improving profits — mix, match — select Positioning

alternatives from both Branches A and B.
For many marketers and marketing instructors,
One item is very clear: Pursuing too many alter- positioning is the heart of the market-segment
natives simultaneously violates the Principle of strategy. The firm seeks to create a unique, favorable
Selectivity and Concentration, causes the firm to image in customer minds. Clarity is key; confusion is
lose focus. positioning’s enemy.
We emphasize the critical distinction between
targeting a market segment and positioning in a
market segment. Chapter 7 discusses targeting
market segments; here we assume the firm has made
the targeting decision. Now we focus on devel-
oping strategy to compete successfully in the target
segment. Positioning requires marketers to complete
[131t] four key tasks within the segment — Figure 8.4:
• Select customer targets.
• Frame competitor targets.
• Design the value proposition.
• Articulate reasons to believe.
Mexico Loly in the Sky We discuss these decisions sequentially, but they
are highly interrelated. Typically, the firm goes back
Monterrey-based Loly in the Sky (Loly) (founded 2011) and forth among these decisions until they form a
addresses the women’s shoe market. Designer Lorena coherent whole.
Vázquez focuses on comfort and original design
— patterns, textures — at affordable prices. Loly Select Customer Targets
outsources production; it distributes throughout Mexico, The firm places the bulk of its marketing efforts
Canada, Japan, Saudi Arabia, U.S. Loly’s competitive at customer targets. Three issues are important for
advantage is design originality, standing out from other targeting the right customers:
competitors. Loly’s invitation to international design
Choosing the Distribution System. The firm’s
fairs, placement in Forbes 30 most promising Mexican
products/services may reach consumers/end users
businesses, and active social media presence drives
in many different ways — direct, via third-party
online sales.
organizations. Tangible product examples:
• Component manufacturer — sells products to
finished-goods manufacturers.
• Component manufacturer — sells products to
subassembly manufacturers; subassembly manu-
facturers sell products to finished-goods manufac-
turers.
• Products from finished-goods manufacturers pass
through distributors, wholesalers, retailers before
reaching consumers/end users.

Many industries have well-established distribution

systems — products travel downstream from level to
level, ultimately reaching consumers/end users. But
the firm may develop innovative channels to gain
differential advantage. Example: Many firms avoid
 CHAPTER 8 MARKET STRATEGY – INTEGRATING FIRM EFFORTS FOR MARKETING SUCCESS 71

Figure 8.4 Positioning Elements

Supply-Chain
Competitors

Intermediaries/ Direct
Consumers/End Indirect
Original Equipment Competitors
Users Competitors
Manufacturers

Select Frame
Customer Targets Competitor Targets

Positioning

Design the Articulate Reasons

Value Proposition to Believe

Psychological
Functional Value Economic Value
Value

distributors, wholesalers, retailers (and their profit geting decisions. A firm selling raw materials to man-
margins) by targeting consumers directly via the ufacturers may target operations managers, design
Internet. engineers, marketing/sales executives, purchasing
Targeting Levels within the Distribution System. With agents, general managers. Creativity is important; the
limited resources, the firm must decide which distri- firm should consider:
bution level(s) to target for effort: • Reachability. Target customers should be easy
• Push strategy — place most marketing effort to reach, but gaining access may be difficult. In
upstream on direct customers. A firm selling B2B, procurement personnel often block access to
finished consumer products focuses on retailers; designers, engineers, operations managers, senior
a raw material/component producer focuses on executives.
finished-goods producers. The firm expects these • Obvious versus hidden targets. Some customers
customers/their customers to undertake promo- are easy to identify, reach; regardless, such targeting
tional efforts at consumers/end users. may be ineffective because they are obvious — they
• Pull strategy — place most marketing effort may also be customer targets for competitors! Deep
downstream on indirect customers — consumers/ customer insight, creativity, contrarian position can
end users. FMCG firms: Focus on consumers. Raw pay great dividends.2 Example: FedEx’s early success
material/component manufacturers: Focus on came from targeting executives, their secretaries
consumers/end users — Intel Inside. versus shipping managers, the traditional decision-
makers.
Typically, the firm cannot apply equal effort to all
• Influentials. May not be decision-makers, but may
potential customer targets; should designate primary,
heavily influence the buying decision. Neglecting
secondary targets.
important influentials can be fatal.
Targeting Specific Person Types/Roles. The firm fol-
• Personally benefits but does not pay. The ideal
lows the distribution-level choice by deciding which
target has significant influence, and personally
specific influencers/decision-makers to target. Typ-
benefits from the purchase, but does not pay:
ically, the firm wants to reinforce/change behavior/
mental states — knowledge, attitudes, purchase • Children — influence parental decisions.
intentions. B2B firms also make individual-level tar- • Doctors — write prescriptions.
72 SECTION 3 STRATEGIC MARKETING

• Executives — the firm pays travel/entertainment The value proposition should follow the BUSCH
expenses. system — believable, unique, sustainable, com-
• Politicians/regulators — spend taxpayers’ money. pelling, honest.3 The value proposition plays two
separate but related roles:
Targeting these customers can raise ethical issues.
• Externally — the firm’s major competitive weapon
Many people object to children’s advertising; others
to attract, retain, grow customers.
object to targeting by government lobbyists.
• Internally — defines the implementation task.
Frame Competitor Targets
The firm decides which competitors to compete Articulate Reasons to Believe
against. Competitor targets may be current/potential Declaring the firm’s intentions in the value propo-
competitors, direct/indirect competitors, supply- sition is one thing; convincing target customers the
chain competitors. Choice of competitor target firm will deliver on its promises is quite another. The
depends on firm strength in the market segment. reasons-to-believe statement is an essential compo-
nent of positioning; it supports the value proposition
The firm should place competitors into one of with compelling facts to make firm claims believable
two categories — competitors to avoid versus — scientific evidence, independent testing data, testi-
competitors the firm is quite happy/chooses to face. monials, proven competencies, prior performance.
This partition helps design the value proposition
(next section). Competitive targeting shapes cus- Developing Positioning Statements
tomer perceptions of firm offers; it also helps the
firm refine benefit/value claims. Positioning is not what you do to a product —
positioning is what you do to the mind of the prospect.4
Subtlety in Competitor Targeting. The most effective
competitor targeting may not be obvious. Example: The capstone of the positioning process is a com-
Visa advertises that many restaurants globally accept pelling positioning statement. Positioning is vital
its cards, but relatively few accept AmEx. Visa wants for guiding/coordinating marketing efforts. But
customers to believe AmEx is a direct competitor. But developing the positioning statement is complex,
Visa’s real competitor target is MasterCard. difficult, time-consuming. Example: When P&G
introduced Whitestrips (teeth whitener), it delayed
Design the Value Proposition expensive TV ads and store testing. Rather, P&G
A well-designed value proposition provides a con- took time to refine Whitestrips positioning/assess
vincing answer to a deceptively simple question: consumer interest while undertaking a six-month
Why should target customers prefer the firm’s offer online advertising/sales campaign.
to those of competitors? Positioning is the heart of Positioning must clearly distinguish the firm’s offer
the market-segment strategy; value proposition is from competitor offers. Positioning should:
the heart of positioning. The firm bases the value
Convince — customer target
proposition on functional, psychological, economic
In the context of other alternatives — competitor targets
value, and related benefits it offers customers.
That they will receive these benefits — value proposition
The value proposition defines how the firm wins
Because we have these capabilities/features —
customers, defeats competitors. Related terms: key
reasons to believe
buying incentive, differentiated core benefit, core
strategy, unique selling proposition. Regardless, value
Positioning statements should be distinct, compel-
proposition best captures the concept.
ling, authentic, persuasive, sustainable — DCAPS.
The firm should base its value proposition on the Creativity can be crucial. Example: Guinness Stout
Principles of Customer Value, Differential Advantage traditionally served a limited market of older men/
— Chapter 1: women. Repositioned Guinness Stout is a friendly
• Focus on satisfying important customer needs. beverage for younger consumers.
• Address these needs better than competitors. Positioning is especially important for new products.
Ideally, offer customer benefits/values competitors Unilever and P&G get it, but many firms launch
find difficult to imitate.
 CHAPTER 8 MARKET STRATEGY – INTEGRATING FIRM EFFORTS FOR MARKETING SUCCESS 73

new products with ineffective positioning. Though Aligning Cross-Functional Support

positioning statements encompass more than Marketing owns the market-segment/market
advertising messages, the DCAPS approach can strategies. Regardless, competition is so intense, the
provide excellent guidance for creative personnel at entire firm must work together as a competitive
advertising agencies. weapon. The firm must align all functional areas to
support the value proposition — Chapter 19.
If one or more functional areas cannot provide
Implementation Programs support, the firm must revisit the value proposition.
Strategic focus, positioning specify the firm’s This analysis is critical. Going forward without full
approach to achieve performance objectives. support commits the cardinal marketing sin —
Implementation programs describe specific actions making promises to customers the firm cannot keep.
the firm must take to execute its approach. Any good Customers do not care which individual/department
market-segment/market strategy must seriously is at fault. They want, expect the benefits/values the
address marketing mix, other functional programs. firm promised.

Implementing the Marketing Mix

Chapters 10 through 18 focus on individual Managing Multisegment Strategies
marketing-mix elements. These elements must
This chapter shows how to construct market
support the value proposition; they must also
strategy — performance objectives, strategic focus,
support other marketing-mix elements. Example:
positioning, implementation programs — to address
Waterford Crystal marketing-mix elements support
a target market segment. But the firm often targets
one another for high-quality glass crystal in the gift
several segments simultaneously; hence, it must
segment. The Waterford value proposition revolves
develop several market-segment strategies. Each
around psychological value, assurance that recipients
segment strategy requires its own performance
will love Waterford Crystal — high quality, scarcity,
objectives, strategic focus, positioning, implementa-
image.
tion programs. The firm must ensure each individual
market-segment strategy is distinct. Example: Pottery
Barn Kids’ positioning is distinct from Pottery Barn
— but Pottery Barn is not well distinguished from its
down-market chain, West Elm. When the firm targets
[197t]
multiple segments, it faces three possible implemen-
tation situations:
• Independence — individual segment strategies,
implementation programs are unrelated.

Mexico SuKarne • Positive synergy — implementation programs

interact positively across market segments — may
SuKarne (founded 1969) is in the cattle business — secure cost efficiencies from using the same sales
livestock in Mexico and Nicaragua. Initially focused force/distribution channels, share brand equity.
on the Mexican market, when contemplating exports, • Negative synergy — implementation programs
SuKarne faced the perception that Mexican meat may interact negatively across market segments.
be unsafe. To address this issue, SuKarne focused Multiple products confuse the sales force; brand
on quality. It developed an integrated production extensions confuse customers. Example: Almaden
system — cattle fattening and meat processing in one is a strong brand of popularly priced wine; $100
location — easing logistics/transportation issues that Almaden bottles would probably not do well!
could adversely affect quality. SuKarne’s strategy led to
The firm’s individual market-segment strategies/
its emergence as Mexico’s largest beef, pork, chicken
implementation programs must together form a
exporter. Customer countries: Angola, Japan, Russia,
coherent market strategy. Because of increasing
South Korea, Vietnam.
74 SECTION 3 STRATEGIC MARKETING
[916t]

complexity in customer need profiles, multiple-

segment issues are especially intriguing/challenging.

Endnotes
1 The strategic-focus-alternatives tree is loosely based on the
Argentina La Martina
famous DuPont formula; Wikipedia.
2 P. M. Nattermann, “Best Practice Does Not Equal Best Strategy,” La Martina (LM) (founded 1985) is an Argentine sports
The McKinsey Quarterly, August 18, 2004. and leisure clothing manufacturer. LM’s inspiration
3 Thanks to Mary Murphy, Impact Planning Group, for this originated with the sport of polo — two competing
acronym. teams of horseback riders use long-handled mallets
4 A. Ries, J. Trout, P. Kotler, Positioning: The Battle for Your Mind, to score goals with a small white wooden/plastic
New York: McGraw-Hill, 2001*. [644e]
ball. LM was created as an equipment provider for
polo, but has morphed into a brand representing an
outdoorsy lifestyle and tradition. LM based its brand
reputation on the original polo theme, and has become
a fashion icon. LA has secured international distribution
in more than 100 countries, including China, Great
Britain, Malaysia, Singapore, Spain, Thailand, UAE. LM
operates 85 stores in more than 50 countries, and has
presence at more than 100 polo events annually.

QUESTIONS

1. La Martina dominates the fashion/sports market, as

a polo icon around the world. Should LM expand by
taking on a new sport? If yes, why? If not, why not?
How should LM grow?
 CHAPTER 9

Managing through the Life Cycle

For complimentary material, see Axcess Vids codes at www.axcessvids.com

There are risks and costs to a program of action. But they are
far less than the long-range risks and costs of inaction.
— John F. Kennedy, U.S. President

Chapter 9 is the second of three chapters discussing CEO Steve Ballmer, “I regret that there was a period
separate facets of Imperative 3: Set Strategic in the early 2000s when we were so focused on what
Direction, Positioning. Chapter 3 shows how the we had to do around Windows that we weren’t
life-cycle framework can help the firm generate able to redeploy talent to the new device called the
useful market insights. In this chapter, we revisit the phone.” Market-leading firms should view preemp-
life-cycle framework to help make more effective tion as an insurance policy — when change is swift,
decisions in competitive markets. the costs of inaction escalate rapidly. Firms that will
not pay insurance premiums should prepare to lose
By anticipating competitor actions — and sometimes
market position.
their timing — the firm can develop preemptive
strategies. A preemptive strategy means acting before The life-cycle framework offers a good way to design
competitors, perhaps targeting an emerging market insurance policies. Understanding how life cycles,
segment/introducing a new product. Acting pre- market strategies evolve is valuable for forecasting,
emptively often involves risks; failure may be visible/ anticipating likely scenarios. With these scenarios, the
costly. But the costs of not acting may be significant, firm is better equipped to generate good competitive
particularly for established players. These opportunity strategic options.
costs are the market-share gains, increased profits the
firm did not earn. Opportunity costs are insidious;
they do not appear on the firm’s income statement, Generating Competitive
but they may be more serious than costs that do. Strategic Options
Example: Apple and the iPod: Many observers The firm generates strategic options by developing
counseled caution: “You are a computer company; scenarios; hence, anticipating future competitor
you have no experience in digital music. Napster has actions. The main building block: The classic life
closed; downloading music via the Internet faces cycle — introduction, early growth, late growth,
immense uncertainty. Sony owns portable music maturity, decline — typically at the product-form
players — Walkman — this is their turf; they will level. The life-cycle approach is very powerful because
fight fiercely.” Many executives would have heeded market conditions tend to be similar at the same
these arguments, but not Steve Jobs. The iPod launch life-cycle stage, across many products/technologies.
was an enormous success, even helping Apple sell Each scenario generates a limited number of strategic
more Macintosh computers. Think of the oppor- options — valuable input into formulating firm
tunity costs Apple would have incurred by not strategy. Creativity in generating strategic options is
launching the iPod, iPhone, iPad — what did Apple always important — the firm should avoid becoming
know about recorded music/mobile communications? too predictable, even when it is market leader.
By not acting, the firm opens up potential entry
windows for competitors. Said former Microsoft

75
76 SECTION 3 STRATEGIC MARKETING

Although the scenarios — Figure 9.1 — and strategic Scenario 1: Introduction Stage –
options are valid for many product life cycles,
Pioneers
generally life cycles are shortening. Implications:
• When life cycles were longer, firms could enter a Most products do not generate profits in introduc-
market, fail, redevelop products, then reenter with tion. Pioneering firms typically incur significant
a reasonable chance of success. Today, reentry R&D, market-launch expenses; they must also invest
windows are closing. in plant, equipment, systems/processes, before
launch. Marketing expenses are high; revenues may
• Shortening product life cycles reduce the time — in
not cover operating costs, much less fixed costs.
early growth — to earn highest unit profit margins.
Early on, cash flows are often negative. Example:
• Good strategic thinking early in the life cycle is Before earning profits from innovative athletic wear,
more important than ever. Kevin Plank, Under Armour founder, lived in his
• Faster cycles require proactive management of grandmother’s basement for several years. Pioneers
strategy over the life cycle; evolutionary approaches generally make many mistakes; productive failure is
may be too slow. key to continually moving forward.

Some firms better sustain new-product losses/

negative cash flows than others. Large firms typically
BUILDING PRODUCT cross-subsidize new-product launches — use cash
LIFE-CYCLE SCENARIOS earned from more established products at later life-
cycle stages, as part of a long-term product strategy
Figure 9.1 identifies nine scenarios. Each scenario
— Chapter 11. Example: Tide laundry detergent
description in the chapter begins with a brief
funds many new P&G ventures; Google AdWords
introduction; then we focus on creating/analyzing
funds Alphabet/Google initiatives.
alternative objectives, strategies. We cannot tell you
what strategy to follow for a given scenario — your Small firms typically have fewer resources; they
best strategy depends in part on competitor actions. often require outside financing. In the very early
Rather, we provide several options for you to build stages, wealthy individuals — angel investors — often
into your decision process. provide startup funding. Later, when the opportunity
shows promise, venture capitalists may provide finan-
cial backing. If the value proposition is sufficiently

Figure 9.1 Life-Cycle Scenarios

Scenario 5
Maturity – But Not Really!
Scenario 6
Maturity – Concentrated Market Leaders
Scenario 7
Maturity – Concentrated Market Followers
Scenario 8
Scenario 4 Maturity – Fragmented Markets
Late Growth Scenario 9
Scenario 2 Decline
Early-Growth
Leaders Maturity
Sales

Scenario 3 Late
Early-Growth Growth Decline
Followers

Scenario 1 Early
Pioneers Growth

Introduction
Time
 CHAPTER 9 MANAGING THROUGH THE LIFE CYCLE 77

compelling, the firm may raise funds from an initial developing new applications. Examples: Airbnb —
public offering (IPO) — Facebook, Uber. residential rental; Open Table — restaurant reserva-
tions.
The introduction stage has few pioneers, often only
one. The pioneer should lay the foundation for Successful penetration strategy implies continual
achieving market leadership/profitability, at least in price reductions, but first-mover advantages may
the short/medium run. The pioneer must develop an allow high prices — price skimming (PS). Generally,
appropriate strategy as the life cycle moves toward new entrants erode first-mover advantages: As
early growth — demonstrate value to target cus- product life cycles shorten, advantages erode more
tomers, reduce market uncertainty. quickly. Firms executing PS strategies must be able to
shift direction when advantages disappear.
A particularly effective way of slowing/forestalling
competitive entry is to create/exploit entry barriers —
government-imposed, product-specific, firm-driven.1
Scenario 2: Early-Growth Leaders
Government-Imposed Barriers By the early-growth stage — Figure 9.2 — customers
Patents are the most common government-imposed have accepted the product form; market demand is
barrier. Patents provide owners with legal monopo- growing rapidly. Generally, the market leader has
lies for several years. Firms can petition the courts to a strong position; has worked out market-entry
enforce these patent monopolies via patent infringe- problems; has unit costs under control — should
ment lawsuits — Apple successfully slowed Samsung reduce as sales build. The firm should be profitable,
in smartphones. but cash flows may be negative: Growth requires
investment for increased capacity.
Product-Specific Barriers
These barriers relate directly to the product — access The leader has four strategic options — two each
to capital, raw materials, human resources, minimum based on continuing, surrendering leadership:
scale of operations. Product/process innovations
cause product-specific barriers to diminish over time. Continue to Be Leader – Enhance Position
The firm leverages success to seek market dominance;
Firm-Driven Barriers grows/broadens the market by continually investing
The firm can build low-cost barriers via penetration — R&D for new products, extensive advertising,
pricing; alternatively, it develops/exploits first-mover personal selling. The firm increases production
advantages: capacity ahead of market demand, aggressively
reduces costs. Leaders may also block competitors by
Low-Cost Barriers, Penetration Pricing (PP). The firm entering emerging market segments, new distribu-
plans on low profit margins for a substantial time tion channels, new geographies.
period. PP is risky; it takes significant resolve in the
face of large prelaunch/postlaunch expenditures/ Continue to Be Leader — Maintain Position
market uncertainty. PP requires substantial resources The firm may prefer a more conservative approach
as the firm continually reduces costs/prices, builds — merely try to maintain market position. The
capacity, grows quickly. firm may enjoy monopoly-like status, but may be
Advantageous conditions for PP: Price-sensitive concerned about potential political, legal, regulatory
markets with few government-imposed/product- difficulties — Microsoft, Google. Alternatively,
specific entry barriers. PP is particularly attractive if customers may demand additional sources of supply;
customer switching costs are high; also if the market strong competitors may enter, making clear they
for complementary products/services is significant intend to stay.
— printers/toners. Sometimes technological standards drive this option.
First-Mover Advantage. The pioneer may earn advan-
Multiple standards cause uncertainty; prospective
tages because it was first. The pioneer may sustain customers postpone purchases; the market develops
technological advantage by improving products/ more slowly than expected. The firm may elect to
78 SECTION 3 STRATEGIC MARKETING

Figure 9.2 Pioneers, Early, Late Growth-Stage Scenarios

Scenario 5
Maturity – But Not Really!
Scenario 6
Maturity – Concentrated Market Leaders
Scenario 7
Maturity – Concentrated Market Followers
Scenario 8
Scenario 4 Maturity – Fragmented Markets
Late Growth Scenario 9
Scenario 2 Decline
Early-Growth
Maturity
Leaders
Sales

Late
Scenario 3 Growth Decline
Early-Growth
Followers

Scenario 1 Early
Pioneers Growth

Introduction
Time

work with competitors on a single standard, rather Or a financially stronger competitor sets a market-
than go it alone. Examples: Early consumer video leadership goal/aggressive pricing; the firm knows
(Betamax versus VHS), HDTV, wireless technology. it cannot win a head-to-head battle — decides to
target one or more market segments as a specialized
Maintaining a leading market position may be more
competitor. Discretion is the better part of valor.
difficult than striving for market dominance. The
firm requires good up-to-date competitive intelli-
Surrender Leadership – Exit the Market
gence; must carefully select customer targets; frame
Leaving a market after being the pioneering leader
competitor targets. The firm must have a clear
may seem defeatist, but can be prudent. Throughout
strategy; sufficient resolve to stick to the strategy
the life cycle, as customer need profiles/markets
despite temporary hiccups; thoughtful contingency/
evolve, the firm should continually assess the value
scenario planning.
of its market position, based on the projected stream
of discounted profits. If this projected value is less
Continue to Be Leader – Conclusion
than the current selling price of the business, the firm
Whether the firm undertakes to enhance or main-
should consider exiting, especially if the product is
tain market position, the broad thrust is the same:
not central to its mission.
Ride the leadership position through the life cycle to
maturity. Along the way, the firm shifts focus: From Firm products may be strategically significant for a
selling to first-time users, to selling to repeat users/ potential acquirer/fit well with its current products;
acquiring competitor customers. To be successful, hence, the business may be of immense value.
the firm must broaden/refresh the product line; Successful innovators are often better off selling to
add services; build the brand by enhancing firms with strong marketing expertise.
communications.

Surrender Leadership – Retreat to a Scenario 3: Early-Growth Followers

Market Segment(s)
Unlike market-share loss from competitive pressure, Some firms prefer to follow the leader; they enter
the firm makes a deliberate choice to surrender markets in the early-growth stage. By pursuing a
leadership. It may lack resources to fully develop the wait-and-see strategy, they can better assess market
market/fund an ongoing stream of new products. potential. Followers leverage past successes, learn
 CHAPTER 9 MANAGING THROUGH THE LIFE CYCLE 79

from the leader’s mistakes. But early on, followers Focus on Market Segment(s)
often trail market leaders. This option may be attractive if the follower has
fewer resources than the leader/other followers, and
Followers in early growth have similar strategic
if the segment(s) is attractive. Example: When drugs
options to the leader. But they start from inferior
go off patent, pharmaceutical firms often withdraw
positions; hence, choosing among them has a
marketing support, but add services for a narrow
different cadence. Options:
physician segment.
Seek Market Leadership
Exit the Market
The follower can pursue leadership by imitating
If the business sale value is greater than the projected
or leapfrogging the market leader. In each case, the
discounted profit stream, the firm should consider
follower requires good competitive insight; should
exiting. Early-growth products may have high value
enter as soon as possible:
for a potential acquirer, eager to enter the market.
Imitation — copy the leader, execute more effectively.
Successful imitators spend heavily to play catch-up
on product development; they outspend the leader Scenario 4: Late Growth
in promotion. If possible, the follower leverages an
existing marketing/distribution infrastructure; it By late growth — Scenario 4, Figure 9.2 — the firm
clearly highlights differentiated value. The follower receives minimal value from early market leadership/
should not confuse imitation with price cutting. followership. The customer benefits/values that
drove purchases in introduction/early growth are
Leapfrog — improve on the leader. The follower still important, but they may not enter customer
offers enhanced value by developing innovative/ choice decisions. The firm must focus on identifying/
superior products. Alternatively, the follower enters offering customers determining versus qualifying
an emerging market segment before the leader. benefits/values. Example: In choosing among major
Generally, the leapfrogger avoids head-to-head price airlines, safety is rarely a determining attribute!
competition; it may spend more heavily on R&D
than the leader; marketing spending is also high. The firm requires considerable marketing research
[564v]
skills to conduct market-segmentation studies;
determine which segment(s) to target; decide how to
Effective leapfroggers often do an excellent job of satisfy customer needs in target segment(s); monitor
anticipating emerging customer needs. They spot evolving segments for new opportunities. Successful
segment opportunities before leaders, quickly firms address target segments with focused rifle-shot
offering new values, securing differential advantage. marketing, then build defensible positions against
The most successful followers change the rules. competitors. Even small segments may offer good
profit potential.
Settle for Second Place
Former GE CEO Jack Welch famously mandated GE
be number one or two in each market it addressed. Scenario 5: Maturity – But Not Really
A follower requires substantial resources to become
market leader, so settling for second place may be a Before the firm examines strategic options in
reasonable/profitable option. Several situations argue maturity — Figure 9.3 — it must affirm the life cycle
for this alternative. Perhaps the leader is content with really is in maturity. Perhaps there are possibilities
current market share and does not seek increases; for market growth. To make the point succinctly,
customers may demand a second supplier; multiple many authors assert, “There is no such thing as a
competitors may help simplify product standards; mature business, there are only mature managers.”2
the political/legal/regulatory environment may be When assessing if the life cycle is in maturity, the
favorable. firm should analyze barriers to growth:
• Behavioral barriers require significant change
by customers. Techies were early users of PCs
80 SECTION 3 STRATEGIC MARKETING

Figure 9.3 Maturity-Stage Scenarios

Scenario 5
Maturity – But Not Really!
Scenario 6
Maturity – Concentrated
Market Leaders
Scenario 7
Maturity – Concentrated
Market Followers
Scenario 8
Maturity – Fragmented Markets
Scenario 4
Late Growth Scenario 9
Scenario 2 Decline
Early-Growth
Leaders Maturity
Sales

Scenario 3 Late
Early-Growth Growth Decline
Followers

Scenario 1 Early
Pioneers Growth

Introduction
Time

— difficult-to-use operating systems — CP/M, Increase Product Use

MS-DOS. The mass market developed when Apple/ The firm has many options — reminder/reinforce-
others offered easy-to-use systems. ment communications; promoting different use
• Economic barriers are often linked to technology. applications/occasions/locations; providing incen-
Example: When Roundup herbicide lost patent tives/bundling opportunities; reducing undesirable
protection in the Philippines, Monsanto cut prices consequences of frequency. Specific techniques:
to compete with cheaper generics. Monsanto • Change the model — annual automobile models,
discovered it had vastly underestimated price frequent style changes by fashion houses.
elasticity3; sales grew dramatically as many farmers • Design the product to expire — incorporate
could now afford Roundup. devices to indicate product expiration dates —
• Government-imposed barriers inhibit many FMCG products.
competition/innovation. When governments • Develop new product uses — Arm & Hammer
remove regulations, competitors often enter, identified many new uses for baking soda.
growth explodes.
• Improve packaging for better ease of use — single-
• Technological barriers may be obliterated by serve cereals, easy-to-pour condiments.
innovation. Examples: Inline skates revived the
• Increase quantity per use occasion — increase
almost-dead roller-skate industry. Airbnb, Spotify,
package size/design packaging for dispensing ease.
Uber have each transformed industries by breaking
technological barriers. • Make product easier to use — disposable contact
lenses do not have to be cleaned/disinfected.
Generally, if any of these barriers are in place, the
market is not really mature; the key strategic objec- Improve the Product/Service
tive should be growth. The most serious barrier may Firms should expect sales to slow if products/services
be lack of creativity. Creatively generating/analyzing do not satisfy customer needs. The remedy: Improve
opportunities and approaching seemingly mature the offer! Sometimes even apparently minor changes
markets can spur growth in several ways. can increase sales significantly. Example: Clorox
 CHAPTER 9 MANAGING THROUGH THE LIFE CYCLE 81

introduced a lemon-fresh version of Pine-Sol house- market share from entrenched competitors often
hold floor/wall cleaner — sales grew by 25 percent. wastes resources. Pressures:
Securing product-based advantage is difficult in • Few alternative opportunities.
many industries; hence, adding services may be an
• Internally focused funding criteria.
attractive option.
• Political power of mature-product champions.
Improve Physical Distribution Increasing short-run profits is not difficult; the trick
Sophisticated package delivery/tracking systems is finding the right investment level to sustain profits
helped grow electronic commerce. in the medium/long run. Causes of underinvestment:
• Fear of cannibalization.
Reduce Price
Example: Ryanair transformed the seemingly mature • Inertia.
European airline market into growth with a low- • Limited view of competition.
price strategy. Virgin America, jetBlue, Southwest • Misunderstanding challenger strategies.
Airlines had similar success in the U.S.
Of course, complacency/arrogance can accentuate
Reposition the Brand these errors; past success can blind the firm to
The firm offers the same product but with new evolving market realities. Generally, the firm can
benefits/values, for new customers. Classic example: maintain leadership via incremental product
Honda repositioned motorcycles from a product for improvements. It should also invest in marketing
long-haired guys and the police officers chasing them, activities that build/sustain brand equity, demon-
to a family activity. strate competitive superiority.

The firm should speed up product development,

Enter New Markets invest in process technology for more efficient
Many firms define new markets by geography — lower-cost operations. The firm should also consider
especially emerging markets like BRICI countries variating fixed costs — reducing fixed costs/increasing
(Brazil, Russia, India, China, Indonesia), comprising variable costs. Then, if sales slip, costs also reduce.
millions of low-income customers.
New-product innovation should concern market
leaders. Products based on new technology can
destroy leadership positions. Example: Kodak could
Scenario 6: Maturity –
not make the transition from chemical film to digital
Concentrated Market Leaders imaging successfully; it filed for bankruptcy. An
Generally, concentrated markets support a few sub- external orientation is the best protection against this
stantial competitors; aggregate market share often sort of market erosion.
exceeds 60 percent. Several small players may target
market niches. Profit margins should be high for Harvest
low-cost leaders; investment should be relatively low The firm is market leader, but a harvest strategy may
(because growth is low); cash flow should be strongly be more important than maintaining sales/market
positive. share. Reasons:

The market leader has two key strategic options: • Change in corporate strategy.
• Desire to avoid specific competitors.
Maintain Leadership over the Long Run • Government regulations impose restrictions.
The core decision for maintaining market leader-
• Investment requirements become too high.
ship is choosing the right investment level. With the
right investment, in the right areas, the firm may • New technology makes firm products obsolete.
reap profits for many years. Overinvestment to gain Once the firm decides to harvest, the critical
question: Fast or slow? Fast harvesting — divest the
 82 SECTION 3 STRATEGIC MARKETING

product, gain immediate cash. For slow harvesting, Scenario 7: Maturity –

the firm should focus on three issues:
Concentrated Market Followers
• Cut costs — simplifying product line, reduce
support. Followers have smaller market shares than leaders;
may also have higher costs, lower profits; are prob-
• Minimize further investment.
ably weaker financially. But leaders can lose position
• Raise prices. by poor decisions; followers may attain leadership by
inspired management. The follower has three basic
strategic options/several sub-options.

Improve Market Position

The firm has three primary alternatives to grow/
[867t] perhaps ultimately dethrone the market leader:

Market Segmentation. Options for segmentation

typically appear in early growth, then become
numerous in late growth/maturity. Creative seg-
Mexico Pinol Aromas mentation is the dominant option for countering
market-leader advantages. Another segment option:
AlEn (founded 1949) launched Pinol (1953) to address Offering only essential benefits/values — getting back
the heavy-duty (pine-oil-based) segment of the to basics — at low prices. Examples: Spirit (airlines),
household cleaning market. By 2010, Pinol was widely Acer (netbooks).
distributed/used throughout Mexico. Notwithstanding Kenneling. This metaphor implies bringing several
Pinol’s impressive cleaning abilities, many consumers dog (seemingly worthless) products together. A
preferred more pleasant-smelling Aroma products — follower acquires several unprofitable/marginally
50 percent greater sales than heavy-duty products. profitable low-market-share products, then executes
(Special cleaning products were a third category.) AlEn a roll-up into a single offer. By rationalizing oper-
also offered Flash (introduced 1991) as a low-price ations, distribution, marketing, the follower may
aroma product; higher-quality Fabuloso was market become a strong competitor.
leader in aroma products. In 2011, AlEn launched
Pinol Aromas Trapeado Diario, later shortened to Pinol Direct Attack. If the leader has been lazy, under-
Aromas, as a higher-quality/higher-price aroma product. invested, set prices too high, served customers poorly,
Pinol Aroma is now well established in the Mexican then direct attack may be the follower’s best option.
household cleaning market. Good market insight helps identify leader weak spots;
the follower can invest to exploit them.
In industries as diverse as credit cards and pharma-
ceuticals, market leaders have lost market share to
new entrants offering better products/lower prices.

Keep on Truckin’
This adage describes maintaining/rationalizing the
firm’s current position:

Maintain Position. Holding market share roughly

constant over the long run can be viable. The firm
requires a profitable position/strengths in one or
more segments.

Rationalize Position. If profits are marginal/negative,

rationalizing operations may be the way to go. The
firm should examine all aspects of operations, distri-
 CHAPTER 9 MANAGING THROUGH THE LIFE CYCLE 83

bution, sales with a fine-tooth comb, then make tough Scenario 9: Decline
cost-cutting decisions.
Pioneers face little competition; as the market grows,
Exit competitors typically enter. In the decline stage, the
Followers should choose exit if profitability is last life-cycle stage, the reverse occurs: New entry
unlikely/the product’s future is doubtful. Perhaps is unlikely; rather, competitors exit. Examples:
brand image is negative/market demand is slowing. Carbon paper, many canned foods, full-service travel
Two choices: agents. Two dimensions are important for analyzing
declining markets:
Divest. Find a buyer for which the product is a good
• Market hospitality. Inhospitable characteristics:
fit; the firm secures cash quickly.
• Decline is rapid/uncertain.
Liquidate. If no buyers appear, close down, sell assets.
• Commodity-based market — no price-insensitive
segments.
• Competitor characteristics — viable/credible;
Scenario 8: Maturity –
evenly balanced; view the market strategically;
Fragmented Markets have high fixed costs; sensitive to unit sales
Fragmented markets have many players, but no firm decline; have high exit barriers; are emotionally
is dominant. Hence, leader/follower distinctions have committed to products.
little relevance. An important objective is increasing • Customer switching costs are low.
market share. The firm has two strategic options:
• Bankruptcy laws allow failing competitors to
return with lower costs — U.S. airlines.
Acquisition
Acquisition is similar to kenneling — can be very • Product is part of a vertically integrated supply
successful when geography drives fragmentation. system.
• Government/community pressures/subsidizes
Standardization, Branding some firms to remain.
Many players typically offer a wide range of
Characteristics of hospitable markets tend to be the
products/services. Standardization is a way to reduce
opposite of these conditions.
variation/improve consistency across suppliers;
branding assures customers that each provider • Business strengths. Firms with good business
supplies the same value. Franchising a brand is a strengths — low costs, good raw material contracts
related option. — can keep productive assets running without
major investment.

If the market is hospitable and the firm has good

[670t]

Argentina
strengths, then pursuing leadership may be viable.
The firm should:
Pumper Nic • Publicly recognize the decline — but also
demonstrate its commitment.
Pumper Nic (PN) (founded 1975) was a popular fast- • Market aggressively – add new products, increase
food chain restaurant during the 1980s and 1990s. advertising/promotion; cut prices.
PN expanded quickly throughout Argentina — more • Consider reducing production capacity — several
than 70 locations, annual revenues US$60 million. As U.S. domestic airlines.
it grew, PN was unable to maintain quality standards at
• Encourage competitors to exit by offering them
its franchise establishments; reputation suffered. U.S.
long-term contracts to supply their customers.
chains McDonald’s (1986), Burger King (1989) entered
Argentina. In addition, PN’s logo was very similar to Generally, when the firm has poor business
Burger King; PN was forced to modify its logo and strengths, it should harvest/divest; it should also
change its name to Pumper (P). Around this time, market
share began dropping; P declared bankruptcy in 1979,
victim of operational problems and tough competition.
 exit inhospitable markets, unless it can dominate
one or more price-insensitive segments. [630t]

Leverage the Brand

Notwithstanding market decline/poor business
strengths, the firm may leverage a strong brand in
other markets. By diversifying away from its original
business, the firm may yet survive, grow. Example:
Mexico Nemak
Faced with a decline in cigarette smoking, Zippo, Nemak (founded 1979) produces highly complex
makers of the iconic lighter, introduced lifestyle aluminum automotive components — cylinder heads,
products — camping supplies, casual clothing, fra- engine blocks, transmission parts. Nemak has global
grances, watches — then tape measures, key holders, presence — more than 38 factories, 16 countries
belt buckles. Some were successful, some were not. — Mexico, Argentina, Austria, Brazil, Canada, China,
Czech Republic, Germany, Hungary, India, Poland,
Russia, Slovakia, Spain, Turkey, U.S.
Endnotes Nemak, a relatively late entrant in the automobile
1 Entry barriers retard market entry; exit barriers retard market market, has achieved competitive success by strong
exit. The general term for inhibiting firm movement — mobility focus on five key attributes — cost, global presence,
barriers.
product development, quality, technology. This focus
2 G. Stalk Jr., D.K. Pecaut, B. Burnett, “Breaking Compromises,
Breakaway Growth,” Harvard Business Review, 74 (September– enabled Nemak’s growth though three distinct phases:
October 1996), pp. 131–139 [603e]; Y. Moon, “Break Free from • Phase 1 — company creation; quality, cost critical;
the Product Life Cycle,” Harvard Business Review, 83 (May 2005),
pp. 77–94. [627e] this focus enabled Nemak to develop its reputation
3 Price elasticity = percentage change in quantity demanded • Phase 2 — revenues increased to US$336 million
divided by percentage change in price = dQ/Q ÷ dP/P. (2000); product development, technology critical
• Phase 3 — transformation from local — mainly
Mexico, U.S. — to global

Building on all five attributes, Nemak slowly became a

favorite industry aluminum-parts supplier.

QUESTIONS

1. Nemak’s five attributes have served it well. What issues

should Nemak consider as it addresses the future?
 CHAPTER 10

Managing Brands
For complimentary material, see Axcess Vids codes at www.axcessvids.com

If this business were to be split up, I would be glad to take the brands,
trademarks, and goodwill, and you could have all the bricks and mortar,
and I would fare better than you.
— John Stuart, then Chairman of Quaker Oats1

Chapter 10 is the third of three chapters discussing character), or combination, intended to identify
separate facets of Imperative 3 — Set Strategic products/services from one seller/group of sellers and
Direction, Positioning. In this chapter, we focus on to differentiate them from competition. Brands are
branding and managing brands. Deep insight into a part of everyday life for firms/customers — logos,
markets, customers, competitors, company, com- names, package designs, symbols, trademarks appear
plementers is critical for making good branding on virtually everything we eat, drink, drive, wear.
decisions.
The most often used signifier is brand name, but
In recent years, branding has shifted from a relatively other signifiers can be as (or more) important. We
low-level tactical issue concerned with naming associate Target stores with the color red; UPS with
products/services, to a critical driver of contempo- brown. We recognize Absolut, Coca-Cola brands by
rary marketing practice. Today, the combined value the visual signifier of their bottles; Nike, Mercedes-
of many firm brands far outstrips the value of their Benz are easily recognizable by their swoosh, three
tangible assets. And, of course, brands also have pointer star signifiers, respectively.
significant value for customers.
Today, brands have meaning, importance far beyond
these outward manifestations. By offering customers
value via its brands, the firm secures value for share-
What Is a Brand? holders. The brand has become a symbol around
Brands are different from products. A leading which the firm, customers construct relationships.
marketer once said: “A product is something that We define brand as:
is made in a factory; a brand is something that is A collection of perceptions, associations customers
bought by a customer. A competitor can copy a hold about a product/service/company. This
product; a brand is unique. A product can be quickly collection embodies values that create meaning for
outdated; a successful brand is timeless.”2 customers, represent a promise of the experience
customers expect when they have contact with the
The traditional definition follows logically: A brand
brand.
is a name, term, sign, symbol, design (letter, number,

Where Would We Be Without Them?

85
86 SECTION 3 STRATEGIC MARKETING

Important implications: lifestyle, type of customer — it wants people to hold.

• The primary meaning of any brand exists in The firm must also decide how (if at all) various
customer minds. brand visions should relate to each other. Brand
• Brands make implicit/explicit promises of customer image comprises the actual associations customers
experiences.3 These promises provide value to hold about the brand. The firm should audit brand
customers over and above related products/services. image associations on a regular basis. A critical task is
By providing additional value, the firm earns value to make brand image congruent with brand vision.
for shareholders.
• Figure 10.1 shows how the term brand applies Brand Associations
widely to individual products, product lines, groups The firm should strive for brand associations that
of product lines. reinforce desired brand vision. Brand associations
are thoughts the customer generates when faced
Sometimes brand meaning evolves. Honda’s with a stimulus — brand name, logo, message,
original U.S. association was motorcycles — today, spokesperson. Brand personality captures the idea of
Honda’s product associations include automobiles, enduring, distinct human emotional characteristics
generators, lawnmowers. associated with a brand. Effective brand associations
Sometimes firms use multiple brands. The firm are:
earns value from the monolithic brand — Toyota, • Strong — personally relevant for customers;
American Express — and from individual product presented consistently over time.
brands — Prius, Platinum Card. Other brand • Favorable — desired by customers; successfully
features include: delivered by the brand.
• Anything can be branded — product; service; town, • Unique — perceived by customers as different from
city, country; even yourself! other brands.
• Brands can provide psychological value: Safety, Generally, the firm uses implementation tools
security — ADT, Volvo; winning attitude — Nike, — communications, distribution outlet, product
Wheaties. design/quality — to achieve alignment between
• Brands may become generic — synonymous with brand vision and brand image. Sometimes brand
the product class. U.S. examples: Aspirin, Band-Aid, associations —positive/negative — are outside firm
Google, Kleenex; Britain: Biro, Hoover. control. Examples: Many people associate Levi’s
• Customer judgments, expectations about brands (jeans), Marlboro (cigarettes) with U.S. cowboy
drive purchase decisions. movies. These associations are generally positive.
• Customers often form communities to demonstrate In contrast, widespread opposition to U.S. policies
brand commitment — Harley Davidson riders (Iraq war) affect some brands negatively — Coca-
(HOGs), Apple Macintosh users. Cola, McDonald’s — in Persian Gulf countries. To
avoid negative associations, McDonald’s focuses
The firm must construct a brand vision (identity) for
on local ownership, local suppliers, distinct store
each brand, incorporating associations — personal,

Figure 10.1 Branding Levels/Examples

Carrefour
Group of Citigroup
Product Lines GE, IBM
Microsoft, Nike

Product Line Ragu family, Claritin family

Chevrolet

Individual Aveo, Cheerios, Sprite

Product Camry, Fiesta, Leaf, Town & Country, MX-5 Miata
 CHAPTER 10 MANAGING BRANDS 87

designs, unique menu items: McArabia — chicken Brand Equity and the Value of Brands
sandwich on Arabian-style bread. Evian emphasized
youthfulness associations with its inner-baby TV By effectively developing, implementing market
commercials. [245v] strategy, the firm creates brand value. The firm may
also use brand value to develop, implement market
Branding Is Not Just for Consumers … strategy. Excellent branding operates as a virtuous
Many people assume branding is just for B2C circle, continually employing, enhancing equity in
marketing. Not so! Branding is also very important firm brands.
in B2B markets, especially for firms with many Brand equity captures the idea that brands deliver
customers— Figure 10.2. customer value, over and above actual product/
B2C and B2B branding use different languages. B2C service value. The most widely accepted definition
firms focus on brand image/associations; B2B firms of brand equity is a set of brand assets and liabilities
stress building relationships, customer confidence. linked to a brand, its name, and symbol that add to
B2B firms want customers to view them as experi- (or subtract from) the value provided by a product
enced, risk-free, trustworthy suppliers/partners. or service to a firm and/or that firm’s customers.4
According to this definition, brand value accrues to
… and Is Not Just about Advertising both the firm and its customers. It follows that there
Another common misunderstanding is that are two types of brand equity: Customer brand
branding should focus only on consumers/end equity (CBE) — value customers receive; firm brand
users; advertising is the only approach. Not so! equity (FBE) — value the firm receives.
Communications targets extend far beyond current/
potential customers to include alliance partners, Customer Brand Equity (CBE)
intermediaries, suppliers, employees. Products/brands provide customers three types of
value — Chapter 4:
The firm can also build, reinforce brand vision via • Functional — doing the job they were designed to
other communication forms — brochures, direct do — FedEx packages arrive on time.
mail, products/packaging, promotions, publicity
• Psychological — prestige, security, status — Amer-
& public relations, new digital-marketing alterna-
ican Express Platinum card; fashion items from
tives — Chapter 15. The CEO can also have a major
Armani, Dior, Prada, Versace.
branding impact by becoming the face of the firm.
• Economic — low price, low cost of ownership —
Firm employees are an increasingly important jetBlue; Southwest Airlines (U.S.); Ryanair, easyJet
branding audience/communications channel, notably (Europe).
via social media/digital connectivity. The firm should
Relatedly, customers receive two equity values:
conduct regular branding audits of employees — also
• Prepurchase equity — what customers believe
constituencies like affiliates, suppliers.
before purchase that they will receive after purchase.
Prepurchase brand equity reduces customer search
costs/purchase risk.

Figure 10.2 Branding Is Not Just for Consumers

88 SECTION 3 STRATEGIC MARKETING

• Postpurchase equity — enhances customer con- Some brands have greater brand resilience than
sumption experience. After purchase, customers others. Example: In 1982, J&J withdrew Tylenol
receive some combination of functional, psycho- capsules following a cyanide-poisoning scare (six
logical, economic values, over and above value from people died; unsolved). Sales plummeted to zero.
a comparable generic product. J&J’s timely, caring response led to a quick Tylenol
rebound. J&J introduced more secure packaging; it
Sometimes high CBE focuses on a specific product
also ramped up distribution/promotion. Planning
class — Tide detergent typically engenders positive
for damage control/crisis management is increasingly
functional, psychological benefits/values. But how
important.
would you react to Tide toothpaste, Tide cookies?
Other brands — Virgin, GE, franchises like Star Wars,
Harry Potter — provide customer value across several
product classes. Pre-/postpurchase CBE is generally Monetizing Brand Equity
greater when: We extend the CBE/FBE discussion to brand
• Comparing alternative products is difficult. monetary value.
• Customers only realize value after purchase.
• Customers are inexperienced/unfamiliar with the Customer Brand Equity
product form/class. Customers receive value from a generic product;
• Product quality from some suppliers is variable. typically, they receive greater value from a branded
• The product is socially visible. product. The value difference — brand less generic
— equals CBE . Of course, if the branded price is
Firm Brand Equity (FBE) higher than customers are willing to pay, there is no
FBE results from customer responses to firm actions; postpurchase CBE. The firm can also calculate the
FBE links directly to CBE. High brand awareness, marginal CBE of one brand versus another — the
positive attitudes, high perceived quality, positive extra price customers will pay for their favored brand
word of mouth, intention to purchase, purchase, — Chapter 18.
brand loyalty, positive brand image/associations, high
customer satisfaction all enhance FBE. CBE and FBE Firm Brand Equity
reflect the trust between brand and customers. Firms FBE relates directly to the brand’s current/future
with high FBE can: ability to attract paying customers, and hence to
• Set higher prices; earn better profit margins. increase shareholder value. FBE accounts for about
30 percent of S&P stock market value.5 Key valuation
• More easily introduce similarly branded items in
components:
different product forms/classes/markets.
• Revenues. The price and unit sales differences
• Use cross-selling to encourage existing customers to
between the branded product and an identical
purchase in different product forms/classes.
generic product.
• Generate leverage in distribution channels: More/
• Cost. The costs of supporting the brand.
better shelf space, favorable transaction terms.
• Raise entry barriers for competitors. Various approaches are available to calculate FBE.
• Exploit licensing opportunities.
Basic Approach — the sum of year-by-year differ-
Generally, CBE/FBE build slowly. But, new brands ences between revenues and costs, discounted to the
sometimes gain strength relatively quickly — Airbnb, present. Unfortunately, this straightforward approach
eBay, Facebook, Google, Red Bull, Uber. Nonetheless, has two inherent problems:
CBE/FBE are fragile; they may dissipate quickly if • An unbranded equivalent may not exist.
the firm missteps. Managerial mishaps, neglect can • Ignores potential for brand broadening (leveraging)
wreak havoc with FBE. Examples: Volkswagen — — using the brand to enter new product forms/
faked emission tests; Wells Fargo — opened bank classes/markets. Many brands have customer-
accounts without customer permission. Many firms attracting properties over and above the products/
unwittingly cause brand equity declines by product product lines to which they are currently attached.
proliferation, price cutting, offering discounts/pro- Example: The Pan Am brand — unattached to an
motions, using inferior components. aircraft/airline — sold for several million dollars.
 CHAPTER 10 MANAGING BRANDS 89

Figure 10.3 Monetary Value of Firm Brand Equity — Automobile Example

$11,500

Toyota Corolla
$11,000
Wholesale Price
Price Benefit
Geo Prizm

$10,500
Volume Benefit

$10,000
0 100,000 200,000
Annual Quantity Sold

Market-Value Method — provides the best measure; greater FBE; operating profit exceeded GM by $128
works well for publicly traded corporate brands. FBE million — Toyota dealers earned $107 million more
equals market value less book value, plus nonbrand than GM dealers.
intangibles — human resources, know-how, patents.
Example: Ford purchased Jaguar for $2.5 billion
— book value = $0.4 billion. Observers viewed the Building, Sustaining a Strong Brand
$2.1 billion difference (2.5 less 0.4) as Jaguar’s brand
equity. An important goal of developing, implementing
market strategy is to build/sustain strong brands.
Internal Method. Two internal methods: Strong brands induce positive responses from cus-
• Replacement cost — anticipated brand- tomers. In turn, positive customer responses enhance
replacement cost multiplied by probability of brand strength; they are a powerful influence on
success.6 market strategy.
• Cash flow — intuitively more appealing, but
estimating future cash flows is difficult. Brand Building a Strong Brand
consultancy Interbrand uses a proprietary cash- The firm builds a strong brand by making good
flow based method. branding decisions — Figure 10.4.
Calculating the marginal FBE of one brand versus Brand Vision (Identity) — aspirational — what the
another is probably easier than calculating an firm wants the brand to mean to customers. [464v]
absolute value. New United Motor Manufacturing Brand vision is the blueprint for many marketing
Inc. (NUMMI) — GM/Toyota joint venture — decisions; it defines limits on product quality,
manufactured two virtually identical cars — Geo service, promotion, distribution, price. Executing
Prizm (GM) and Corolla (Toyota). Corolla sold at a brand vision is critical for customers to form desired
premium price and depreciated more slowly. After associations.
five years, Corolla’s secondhand value was 18 percent
Brand Awareness — typically requires significant
more than Prizm. Figure 10.3 (above) shows Corolla
investment. When the brand is first entrant in a new
annual sales were 200,000 at $11,100; Prizm annual
product form, the pioneer must educate potential
sales were 80,000 at $10,700. Clearly, Toyota has
customers about the product form, as well as about

Figure 10.4 Building a Strong Brand

Brand Vision Brand Awareness Brand Associations, Brand Image

Brand Broadening Brand Loyalty Brand Quality/Value Perceptions

90 SECTION 3 STRATEGIC MARKETING

the brand. Example: Gojo educated consumers, — is off-message execution by individual franchised
medical professionals, retailers about a new type of hotels; inconsistency in the customer experience
hand-washing liquid — Purell. Launching a new affects loyalty to the entire chain.
corporate brand is also very costly. Example: Lucent
The firm earns high brand loyalty by:
spent $50 million to create corporate brand aware-
• Selecting the right brand vision for target
ness. Note: A brand may stay in memory for many
customers; consistently executing that identity.
years — Datsun, Esso, Master Charge — even after
retirement by brand owners. • Motivating employees/third-parties — franchisers,
advertising agencies — to deliver on the brand
Brand Associations, Brand Image — meanings the vision.
brand has for customers. Brand image is the overall • Continuously measuring customer satisfaction with
sum of brand associations. Each and every marketing the brand, making necessary course corrections.
implementation decision has a role in developing
customer brand associations, hence brand image — Brand Broadening (Leveraging) — becomes a viable
product design, service, communications, distribu- option to enter new product forms/classes if the firm
tion outlet, price. Consistency is critical: The firm has done a good job of securing brand loyalty, repeat
should strive for congruence between brand image purchase, referrals, favorable word of mouth by
and brand vision. Brand equity always suffers when successfully developing/executing brand vision.
brand vision and brand image are mismatched.
Sustaining a Strong Brand
Brand Quality/Value Perceptions — derives from con- The key to sustaining a strong brand for the long
sistency in communications, customer brand expe- run is continual assessment of brand health. Many
riences. A specific problem for value perceptions is firms measure brand managers on short-term
cutting prices/offering short-term price promotions. revenues, profits, market share. This practice is
Sales may spike in the short run, but cause long-term rather like examining the firm’s income statement
brand damage; customers defer purchases until the but neglecting its balance sheet. Brand-health checks
next promotion. Example: Vlasic discounted pickle use metrics indicating FBE changes, typically via a
prices so far that, despite sales increases, margin balanced-scorecard approach — Chapter 20. Four
declines eventually forced bankruptcy. popular types of measures/sources:
Many global 100 firms have brand police (brand czar) • Purchasing, sales — firm accounting, CRM
to oversee brand consistency. These executives make systems; industry-focused research suppliers.
sure brand names, logos, symbols, all messaging • Perceptual — survey research.
— advertising, brochures, social media, websites • Marketing support — firm accounting, business
— remain consistent. Brand czars provide specific intelligence systems; industry-focused suppliers.
guidance on colors, font size, graphics, words. In • Profitability — firm accounting system.
many firms, all employees learn the dos and don’ts in Brand-health checks are not one-time events. Brand-
mandatory brand training. health checks should occur regularly — quarterly/
Brand Loyalty — results from consistency in biannually. The firm should compare current brand
brand quality/value perceptions. Brand loyalty health versus historic trends, benchmark competing
inspires repeat purchase, referrals, positive word brands. Results from brand-health checks should
of mouth. Examples: Starbucks, Zappos cultivate lead to appropriate changes in market strategy,
brand advocates— loyal/diehard customers — as execution.
promoters/problem solvers; the firms provide
communication options, rewards for their support.
Managing Brand Architecture
Vertical marketers (own retail outlets) — Starbucks,
Ben & Jerry’s — know the importance of consistency. Many firms maintain brand portfolios — multiple
Most automobile firms have difficulty providing brands, each with its own brand vision. Example:
brand-enhancing experiences in independently LVMH (global luxury-goods leader) offers Louis
owned dealerships. A serious problem for hotel Vuitton monogrammed bags — several hundred
management firms — Hilton, Holiday Inn, Sheraton dollars; Murakami bags — $1,000; Suhali goat-
 CHAPTER 10 MANAGING BRANDS 91

skin bags — average $2,000. Brand architecture — Multibranding versus Umbrella Branding
organizing structure for multiple brands — is an In multibranding — aka House of Brands strategy
important decision area. — the firm uses multiple brands for its various
products.7 The firm seeks target-customer loyalty to
Because brands have a major impact on shareholder
individual brands, not to the parent-firm brand.
value, branding decisions should have high priority.
The firm should carefully consider what to brand; By contrast, a firm using umbrella branding empha-
decide on brand visions/desired brand associations; sizes a monolithic brand for several products/
carefully plan brand additions (internally developed/ product lines. Example: Consumers know Yamaha
acquired), brand deletions. The firm should also for electronic musical instruments (keyboards, gui-
consider interrelationships among the corporate tars), traditional musical instruments (pianos), home
brand, product class/form brands, individual product audio products, computer peripherals, motorcycles,
brands. Firm brand portfolios should evolve as even Grand Prix engines. A more recent trend is
markets evolve.

Chile Falabella Brand [351t]

Architecture – Multibranding
Chile’s Falabella Group (FG) is a leading Latin American retailer. Across its retail footprint, FG’s brand
FG competes in Chile, Argentina, Brazil, Colombia, Mexico, architecture embraces multiple brands
Peru, Uruguay. FG ranks 614 in Forbes Global 2000; 87 in — products/services, customers,
the Innovative Companies list. FG’s brand portfolio embraces markets. FG enjoys 40 percent market share among mixed-
several retail types: format retailers in Chile, and is well-positioned regionally
• Department stores — more than 100 outlets in Chile, in Latin America. Fueled by social media, FG’s online
Argentina, Colombia, Peru — broad range of personal/home presence is growing rapidly — first Chilean firm to reach one
products. million Facebook followers. Observers believe FG’s strong
performance results from its focus on quality, design, style. FG
• Home improvement — 250 stores, six store formats,
successfully manages its multibrand portfolio across multiple
several brands: Sodimac Homecenters, Sodimac
retail channels, in multiple countries.
Constructor — Chile, Argentina, Colombia, Peru; Homy,
Imperial — Chile; Dicico — Brazil; Maestro — Peru. Product
portfolio embraces building/home improvement; carpentry; Department Stores

furniture, home decor; hardware, tools; kitchen, bathroom,

garden accessories.
• Supermarkets — 120 stores, three formats/brands: Home Improvement
Tottus Supermarkets — Chile, Peru (traditional); Tottus
Hypermarkets — Chile, Peru (supermarket plus appliances);
Precio Uno Hiperbodega — Peru (similar to Tottus
Supermarkets
Hypermarkets).
• Financial/related services — 4.9 million accounts,
US$6.5 billion loan portfolio — Chile, Argentina, Colombia,
Financial Services
Peru. Businesses — CMR Falabella (credit cards); Banco
Falabella (savings/current accounts, time deposits,
mortgages, car loans, consumer credit services); Seguros
Falabella (insurance); Viajes Falabella (travel); Movil Falabella Real Estate
(telecommunications, prepaid mobile services).
• Real estate — 40 shopping centers — Chile, Colombia,
Peru. Three brands — Mall Plaza, Aventura Plaza, Open Online
Plaza.
 [756t] [827t]

Mexico Cemex Brand

Value – Umbrella Branding
Cemex is the second-largest construction-materials firm — internal benchmarking; act with integrity; care about
globally. Products: asphalt, blended cement, concrete people, communities, natural resources. Cemex has earned
blocks, gravel, recycled concrete, sand, roof tiles. Services: substantial brand equity by attracting customers, investors,
construction finance, customer educational/training, mobile superior human talent.
solutions, technical support. Cemex is one of Mexico’s most
valuable brands — US$10.2 billion; ranks 908 in Forbes
Global 2000. Cemex is market leader in many countries —
Mexico, Costa Rica, Dominican Republic, Panama, Spain,
U.S.; strong presence — Colombia, Egypt, several Asian and
European countries.
Cemex operates an umbrella-branding strategy globally,
regardless of product, country market. Each international
business unit displays the Cemex logo, country name,
product/service; simultaneously communicating its top-
quality promise. Cemex’s brand strength is critical for
bagged-cement growth, especially in developing countries.
Customers (households, construction firms) pay a premium
price for conveniently distributed, high-quality building
materials.
Cemex predicates brand strength on corporate values:
Ensure safety for workers, contractors, community; focus on
customers to provide valuable solutions; pursue excellence
by exceeding expectations; continuously improve; work as
One Cemex by leveraging global knowledge in local markets

for some multibrand firms — P&G, Unilever — to • Is the firm capable of satisfying potential demand?
emphasize corporate ownership. The firm commu- • Does the firm have access to raw materials, other
nicates overarching corporate values to support its production inputs?
brands. [527v] • Does the firm possess other competencies necessary
for success?
Brand Broadening (Leveraging)
Branding — concerning brand associations, fit with
Brand broadening (leveraging) occurs when the firm
undertakes brand extension — attaching an existing the extension:
brand to a product entry in a different product • Do customers perceive a fit between the original
form/class, to address a new opportunity — Harley and new product form/class?
Davidson restaurants, Coca-Cola clothing. Brand • Will customer brand associations transfer to the
broadening reduces launch costs, can increase profits new product?
with small investments. A new product with a lever- • How will customer associations for the new
aged brand gains automatic brand awareness. Core product back transfer to associations for the core
issues to consider before leveraging: product?
• How does the corporate/monolithic brand relate to
Opportunities, Obstacles — the firm must address
these associations?
such questions as:
• Is there sufficient demand for the new opportunity? Brand extensions tend to fail when:
• Is the firm sufficiently strong to compete? • They lack strong positive associations.
• Can the firm access the new market through cur- • Associations between brand and extension are not
rent distribution channels? obvious.
 CHAPTER 10 MANAGING BRANDS 93

• The brand has a unique image/associations that do closely associates its parent brand with Crowne Plaza
not transfer. hotels — endorsed brand. By contrast, in the U.S.,
• The new product form/class has a dominant Crowne Plaza is a standalone brand; Holiday Inn
competitor. associations negatively affect the Crowne Plaza brand
• Positioning is confusing/inconsistent. image.
• Extension quality does not match customer
expectations for the brand. Aging, Defunct Brands
Some aging brands have loyal customers; they
Brand dilution is potentially serious. Should the survive for many years. But these are exceptions. The
brand extension fail, FBE reduces, overall sales marketing landscape is littered with the corpses of
decline. once-valuable/famous brands. As markets evolve,
weakly positioned brands may not be economically
Brand Migration viable. Chapter 9 identifies a second option for
Firms sometimes retire individual brands. Perhaps improving sales — reposition the brand.
the target market/market segment has contracted;
competition may be severe; brand vision may no Brand reintroduction/revitalization is the key
longer fit evolving customer needs. Or, the firm objective for repositioning. Options/examples:
may decide to refocus efforts on fewer, stronger • Target new market segment(s). Avon, Colgate-
brands, seek scale economies in marketing. Example: Palmolive, Reader’s Digest each increased sales by
Federated Department Stores retired Abraham & targeting new geographic segments outside the U.S.
Strauss, L.S. Ayers, Bon Marché, Bullocks, Burdines, • Change brand associations. Honda’s classic motor-
Famous-Barr, Filene’s, Foley’s, Goldsmith’s, Hecht’s, cycling repositioning from long-haired guys and
Jordan Marsh, Kaufmann’s, Lazarus, I. Magnin, Mar- the police officers chasing them to a family activity
shall Field’s, Meier & Frank, Rich’s, Robinsons-May, — you meet the nicest people on a Honda.
Stern’s, Strawbridge’s, The Jones Store in favor of • Alter the competitive target. Bacardi successfully
Macy’s. repositioned light rum to compete against vodka
and Scotch whisky, rather than other rums.
Sometimes the firm secures brands via acquisition,
then retires them. Examples: Citigroup — Schroder The firm can avoid necessity for revitalization
Salomon Smith Barney; Morgan Stanley — Dean by continually innovating, adding new products,
Witter. The firm may be contractually obligated to keeping the brand vital/relevant.
stop using the brand: Black & Decker acquired GE’s
small appliance (housewares) business but could
use the GE brand for only five years. The challenge: Endnotes
Retain brand equity by transfer to another brand 1 J. Sampson, “Brand Valuation: Today and Tomorrow,” Chapter 20
— brand migration. Example: In Germany, Voda- in Brand Valuation, R. Perrier, P. Stobart (eds.), London: Premier
Books, 1997.
fone acquired D2, rebranded as D2/Vodafone, then
2 S. King, Developing New Brands, London: J. Walter Thompson
Vodafone/D2. Eventually, Vodafone dropped D2 to Co. Ltd., 1984. [646e]
become Vodafone. 3 B.H. Schmitt, Experiential Marketing, New York: Free Press, 1999;
Customer Experience Management, Hoboken, NJ: Wiley: Wiley,
Strategic Alliances 2010*. [192e]

Strategic alliances can extend firm brands into new 4 D.A. Aaker, Managing Brand Equity, New York: Simon & Schuster,
2009* [860e], identifies 11 types of associations — product
market segments. Alliances range from informal/con- attributes, intangibles, customer benefits, relative price, use/
tractual working relationships to new entities struc- application, user/customer, celebrity/person, life style/personality,
tured as legal joint ventures. Most alliances focus product class, competitors, country/geographic area.

on competency — one firm’s strengths mitigate the 5 M.E. Barth, M.B. Clement, G. Foster, R. Kasznik, “Brand Values
and Capital Market Valuation,” Review of Accounting Studies, 3
other’s weaknesses. Strategic alliances have important (1998), pp. 41–68.
co-branding implications when partners can transfer 6 The cost to create a successful midsize B2C brand is about $100
positive customer attitudes/behavior. million. At a 15 percent success rate, brand value = $670 million
(100/0.15).
When firms co-brand themselves, they must ensure 7 Aaker, 2009, op. cit. [830e]
brand associations are appropriate for product/target
market segment(s). Example: In Asia, Holiday Inn
 94 SECTION 3 STRATEGIC MARKETING

[326t] [572t]

Mexico Grupo Bimbo – Bakery

Grupo Bimbo (GB) (founded 1945) is Mexico’s highest-value GB’s CEO stated:
food brand, the world’s leading bread producer, and second- “For 70 years, Bimbo’s commitment to meet consumer
largest bakery. GB’s product line includes bread, cakes, needs and preferences has been characterized by
candies, chocolates, confectionery, cookies, processed the highest quality and freshest products. Bimbo has
foods, regular/salted snacks, tortillas — more than 90 remained at the forefront by constantly innovating
percent of sales are packaged food. GB operates 1,700 its product portfolio, through ongoing research at its
sales centers, and more than 52,000 distribution routes, in Innovation and Nutrition Institutes.”
22 American, Asian, European countries. GB brands are
especially widely distributed in Mexico, including many small GB focuses on healthier products — via whole grain/
stores in remote rural areas. fiber options. Some ancient grain cereals — amaranth,
Mexico’s top 50 most valuable brands include GB’s spelt, rye, teff, chickpea flour — are becoming popular in
Bimbo, Marinela, Oroweat, Tia Rosa. Other well-known GB bread production. Product reformulations include removing
brands — Barcel, Coronado, El Globo, Lara, Milpa Real, significant amounts of fat, sodium, sugar from sweet baked
Ricolino, Sanissimo Suandy, Vero. goods/snacks. Healthy breakfast bars are an increasingly
GB holds 2.9 percent global market share in baked important high-profit category; Multigrano, Bran-Fruit, Silueta
goods, slightly ahead of Kellogg — 2.8 percent. Mondelez fruit bars are widely distributed in Mexico and elsewhere.
(U.S.) leads — 3.4 percent. Other top-10 firms (in order) — GB’s labeling, messaging, promotions focus on
Yamazaki, PepsiCo, Campbell’s, Barilla, General Mills, Cereal ingredients and benefits from naturally healthy bread brands
Partners Worldwide, Nestlé. — Oroweat (U.S.), Million Manor (Asia-Pacific), Fargo
GB’s growth strategy focuses on acquiring strong (Argentina).
local brands: Panrico-Donut — Spain, Portugal; Fargo —
Argentina; Sara Lee — U.S.; Jin Hong Wei — China. GB QUESTIONS

acquired several Canadian brands — Canada Bread, Italian 1. Why has GB become a leading bakery firm?
Home Bakery, Saputo. Other global players also acquired 2. GB employs a multibrand versus an umbrella-branding
local brands. strategy. Do you agree with this decision? Why or why not?
3. What strategic actions should GB take?
Global trends impacting GB:
• China — soon to become second-largest baked-goods
market globally, just behind Mexico. Major product classes
— cakes, snacks, baked goods.
• Consumer tastes — evolving to
indulgence, affordability. GB’s broad
product portfolio allows it to address these
needs.
• Healthy products — obesity concerns
drive increased requirement for healthy
products. Observers frequently link baked
goods with obesity.
• Product innovation — to address health
issues, in part driven by regulations.
Increased awareness of low-carb/high-
protein products; multiple grains/seeds
bread versus white bread increasingly BIMBO (2017). Grupo Bimbo Today.
popular. Retrieved from: http://www.grupobimbo.com/informe/en/about/grupo-bimbo-today.html
 95

SECTION 3 KEY MESSAGES

Chapter 6
Marketing’s first imperative is to determine, • Implementation — specific actions to implement
recommend which markets to address. A marketing growth strategy:
perspective should infuse critical strategic decisions • Internal development — new products/services
— marketing should focus on two areas: developed via firm efforts.
• Identify potential opportunities. • Insourcing — capturing greater value-added,
upstream/downstream.
• Provide marketing input for other strategic actions
• Outsourcing — engaging other firms to conduct
the firm is contemplating.
needed activities.
A systematic approach to developing, selecting, • Acquisition — purchasing a firm/business.
implementing opportunities has three elements: • Strategic alliance — agreement with a partner
• Strategy for growth — frameworks to help decide firm to jointly exploit an opportunity.
which businesses to be in/not in: • Licensing, technology purchase/sale — accessing
• Vision — description of an ideal future state for technology developed by others/earn revenues.
the firm/business. • Equity investment — taking ownership positions
• Mission — directly guides search for in startups.
opportunities.
• Growth path — a focused approach to identify Videos related to Chapter 6
opportunities; trades off return, risk. • Being Entrepreneurs [281v]
• Timing of entry — market-entry options related (Steve Jobs, Bill Gates — Apple, Microsoft)
to product life-cycle stage. • Lessons from Entrepreneurs [839v]
• Screening criteria — ways of evaluating individual (Harvard iLab)
opportunities:
• Objectives — growth, risk, timing, stability, Audio related to Chapter 6
flexibility. • Marketing Imperative 1 [723a]
• Compatibility (fit) — product-market fit, (Noel Capon — Columbia Business School)
product-company fit, company-market fit.
• Core competence — capabilities to achieve
differential advantage.
• Synergy — 2 + 2 = 5.
• Contribution to the venture portfolio.
96

Chapter 7 Chapter 8
• Market segmentation is fundamental to developing The market strategy has four key purposes:
the market strategy. The firm has three separate,
• Provide strategic direction in the market.
but related, strategic tasks — segmentation,
targeting, positioning (STP): • Secure differential advantage.
• Conduct a market-segmentation process to • Guide the effective allocation of scarce resources.
identify market segments. • Achieve cross-functional integration.
• Decide which of the identified market segments
to target for effort. The market-segment strategy comprises four key
• Develop a market-segment strategy, positioning elements; each element has several constituent parts:
for each target segment. • Performance objectives: Results the firm hopes to
• Segmentation is a process for deconstructing the achieve:
market into customer groups defined by need • Strategic objectives — qualitative, directional;
profiles. typically fall into one of three categories —
• Customers in each market segment have homo- growth/market share, profitability, cash flow.
geneous (similar) need profiles. Customer need • Operational objectives — quantitative, time-
profiles differ from market segment to market bound. How much and by when.
segment. • Strategic focus: The broad direction of the strategy.
• The firm can approach the segmentation process in Has two main branches:
two different ways: • Increase unit sales:
• Identify groups of customers with different need • Current revenue base — increase customer
profiles. retention; increase customer use.
• Use candidate descriptor (segmentation) variables • New revenues — attract customers from
to form groups, then see if need profiles differ competitors; secure new business.
across groups. • Improve margins and investment returns:
• Good market segments satisfy six separate • Increase revenues — raise prices; improve the sales
criteria — differentiated, identifiable, accessible, mix.
appropriate size, measurable, stable. • Reduce costs and assets — reduce operating costs;
improve asset utilization.
• The segmentation process is creative, analytic
— requires good market, customer, competitor, • Positioning: How target customers should view the
complementer insight. Targeting requires decision- firm’s offer. Requires four key decisions:
making. • Select customer targets — choose the distribution
• The multifactor matrix is a good approach for system, level(s) to target, specific person types/
making targeting decisions. roles.
• Frame competitor targets — competitors the firm
• Large firms generally succeed by targeting multiple
decides to go up against.
segments; small firms succeed by targeting few
segments. • Design the value proposition — why customers
should prefer the firm’s offer.
Video related to Chapter 7 • Articulate reasons to believe — supporting
evidence for the value proposition.
• Market Segmentation, Targeting [350v]
(Ron Boire — Best Buy)

Audio related to Chapter 7

• Marketing Imperative 2 [498a]
(Noel Capon — Columbia Business School)
 97

Chapter 9
• Implementation programs: Actions the firm must Preemption is an important dimension of market
take to execute the strategy: strategy-making; acting before competitors can put
• Marketing mix: Externally — product, promotion, the firm in good competitive position. Using the
distribution, price. product life-cycle framework, we constructed nine
• Supporting functional programs: Internally — scenarios for developing preemptive strategies:
integrate functional areas to work together. • Introduction Stage — Pioneers
If the firm targets multiple market segments, each • Early-Growth Leaders
segment strategy must be distinct. The firm should • Early-Growth Followers
seek positive synergy among implementation pro- • Late Growth
grams.
• Maturity — But Not Really
Videos related to Chapter 8 • Maturity — Concentrated Market Leaders
• Segmentation, Targeting, Positioning [406v] • Maturity — Concentrated Market Followers
(Wayne DeSarbo — Smeal College of Business, • Maturity — Fragmented Markets
Pennsylvania State University) • Decline
• Why Strategies Fail [590v]
These scenarios can help the firm think through its
(Mark Chussil — Advanced Competitive Strategies)
strategy by anticipating and striving to influence
change. For each scenario, we developed a family
Audios related to Chapter 8
of strategic options. Notwithstanding the value of
• Marketing Imperative 3 — Market Strategy [602a] identifying these options, the best competitive strat-
(Noel Capon — Columbia Business School) egies are often contrarian. When the firm surprises
• Marketing Imperative 4 [173a] competitors, it can gain significantly.
(Noel Capon — Columbia Business School)
Video related to Chapter 9
• Managing through the Life Cycle [953v]
(Ron Boire — Toys “R” Us)
98

Chapter 10
• The nature of brands has changed from signifiers • To sustain a strong brand, the firm should regularly
of products/services, to symbols for constructing measure brand health, then act on results.
relationships between the firm and customers. • To secure the best results from branding efforts, the
• Positive relationships between brands and firm should make serious decisions about various
customers can significantly enhance shareholder facets of brand architecture.
value.
• The firm can brand individual products, product Videos related to Chapter 10
lines, product groups. • Branding [241v]
• The firm should choose a brand vision/supporting (Schmitt — Columbia Business School)
associations. • Brand Management [630v]
• Brand image represents the associations customers (Barton Warner — Bayer HealthCare)
hold about the brand. The firm should strive to • Branding in Action [882v]
achieve alignment between brand image and brand (Dr. Ulrich Bez — Aston Martin)
vision. • Building Brands [447v]
• Some important items about brands/branding: (Sasha Strauss)
• Branding is important in B2C, B2B. • Branding Stories [146v]
• Branding is much more than advertising. (David Aaker — University of California, Berkeley)
(skip 7 mins.)
• Customers are only one of several targets for
brand messages.
Audio related to Chapter 10
• Customer brand equity (CBE), firm brand equity
• Marketing Imperative 3 —Branding [226a]
(FBE) are two distinct constructs.
(Noel Capon — Columbia Business School)
• To build a strong brand, the firm must execute
a process to establish brand vision; create brand
awareness; form brand associations/brand image;
develop consistent brand quality/value perceptions;
build brand loyalty; possibly broaden (leverage)
brand strength to new products/services.
 SECTION 4

Implementing the Market Strategy

IMPERATIVE 4
Design the Market Offer

PART A: PROVIDING CUSTOMER VALUE

CHAPTER 11

Managing the Product Line

CHAPTER 12

Managing Services, Customer Service

CHAPTER 13

Developing New Products

For key messages from Section 4, Imperative 4 – Part A, see page 127.
Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 11

Managing the Product Line

For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 11 is the first of three chapters in Part A approach to product management, balancing
of Imperative 4 — Design the Market Offer. Part A objectives and resource allocations across all
focuses on providing customer value. Chapter 11 products. New products typically require investment
addresses managing the product line. in R&D, plant/equipment, promotion; they consume
cash. In growth markets, many firms believe securing
Products/services are central to the marketing
market position is more important than earning
mix. Since decisions about products/services cross
profits, at least in the short run. By contrast, when
functional lines, they have broader impact on firm
growth slows/investment requirements diminish,
operations than other marketing-mix variables —
established products can become cash generators.
promotion, distribution, price. Firms also face diffi-
The firm uses this cash to develop/support new,
cult issues allocating limited resources across product
younger products. The cycle continues.
portfolios. Optimal product-line breadth is a critical
issue; product proliferation, product-line simplifica- The firm optimizes shareholder value when it
tion can each have dramatic effects on shareholder balances its product portfolio; imbalanced portfolios
value. Introducing new products — Chapter 13 — is put shareholder interests at risk. Imbalances occur
critical. Product safety can embroil the firm in legal, when the firm funds too many new products, enters
ethical problems. Increased societal expectations too many new markets, creates shortages of cash/
regarding health — fast food, sugary soft drinks, other resources. Imbalances also occur when the firm
obesity — and environmental concerns — pesticides, has too many old products, masking failure to invest
packaging/product disposal — highlight the impor- sufficiently in the future. Securing the right balance
tance of product decisions. of successful new products and profitable established
products is important for enhancing shareholder
value.
The Product Portfolio Concept The key to successful product strategy is setting
The firm’s product portfolio is a collection of objectives, allocating resources based on each
products. Large firms offer thousands of products/ product’s role in the portfolio. The core challenge:
product lines, often grouped by business. Corporate Allocate the right financial/human resources so each
leaders allocate resources among businesses. Business product achieves its objectives. This chapter shows
heads make resource allocations among products/ portfolio analysis methods used by many firms to
product lines, based on their assessments of potential make these difficult decisions. But first, we describe
growth/profitability.* traditional financial analysis methods for making
product decisions.
The firm does not optimize overall profits by
maximizing short-run profits from individual Financial Analysis Methods
products. Rather, the firm should employ a portfolio Superior financial performance is critical for
delivering increased shareholder value. Hence,
* In this section, we use the term product to embrace both a financial analysis (FA) perspective for making
individual products/services and product lines.

99
100 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

resource allocation decisions is both important and Portfolio Analysis (PA) Methods
proper. Approaches: PA is central to many firms’ strategic planning
• Return on investment (ROI) projects future processes for businesses/products. PA is best viewed
accounting data. ROI calculations compare the as an additional tool for allocating resources, not an
product’s forecast rate of return versus a target — alternative to FA. PA’s goal is a systematic, organized,
hurdle rate. easily communicable way of assembling, assessing,
integrating important information about products/
• Payback forecasts the time to pay back the invest-
markets. The goal is to construct a balanced portfolio.
ment. Generally, shorter paybacks are better than
PA helps set strategic direction, establish investment
longer paybacks. Payback’s problem is ignoring
priorities, allocate resources.
profits earned after the payback period.
PA has dramatically affected many firms’ resource
Neither ROI nor payback distinguishes among time
allocation processes; PA includes factors traditional
periods. Each method treats financial flows similarly
FA ignores. Table 11.1 illustrates several differences
regardless of when they occur. Because of this defect,
between FA and PA. Using FA and PA together leads
most firm approaches account for time value of
to better investment decisions than either approach
money:
alone.
• Net present value (NPV), internal rate of return
(IRR) are the most common financial analysis Two important PA methods: Growth-share matrix,
methods for assessing investment opportunities. multifactor matrix.
Discount factors account for time value of money. Growth-Share Matrix. The Boston Consulting Group
Both methods use actual cash flows rather than (BCG) developed the original PA. [522v] As the name
financial/cost accounting data. NPV/IRR assess implies, the core dimensions are growth, share:
cash inflows — sales revenues — when earned; cash forecast long-run market growth, relative market
outflows — costs/investments — when paid out. share — firm share divided by major competitor’s
• NPV: Uses a predetermined discount factor, share. Figure 11.1 shows each dimension bisected to
typically the firm’s cost of capital. The firm produce BCG’s four-cell classification. Matrix entries
calculates NPV for various opportunities, then represent products (businesses). Typically, each
ranks by monetary value. circle’s size is proportional to sales revenues/invested
• IRR: The firm calculates the discount rate assets. Note: Rather unconventionally, the X-axis
that equalizes cash inflows/cash outflows. IRR runs high to low.
typically ranks opportunities whose IRR exceeds BCG’s growth-share matrix places heavy emphasis on
the firm’s hurdle rate. financial characteristics by cell. High-share products
More recently, firms use economic profit/economic are typically more profitable than low-share prod-
value added (EVA). EVA equals annual profit less an ucts. Growth products typically require significant
explicit charge for capital.1 investment in fixed assets, working capital, market

Each method relies on forecast sales units, prices,

costs, investments — these may be highly uncertain.

Table 11.1 Financial Analysis, Portfolio Analysis

Variable Financial Analysis Portfolio Analysis

General approach Financial-, budget-oriented Market-, competitive-oriented

Investment decision focus Technologies/facilities Products/markets/customers/applications

Key concerns Derived profit/cash-flow figures Market/competitive factors underlying

financial numbers
Tools Capital budgeting Growth-share, multifactor matrices

Typical measures ROI, payback, NPV, IRR Market — size, growth, competitor strength
 CHAPTER 11 MANAGING THE PRODUCT LINE 101

Figure 11.1 Illustrative BCG Growth-Share Matrix Best way to view the growth-share matrix: A
device for raising/discussing what-if (contingency)
B D questions.
High

Forecast
Long-Run Market [323t]
Growth
A C
Low

Chile Viña
High Low Santa Rita
Relative Market Share

Viña Santa Rita (VSR) (founded 1880) is Chile’s leading wine

producer — 31 percent Chile market share. VSR sells more
development. Conventional labels, classic strategic than 70 million liters annually — many brands, different price
recommendations for products in each cell: points — 120, Bougainville, CaSigma Real, Floresta, Medalla
Real, Pehuén, Secret Reserve, Triple C. 120, positioned as
• Cash Cows — low market growth/high market
familiar, traditional, emotional, humorous — accounts for 60
share (cell A)
percent VSR sales.
Characteristics: Low costs, premium prices, low
VSR’s wine portfolio includes white, red (most sales),
reinvestment — should be highly profitable.
rosé (niche), sparkling (fastest growth), Vermouth (niche).
Strategic recommendations: Invest moderately to Major wine consumption trends: Growing professional class
maintain position, generate long-run cash. pay high prices for high-quality wine brands — restaurants,
bars, at home. Sharply increased female consumption
• Stars — high market growth/high market share
drives growing preference for white/sparkling wines. Also,
(cell B)
sparkling wine consumption is expanding beyond traditional
Characteristics: Relatively rare; frequently profitable
Christmas/New Year seasons to many more occasions —
in accounting terms, but cash negative — growth
happy hours, birthdays, social events. Chileans also prefer
requires substantial investment.
white wine when eating seafood/visiting the Chilean Pacific
Strategic recommendations: Manage carefully; coast. Today’s more sophisticated consumers also pay
appropriate investment leads to cash cow as growth more attention to vintage year, region of origin, grape variety,
slows, the market matures. tannins.
VSR has addressed these trends with new product offers.
• Dogs — low market growth/low market share
Examples: 120 50th Anniversary Limited Edition — super-
(cell C)
premium wine, launched via the Live Life 120 campaign for
Characteristics: High costs, lower prices than
millennial-professionals; Viña Carmen premium sparkling
market leader — dogs is a pejorative term for
wines — Carmen Brut, Carmen Extra Brut; Carmen Rosé —
products with unfavorable characteristics.
fresh/fewer calories for women/special occasions.
Strategic recommendations: Exit, but analyze care-
fully to identify other options.

• Problem Children — aka lottery tickets, question

marks, wildcats — high market growth/low market
share (cell D)
Characteristics: Combine uncertainties of high-
growth markets with nondominant market share.
Strategic recommendations: Double or quit!
• Double. Large strategic investments — can move
the product to market leadership.
• Quit. Exit, immediately or gradually.
102 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Multifactor Matrix. The growth-share matrix spawned Figure 11.2 Illustrative Multifactor Matrix
many other portfolio approaches — some public,
some proprietary. Most popular: Multifactor matrix, A B C

aka GE/McKinsey screen. The multifactor matrix High

redefines growth-share axes: Long-run market

growth — market attractiveness; relative market D E F
share — business strengths. The user identifies several Market Medium
attractiveness/business strength factors — similar Attractiveness

to the criteria in Tables 7.3, 7.4 — to measure each G H I

dimension.
Low

Figure 11.2 illustrates the multifactor matrix. The

most attractive cell — C — is empty, but the firm has Low Medium High

small entries in two other attractive cells — B, F; the Business Strengths

firm should probably invest in these products. The

large entries in A, E are questionable; the firm should
examine each carefully. Finally, the firm should make
the tough decision — retain/remove — about the managers agree on market definition, the firm can
large poorly positioned product — G. measure these criteria objectively. Reasonable people
may disagree about forecast market growth, but
Growth-Share and Multifactor Matrices. Each method
relative market share is quite simple to measure —
helps the firm make resource allocations, in part by
managers have limited ability to manipulate entries
visual display. Table 11.2 shows advantages/disadvan-
for favorite products. By contrast, the multifactor
tages of each approach.
matrix addresses realism by using several criteria;
The growth-share matrix has only two criteria — it embraces many factors the growth-share matrix
long-run market growth, relative market share. Once omits. But entries can be manipulated.

Table 11.2 Comparison of the Portfolio Approaches

Comparisons Criteria Growth-Share Matrix Multifactor Matrix

Ability to manipulate entries Difficult Easy

Accommodates new businesses Not well Yes

Application across firm Single set of criteria Multiple sets of criteria

Appropriate for fragmented markets No Yes

Communicability Easy More difficult

Criteria Limited, but unambiguous Unlimited, but disputable

Explicit consideration of risk No Yes, if required

Grouping tendency of entries Low market growth/low market share High/high, high/medium, medium/high,
(bottom right) medium/medium (top right)
Implementability Easy More difficult

Measures Basically objective Highly subjective

Realism May be limited May have more

Sensitivity to basic assumptions Yes Yes

Sensitivity to market definition Yes Yes

Underlying focus Cash flow ROI

 CHAPTER 11 MANAGING THE PRODUCT LINE 103

Other Important Product address/could address the same market/market

segment. The firm has three options:
Interrelationships
• Develop separate missions — each business
Products compete internally for resources; they may addresses separate market opportunities; hence, the
also be interrelated in other strategic ways. firm does not squander resources.
• Intrafirm collaboration — separate businesses
At the Customer
work together. Example: At J&J, corporate account
Some products are directly complementary — razors,
managers integrate products from several units to
razor blades; printers, toner. When each product
form a single offer for hospital operating rooms.
needs the other, the firm can be successful by placing
either/both in its portfolio. When the firm offers • Intrafirm competition — products from different
both products — HP Inc. printers, toner — pricing businesses pursue overlapping missions in this
becomes particularly crucial. Darwinian approach. As long as one business seizes
the opportunity, the firm accepts efficiency losses in
Positive Complementary. In many markets, customers
product development/promotion.
who buy one type of product are more likely to
buy a related product — positive complementarity.
Example: Verizon knows traditional local wire-based
[606t] [650t]
telephone service is declining, so it offers customers
long-distance, DSL, wireless services. Positive
complementarity occurs when customers trade up
to higher-quality, higher-profit products. Example:
GM’s historic strategy traded customers up from
Mexico Grupo
Chevrolet to Pontiac, Buick, Oldsmobile, Cadillac. Financiero Banregio
Negative Complementary. Customer dissatisfaction
Grupo Financiero Banregio (GFB) (founded 1994) is a
with one product negatively affects sales of another.
Mexican regional bank — more than 140 branches, 22
Example: PepsiCo acquired Pizza Hut, Taco Bell,
states, 48 cities. The initial focus — small/midsize businesses
Kentucky Fried Chicken. Coca-Cola convinced
(SMBs) — well-positioned GFB as the entrepreneur’s bank.
McDonald’s, Burger King, Wendy’s that selling
In 2017, GFB ranked 20 in Interbrand’s Best Mexican Brands.
Pepsi helped competitors; these chains agreed to
GFB is Monterrey-areas third-largest bank — about 13
sell Coke exclusively. PepsiCo spun off its restaurant
percent deposit share; 15 percent loan share. Nationally,
businesses.
GFB enjoys 6 percent SMB market share; GFB ranks 15 of
40 in assets among full-service Mexican banks.
At the Firm
Sometimes firm products have important internal GFB’s growth strategy is three-pronged:
interrelationships with each other. • Continuous geographic expansion to central, western
Strategic Roles. Different products may have sepa- Mexico;
rate yet mutually reinforcing strategic roles. Example: • Increased focus on consumers via La Rioja improved
The Swatch Group (TSG) markets watch brands customer experience;
in five price ranges. Each range targets a different • SMB-related product-line additions, including nontraditional
market segment, has a different strategic role for banking products.
TSG. TSG earns most profit from products in the
top two ranges, less from the middle range. Basic GFB’s product line embraces automobile loans, leases;
range, private-label products — Swatch, Flik Flak — brokerage — securities, commodities, derivatives-trading;
are profitable, but their major purpose is to act as commercial short/long-term loans; consumer credit —
firewalls — fighter brands. They impede competitors personal loans, credit cards; mortgages — credit for land/
offering low-price watches, thus protecting TSG’s real estate acquisition; personal banking — checking/savings
middle-, high-, prestige-, luxury-range products. accounts, investments; SMB products — credit, insurance.
GFB has grown successfully by focusing more strongly
Multiple Businesses. Interrelationship issues occur on its traditional SMB market, and enhancing user experience
with products from different businesses when they in personal banking.
104 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Product-Line Breadth: Product Proliferation, Market Segmentation

Proliferation versus Simplification The difference between product proliferation and
market segmentation confuses many marketers.
Firms often face conflicting pressures for product- Product proliferation refers to product variety.
line size — broadening versus narrowing. Market segmentation explores differences in cus-
tomer needs that may be satisfied with different
Product Proliferation products — Chapter 7. Generally, product varia-
Variety in customer needs often drives product tions do not target different market segments; they
proliferation; the firm adds products to fill product- just offer variety. Customers for cereals, jams/jellies,
line gaps. Example: Time Inc. traditionally published salad dressings, spices, even water (flavors, vitamins)
male-oriented magazines — Time, Fortune, Money, demand wide choice assortments. Sometimes firms
Sports Illustrated. Time sought growth by targeting provide variety through packaging. Example: Tylenol
new audiences — children, minorities, teenagers, is available in caplet, cool caplet, EZ tab, geltab,
women — BabyTalk, Entertainment Weekly, InStyle, liquid.
Martha Stewart Living, Parenting, People, People en
Español, Sports Illustrated Kids, Sunset, Teen People. Simplifying the Product Line
Sometimes firms tap different customer needs by The late Peter Drucker famously posed this question:
offering products in different versions/variations. “If you weren’t already in your business, would you
Common differentiators2: enter it today?” If the answer is NO, the firm must
answer a second question: “What are you going to do
• Access, functionality. Some firms offer differing
about it?” One answer: Slim down the product/brand
versions of information/media products for
portfolios.4 Example: Unilever reduced its brand
different audiences, based on user interface —
portfolio to 400 global/regional brands (from 1,600)
simple for casual users, complex for serious users.
— approximately 90 percent of revenues; it exited
The firm may also vary access to features/func-
the U.S. detergent market. Firms typically streamline
tionality —time of use, ability to copy/download
product lines under pressure from increased compe-
products/information.
tition. In B2C, distribution-channel consolidation,
• Product performance. Some firms — like plastics store-brand growth are important factors.
producers — make high-quality products for high
prices; they degrade products for price-sensitive The firm may reap significant benefits from product-
customers — versioning. line simplification, but should make product-
deletion decisions carefully. When firms eliminate
• Time availability. Airlines make multiple ticket
high-sales-but-loss-making products, they often
offers for the same flight; prices differ based on
discover these products were carrying a large share of
booking time, available capacity.
overhead allocations. The remaining products must
FMCG firms seeking market share frequently offer assume this burden; their costs increase, overall firm
multiple products to maximize display space. They profits fall!
also offer firewall products to defend profitable
products, deter competitive entry. Example: P&G
maintains market leadership in laundry detergents by Other Product-Line Issues
offering six brands, more than 50 versions, 100 skus.
We examine several issues.
When product proliferation is excessive, costs spiral
out of control; the firm loses market position. On Bundling
the Internet, however, product proliferation is not so The firm can sell products as single unbundled items,
much of a problem. Shelf-space constraints virtually but may combine products/services as bundled offers.
disappear; inventory costs are much lower than for Sometimes firms bundle attractive products with
physical stores. Variable production costs are zero for less-attractive products. Example: Viacom bundles
digital products. Hence, sellers can offer very long popular channels — MTV, Nickelodeon — with
product lines.3 lesser-known channels — Tr3s, BET Soul. In mixed
 CHAPTER 11 MANAGING THE PRODUCT LINE 105

bundling, the firm sells products both unbundled and cannibalization, the firm should consider three
bundled. important issues:

Bundling versus unbundling decisions are difficult. • Balancing effects. Cannibalizing existing product
If the firm shifts from bundling to unbundling, sales causes immediate profit reduction. But the
customers may reject less-attractive items. But con- firm should secure improved market share.
tinued bundling risks losing sales to more focused • Fear of lower profits. Customers may switch from
competitors. Weak competition is more conducive to the original higher-price/higher-profit product to
bundling, but the firm should develop contingency the new entry, reducing overall profits. Fear of this
plans for unbundling. scenario frequently generates internal pressures
against new entry/immobilizes the firm.
Counterfeiting • How to decide. Many firms make product entry
Brand piracy, illegal product copying, prototype decisions by comparing most recent results against
theft are increasingly prevalent globally. Intellectual forecast results after introducing the new product.
property loss via prototype theft is a serious matter This practice is incorrect. The firm should always
for R&D-intensive firms. The best protection is con- compare forecast profits with the new product
tinual vigilance regarding copyright, design patents, versus forecast profits without the new product.
trademarks. In many markets, some customers want low-price
products. If they cannot buy from the firm, they
Evolving the Product Line will buy from competitors.
The firm should address several key issues:
Product Replacement. When the firm secures
Extend Product Life. We illustrate with typical differential advantage with a better product,
practice by pharmaceutical firms when patents competitors often imitate, reduce price. The best
expire: approach is to replace the older product with an
• Add additional services to support customers. innovative successor. Ideally, the firm introduces a
• Combine the drug with another drug for a higher-value replacement shortly before competitive
complementary effect. launch. Successful preemption weakens competitor
resolve to attack the incumbent. Good competitive
• Develop new dosage formulations.
intelligence, appropriate timing are critical for
• Devise new drug-delivery methods — patch, pill. managing the replacement cycle.
• Secure FDA approval for other indications
Limitations on Product Availability. Some firms
(diseases).
deliberately underproduce so as to create customer
• Persuade more physicians to prescribe, educate value via scarcity. Example: Sneakers — Converse,
pharmacists. Nike, Vans.
• Switch drug from prescription to over-the-counter.
Product Shrinking. Faced with margin pressure from
Firms in other industries apply variations of these tough price competition, rising raw material costs,
approaches. many firms shrink product offerings. Examples:
Snickers, Tropicana — 10 percent less weight;
Improve Product Mix. Firms can increase profits
Kimberly-Clark, P&G — desheeted (reduced count)
by introducing higher-margin products, possibly
toilet tissue.
replacing lower-margin products. Example: Gillette
pursued this strategy for many years with successively
Product Quality
more expensive razor systems.
Product quality is very important to customers; it
Product Cannibalization. To preempt/stave off is necessary for any serious competitor. According
competitive threats, address new market seg- to Businessweek, the share price of Baldridge quality
ments, the firm may introduce relatively low-profit award winners has consistently outperformed the
products. These products may cannibalize sales S&P 500 index by 3:1.
of higher-margin products. When contemplating
106 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Product Safety Disposal

In many jurisdictions, regulatory bodies — FDA, Traditionally, customers were responsible for
CPSC — enforce laws protecting consumers from packaging/product disposal. But governments, par-
product hazards. (Safety at Virgin America [304v]) ticularly in Europe, passed environmentally friendly
Regardless, producers have a special responsibility to laws focused on disposal. To address disposal issues,
ensure their products do not harm customers. Unfor- cost concerns, potential impact on brand image,
tunately, some firms do not behave properly. Exam- many firms promote recycling. Some firms make
ples: Chinese firms added toxic melamine (protein new products with parts from discarded products.
powder) to animal feed — children died from tainted Remanufacturing is a $50 billion industry. Packaging/
milk powder. Merck withdrew top-selling arthritis product disposal is not a pressing issue for all firms,
drug Vioxx because of heart attack, stroke risks. How but they should be aware of growing environmental
the firm responds to product safety issues can be a concerns, potential government action.
key differentiating factor.

Secondary Market Products Endnotes

Durable products — automobiles, home appliances 1 Stern Stewart trademarked EVA; J. M. Stern, J. S. Shiely, I. Ross,
— are often resold in the secondary market. For The EVA Challenge, New York: Wiley, 2003. [794e]

customers purchasing new cars, forecast resale price 2 C. Shapiro, H.R. Varian, Information Rules, Boston, MA: Harvard
Business School, 2013. [341e]
is often an important attribute. Automobile firms
3 C. Anderson, The Long Tail, New York: Random House, 2006; and
enhance resale prices by certifying previously owned A. Elbese, “Should You Invest in the Long Tail,” Harvard Business
vehicles. Review, 86 (July–August 2008), pp. 88–96. [846e]
4 J.T. Horn, D.P. Lovallo, S.P. Viguerie, “Learning to Let Go: Making
Packaging Better Exit Decisions,” McKinsey Quarterly, (2006), pp. 65–75.
[412e]
Packaging is important for guaranteeing product
integrity in storage, distribution. But packaging can
also communicate information, represent a signifi-
cant brand statement — hourglass Coke bottle — or
provide convenience benefits.
 CHAPTER 11 MANAGING THE PRODUCT LINE 107
[699t]

Mexico Sigma Alimentos

Sigma Alimentos (Sigma) (founded 1980) (annual revenues Mexico, Nicaragua, U.S.) and nine (plus Haiti) countries
US$6 billion) is a Mexican food processing firm. Sigma respectively. Other Sigma brands: Camelia, Chen, Franja,
is one of four subsidiaries of industrial conglomerate Norteño (Mexico); La Chona, Playero, San Rafael (U.S.);
Grupo Alfa (aluminum, petrochemicals, processed foods, Del Prado (Costa Rica, Honduras); Lekkerland (Costa Rica);
telecommunications). In Mexico, Sigma enjoys strong Monteverde (Costa Rica, El Salvador, Nicaragua); Sosua
positions and high market shares in several product classes (Dominican Republic).
— processed meat, seafood (leader, 24 percent), ready Sigma has franchise arrangements to produce/distribute
meals (leader, 23 percent), cheese (second, 15 percent), several yogurt brands — Yoplait, Greek Yoplait, Yoplait
yogurt (fourth, 16 percent). Sigma seeks to align brands with Disfruta, Yoplait Mini for children, Yoplait Placer (creamy
consumer trends/new consumer lifestyles. Sigma produces/ texture, innovative flavors — caramel, coconut, cookies,
distributes in the U.S. and many Latin American/European guava mousse, pecan, strawberry pie).
countries. Sigma operates 67 plants, employing more than
Other Sigma product lines:
40,000 people, in 18 countries.
Sigma operates a multibrand strategy in its various • Dairy — butter, cream, margarine. Brands: Delicia,
product lines. Brands range from economy to premium Eugenia, La Chona, La Villita, Norteñita, Playero.
(gourmet) at different price points. Each brand targets a • Foods — precooked meals; beverages. Brands: Café
specific socioeconomic group with unique positioning. Olé, Del Chef, El Cazo, Gluten — practical, tasty, fresh.
Examples: FUD — best flavor at a just price; San Rafael • Meat — beef, pork, poultry. Brand: ComNor — targeted
— prestigious/delicatessen, balanced products (low fat/ at best hotels/restaurants.
sodium); Tangamanga — artisanal, authentic recipes, original
ingredients; Chimex — low price. Industry observers believe Sigma’s success has several
Sigma’s most important product line (by acquisition) causes: Traditional brands are strong, but Sigma is also a
is processed meat. Sigma offers many brands: FUD — a consistent industry innovator — products, tastes, packages.
leading Mexican brand (8 percent market share) (Costa Rica, Sigma’s distribution strategies make it an active presence
Dominican Republic, El Salvador, Guatemala, Honduras, in every Mexican retail grocery channel — supermarkets,
Nicaragua, U.S.); San Rafael (El Salvador, Guatemala, wholesale, convenience stores. Sigma targets products/
Mexico, U.S.); Tangamanga (Mexico); Chimex (Guatemala, brands at the right consumer groups.
Mexico); Bar-S (Costa Rica, Dominican Republic, El Salvador,
Guatemala, Haiti, Honduras, Mexico, Nicaragua, U.S.); QUESTIONS

Bernina (Mexico); Braedt (Peru); Checo (Dominican Republic, 1. Why has Sigma become a reference standard in product-line
Haiti); Nayar (Mexico); Oscar Mayer (Mexico, U.S.); La Chona management?
(U.S.); Longmont (Mexico); San Antonio (Mexico); Sosua 2. How do consumer lifestyle trends allow improvements in
(Dominican Republic). Sigma’s product portfolio?
Sigma’s second most important product line is cheese 3. What strategic actions should Sigma take?
— fresh, matured, processed. Leading Mexican brand
Noche Buena (10 percent market share) has many cheese
varieties. Sigma sells
second and third
brands, FUD and La
Vaca que Ríe (The
Laughing Cow), in
eight (Costa Rica,
Dominican Republic,
El Salvador,
Guatemala,
Honduras,
 CHAPTER 12

Managing Services,
Customer Service
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 12 is the second of three chapters in Part people use the term product to describe any core
A of Imperative 4 — Design the Market Offer. Part offering — including services. We use this convenient
A focuses on providing customer value. Chapter 12 shorthand throughout much of the book; in this
addresses managing services, customer service. chapter, however, we separate tangible physical prod-
ucts — can be touched, kicked, sat upon — from ser-
Some firms produce/sell tangible products — cars,
vices. A service is any act/performance that one party
computers, kitchen equipment, TVs. Much of
can offer another, that is essentially intangible, and
Marketing for Latin American Managers in the 21st
that does not result in the ownership of anything. As
Century focuses on these firms, their approaches
we discuss in Chapter 4, essentially, customers do not
to markets. Many other firms produce/sell intan-
want your products or services; they want the benefits/
gible services — beauty treatments, information
values your products/services provide! Sometimes
technology, retail distribution, tax preparation,
customers receive benefits/values from physical
transportation. Unfortunately, the product/service
products — car, food, washing machine. Other times,
distinction is often fuzzy; many tangible prod-
they receive benefits/values from services — haircut,
ucts also have intangible service components. Car
Internet provider, medical procedure, travel. Regard-
companies offer financing, insurance, warranties;
less, to attract, retain, grow customers, the firm must
technology advances allow some products to morph
develop offers of value to satisfy customer needs.
into services, as customers purchase the benefits/
values the product delivers as a service, rather than The firm can enhance benefits/values inherent in
the product itself. B2C — lease (service) versus buy its products/services by adding customer service —
automobile (product); B2B — hire IBM/HP Inc. to delivery, information, repair, sales support, technical
manage data systems (service) versus buy hardware, support, warranties. Example: FedEx core service is
software (product). overnight package delivery, but it surrounds this core
with billing statements, documentation, information,
Because they are intangible, services can pose a
logistical advice, order-taking, package tracking,
real managerial challenge. Yet well-designed/well-
pickup, supplies.
delivered services create customer satisfaction,
loyalty, differential advantage, positive word of
mouth, high profits. Customer service is a special type
of service — key approach for the firm to augment Growth in the Service Sector
its core product/core service, by providing positive user In advanced economies, the service sector has
experiences. grown dramatically in recent years; hence, product,
service, customer service distinctions are increas-
ingly important. Services account for upward of 70
Products, Services, Customer Service percent total employment/GDP. More and more
service firms populate the Fortune 500 every year;
The distinction between products and services
social enterprises like government, nonprofit orga-
remains one of marketing’s great confusions. Some
nizations (NGOs) almost exclusively offer services.

108
 CHAPTER 12 MANAGING SERVICES, CUSTOMER SERVICE 109

Rising incomes, age-related demographic shifts Characteristics of Services

are each driving services growth. Other important
private-sector growth factors: Physical products differ from services in several
important ways:
• Customer behavior changes. Customer preference
for ownership is decreasing: B2C — many con-
Intangibility
sumers prefer to avoid these responsibilities; B2B
Services are not physical in nature; they are
— firms want to remove investments from balance
intangible. Services are concerned with people,
sheets to increase ROI.
products, information. Services focusing on
• Deregulation. New entrants in service industries people generally require the customer’s physical
— electricity, financial services, natural gas, presence/interactivity; services focusing on products,
telecommunications, transportation — result from information generally do not.
deregulation; innovative strategies fuel growth.
Although some services — restaurant meals, in-store
• Franchising. This service is the backbone of the
product purchases — are more tangible than others,
hospitality, restaurant, tax preparation industries.
the core experience is still intangible. Generally,
• Globalization. Innovations in technology/com- intangibility makes customer evaluations more
munications make products/services accessible to subjective for services than for physical goods. Hence,
global markets. Firms conduct business across the tangible service elements often play an important
globe using many derivative service strategies to role in forming customer expectations/evaluations of
meet diverse needs from new customers. service experiences:
• Leveraging core competence. Some firms find
Service Equipment. Generally, services require
in-house activities valuable to other firms; they
tangible physical products: Air travel — airplane;
repackage, sell as services. Examples: Florida Light
iTunes — iPod/iPhone; haircut — scissors, mirror.
and Power — winner of Japan’s prestigious Deming
Service equipment quality often influences the service
quality award — offers workshops on imple-
experience.
menting quality standards. Disney offers executive
programs in leadership, customer service. Service Facilities. Where the firm delivers the service:

• Outsourcing. Many firms narrow missions, down- • Exterior — location, outside view, signage. These
size, to focus on core competencies. They outsource tangible elements provide information about the
activities/processes previously performed in-house, interior — where the service is provided. The
often secure better value/cost ratios. Examples: exterior may attract/detract from the service
Call-center customer service, financial transactions, experience.
human resource functions (benefits, payroll), legal • Interior comprises two dimensions:
advice, security, technology, telephony, manufac-
• Offstage. Out of customer sight.
turing. Outsourcing provides suppliers with service
opportunities, potentially higher profit margins. • Onstage. Where customers experience deeds,
Examples: IBM, Hewlett Packard Enterprise, Unisys efforts, performance — some high-end
design, install, operate customer cloud-based restaurants.
information systems; Accenture manages various Service Personnel. Some personnel work offstage;
transactional/transformational business process others work onstage. Airline mechanics, baggage
outsourcing relationships. handlers — generally offstage; ticket agents, flight
• Technology. Advances allow firms to connect with attendants — onstage. The customer experience
customers on increasingly individualized bases; depends on how well all service personnel perform
they deliver ongoing, complementary services. their functions. Because appearance, demeanor,
manner of onstage personnel offer important
quality cues, many service personnel wear uniforms.
Bringing offstage personnel onstage can enhance the
customer experience.
110 SECTION 4 IMPLEMENTING THE MARKET STRATEGY [934t] [688t] [232t]

Colombia Starbucks

In 2014, Starbucks opened its first Colombian store

— Bogota’s Parque de la 93 (P93) district — bars,
restaurants, shops. Despite skepticism, by 2017,
Starbucks operated 16 stores in Colombia. The P93
store set the stage — only store globally offering 100
percent locally sourced coffee; only three-story store in
Latin America; constructed with local woods — Pino,
Teka wood; inviting patio entry — long banquettes,
luxurious planters; coffee-pigmented six-meter mural —
Starbucks siren — by local artist. Starbucks strove to
provide a unique experience.
Source: https://news.starbucks.com/news/starbucks-first-store-in-bogota-
celebrates-colombian-coffee

Jan Carlzon (former SAS airline president) used the guarantee. Guarantees should motivate employees
phrase moment of truth to emphasize the importance to improve service quality so fewer customers invoke
of pleasing customers at every service personnel- the guarantee.
customer interaction. Customers make judgments
based on their own service personnel interactions, Inseparability
and other customer interactions they observe. Many firms manufacture, sell, ship, store physical
Managing service personnel-customer interactions goods. These firms deal with demand/supply fluctu-
across all engagement channels is a major firm ations, imperfect forecasting via inventory controls.
challenge. Example: Disney’s elaborate training/ For service businesses, provider and customer are
management program carefully controls employee inexorably linked, making production/consumption
response behavior, so each customer has a consistent/ innately inseparable. Because firms cannot inventory
magical experience. An even greater firm challenge services, demand forecasting is critical. Crowded
is managing customer interactions with distributor/ restaurants, long ski-lift lines, transportation snags
franchisee employees. all result from excess demand. To address supply/
demand imbalances, the firm must modify supply/
Another serious concern for service firms —
demand.
advertising agencies, beauty salons, business/
professional service providers — is the relative Modify Supply. The firm can address short-run
strength of employee versus firm relationships with demand fluctuations by increasing (stretching)
customers. When the service-person-to-customer capacity — working longer hours, outsourcing,
relationship is strong, employees may resign, take renting/sharing extra facilities/equipment, adding
customers with them — Chapter 5. Better firm com- full-time/part-time workers. The critical challenge:
munications can strengthen firm-customer bonds. Maintain service quality — an upscale hair salon
should not hire temporary stylists, unless their skills
Service Guarantees. Guarantees about the service
meet salon standards. The firm can decrease supply
experience provide tangible value should the firm
by scheduling employee training, maintenance,
fail to keep its promises. Good service guarantees
renovations, vacations.
are unconditional, painless to invoke, easy/quick
to collect. The service agreement should be simple Modify Demand. The firm should analyze demand
to understand/communicate, meaningfully related patterns, answering questions like:
to the service it guarantees, built on specific key • Does service demand follow a regular, predictable
performance indicators (KPIs). Good guarantees work cycle — daily, weekly, monthly, annual, or some
because customers have positive experiences with the other pattern?
 CHAPTER 12 MANAGING SERVICES, CUSTOMER SERVICE 111

• What causes these fluctuations — climate, paydays, Substitute Capital for Labor. The firm can remove
school vacations, work schedules? human variability via automation. Examples:
• Are there random demand fluctuations — births, dispensing machines for cash, drinks, sandwiches,
crime, economic conditions, weather? subway cards. Cost reduction objectives often drive
these innovations, but they also reduce variability.
• Can we disaggregate use patterns by market
The downside: Machines break down; customers may
segment, profitability?
desire human contact.
Based on its analysis, the firm must decide which
segments to target, then increase/decrease demand Perishability
as necessary. Options to increase demand — improve Perishability is tightly linked to inseparability, the
service offerings, provide better time/place con- inability to inventory services. Perishability focuses
venience, communicate more effectively with on situations where supply is committed, but
potential customers, reduce prices. Options to demand is not. Situation A: Demand is apparently
decrease demand (demarketing) — offer incentives to sufficient but unpaid — patients miss doctor
switch purchases to lower-demand periods; reduce appointments. Situation B: Demand is variable/
marketing activities — advertising/promotion, insufficient; the firm may offer lower prices — last-
service availability; raise prices. Increasingly, service minute booths in New York/London theater districts,
firms use big data, analytics to forecast demand; they StubHub for sporting events.
price services dynamically — airlines, hotels, energy
— Chapter 18. Divisibility
We view most products as single entities: An automo-
Variability bile is a single unit, not a collection of components
Lack of consistency follows directly from human — engine, seats, transmission, wheels. Divisibility is
involvement in service delivery. Firms address a key service characteristic: Many core, surrounding
product-manufacturing variability using quality- services comprise a sequence of activities conducted
assessment tools; these are more difficult to imple- over time. Consider the many activities involved in
ment for services. Nonetheless, approaches like six your marketing course, from registration to final
sigma — data-driven methodology for eliminating grade.
defects in any process — can be effective for securing
service-system consistency. Lack of Acquisition
People acquire/own products, but not services. People
Human Capital. Employee recruitment, selection,
experience the physical manifestation of services —
training are critical for improving employee
smoother-running car, auction win on eBay. But,
performance/reducing service variability. Treating
typically, the service is, at best, a set of associations
employees appropriately is also important. Example:
in memory. Yet a service experience can be highly
Virgin puts employees ahead of customers under the
salient; related associations are very influential.
philosophy happy employees mean happy customers.
Positive associations drive repurchase, positive word
Virgin believes poorly treated employees will not
of mouth. Negative associations lead customers to
deliver high customer satisfaction.
avoid the service provider, dissuade others.
Sometimes service variability is positive: Service
providers enhance satisfaction by tailoring actions to Role of Customers
individual customers, responding to personal needs Firms rarely refuse to sell products to customers
in real time. To secure such behavior, reward systems/ because of the effect on other customers. But
empowerment should encourage employees to go the customers experience many services in group
extra mile to serve customers. The firm should not settings, so customer-customer interactions are
penalize employees for innovating/breaking rules critical issues for many service providers. The
to provide better customer experiences. Example: drunken airline passenger, the sleeping student in
Ritz Carlton allows every employee up to $2,000 to a finance class, the baseball fan behind home plate
remedy customer service issues on the spot — no shouting out pitches — each affects other customers’
questions asked. [387v] Many firms identify/applaud experiences. The firm must not unthinkingly believe
company heroes who deliver exceptional service. the customer is always right.
112 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Service Quality Also, rising customer expectations make it increas-

ingly difficult to deliver greater-than-expected service.
Generally, high customer satisfaction drives customer
loyalty, repurchase, positive word of mouth; these Measuring, Managing Service Quality
activities enhance shareholder value. The converse is In SERVQUAL, five key variables influence perceived
also true. Figure 12.1 shows the SERVQUAL model: service quality:
Customer satisfaction relates to service quality via
• Tangibles — communication materials, equipment,
expectations disconfirmation — Gap 5 — the differ-
personnel, physical facilities.
ence between perceived quality and expected quality.1
• Reliability — ability to perform promised service
• Customer satisfaction — perceived service better
accurately, dependably.
than expected service.
• Responsiveness — willingness to help customers,
• Customer dissatisfaction — perceived service worse
provide prompt service.
than expected service.
• Assurance — employee courtesy, knowledge, ability
Gap 5 depends on four other gaps: to convey confidence/trust.
Gap 1. The firm does not understand customers’ • Empathy — providing caring, individualized
service expectations. attention to customers.
Gap 2. Service quality specifications do not reflect
The SERVQUAL scale collects service quality data.
firm beliefs about customers’ service
The provider’s total SERVQUAL score comprises
expectations.
expectations data minus perception data, summed
Gap 3. Service delivery performance does not meet over 22 items. Subscale scores for tangibles, reliability,
customers’ service specifications. responsiveness, assurance, empathy provide more
Gap 4. External communications about service granular data; they offer action recommendations.
quality do not reflect service performance. (Table 12.1 shows subscale questions for tangibles.)
Figure 12.2 plots hypothetical scores for one service
SERVQUAL identifies a dilemma: The firm may
provider. Reliability, empathy are fine, but the firm
increase short-run sales by advertising high service
may be overemphasizing empathy. The firm should
quality. But if perceived quality is lower than expected
focus in two areas: Assurance — high expectations,
quality, customers will be dissatisfied. Yet, if the firm
low perceived performance — and tangibles. The
underpromises on service quality, sales may be low.
firm should keep an eye on responsiveness.

Figure 12.1 SERVQUAL Model for Diagnosing Service Quality

Word-of-mouth
Personal needs Past experience
communications

Expected service
Gap 5

Perceived service

Gap 1 External communications

Service delivery
to customers
Gap 3
Service quality Gap 4
specifications
Gap 2
Firm perceptions of
customer expectations
 CHAPTER 12 MANAGING SERVICES, CUSTOMER SERVICE 113

Table 12.1 The SERVQUAL Scale — Tangibles

Expectations Item – QE Perception Item – QP

1. Excellent ____________ companies will have modern- XYZ has modern-looking equipment.
looking equipment.
2. The physical facilities at excellent ____________ XYZ’s physical facilities are visually appealing.
companies will be virtually appealing.
3. Employees at excellent ____________ companies will XYZ’s employees are neat-appearing.
be neat-appearing.
4. Material associated with the service (such as pamphlets Material associated with the service (such as pamphlets or
or statements) will be visually appealing in an excellent statements) are visually appealing at XYZ.
____________ company.
Notes: All questions answered on a 1-to-7 scale: 1 = Strongly disagree, 7 = Strongly agree.
The blank line in the Expectations items is for the particular industry, subindustry, or department being studied.
XYZ in the Perception items stands for the company being studied.

Figure 12.2 Customer Expectations, Performance Perception on Five Service Dimensions

Trouble Keep it up

• Assurance
• Reliability
High
Customer
Performance
Expectations for • Responsiveness
Service Variables • Tangibles
Low • Empathy Too much
effort

Low High
Customer Performance Perceptions
Be low key of Firm on Service Variables

Issues in Improving Service Quality removing services! Popular/profitable Southwest

The firm should consider several issues: Airlines (SWA) uses secondary airfields, on-board
• Customer co-production. Some firms improve ticketing, nonassigned seats; it has no interline
service quality via customer participation in baggage transfer with other airlines. By reducing
service delivery. Examples: Self-service restaurants, costs, SWA continues to offer low fares; high-
self-checkout supermarkets, airport self-check-in. frequency flights, good on-time performance, fun
Previously, FedEx customers tracked packages by experience lead to high service quality ratings.
phoning customer service representatives; today, • Maintaining the service environment. The output
they track packages via the Internet. Customers from some services negatively affects the physical
enjoy better service; FedEx cuts costs — nirvana! environment — dirty towels in health clubs,
• Improving the offer. The firm enhances service cluttered unkempt office space. Quickly restoring
quality by adding customer service. FMCG firms the environment improves service quality.
provide retailers with plan-o-grams (layouts) for • Providing service information. Customers want
arranging shelf space. Private banks offer money- high service quality, but also to know when
management seminars for children of high-net- they will receive the service. Example: London’s
worth clients. Sometimes firms improve quality by Heathrow Express provides passengers on the
114 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

platform/train with accurate estimates of train Customer Service

arrivals/departures. In many cities, clocks advise
pedestrians when traffic lights will change. At the start of this chapter, we showed that core
services differ from customer services. Customer
• Recovering from service quality failures. Despite
service is any act, performance, information that
the firm’s best efforts, service errors occur. To
enhances the core product/service. Customer service
minimize customer defection, the firm should deal
is critical for CRM; it can be as important as the core
swiftly with service failure, aggressively manage
product/service. Positive word of mouth follows
service recovery. Done well, formerly unhappy
from great customer service. [889v]
customers become loyal, even advocates. The firm
should make complaining easy, but follow up
Types of Customer Service
swiftly, aggressively.
Figure 12.3 shows the flower of customer service,
• Addressing customer concerns. Increasingly, embracing eight dimensions for augmenting the core
customers complain in public, especially on the product/service.2
Internet/social media, posting reviews on bulletin
boards, Twitter, Yelp. The more aggressive set up We may also classify customer service by phase of the
attack websites: Apple, Gap, JPMorgan Chase, purchase process. Each phase has different customer
McDonald’s, Microsoft, United Airlines [303v] have requirements where different customer services are
all been targets. How the firm manages reputation appropriate. Most marketing activity occurs pre- and
in the digital realm is increasingly critical. Some during purchase; most customer service occurs after
firms employ web watchers to monitor complaints/ purchase.
answer questions; other firms use sentiment analysis • Prepurchase — assist customers preparing for
(opinion mining) to assess text polarity, then act purchase; help identify needs, provide product
appropriately. Many firms sponsor user groups on information, purchase locations.
Facebook/LinkedIn, host YouTube channels to help • During purchase — help with product selection,
manage customer perceptions. trial; customization agreements; financing; quality
assurance.

Figure 12.3 The Flower of Customer Service

Information
Data provided
in response
ts,
en

to customer
ion em

questions, in
lut ir
so equ
n

s
tai stom tio

anticipation
ed er r
lop cu lta

Ac
tio Pay
ve e su

of needs
de prob Con

n t me
o p nt
lor

ay
the
b
o

ill
gt
alo
Di

Billing Order-taking
Requests for payment Accepting applications, orders, reservations

l
de ia Co
tsi ec ns
s ou : sp s, ide
t ion ices ines tion rat Ho
p v t a
ce er ou ic n i
to on, spit
Ex ary s ery r mun tutio cu co ali
e nt eliv com esti sto urt ty
d ial g, r me esy
lem e
pp vic ec vin Safekeeping r n in
Su l ser s, sp sol ee att
ds en
a s t em Looking after d
rm ue l ing
no req prob customer
possessions
 CHAPTER 12 MANAGING SERVICES, CUSTOMER SERVICE 115

• Postpurchase — help customers pay for, transport, recruiting, selecting, training, developing, appraising,
receive, install, use, return/exchange, repair, service, recognizing, rewarding, retaining tools are important
dispose of products. The firm may provide some to ensure good employee/firm fit.
postpurchase service (PPS) at no extra charge; but
High personnel costs lead many firms to outsource
with astute segmentation and pricing, PPS can
customer service call centers to India, Kenya,
be very profitable. PPS can also act as an early-
Malaysia, the Philippines. Although well-educated/
warning system for detecting quality problems.
English-speaking, candidates typically require
PPS raises repurchase rates, enhances cross-selling,
training in products/services, speaking with a U.S.
increases customer retention.
accent. Costs often drive outsourcing decisions, but
the firm must balance cost savings with cultural fit,
Delivering Exceptional Customer Service
service quality.
The firm has several levers:
Service Infrastructure. The firm must design the
Top Management Support, Involvement. Top
appropriate infrastructure — HR, management,
managers should overcommunicate that serving
technology — to support customer service strategy.
customers well is crucial — they should build a
Some customer services — repairs — depend heavily
culture where all employees emphasize customer
on people; others — web-based reservation systems
service. It’s one thing to talk the talk, but top
— depend on technology. Paradoxically, many
managers should also walk the walk by interacting
highly people-intensive service systems — airline-
directly with customers. In B2C, top managers may
passenger-baggage check-in — require the most
spend a day or so a month in customer service
sophisticated technology investments.
— senior Toyota executives when introducing the
Lexus. They should publicly acknowledge/reward Customer interfaces are crucial. Most customers
customer service heroes. In B2B, top managers should want simple interfaces, a single customer service
support strategic/key account managers by serving as representative; customers dislike being passed
executive sponsors for strategic customers — Chapter around. Many firms use web-based technological
16. CEO Larry Ellison is Oracle’s executive sponsor solutions to reduce personnel costs. Well-designed
for GE. systems — some airline, hotel reservations — guide
customers seamlessly; they improve customer service,
Customer Service Strategy. In developing its market
provide intimacy/connectivity to the firm; they
strategy, the firm identifies customer product/service-
also reduce costs. Poorly designed systems can be
based needs, then develops a value proposition to
intensely annoying, highly dissatisfying.
satisfy those needs. In formulating customer service
strategy, the firm focuses on needs for customer Internet retailers — CheapTickets, Netflix — send
service. Customers with similar product/service-based e-mails regularly to maintain customer relation-
needs may have very different customer service needs. ships, stimulate purchase. Such firms often include
offers, recommendations based on previous searches/
Standard marketing research techniques provide
purchases. Many community-oriented sites, content
insight about customer service needs. At retail,
publishers send e-mail news alerts to keep customers
mystery shopping programs examine customer
returning to their websites.
experiences with the firm/competitors. Generally,
the firm should strive to surpass competitor service Today, most firms create special pages on social
levels. Setting customer expectations slightly below media sites to share information, encourage cus-
firm ability to deliver leads to positive expectations tomer communities to share. Firms frequently post
disconfirmations. interesting new content — feeds — that friends/fol-
lowers receive when they sign onto the site. If a friend
Human Resource Management. Human resource
likes (Facebook/Instagram), retweets (Twitter), or
(HR) planning — especially for onstage personnel
otherwise comments on a content item, that person’s
— is important for superior customer service. Many
friends/followers also receive it. Easy peer-to-peer
frontline positions, particularly in retail/hospitality,
communications, plus large numbers of social media
are low skill/low pay. The firm should develop good
users, offer enormous word-of-mouth opportunities.
HR policies, apply them rigorously. Traditional
 116 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

The firm also receives real-time insight into customer Measuring Customer Service Quality. If you can’t
experiences. measure it, you can’t manage it. Customer satisfac-
tion is a good service quality measure, but across-
Reporting relationships, customer service interfaces
the-board quality improvements have made it less
with other firm functions are important infrastruc-
useful. Customer defection rate is better. Identifying
ture issues.
defectors is easy when customers must terminate a
formal relationship — banking, insurance, telephone
service — but difficult when individual customer
records do not exist.
[399t]
Analyzing causes of defection provides valuable
information for improving service delivery. The firm
should identify, regularly measure critical customer
service against performance standards. Standards,
actual performance differences should form the basis
Colombia DHL for modifying customer service. The firm should also
design employee-reward programs based on perfor-
DHL, aiming to be The Logistic Company for the World, mance against standards.
operates in more than 220 countries/territories. DHL
offers various services — from mission-critical express
deliveries to economical freight. DHL Express (entered Endnotes
late 1970s) — more than 200 sales locations — 1 Not perceived quality alone. V.A. Zeithaml, A. Parasuraman, L.L.
handles 4,000 daily shipments — 54 percent market Berry, Delivering Quality Service: Balancing Customer Perceptions
and Expectations, New York: Simon & Schuster, 2010*. [138e]
share. Shipments: automotive/hi-tech components, Some expectations models include a tolerance zone: Service
equipment, food, machinery, textiles. Fast-growing quality below expectations but still acceptable.
medical-industry shipments via DHL’s Medical Express 2 C.H. Lovelock, J. Wirtz, Services Marketing (7th ed.), London:
service include laboratory samples for cancer treatment. Pearson, 2015*. [270e]

DHL’s Colombia customer service department received

the Centro de Excelencia certification from DHL global
headquarters (Germany), first in South America.
 CHAPTER 13

Developing New Products

For complimentary material, see Axcess Vids codes at www.axcessvids.com

If we are to achieve results never before accomplished,

we must employ methods never before attempted.
— Sir Francis Bacon, English author, philosopher, scientist, statesman (1561–1626)

Chapter 13 is the third of three chapters in Part A Chapter 13 focuses on product innovation, particu-
of Imperative 4 — Design the Market Offer. Part A larly its impact on developing, launching, managing
focuses on providing customer value. Chapter 13 new products. Generally, successful innovation
addresses developing new products. provides better, cheaper, faster benefits/values to
customers. Chapter 3 introduces the ideas of sus-
Today, many firms are dissecting/improving internal
taining/disruptive technologies.2 Sustaining technol-
systems, processes, culture to increase innovation
ogies spawn innovations that improve established
capabilities and sharpening external searches for new
products on performance dimensions valued by
products. New technologies, development processes
major customers. Innovations driven by disruptive
improve new product success rates and help firms
technologies offer new, very different value propo-
reduce time to market. Both business and academia
sitions. Initially, these innovations may underper-
now pay great attention to managing innovation,
form existing products/processes, but a few explorer
developing new products as a critical way to achieve
customers recognize value. Later, as cost-benefit
differential advantage.
ratios improve, disruptive technologies broaden
their appeal/surpass the old technology. Researchers
believe leading firms often miss disruptive innova-
Where and How Innovation Occurs tions because they are committed to existing ways of
The late Peter Drucker asserted that marketing was doing business. CEO Steve Balmer admitted that, for
one of two basic firm functions, but: several years, Microsoft was so focused on upgrading
the Windows operating system — sustaining
Marketing alone does not make a business enter-
technology — that it failed to identify disruptive
prise. The second function of a business, therefore,
telephone technology.
is innovation. In the organization of the business
enterprise, innovation can no more be considered a Serving existing customers well is an important
separate function than marketing. It is not confined activity, but creating new customers is essential.
to engineering or research, but extends across all parts Because sustaining, disruptive innovations are
of the business. Innovation can be defined as the task so different, firms pursuing both should do so in
of endowing human and material resources with new separate organizational units.
and greater wealth-producing capacity.1

In 2015, Fast Company’s top-20 leading inno- What Fosters Product Innovation
vators were Warby Parker, Apple, Alibaba,
Firms vary widely in their abilities to develop inno-
Google, Instagram, Color of Change, HBO,
vative new products. A Columbia Business School
Virgin America, IndiGo, Slack, Houzz, Catapult,
study classified less than one third of a Fortune 500
Inventure, Line, WeWork, Gilead Sciences, Tesla,
sample as product innovators, but these firms earned
Toyota, Cree, Stripe. [438v]

117
118 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

the best returns on capital. Three factors were most Four approaches to new product development differ
important for success: on financial return, risk, time characteristics:
• Market selection — high-growth markets to • Basic technology research. Typically aimed at
stimulate innovation. disruptive innovations — DNA mapping, finding
• Organization — formal structures to foster R&D new chemical entities for pharmaceuticals,
efforts; supportive cultures. advanced analytics, electrical superconductivity.

• R&D — significant, consistent R&D spending, • Applied technology research. Uses basic technology
especially applied versus fundamental. to develop new products. Pharmaceutical research
adapts new chemical entities to treat medical
Funding, setting appropriate business objectives conditions.
are always critical innovation issues. Unfortunately,
• Market-focused development. Directed at
some firms/businesses focus too narrowly on short-
marketable products, often by improving ease of
term profits; hence, investments to create disruptive
use, generating complementary products. Pharma-
innovations/new businesses are insufficient.
ceutical firms develop new delivery methods —
pills, patches — to replace injections. Electrical
superconductivity has not progressed this far.
New Product Development
• Market tinkering. Makes minor modifications to
Approaches to innovation/new product development current products — new dessert flavors, different
are deeply embedded in firm cultures. If innovation scents for air fresheners.
performance is unsatisfactory, firm culture may have
When approaching new product development,
to make innovation a more central value.
marketers should think carefully about problem
New product success is critical for the many firms focus, market knowledge, firm competence, comple-
that introduce thousands of new products annually. menter products, effectiveness measures.
These firms often set aggressive product develop-
ment targets — 30 percent annual revenues from
products launched in the previous four years. Some THE STAGE-GATE PROCESS
firms benchmark product development processes to
FOR NEW PRODUCT
identify global best practice, then make appropriate
changes in their processes. Other firms encourage
DEVELOPMENT
broad employee experimentation by allowing The stage-gate process is a systematic way of gener-
unapproved skunkworks projects. One widespread ating, then pruning, many new product ideas to a
problem: Product developers are sometimes dis- small number of products the firm may successfully
connected from potential marketability of their launch. [899v] Figure 13.1 shows a gate — kill point
discoveries. One solution: Infuse market-oriented — after each stage; at each gate, the firm must make
criteria in the development process. Examples: At a go/no-go decision. At each gate, two errors are
BASF, scientists write market plans for products they possible:
expect to develop. At GE, scientists regularly meet • Type I error. Investing in a project that ultimately
with marketing/business executives to ensure appro- fails; these errors occur when the firm allows such a
priate project-business linkages. project to move from one stage to the next.

Figure 13.1 The Stage-Gate New Product Development Process

Commercialization
Idea Generation

Product Testing

Test Marketing
Market-Factor
Case Analysis
Development

Development
Preliminary
Screening

Business-
Concept

Testing

Kill point Kill point Kill point Kill point Kill point Kill point Kill point Kill point
 CHAPTER 13 DEVELOPING NEW PRODUCTS 119

• Type II error. Rejecting a project that would have Dismissing an idea is inexpensive; the costs of a failed
succeeded; these errors are difficult to isolate. launch are substantial. Only projects meeting the
criteria pass through the gate to enter the following
Table 13.1 expands on the criteria firms typically
stage. Each subsequent stage typically involves greater
use to move new product ideas through the gates
investment, risk; hence, projects should not pass kill
(stages). Resource commitments increase dra-
points lightly.
matically as a project moves from idea to launch.

Table 13.1 Types of Criteria for Moving from One State to Another in the Stage-Gate Process

Stage in the Process Typical Criteria

Idea generation Provides incremental customer value; makes sense as potential product

Preliminary screening Technologically feasible; likely market need; fits with firm strategy

Concept development Well-defined product concept; continues to meet criteria

Business-case analysis Fits firm strategy; coherent business plan; forecasts meet market/financial goals

Development Fulfills concept definition

Product testing Performs as planned in business-case analysis

Market-factor testing Customer attitudes, purchasing as anticipated in business-case analysis

Test marketing Positive customer response; revenues, market position, profitability as anticipated

Commercialization Revenues, market position, profitability as anticipated

Idea Generation New Idea Sources

The firm should secure ideas from many sources,
“No one can resist an idea whose time has come.” inside/outside the organization. P&G embraces a
— Victor Hugo reapplied-with-pride approach. Sources include:
The firm requires a large number of high-quality Internal Generation. R&D is often a major idea
ideas to create a new product development portfolio source. Success rates depend on several factors
that drives long-term growth. Typically, the firm — budget, type of people hired/motivations.
discards many ideas, but discarded ideas may help Example: Kellogg’s Institute for Food and Nutrition
generate new ideas with greater promise. Research invests heavily in food laboratories,
restaurant-quality kitchens. Researchers are diverse
Number of Ideas in education/training (from 22 countries). In one
Firms that generate only a few ideas have few new month, they generated 65 new product concepts, 94
product successes. Successful firms eliminate many new packaging ideas.
ideas during the development process; hence, they
must identify large numbers of ideas to find the one Manufacturing, operations also generate new
idea that produces a successful product. In many product ideas. Many firms conduct employee com-
studies, the average ratio of new product ideas to petitions; they even offer seed capital for employees
successful products is about 100:1. to pursue their own ideas.

Customers. Many innovations start with customers.

Scope of Search Examples: Kraft used insight from focus groups to
Focused search within the firm’s mission — Chapter launch multiple new Oreo cookie variations. Lego
6 — typically generates better ideas than unfocused works with 44 Lego ambassadors from 27 countries,
search. As the firm’s mission evolves, so should the seeking advice on new products. Cisco, GE, PepsiCo
scope of search. conduct customer-idea competitions. 3M secures
120 SECTION 4 IMPLEMENTING THE MARKET STRATEGY
[963t]

Mexico Bambú
Eco-Friendly Straws
Plastic non-biodegradable straws — 500 million Bambú’s products contain neither resins nor tannic acids.
used daily around the world — are an increasingly Bambú’s social media campaign focuses mainly on
recognized environmental problem in many countries — B2B — cafés, high-end spas, juice bars, organic shops,
some restaurants ban their use. Explored alternatives sports clubs, restaurants, but also households. Sales are
include ceramic — expensive; glass — breaks easily direct to customer via social media.
in dishwashers; paper — quickly becomes soft. By
contrast, 100 percent biodegradable bamboo straws QUESTIONS
avoid these problems, and are highly durable (up to 1. What do you think of this new product idea? Will Bambú
1,000 uses). succeed?
On an Asian trip, Valeria Lozano (young Mexican 2. What are Bambú’s most serious challenges?
entrepreneur) noticed that eco-friendly hotels/resorts in
Thailand used lemongrass and wooden straws for every
drink. Lozano knew bamboo’s natural stem shape —
perfect for straws — and how easily/fast it grew. In 2017,
she founded the anti-plastic company Bambú as a
proactive effort to reduce waste and contamination from
plastic straws.
Bambú offers two bamboo straw types: classic —
same tone; rustic — varying natural shades; special-sized
cleaning brushes. Priced higher than plastic straws,

inventions from lead users, completes development, culture to another. Ideas from England’s textile
then markets the products. industry led the U.S. industrial revolution. Two
hundred years later, Howard Schultz secured the idea
Competitors. Some firms just copy competitor
that became Starbucks while on a coffee-buying trip
products. Cialis, Levitra, Staxyn, Stendra all
to Milan, Italy.
essentially copied Viagra. Other firms identify
improvement options; still others seek opportunities Disruptive Innovations. Increasingly, innovative
via gaps in competitor product lines. products/services disrupt existing markets — Airbnb,
smartphones, Uber. Typically, disrupting products/
Independent Inventors. These persons can be a
services (also copycats) secure significant attention/
vital source of ideas. Inventors and outside firms
revenues; they may also lead to new product ideas.
now provide 35 percent of P&G’s new product
Examples: iPads — carrying cases; smartphones —
ideas. Products successfully developed/marketed
selfie-sticks; Lyft, Uber drivers — automobile leasing
by independent inventors: Cuisinart (food mixer),
packages; Airbnb renters — property management
dental implants, Kitty Litter, Matchbox toys, Super-
services.
Soaker water gun, Velcro. Of course, independent
inventors founded many well-known successful Regulations. Regulations often cause market
firms — Airbnb, Apple, Facebook, Google, HP, Nike, inefficiencies that stimulate ideas to build businesses.
Spotify, Uber. Leased lines, satellites, voice-over-Internet protocol
(VOIP) each helped circumvent local monopolies for
Different Environments. The firm may transfer
international telephone calls.
successful business activities from one country/
 CHAPTER 13 DEVELOPING NEW PRODUCTS 121

Serendipity. New product ideas sometimes arise Preliminary screening typically involves securing
unexpectedly. Pfizer was testing sildenafil citrate for opinions from knowledgeable marketing/technical
angina; it discovered the unexpected side effect of personnel, customers, even suppliers. The exact mix
treating erectile dysfunction — Viagra. depends on the idea. Preliminary screening is the first
stage for eliminating new product ideas.
Idea Libraries. Ideas have their right time. The envi-
ronment changes: Ideas with no value at time A may Because return/risk profiles differ among ideas, the
have great value at time B. Example: AT&T’s video firm should use several criteria sets. A useful way to
telephone failed, but reappeared many years later assess new product ideas is the spiderweb diagram —
as video conferencing, Skype. Firms should develop Figure 13.3. Each 10-point-scale spoke represents a
idea libraries, then revisit those ideas periodically, screening criterion; poor scores are near the center,
systematically. good scores are near the periphery.

New Idea Processes Figure 13.2 Risk and Return in

New Product Ideas — A Balanced Portfolio
Two main approaches:
High
• Structured thinking 3 — uses logical methods.
• Attribute listing — identify product attributes, x
generate variations; focus on ways to improve. x
• Morphological analysis — combine items from x x
attribute listening to develop new/interesting
x
Risk
ideas. x
x
• Unstructured thinking — outside the box. x
x x x
• Brainstorming — focus on a problem, seek radical
solutions. Helps break everyday patterns. x x
Low
• Mind mapping — seek a solution by examining Low High
local clusters of associations around a specific Profit Potential
problem.
• Provocation — uses a stupid untrue statement
to shock participants from established patterns. Figure 13.3 Assessing New Product Ideas

Example: Ballpoint pens cannot write. Consistent with

Fits with
business-unit
environmental
• Random input — insert a random noun to regen- goals
strategy

erate brainstorming sessions. Example: Ballpoint

pens — coffee shops, cars, carpets. Likely to meet
Complements
profitability
• Six Thinking Hats — each of six different-colored targets existing products

real/imaginary hats represents a different nature

of thought: green — creative; red —emotional;
Likely to meet Meets needs of
white — analytic; black — pessimistic; yellow — revenue growth existing customers
optimistic; blue — procedural. Participants think targets

according to the hat they are wearing.

Uses firm core Meets needs of
competencies potential customers

Preliminary Screening
The preliminary screening goal is to create a balanced
portfolio of high-potential new product ideas. For Concept Development
most firms, a balanced portfolio includes ideas The product concept (concept definition) describes
ranging from low return, low risk to high return, the product idea. Good concepts detail deliverable
high risk. Figure 13.2 shows a portfolio balanced on
return, risk.
122 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

customer benefits/values. The development process is Development by multifunctional teams, including

highly iterative. Examples, current status: voice of the customer, helps avoid time-consuming
• Breath fresheners for dogs — successful new back-and-forth interactions that slow linear, sequen-
product. tial processes. Achieving consensus may be difficult,
but teams often produce better products. Requiring
• Inexpensive four-passenger business jet — under
clear written reports, intensive problem-solving
development at Honda, GE.
meetings, good direct supervision, standard work
• Diet baby food — not under development. procedures can mitigate many problems.
• GPS locator for children — launched, doing well.
Product Design
Criteria for product concept approval should be
During development, the firm must make perfor-
similar to preliminary screening criteria. Product
mance trade-offs among product attributes, but
concepts must appeal to customers and guide
should always keep the value proposition squarely
development teams. Firms get in trouble when
in mind during design. The firm must also address
concepts drift during development.
negative side effects, possibly with creative design
approaches.

Business-Case Analysis Development is typically the most time-consuming

stage in new product development. Faster develop-
Business-case analysis (BCA) sits between concept ment helps gain first-mover advantage, enhanced
approval and development. BCA details the concept’s revenues. Continuous development on a 24/7 cycle is
financial viability, considers various risk factors. one option. Example: Bechtel development teams in
Projects must meet minimum financial targets to London, U.S., Japan take over from each other as the
move forward. The heart of BCA is a draft market day ends/begins.
plan: The firm must think through market segmen-
tation, choose target segments, prepare positioning; New Product Development Portfolio
designing a value proposition for securing differen- For most firms, the new product development
tial advantage is crucial. portfolio is a critical element in the entire venture
Four considerations underlie forecast financial portfolio, along with insourcing, outsourcing,
performance: acquisition, strategic alliance, licensing/technology
purchase/sale, equity investment — Chapter 6. The
• Sales revenues — can be highly uncertain.
new product development portfolio is especially
• Cost of goods sold (COGS) — all ongoing costs to critical because resource commitments are often
make, distribute, sell the product. large/ongoing. Specifically, four goals are important:
• Investment, development costs — all costs to • Portfolio value. Consideration of forecast revenues/
develop the product, plus fixed investment for profits, risk, timing, required resources.
factories, equipment.
• Portfolio balance. Ensure projects are appropriately
• Discounting — applied to all future cash flows dispersed among high/low risk, short/long term;
to predict appropriate financial measures — IRR, across various product forms, markets, technolo-
NPV. gies; across types of development efforts.
• Strategic alignment. Product innovation strategy
should be directly linked to business strategy, via
Development resource allocation, into strategic buckets, with top-
Successful BCA sets the stage for development. level management support.
Design, engineering, R&D focus initially on product • Right number of projects. Resources are limited.
design, functional performance. Sourcing decisions Excessive numbers of projects slows the entire
are critical for determining product performance, product development process.
costs. Input from manufacturing, service helps
ensure the product can be made/serviced efficiently.
 CHAPTER 13 DEVELOPING NEW PRODUCTS 123
[907t]

Mexico Omius Jacket

Omius (founded 2013) integrates robotics and artificial fabric, allowing hot/humid air to leave the body —
intelligence into clothing. Omius’ first product is a self- operated by algorithm and manually. Mexican engineers
regulating, temperature-controlled jacket that provides Gustavo Cadena, Amin Altamirano, Jorge Álvarez
thermal protection; adapts to both environmental nurtured the idea, developed the product concept,
conditions and the wearer’s physical activity. The Omius fabricated prototypes. Beta tests with athletes in
jacket contains electronically operated vents (powered by various sports earned highly positive feedback. Ready
rechargeable batteries) and sensors to keep wearers at for commercialization, the Omius jacket is automatic,
the right temperature by learning preferences. lightweight, washable, noiseless, completely safe.
Using plants as design inspiration, the Omius
jacket has small vents along the windproof/waterproof

Product Testing ments. [493v] Several alpha tests may run simultane-
ously; alpha tests often lead to further development.
The firm should test new products for aesthetic,
• Beta tests — with customers. Beta tests typically
ergonomic, functional, use characteristics. Devel-
follow successful alpha tests. But firms sometimes
opment follows a series of develop → test → develop
conduct beta tests on product features before
feedback loops, until the product is ready for market-
finishing development. The firm may also conduct
factor testing. Two major testing types:
several beta tests as development is concluding.
• Alpha tests — in-company. For most new products, Beta tests give customers an early look at devel-
firm employees provide critical feedback. Example: oping/soon-to-be-introduced new products.
Google tests its driverless car in many environ-
124 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Speedy testing has many advantages. But inadequate effort is nonreplicable at launch, adds expenses,
testing can cause major problems, especially at the time costs.
commercialization stage (below).

Commercialization
Market-Factor Testing
Successful completion of previous stages in the stage-
The product is just one element in the market offer. gate process results in a product ready for launch
First-rate products fail if the firm poorly designs/ — commercialization. The firm assigns resources,
implements other marketing-mix factors. Conversely, approves marketing effort. The launch strategy must
the firm may be successful with marginal products consider sales forecast, time to bring facilities on line/
if other marketing-mix elements are superior. The production, inventory requirements, competitive
firm should evaluate implementation elements — lead time, expected competitive response, patent/
advertising, distribution price — via market-factor trade secret protection.
testing. Market-factor, product testing can occur in
All marketing-mix elements are important for
parallel. The firm can test using simulated environ-
launch. Regarding communications, B2C firms often
ments —mock-up store displays — or virtually on
use celebrity spokespersons/advertising to promote
the Internet.
new products; they also seek product placement
— working with directors/producers so actors use
products in movies/TV shows. B2B firms focus on
Test Marketing good distribution, support programs, endorsements
Test marketing is an advanced form of testing that by key opinion leaders.
simulates actual market conditions. Typically, in Traditionally, firms launched new products domes-
B2C, the firm selects two geographic areas with tically, then addressed foreign markets. Today, many
similar market/customer profiles, considering firms launch in multiple national markets simulta-
issues like seasonality. The firm implements the full neously.
market-launch program in one geography; the other
geography acts as a control to isolate product launch No one likes commercial failure, but the best com-
results. Global firms often speed time to commercial- panies learn from mistakes. Example: British Airways’
ization by test marketing simultaneously in several flat beds upstaged Virgin’s reclined sleeper seats, but
countries. Measurement is crucial: Virgin used its learning to develop a leapfrog inno-
vation — upper-class suite — that helped improve
• Input measures — advertising, price, sales effort.
business-class market share.
• Intermediate measures — customer awareness,
interest, intention to purchase.
• Output measures — sales, profits, customer Product Adoption
satisfaction.
The goal of commercialization is customer product
FMCG firms collect point-of-sales data from super- adoption. But not all customers adopt at the same
market scanners. Consumer panels/independent time. As part of product planning, the firm should
surveys provide intermediate measures, customer anticipate five categories of adoption behavior4:
satisfaction.
• Innovators (2.5 percent) — Explorers. The first to
Test marketing has pros and cons: adopt the innovation, but are only a small part of
• Pros — fine-tunes launch; may provide unexpected the population. Typically, other customers do not
insight; allows the firm to identify, withdraw poor emulate these venturesome risk-takers.
performers, saving launch costs. • Early adopters (13.5 percent) — Visionaries.
• Cons — alerts competitors; they may interfere by Follow the innovators. Are more respected in their
offering promotions/cutting prices. Special firm communities; are opinion leaders for others.
 CHAPTER 13 DEVELOPING NEW PRODUCTS 125

• Early majority (34 percent) — Pragmatists. • Compatibility. Driver behavior largely unchanged;
Motivated by current problems; make decisions initiating the credit card account is trivial.
deliberately; influenced by early adopters. • Complexity. Learning minimal: Driver attaches the
• Late majority (34 percent) — Conservatives. device; drives through the tollbooth.
A skeptical group; adopts only when half the • Observability (Communicability). Benefits easy to
population has adopted. Tend to be price sensitive. understand, communicate.
• Laggards (16 percent) — Critics. These tradition- • Risk. Little risk to trying the EZ Pass system — no
alists are suspicious of change, averse to novelty; upfront payment.
adopt only when adoption/use are widespread.
• Divisibility (Reversibility). Driver can easily switch
Identifying potential customers by adoption back to cash/receive mailed invoice.
category is a critical marketing challenge. In B2C,
Notwithstanding the role of innovation, securing
early adopters tend to be better educated, socio-
new products is critical to success for many well-
economically advantaged, younger. Innovators/early
known firms. These firms develop new products,
adopters for one product may be early/late majority
then successfully introduce in current/different
for another. Figure 13.4 shows that to be successful,
markets.
product innovations must cross the chasm from
early adopters to early majority and the mainstream
market.5 Many new products fail to cross the chasm;
Endnotes
for others, it takes a long time.
1 P.F. Drucker, The Practice of Management, New York: Routledge,
The ACCORD acronym summarizes several factors 2012*. [785e]

affecting adoption speed, commercial success. 2 C.M. Christensen, The Innovator’s Dilemma: When New
Technologies Cause Great Firms to Fail, Boston, MA: Harvard
Example: Consider the successful introduction of Business School, 2015*. [647e]
EZ Pass on toll roads/bridges. The EZ Pass device 3 Based in part on [310e]; also J. Goldenberg, Creativity in Product
attaches to vehicle windshields. An electronic signal Innovation, Cambridge, UK: Cambridge University, 2002. [360e]
at the tollbooth recognizes the device, allows passage, 4 E.M. Rogers, Diffusion of Innovations (5th ed.), New York:
deducts payment from an account linked to a credit Free Press, 2003 [770e]; E. Ofek, O. Toubia, “Marketing and
Innovation Management: An Integrated Perspective,” Foundations
card. The account automatically replenishes when and Trends in Marketing, 4 (2009), pp. 77–128. [343e]
the balance falls to a preset level: 5 G.A. Moore, Crossing the Chasm — Marketing & Selling
• Advantage. Saves time at tollbooth; automatic bill High-Tech Products to Mainstream Customers, New York:
HarperBusiness, 2009*. [913e]
payment more convenient than cash (but raises
privacy concerns).

Figure 13.4 The Adoption Curve, Chasm

Chasm
aka “Valley of Death”

Innovators Early Early Late Laggards

Adopters Majority Majority
126 SECTION 4 IMPLEMENTING THE MARKET STRATEGY [764t] [448t]

Chile Sun Light Laboratory

[720t] [327t]

Sun Light Laboratory (SULI) (founded 2014) implements SULI participates in social/environmental impact
best practices — environmental, human, social, programs and in building customer communities.
technological — to turn sunlight into usable energy. SULI Example — Haiti: Partnership with nonprofit America
manufactures portable, multifunctional lamps powered by Solidaria to help a 3,500-person village with no access to
sunlight — up to 60 hours duration. SULI lamps do not light or water. Example — SULI Community: Customers
require electricity. develop new ideas to inspire creativity/innovation. Some
SULI focuses on one simple vision: light access SULI accessories arose from ideas developed in its
for all — no electricity, no special equipment; four open-source platform, using 3-D printers.
colors — black, cyan, magenta, yellow. The SULI lamp SULI sells lamps/accessories through its Chilean
complements different 3-D-printed accessories or PET website. Price per lamp averages US$50. SULI prices
bottles (water/soft drinks) via simple attachments. SULI a complete pack — six lamps, standard accessories
lamps have various uses — outdoor, night reading/ (multipurpose/pendant rings to hold/hang SULI lamps;
studying, basic lighting for households without electricity. bag) — US$275. SULI develops its brand and user
In 2014, an interdisciplinary team — engineering, community mainly via social media — Facebook,
industrial design, lighting, product development, Instagram, Twitter, YouTube.
manufacturing, digital communications — turned the Some of SULI’s near-term challenges/goals:
SULI vision into reality. Following early-2015 field tests, Spread the innovation; start up production in China.
SULI crowd-funded startup capital and secured initial SULI is adding new features — USB port (to charge
customers. By late 2015. SULI had tested prototypes, smartphones) and Bluetooth (to connect an app —
finalized the design, and ordered production molds. control remote systems comprising several lamps).
Manufacturing commenced in early 2016.
As a clean-tech, energy innovator, SULI has been QUESTIONS
recognized/awarded funds/supported by several 1. Why has SULI become a reference for clean-energy
institutions — Acera (Chilean Association of Renewables product development in Latin America?
Energies); Agora Partnerships (access to knowledge, 2. How has open-source innovation with customers helped
networks, capital — Latin America); B-Pending SULI? What are advantages/disadvantages of this idea
Corporation seal of approval (commercial success source?
delivering solutions to social/environmental problems); 3. What new idea sources will be most suitable for SULI
Innova Chile of CORFO (support entrepreneurship, going forward?
innovation, competitiveness); InterAmerican Development 4. What are SULI’s opportunities and challenges?
Bank (largest source of development financing for Latin
America and the Caribbean).
 127

SECTION 4 — IMPERATIVE 4 / PART A — KEY MESSAGES

Chapter 11 Chapter 12
Managing the firm’s product line is a major • Sometimes the firm’s core offering is a service —
challenge. The firm must make decisions in four sometimes a physical product.
areas: • Customer service complements either a core
• Product portfolio. product or a core service.

• The firm should construct a balanced portfolio • Some products are transitioning to services as
where some products generate growth, market customers purchase the benefits/values physical
share; some products earn profits; some deliver products deliver, rather than purchase products.
cash flow. • Several characteristics distinguish services — core
• The firm’s key challenge is allocating resources services, customer service — from physical prod-
across the portfolio. Financial analysis methods ucts. Each has important marketing implications:
have advantages, disadvantages. The firm should • Intangibility • Divisibility
supplement financial analysis with portfolio • Inseparability • Lack of acquisition
analysis, using the growth-share/multifactor
• Variability • Role of customers
matrices.
• Perishability
• Other product interrelationships. Firm products
may be interrelated at the customer — the firm • SERVQUAL is an important diagnostic tool for
should seek positive complementarity, avoid understanding/improving services.
negative complementarity. Products may also be • High service quality generally leads to greater
interrelated at the firm, playing different strategic customer satisfaction, but enhanced competition
roles. and increased quality are weakening the customer
• Product-line breadth: proliferation versus satisfaction/loyalty relationship.
simplification. The firm faces conflicting pressures • The firm can deliver customer service pre-, during,
for product proliferation, product simplification. post-purchase.
Variety in customer needs drives proliferation; • Well-designed, well-delivered customer service
many firms offer similar versions of the same allow the firm to reap significant benefits from
product. The reader should not confuse product repurchase, positive word of mouth.
proliferation with market segmentation. Industry
consolidation often drives product simplification, Video related to Chapter 12
but the firm should make product-deletion
• Customer Service [463v]
decisions carefully, using well-thought-through
(Joseph Michelli)
criteria.
• Other product-line issues. The firm should
address many other product-management issues
— bundling; counterfeiting; evolving the product
line; product quality; product safety; secondary
market products; packaging; disposal of products,
packaging.

Videos related to Chapter 11

• Luxury Goods [927v]
(Ketty Maisonrouge — Columbia Business School)
• Best-in-Class Product Management [485v]
(Steven Haines)
128

Chapter 13
• Successful new products are a major factor in • The cost of failure increases as a project moves
creating shareholder wealth. through the new product development process.
• Innovations can be either sustaining or disruptive. Hence, each gate in the stage-gate process should be
a kill point.
• The most important factors for innovation success
— market selection, R&D spending, organization. • New product success depends on crossing the chasm
from early adopters to early majority.
• Four approaches to new product development
— basic technology research, applied technology • The speed of adoption for a successful project
research, market-focused development, market depends on the ACCORD factors. (Do you know
tinkering. what they are?)
• The stage-gate process is a systematic approach to
Videos related to Chapter 13
new product development. Key stages:
1. Idea generation • Innovation [687v]
(William Duggan — Columbia Business School)
2. Preliminary screening
3. Concept development • Service Innovation [648v]
(Dean Crutchfield)
4. Business-case analysis
5. Development • Disruptive Innovation [996v]
(Clayton Christensen — Harvard Business School)
6. Product testing
7. Market-factor testing • Creativity [925v]
(Jacob Goldenberg — Hebrew University/
8. Test marketing
Columbia Business School)
9. Commercialization
• At each stage, the firm should be concerned about
two types of error: Type I — investing in a project
that eventually fails; Type II — rejecting a project
that would have succeeded.
 SECTION 4

Implementing the Market Strategy

IMPERATIVE 4
Design the Market Offer

PART B: COMMUNICATING CUSTOMER VALUE

CHAPTER 14

Integrated Marketing Communications

CHAPTER 15

Mass Communications, Digital Marketing

CHAPTER 16

Directing, Managing Field Sales Efforts

For key messages from Section 4, Imperative 4 – Part B, see page 160.
Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 14

Integrated Marketing
Communications
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 14 is the first of three chapters in Part B creating greater communications options between/
of Imperative 4 — Design the Market Offer. Part B among customers. For marketing professionals, a vast
focuses on communicating customer value. Chapter array of communications is available:
14 addresses integrated marketing communications. Blessing: The firm has many more communications
We’ve all heard the popular saying: If we build a better alternatives.
mousetrap, customers will come. Rubbish! Customers Curse: Coordinating multiple messages to multiple
will not come unless they know about the mousetrap; targets, yet producing a coherent, consistent,
that’s the purpose of communications. To be suc- integrated whole, can be very difficult.
cessful, the firm must communicate benefits/values
to target customers. Many communications tools/
techniques are available. In this chapter, we consider The Communications Process
several broad categories; we show how to use them in
an integrated fashion: Integrated marketing communications captures
the idea of coordinating various communications
• Personal communications — face-to-face personal
messages with the right communications tools/
selling, telemarketing/telesales, live chat, service.
techniques, delivered to the right target audience, at
• Traditional mass communications — advertising, the right time. [936v] An integrated communications
direct marketing, packaging, publicity & public program is critical for successfully implementing
relations, sales promotion — product placement/ market strategy, achieving firm objectives. But it’s
trade shows. not easy. In a communications process, the sender
• Digital communications — e-mail; search, blogs, sends a message to a receiver; the receiver receives the
social media; advertising — display, classifieds, message; the receiver may also communicate with the
video; websites; mobile marketing. sender — Figure 14.1.

Traditionally, firms also plan some word-of-mouth Ideally, the receiver receives the message the sender
communications to enhance the value of their intended to send. If this does not happen, miscom-
messages. Social media has changed the paradigm, munication occurs — typically not a good outcome,

Figure 14.1 The Communications Process

Sender Message Receiver

Potential miscommunication Encoding Distortion Decoding

129
130 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

particularly for marketers. Three main sources of Personal Communications

miscommunication: Most personal communication in marketing occurs
• Encoding. Some person/organizational entity when salespeople, other firm representatives —
decides the intended message, but this message is technical/customer service personnel — interact
not sent properly. Perhaps the advertising agency with customers, individually or as team members. In
misinterprets product positioning. Or, sales force many firms, telemarketing/telesales/live chat supple-
training is ineffective; salespeople do not commu- ments/replaces field salespeople. Some firms script
nicate the right message. personal communications, but personal communi-
cations generally evolve spontaneously during the
• Distortion. The firm sends the intended message,
interaction.
but communication is distorted; hence, the receiver
does not receive the sent message. Note: Consumers
Mass Communications
may receive essentially the same advertising
The most pervasive marketing communication
message differently, depending on the medium —
occurs without interpersonal sender/receiver contact,
Internet, print, TV.
particularly in B2C marketing.1 Typically, the firm
• Decoding. Communications targets may receive the has greater control over message content in mass
same message differently — selective attention, per- communications than in personal communications.
ception, retention — related to individual percep- Various types of mass communications:
tion, memory, belief system. Hence, the message is
• Advertising. Paid communications directed at a
misperceived/misunderstood. A critical marketing
mass audience. Advertising embraces different
challenge is understanding, minimizing causes of
modes, typically visual/audio, deployed via many
miscommunication.
media types:
• Visual-static. Printed matter — billboards, bro-
chures, magazines, newspapers, point-of-purchase
Communications Tools
displays, signage, trade journals.
Communications tools are the ways marketers inter- • Visual-dynamic — television, movies, You-
face with target audiences. We discuss varied options, Tube videos, games, streamed mobile, online
their impact on today’s integrated communications advertising.
strategies — Figure 14.2.

Figure 14.2 Communications Tools and the Communications Process

Personal
Personal selling
Telemarketing/Telesales Customer
Service

Word of Mouth, Social Media

Mass
Advertising
Direct marketing Customer
Firm
Packaging
Publicity & public relations
Sales promotion
Word of Mouth, Social Media
Digital
E-mail
Search, Blogs, Social Media Customer
Advertising — display,
classifieds, video
Websites
Mobile marketing
 CHAPTER 14 INTEGRATED MARKETING COMMUNICATIONS 131

• Audio — radio; newer communications types — story, video — with a third-party transmitter. The
podcasts; ad-sponsored digital music — Deezer, transmitter — may be an industry analyst, maga-
Pandora, Spotify. zine, news organization — incorporates the mate-
rial in its own communications. Public relations
(PR) embraces publicity, but is broader; includes
other ways of gaining favorable visibility. Typical
[901t] [752t] PR activities — philanthropy, giving speeches,
participating in community activities, sponsoring
events, various public-facing activities.
• Sales promotion. Provides extra value for cus-
tomers. Consumer promotions include contests,
Mexico Ternium coupons, games, point-of-purchase materials,
premiums, rebates, samples. Special promotions
forms:
Ternium Mexico (TM) was formed (2005) when Techint
• Product placement. The firm places products/
Group acquired Hylsa. TM manufactures various
brand imagery in movies, TV shows. Placement
steel products — galvanized sheet; hot-rolled, cold-
can also be virtual via electronic insertion of
rolled steel, steel bars, metal building components.
logos, products, signs in digital media.
TM customers are entirely B2B, competing in
several industries — automotive, energy, metallurgy, • Trade shows. In many industries, suppliers
transportation. In late 2015, TM launched its Ponle tu (vendors) display/demonstrate products to large
sello, ponle Ternium advertising campaign in multiple numbers of current/potential customers. In turn,
formats — print, radio, videos on Facebook. The customers can communicate with large numbers
purpose: Create brand awareness — associate the little of suppliers offering similar products/services.
house brand with TM’s steel — and defend its market
position — steel-quality guarantee. TM’s campaign
illustrates use of several communication modes —
audio , visual static, visual dynamic.
[183t]

• Direct marketing. Includes all paid, company-

sponsored communications directed at individuals.
Peru Alicorp
Most direct marketing is printed/electronic direct
Alicorp (formed 1997) resulted from a series of
mail, but contemporary versions include targeted
acquisitions by Grupo Romero. Alicorp offers various
audio/video/interactive messages.
FMCG products — candies, cereals, chocolates,
• Packaging. Packaging’s main value is to protect
cookies, desserts, detergents, edible oils, fabric
the product. But packaging is also a communica-
softener, flour, sauces. In 2016/7, Alicorp launched
tions vehicle, delivering information/visual appeal.
several sales promotions in Peruvian supermarkets:
Research shows consumers make a judgment on
• Coupons. Purchase one unit of Bolivar fabric
packaging in less than seven seconds — posting
softener — PEN$19.90 (US$6) value — opportunity
and sharing online when packaging was perceived
to win a coupon to consume in Plaza Vea
to be premium, innovative, emotionally appealing.
supermarket for PEN$50, 100, or 300 (US$15, 30,
• Publicity & public relations (P&PR). Publicity is
90).
communication for which the firm does not pay.
• Drawings. Purchase two bottles of Primor edible oil
Typically, the firm gains visibility for its message by
— enter a drawing to win a trip to Rio de Janeiro (first
placing information — photograph, press release,
prize).
132 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Word-of-Mouth Communications (WOM) Some digital methods are electronic analogues of

Communication among customers/potential traditional communications tools — advertising
customers can impact many purchase elements — via display, classifieds, video; direct marketing via
brand/product choice, distribution channel, timing. outbound e-mail. Other methods are specific to the
Communications about firm/products/brands can be medium: Search engines, blogs, social media help
positive/negative, depending on customer experi- customers find/interact with the firm, firm prod-
ence. Because customers typically have no commer- ucts, other customers. Social media vastly enhances
cial interest, they often have higher credibility than traditional word of mouth; mobile marketing has
paid communicators. Generally, firms have little introduced an entirely new medium for interfacing
control over WOM, but increasingly they orchestrate with customers. New technologies — Bitly, QR
buzz-marketing, guerrilla-marketing, viral-marketing (Quick Response) codes, one-click social sharing links
campaigns — Chapter 15. In the digital domain, on mobile screens, e-mail, print media with digital
firms may incentivize bloggers to encourage positive content — connect recipients to communities, Face-
communications. Some firms tap into established book pages, Twitter hashtag conversations, URLs.
groups to take advantage of social networking. By visiting firm websites, social media destinations,
Marketers are increasingly using social media for customers self-select communications they receive.
WOM advertising. [795v] Hence, digital communications are increasingly
personalized, measurable.
Digital Communications
Although these many tools/options produce exciting
Digital marketing is the fastest-growing approach
opportunities for marketers, they also pose greater
for firms wishing to communicate/interact with cus-
complexity. Today’s customers want control of com-
tomers. Digital marketing methods are very different
munications they receive. Recent research shows 86
from traditional mass communications options —
percent of people skip TV commercials; 44 percent
WOM plays an especially important role.
of direct mail is never opened; 91 percent of people
Digital marketing provides a powerful alternative/ unsubscribed from company e-mails to which they
enhancement to traditional communications previously opted in.
methods. Using web analytics, the firm can capture
data that follows customers as they search, visit web-
sites, view advertisements, engage social media, make Developing a Communications Strategy
purchases. Firms combine these data sets with bricks
Table 14.1 depicts critical questions for developing an
& mortar purchases/other data to predict customer
integrated communications strategy.
behavior, strengthen brand image, increase sales,
enhance customer satisfaction.

Table 14.1 Critical Questions for Developing Communications Strategy

Basic Questions Subsidiary Questions

1. Who are our communications targets? Specifically, with what people/entities shall we communicate?

2. What are our communications objectives? How do communications objectives vary by communications
target?
3. What key message(s) do we want to get across? How should our message(s) vary across communications
targets?
4. What communications tools shall we use? What combination of personal, mass, digital, WOM
communications is appropriate?
5. What communications budget shall we set? How shall we apportion the budget among different
communications targets/communications tools?
6. When is the right time to communicate? What is the appropriate timing for various targeted messages,
considering seasonality, other factors?
 CHAPTER 14 INTEGRATED MARKETING COMMUNICATIONS 133

Communications Targets — rely heavily on pull-based advertising directed

The firm has two major types of communications at consumers — indirect customers. But they also
targets: directly related, not directly related to firm execute major push programs targeted at retailers
offers. Some directly related targets are decision- — direct customers. Figure 14.3 illustrates push, pull
makers; others are influencers. strategies for a subcomponent manufacturer.

Directly Related Communications Targets. The firm Regulations influence communications in some
should be most concerned with reaching customers industries. The FDA previously banned direct-to-
specified in the positioning statement of the market consumer prescription-drug advertising, but relaxed
strategy — Chapter 8: current/potential customers, this prohibition several years ago; most countries
direct/indirect customers, third-party specifiers/advi- still ban the practice. Pull strategies now encourage
sors. Once identified, the firm can decide whether patients to ask your doctor.
push or pull communications is appropriate:
Not Directly Related Communications Targets. Many
• Push strategy — communications focus on firms have these communications targets. Capital
direct customers. Many B2B firms use push markets are a special case; firms (or agents — invest-
communications strategies, most effectively ment banks) target investors to secure debt, equity
delivered by the sales force. The firm expects direct financing. Many firms lobby legislators/special-
customers — manufacturers/distributors — to interest groups. The firm must be cautious to under-
communicate with indirect customers further stand potential unintended consequences for brand
down the channel. image — lobbying against popular causes.
• Pull strategy — communications focus on indirect
customers further down the channel — final Communications Objectives
consumers/other end users. By encouraging these Typically, long-run communications objectives
customers to request/purchase finished goods, the focus on increasing sales units, revenues, repeat
firm generates pull, drives its own sales. purchase of firm products. Major considerations
in setting short-run objectives for directly related
Most firms use either push or pull strategies;
communications targets are the specific targets and
resource-rich firms often use push/pull combina-
the firm’s market strategy.
tions. Example: FMCG firms — P&G, Unilever

Figure 14.3 Communications Targets: Push, Pull Strategies

Push Pull
Subcomponent Subcomponent
Manufacturer Manufacturer

Component Component
Manufacturer Manufacturer

Finished-Goods Finished-Goods
Manufacturer Manufacturer
Influence in
the Channel
Distributor Distributor

Retailer Retailer

Final Consumer Final Consumer

Flow of Goods Flow of Goods

Subcomponent manufacturer’s communication

134 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Defining Targets. The firm should be concerned with (positioning element) in the market strategy. If the
reaching customers identified in the positioning firm has multiple customer targets, each with dif-
statement of the market strategy —Chapter 8. These ferent value propositions, then the firm must design
include current/potential customers, direct/indirect multiple messages.
customers, third-party specifiers/advisors. Table 14.2
shows possible communications objectives for each Selecting Communications Tools
customer type. In addition to customers, commu- Communications objectives/messages drive choice of
nications objectives may also include competitors/ communications tools. Suppose the communications
complementers. Typically, the firm tries to influence objective were awareness for a new product among
competitor/complementer actions, so customers a broad consumer group; common sense tells us
perceive firm offers more favorably. advertising is probably more effective than sending
salespeople door-to-door. But if the objective were
Market Strategy. The firm’s customer targets are also
purchase of sophisticated capital goods by large
its communications targets. The firm must align
industrial companies, personal selling, supported
communications objectives with selected alternatives
by detailed web-based content/demos, would likely
in the strategic focus to increase unit sales:
be more effective. As illustration — Table 14.3 — a
• Increase customer retention (reduce defection). wholesaler trying to distribute/sell a new product
• Increase customer use. may decide to:
• Attract customers from competitors. • Identify potential retailers via direct marketing,
• Secure new business. trade shows.
• Qualify retailers by telemarketing/telesales.
Communications objectives depend on market con-
ditions, firm market position. In new markets, the • Sell to qualified retailers via personal selling/the
firm most likely focuses on identifying, qualifying, firm’s website.
communicating, selling to nonusers. Conversely, in • Provide retailers with ongoing sales/service via
mature markets, objectives focus on retaining current digital communications, sales/service team.
customers, attracting competitor customers.
The wholesaler chooses not to use advertising, P&PR,
sales promotion, individual service personnel, digital
Communications Messages
approaches (except its website); but instead direct
Constructing the appropriate message for a cus-
marketing, telemarketing/telesales. The wholesaler
tomer target is central to developing the commu-
should develop a similar analysis for each customer
nications strategy. The core underlying principle:
target.
Message design should reflect the value proposition

Table 14.2 Illustrative Communications Objectives for a Subcomponent Manufacturer

Type of Customer Communications Objectives for Customers

Component manufacturer – Learn how to assemble firm subcomponents into customer components
– Purchase subcomponents for use in components
– Inventory sufficient components to satisfy finished-goods manufacturers
Third-party advisor – Recommend firm subcomponents to component manufacturers
Finished-goods manufacturer – Agree to purchase components for finished products
– Agree to place subcomponent brand logo on finished product
Distributor – Train salespeople to communicate benefits and sell finished products to retailers
Retailer – Agree to budget co-op advertising funds for finished products
Consumer – Become aware of, understand, like, try, and continue to purchase finished products
 CHAPTER 14 INTEGRATED MARKETING COMMUNICATIONS 135

Table 14.3 Matching Communications Targets, Objectives, and Tools

Communications Targets and Objectives

Provide retailers
Identify potential Sell to qualified with ongoing sales,
Communications Tools retailers Qualify retailers retailers service
Personal selling ****

Telemarketing/telesales ****

Individual service personnel

Sales and service teams ****

Advertising

Direct marketing ****

Packaging

Publicity & public relations

Sales promotion

E-mail

Search, blogs, social media ****

Online display advertising

Website ****

Mobile marketing

Budgeting, Timing marketing communications program to maximize

Budgeting, timing of communications efforts are firm-strategy impact, achieve objectives. [907v, 159v]
critical for designing an effective communications The firm should strive for four communications-
strategy. Budgeting relates specifically to push/ integration types — Figure 14.4:
pull decisions. (Chapter 15 discusses advertising A — for all targets in a single market segment.
budgeting decisions.) Timing issues are especially B — with other marketing implementation
critical in developing/executing multipoint integrated variables: product, service, distribution, price.
communications campaigns using communication-
C — for all targets in several market segments.
tool combinations.
D — for all targets: market segments, markets,
businesses, corporate.
Integrating Marketing Communications
By now, you should have a good understanding of Endnotes
the communications process, know the key questions 1 G.E. Belch, M.A. Belch, Advertising and Promotion: An Integrated
for developing communications strategy, be familiar Marketing Communications Perspective (9th ed.), Homewood, IL:
McGraw-Hill/Irwin, 2011. [571e]
with communications tools. At this stage, the core
challenge is developing an effective integrated
 136 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Figure 14.4 Coordinating and Integrating Communications

Corporate Business
D Strategy

Market Strategy Market Strategy Market Strategy

Market-Segment Market-Segment Market-Segment

C Strategy Strategy Strategy

B Product Service Promotion Distribution Price

Personal Mass Digital Word-of-Mouth

A
Communications Communications Communications Communications

Tele-
Personal Service Social Online Mobile
marketing/ E-mail Search Blogs Websites
Selling Personnel Media Advertising Marketing
Telesales

Publicity
Direct Sales
Advertising Packaging & Public
Marketing Promotion
Relations

[243t] [656t] [176t]

Peru Belcorp

Belcorp (formed 1968) is a Peruvian cosmetics manufacturer In Peru, Belcorp employs several promotional approaches.
— facial/body treatments, fragrances, makeup, personal care Uniquely, Belcorp places super-size replicas of products in
— with presence in 15 Latin American countries — Colombia, commercial areas in downtown Lima — a three-meter-high
Brazil, Chile, Ecuador, Guatemala, Mexico, Panama. Belcorp’s version of L´Bel Nocturne Sérum — facial product for use at
mission is to promote beauty, so consumers achieve personal night (2014).
fulfillment. Belcorp earns 20 percent of revenues in Peru. Belcorp uses Facebook to establish a direct relationship
Belcorp addresses several market segments via three brands: with customers. In 2016, Ésika and Cyzone advertising were
high income — L’Bel; middle income — Ésika; teenagers — the most-viewed cosmetic brands on YouTube. The Ésika
Cyzone, Belcorp’s low-price brand. Belcorp sells direct to campaign Mi belleza, mis logros (My beauty, my achievements)
consumers via beauty consultants. was recognized by UN Women and USAID for its attempt to
• L’Bel — for women who have their own style and want redefine the beauty concept and trigger positive changes in
to reveal their essence through their beauty. L’Bel offers gender equality and women’s empowerment. The advertising
makeup tutorials with Mytzi Cervantes, a beauty blogger. invited women to share these achievements in social media
(hashtag #MiBellezaMisLogros).
• Ésika — the beauty coach that inspires and empowers
women to achieve their goals. Through its YouTube channel,
QUESTIONS
Ésika offers makeup tutorials with Claudia Betancur —
celebrity and makeup artist. Ésika also offers small capsules 1. Which communication tools does Belcorp use to promote its

with advice for women to achieve their goals. main brands?

2. For L’Bel, Ésika, Cyzone, identify communications targets.
• Cyzone — invites teens and young women to dare with
Do Belcorp’s communications tools match these targets?
fashion. In its YouTube channel, Cyzone shows videos with
different young women — Caro Paz, young urban artist —
using Cyzone products.
 CHAPTER 15

Mass Communications,
Digital Marketing
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 15 is the second of three chapters in Part entertaining. Indeed, many of us look forward to
B of Imperative 4 — Design the Market Offer. Super Bowl advertisements. You may also receive
Part B focuses on communicating customer value; psychological/economic value, but you rarely ever
Chapter 15 addresses mass communications, digital pay for advertisements!
marketing.
So how does this system work? Mostly, you (as a
The first part of this chapter essentially focuses on customer) receive advertising messages together
advertising, then discusses other traditional mass with some content you desire — TV show, news-
communications options — direct marketing, paper article, magazine story — traditional/digital.
packaging, publicity & public relations (P&PR), sales The advertiser pays the media firm to bundle
promotion. Then we switch direction to the much together advertising, content, but the advertiser
newer, faster-growing field of digital marketing. receives nothing directly in return. The advertiser
Advertising is again the most important communi- receives value indirectly, from the attention you
cation approach, but we also address e-mail, search, give its messages, with your eyes, ears, engagement
blogs, social media, websites, mobile marketing. (hopefully). This attention has immense value for
advertisers. Indeed, the high Google/Alphabet market
As we broaden our discussion of various communi-
valuation derives from substantial website traffic,
cations options and how they work, we continue to
subsequent click-through from Google AdWords/
emphasize the importance of integrated marketing
Google+ to advertiser websites.
communications — Chapter 14. The power of the
firm’s communications program rests on integrating In many industries, advertising is central to imple-
selected options into a coherent whole versus a set menting market/communications strategy. Table 15.1
of uncoordinated efforts. Marketers must know the shows critical questions for developing advertising
difference, and take necessary actions. strategy, relevant links to communications strategies.
We address these questions throughout the first half
of this chapter.
MASS COMMUNICATIONS The firm should consider advertising as an invest-
ment. Advertising should contribute to building the
Advertising Foundations brand, lead to customer purchases immediately/in
Half the money I spend on advertising is wasted; the the future. Unfortunately, advertising is an expense
trouble is I don’t know which half. on the income statement, counts against current
— John Wanamaker, marketing pioneer.1 revenues. Hence, many firms underfund advertising.

At root, advertising is a service. When you pay Today the firm must choose among a fast-evolving
attention to an advertising message, you receive the set of advertising options, making the integration
functional value of information; may even find it task ever more complex.

137
138 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Table 15.1 Elements of Advertising Strategy

Element Question Link to Market, Communications Strategy

Communications target Who are we trying to influence? Customers in target segments (market strategy)

Advertising objectives What are we trying to achieve? Directly related to strategic, operational objectives
(market strategy)
Messaging What message(s) should Related to value proposition (market strategy)
communications targets receive?
Execution How shall we communicate the The most effective way to reach communications
message? targets
Media selection, timing Where, when shall we place our Select media to reach communications targets at the
advertising? appropriate time
Advertising budget How much shall we spend on Advertising is one element of the entire
advertising? communications budget
Evaluation How shall we test our advertising, Choose from several measurement methodologies
measure its effectiveness?

The Advertising Program The firm must carefully select communications

targets before making budget allocations.
Communications Targets
Who Are We Trying to Influence? A key element Advertising Objectives
in formulating market strategy is deciding which What Are We Trying to Achieve? Key considerations:
segments to target.
• Output objectives — what the firm eventually
• Push strategy — focus on direct customers wants to achieve — sales, market share, brand
• Pull strategy — focus on indirect customers (Figure loyalty — secured via purchase/repeat purchase.
14.3, p. 121)

How Advertising Works High involvement. The customer believes

the purchase — new automobile — involves
Advertising effectiveness is perhaps the most-
functional, psychological, economic risk. The
studied marketing topic.2 Hierarchy-of-effects
customer engages in staged process:
models are central to understanding how
• Awareness. Learn the product is available.
advertising works. Figure 15.1 shows models
• Knowledge. Understand product attributes/
for high-involvement, low-involvement products.
features, benefits/values.
High-involvement processes typically take longer.
• Liking/preference. Develop favorable/positive
Figure 15.1 Hierarchy-of-Effects Advertising Models feelings about the product.
• Trial. Test the product before purchase.
High Involvement Low Involvement
• Purchase. Exchange money, other resources to
Awareness Awareness
secure the product.
• Repeat purchase. Purchase the product again.
Knowledge Trial
Advertising reinforces beliefs.
Liking/preference Liking/preference Low involvement. Customers see little risk, require
little prepurchase knowledge. Examples: FMCG
Trial Purchase
categories — soda, cereal. The hierarchical process
Purchase Repeat purchase
is quite different. Advertising creates high aware-
ness, motivates trial. If customers like the product,
Repeat purchase they purchase, repurchase.
 CHAPTER 15 MASS COMMUNICATIONS, DIGITAL MARKETING 139

• Intermediate objectives — relate to hierarchy- • One-sided — focus only on positive attributes

of-effects models — Figure 15.1. These include versus two-sided.
awareness, knowledge, liking/preference, trial, • Primary versus recency — position of key claim(s)
emotional commitment (to a brand). Example: In in the message.
a new product launch, the firm may initially focus • Refutational — directly counter competitor claims.
on awareness, then shift to knowledge, liking once it
Emotional Appeals. Resonate personally:
achieves awareness objectives.
• Celebrity endorsements
Failure to achieve an output objective — sales, profits • Fear
— may not directly relate to success/failure of an • Humor
advertising program. By contrast, monitoring well- • Storytelling
chosen intermediate advertising objectives provides
In practice, much advertising combines/blends these
excellent feedback on advertising effectiveness.
pure-form approaches. Moreover, the firm must
understand the context, culture, language of target
Messaging
customers, especially abroad.
What Message(s) Should Communications Targets
Receive? The advertising message derives directly
from positioning in the market strategy — Chapter
8 — in particular, the value proposition:
[896t]
Convince [customer target]
In the context of other alternatives [competitor targets]
That they will receive these benefits [value proposition]
Because of our capabilities/features [reasons to believe]
Mexico Repositioning
The message should always focus upon core benefits/
values, reflect unique claims where the firm has Aeroméxico via Instagram
differential advantage. [446v] Clear positioning
Mexican airline Aeroméxico (AM) (formed 1934) was
statements provide excellent guidance for advertising
perceived as traditional and old-fashioned; AM was
agency creative personnel to help them develop
especially poorly perceived by young Mexicans.
effective messages. Messaging must also consider
AM wished to reposition and improve brand image,
the amount of time communications targets may be
especially among millennials. The approach —
exposed to advertisements.
#viajesquemarcan (memorable trips) campaign.
Various executions focused on enjoying a memorable/
Execution
extraordinary trip with AM.
How Shall We Communicate the Message? Execution
AM mainly communicated this message via
focuses on the method (style) firms use to turn emotional appeals, using storytelling. Advertisements
core messages into effective advertising. This task is featured young consumers visiting aspirational
daunting, challenging. [799v] Branding guru Schmitt destinations — Buenos Aires,
explains: “Creative output [is] the most visible part New York, Tokyo. AM ran
of advertising. … the creative process is an enigma, this campaign on several
more art than science, mysterious and unexplainable. social networking sites, but
The essence of creativity seems to be a willingness to focused major efforts on
alternate between divergent and convergent thinking, Instagram, the most popular
between brainstorming and analytic reasoning, site for millennials. Instagram’s
between pushing the limits and being reasonable segmentation capabilities
and practical. [The result, ideally,] culminates in an allowed AM to target persons
illumination — the Big Idea.” 3 age 18 to 34. In four weeks,
Rational Appeals. Based on logic: AM reached 4.4 million
• Comparative (attack advertising). [792v, 163v, 403v] young people; AM achieved
• Demonstration — focus on performance. a 37-point increase in brand
recall among millennials.
140 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Media Selection and Timing When the firm uses different media types, duplicated
Where, When Shall We Place Our Advertising? In reach — similar message/multiple sources — can
2015, global advertising spending was $497 billion be a problem; it can also be a carefully managed
(U.S. — $180 billion), led by television, followed by strategy!
digital — Figure 15.2. A fourth key media objective is impact — directly
Figure 15.2 Percentage Global Media Spending by Major
related to creativity in generating advertisements.
Media Class 20154 As media fragments, consumer media habits are
Outdoor, 5.9% Radio, 4.5%
more varied; hence, media decisions are increasingly
Magazines, 7.8%
Cinema, 0.2% challenging.

Media Placement. Once the firm has determined

Newspapers, 11.3% objectives (short/long term) it can address questions
relevant to selecting/timing its advertising. A short
Television, 42% guide to decision-making:
Media Class A category of closely related media
Digital, 28.1% vehicles: broadcast — television,
radio; digital; outdoor (billboards);
print — magazines, newspapers.

To evaluate/select appropriate media, the firm must Media class decisions vary across
several dimensions — attention-
address five related media topics — objectives, class,
getting, cost, intrusiveness,
vehicles, timing, schedule. targeting ability, time availability,
word-of-mouth potential.
Media Objectives. The media strategy should accom-
plish three key concerns: Media Vehicles A specific entity in a media
class — Boston Globe, New York
• Reach. Number of target individuals exposed to Times (newspapers), 60 Minutes
advertising at least once — impressions, eyeballs. (television). Considerations include
cost, audience size/type, product
• Frequency. Average number of times a target
fit.
individual is exposed to advertising.
Timing When advertising should appear:
• Reach and frequency. Traditional advertising, gross
• concentrated — at one time
rating points (GRPs) = Reach × Frequency
• continuous — all the time
Generally, advertisers trade off reach, frequency. • flighted — repeated high level,
Example: To secure 250 GRPs: then low (or no) advertising)

• 100 percent of the communications targets receives, • pulsing — periodic

on average, 2.5 exposures. Media Schedule Specific times/places to execute

the advertising program. Designed
• 10 percent of the communications targets receives, to optimize advertising objectives,
on average, 25 exposures. subject to a budget constraint.
Typically determined via complex
Many advertisers require a minimum number of computer models.
exposures — they set GRP objectives subject to
minimum required frequency. Media objectives
should relate directly to advertising objectives. Advertising Budget
How Much Shall We Spend on Advertising? The
Communications Objectives: Illustration advertising response function (ARF) helps marketers
Advertising objectives: Increase repeat purchase examine advertising spending relative to advertising
of Munchee candy bars from 30 percent to 50 objectives. Two important questions for deciding the
percent among 10- to 16-year-old boys by end advertising budget:
June. • What shape is the ARF? Figure 15.3 shows alter-
Media objectives: Deliver 1,500 GRPs, subject to native ARFs — each with some intuitive appeal,
minimum 60 percent reach. research support.
 CHAPTER 15 MASS COMMUNICATIONS, DIGITAL MARKETING 141

Figure 15.3 Alternative Advertising Response Functions Testing Individual Advertisements, Spending Levels.
The firm tests advertisements directed at commu-
II nications targets — individually, groups — in a
A
laboratory/experimental field setting. Global adver-
B tisers typically test in multiple cultures. Traditional
II’
advertising effectiveness measures include recog-
Sales

nition, unaided recall (without prompting), aided

I
recall (with prompting), purchase (in field settings).
The firm also tests alternative spending patterns in
I’ different market areas (geographies), using experi-
mental design procedures.
Advertising Expenditures

Evaluating the Entire Advertising Program. Over and

• Where is the firm currently operating? ARF A, above testing individual advertisements/spending
I — the firm should probably increase spending levels, the firm may wish to evaluate an entire adver-
modestly; ARF A, II — the firm would likely hold/ tising program. Tracking studies measure customer
reduce spending. ARF B, I' — the firm should responses over time, using a customer panel/ran-
increase spending dramatically. domly selected respondents. Suppose firm objectives
mirror the high-involvement hierarchy-of-effects
Managers typically estimate ARFs for different media
model: Awareness → liking/preference → trial →
vehicles, then determine optimal spending levels,
purchase → repeat purchase; the firm should base
media allocations. Useful approaches:
advertising objectives/actions on these stages. In
Objective and Task. This bottom-up approach focuses a tracking study, the results from one period help
on achieving advertising objectives — achieving 80 define the advertising program for the following
percent awareness by a specified time — then identi- period.
fying necessary tasks. The firm uses historical/exper-
imental data to estimate the budget for each task, The Advertising Agency System
then sums to calculate a total. Though not broadly Some large firms — Prudential, Ryanair — conduct
popular, this approach establishes ballpark estimates. advertising activities in-house. But most major U.S.
advertisers outsource advertising program develop-
Other Budgeting Methodologies. Top-down methods
ment to advertising agencies. By outsourcing, firms
help calibrate budgets:
have better access to creative talent, greater flexibility.
• Percentage of sales. Sales is current sales, The firm usually works with three agency groups:
anticipated-next-year sales, or some combination.
• Account/relationship managers — the key agency
• Competitive parity. The firm uses competitor interface; helps craft the advertising strategy.
spending as a benchmark.
• Creatives — develops messaging/executions.
• What the firm can afford. There is no rational basis
• Media department — prepares the media schedule,
for this approach.
provides supporting data.

Evaluation The core agency job is to translate firm market

How Shall We Test Our Advertising, Measure Its
strategy into advertising messages, then execute
Effectiveness? Now we have answered the questions
those messages. (P&G’s perspective [378v]) For each
of who, what, how, where, when, how much to spend messaging initiative, firm and agency personnel
on advertising, we must evaluate advertising relative should jointly develop the creative brief — a contract
to objectives. The firm may test individual advertise- between firm and agency — particularly for use by
ments, different levels/types of spending, evaluate the agency creatives.
entire advertising program.
142 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

• Better customer knowledge. Direct marketing firms

OTHER MASS have extensive customer information.
COMMUNICATIONS • Better measurement. The firm can test program
elements — message, price, incentives, type of
Direct Marketing direct marketing — to assess impact, then adjust.
Direct marketing is a fast-growing communications • Flexibility. The firm can quickly develop direct
tool embracing many ways of requesting customer marketing campaigns.
response. Traditionally, direct marketing includes • Predictability. Because direct marketing requests
print/broadcast advertising, packaging, package purchase, sales forecasts can be fairly accurate.
inserts, warranty cards, take-ones. The direct-mail Budgeting for direct marketing is simpler than for
subcategory includes brochures, catalogs, statement advertising.
inserts. Internet options are the latest iteration. Firms
like L.L. Bean, Lands’ End, Lillian Vernon continually
develop/refine demographic/product-preference Publicity & Public Relations
customer databases to fine-tune product develop-
ment, product assortments, communications Publicity & public relations (P&PR) comprises two
programs. Environmental changes — lower bulk closely related concepts: Publicity is really a subset
postal rates, online shopping, widespread credit of public relations, focusing on securing favorable/
card use — have greatly impacted direct marketing. neutral short-term media coverage. Public relations
Factors contributing to direct marketing growth: (PR) is a formal communication process, attempting
to build favorable relationships between the firm and
• Big data, advanced analytics allow firms to
public audiences. PR embraces corporate reputation,
develop, manage, mine customer databases for
crisis management, government relations (lobbying),
more targeted efforts.
internal relations, press relations, product publicity,
• Package delivery firms — FedEx, UPS — shareholder relations. P&PR generally relies on inter-
increasingly offer better systems/service variety. mediaries — specialist firms, analysts, influencers,
• Changing demographics/lifestyles — growth of media — to transmit messages to target audiences.
telecommuting, increased time pressure — makes
Firms also use P&PR, advertising, social media
shopping from home attractive.
synergistically. Example: Victoria’s Secret spends
• Increase in product quality has reduced customer several million dollars advertising its annual fashion
risk when selecting products remotely. show; extensive publicity sends millions of visitors
• Direct marketing firms are more professional/ to its website. For difficult situations, firms can use
sophisticated, especially in segmenting, targeting, P&PR to offset negative news. Example: J&J received
communicating. considerable praise for its handling of the mid-
1980s Tylenol poisoning scare. CEO James Burke
Direct marketing can be more expensive than
took charge; J&J focused its concern on customers,
advertising, but offers several advantages:
temporarily withdrawing Tylenol tablets and then
• Ability to identify prospects. By relating customer relaunching in tamper-free packaging. J&J’s actions
profiles to purchase patterns, direct marketers can and related P&PR campaign put senior executives,
identify high-quality prospects. including Burke, on many U.S. talk shows; they
• Ability to tailor the offer. Direct marketers know explained J&J’s actions, commitment to customers.
what customers purchase; hence, they can tailor J&J turned a major debacle into a major coup. [442v]
messages, offers to individuals.
P&PR has its drawbacks. The firm hopes to select
• Action-oriented response. Advertising typically friendly intermediaries, but it does not have direct
works via an effects hierarchy; purchase often control of intermediaries’ audience, message.
occurs after awareness, knowledge, liking/
preference. By contrast, direct marketing is more
action-oriented; it typically requests purchase.
 CHAPTER 15 MASS COMMUNICATIONS, DIGITAL MARKETING 143

Sales Promotion E-mail

Sales promotion (SP) is a complex blend of com- Of the various forms of digital communication,
munications techniques providing extra customer e-mail has the most direct relationship to traditional
value, typically for trial to stimulate immediate communication approaches. Indeed, e-mail is the
sales. Sometimes SP has a longer-run objective — virtual equivalent of traditional direct marketing.
increasing awareness. SP comes in three main types: E-mail is familiar, inexpensive, measurable.
• Consumer promotion — supplier to consumer E-mail communications can be outbound or inbound.
• Trade promotion — supplier to retailer U.S. firms send 1.5 billion e-mails monthly; some-
• Retail promotion — retailer to consumer times recipients have a prior firm relationship,
sometimes not.
Consumer, retail promotions — cash refunds,
contests, coupons, deals, games, point-of-purchase Outbound E-mail — No Prior Relationship. The most
displays, premiums, prizes, rebates, samples, sports common objective is to acquire new customers. The
sponsorships. Trade promotions — advertising/ firm may buy e-mail lists/develop lists based on
merchandising allowances; contests, deals/prizes; target segments. To avoid spam filters — designed to
special price deals; spiffs (sales incentives offered to reject unsolicited e-mails — many firms encourage
retail salespeople); trade shows. Firms continually prospective customers to consent to mailings by
create new SP techniques. Generally, SP is not a providing their e-mail addresses — opt in. The CAN-
good standalone approach; the firm should tightly SPAM Act (2003) requires that customers may also
integrate SP with other communications, set clear easily refuse to receive future mailings — opt out.
objectives before selecting a SP device. Regardless, the overall effectiveness of unsolicited
e-mail is decreasing. Campaigns can achieve higher
open rates by using specialty firms — HubSpot,
Salesforce, Constant Contact, Mail Chimp.
DIGITAL MARKETING
Outbound E-mail — Prior Relationship. E-mail is
Digital marketing is the fastest-growing approach
a popular way for firms to maintain contact with
for firms to communicate/interact with customers.
customers who have searched/purchased from its
Many methods are very different from and provide
website.
a powerful alternative to traditional mass commu-
nications. Marketers have new/improved ways to Inbound E-mail. The main difference between
reach/engage with customers: Easy for customers traditional direct marketing and e-mail communi-
to communicate with the firm, with each other; cations is the easy ability for online customers to
communicate globally 24/7/365; better customer communicate with the firm. The firm must develop
targeting; instant purchasing. processes to address inbound communications
candidly, promptly. Example: Firms like Zappos
Using digital approaches, the firm can capture data
encourage consumer contact for relationship
that follow customers as they search, visit websites,
building.
view advertisements, engage social media, make pur-
chases. The firm combines these data sets with bricks
& mortar purchases, other data to predict behavior,
strengthen brand image, increase sales, enhance cus- Search
tomer satisfaction. Each approach uses similar tools, Individuals initiate close to 10 billion Internet searches
but the distinction in objectives is important. daily, the vast majority on Google. By definition,
We explore various digital marketing approaches, searchers are looking for something. Smart digital
each with its own special characteristics. marketers optimize website content to ensure cap-
turing the right searchers. Industry research indicates
leads secured from search are eight times more
effective than those secured from outbound e-mail.
Search engines — Google, Yahoo!, Bing — conduct
144 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

searches using two related approaches — organic Social Media

search, paid search. The firm should develop optimi-
zation strategies for each approach. Social media (SM) comprises online tools, platforms
that allow Internet users to send messages; share
Organic (Natural) Search. Search engines work using insights/experiences for business/pleasure; share
web crawlers (spiders) to periodically scan web pages, content — words, pictures, audio, video. [188v] People
place them in the search engine index, then rank for also use SM to entertain, share reviews/opinions,
relevance on important keywords — more correctly, collaborate. SM communications can be very
key phrases. Simple keywords produce so many hits; powerful. In the digital realm, customers (millennials
the firm secures better results by refining phrases — in particular) often find strangers’ opinions more
men’s brown belt (119 hits) versus belt (450 million credible than paid spokespeople.
hits). Search engines employ complex software to
analyze website content, determine relevance. Then SM sites collect significant demographic data on
they factor these results by page-ranking methods users. Combined with browsing, online purchasing
that estimate, weight website authority/importance data, SM offers the firm attractive options to reach/
— number, quality from other websites. communicate with large numbers of current/poten-
tial customers in many ways — podcasts, pop-up
Search engine optimization (SEO) can be very offers, webinars. [685v]
complex; SEO embraces a variety of strategies,
tactics, techniques for securing high search-result Of course, not every SM option is relevant for the
rankings to increase website visitors. High rankings firm’s digital communications strategy. Each SM
are important: Research indicates that fewer than 10 platform offers various options; hence, the firm
percent of searchers go beyond the first search page; should understand how each SM site works, what
only 50 percent click beyond the first three links. audiences it addresses, how to optimize each plat-
Accordingly, firms allocate dedicated SEO resources/ form. Frequently, firms assign different executives
hire third-party specialists to ensure that websites/ to manage content/communities on different sites
other digital content are continually optimized for — Table 15.2. Increasingly, SM users add hashtags
best results. (#) to their posts/messages. Hashtags identify topics
— even firms. Individuals may search using hashtags,
Paid Search. Advertisers pay to appear next to/be hence broadening the scope of communication.
associated with search results based on keywords. An
electronics retailer using Google AdWords may pay
to appear next to searches for HDTVs. Typically, the
Advertising
advertiser pays only when a searcher clicks through
to the website — pay per click. Advertisers bid for The first part of this chapter discusses advertising’s
position; higher bids, higher relevance, higher click- foundation, the general advertising program. Here
through rates earn higher page listings. Spending we take a deeper look at online advertising — display,
on paid search, especially on mobile platforms, classifieds, video.
continues to grow.

Table 15.2 Social Media Users (2016)

Social Media Site Number of Users Vision/Mission

Facebook 1.7 billion Global sharing, connections, openness

Google+ 300 million Bringing the nuance, richness of real-life sharing to the web

Instagram 500 million To allow you to experience moments in your friends’ lives through pictures as
they happen
LinkedIn 450 million Connect the world’s professionals to make them more productive/successful

Pinterest 100 million To help people discover the things they love; inspire them to go do those
things in their daily lives
Twitter 320 million To give everyone the power to create/share ideas/information instantly,
without barriers
 CHAPTER 15 MASS COMMUNICATIONS, DIGITAL MARKETING 145

The key benefit of digital advertising is the ability to show an advertisement to a specific customer/
to target segments of online users. Big data gives which advertisement to show. Advertisers frequently
significant information on individuals/groups construct multiple versions of a single advertisement
— demographics, expressed interests, browsing based on consumer characteristics. These decisions
behavior, social network connectivity to other are made in milliseconds. Approaches to avoid
customers/brands. By knowing target audience overexposure include contextual targeting (adver-
characteristics, the firm can direct specific advertise- tising related to the site), rotation filters (based on
ments to select individuals. Clearly, this pinpointing customer profiles), frequency caps, burn codes (stop
ability infuses digital advertising with a very different exposures when the customer purchases).
character from traditional mass media approaches,
where targeting is much blunter. Advertising Challenges
Notwithstanding the many opportunities the
Display Internet affords advertisers, challenges arise:
Display/banner advertising was originally based
Fraud in Digital Advertising. The most pervasive
on a magazine model. Banner ads tend to come in
form of fraud arises from bots, software that behaves
standard sizes — easy to develop, purchase, track,
like humans. Bots click on display ads/video links,
measure. Banner ads direct users to click to reach the
artificially raising click-through rates — advertisers
advertiser’s website. Advertisers attempt to match
overpay for digital advertising. Bot owners make
their advertising to the customer’s purchase-process
money by constructing false websites; they direct
stage. [967v] Hence, a consumer who explores a
their bots to legitimate websites, receive payment for
product form on Amazon will likely see advertise-
false-impressions click-throughs.
ments for various purchase options the next time
she logs in to Amazon; she may see similar ads when Ad Blocking. In this Internet counterpart to ad-
logged in to Facebook, Twitter — remarketing/ skipping for DVRs, software packages perform
retargeting. Firms measure banner advertising similar functions when people visit websites. Hence,
effectiveness by click rate/some other customer some sites — Spotify — offer two versions: paid
action — download, enquiry, registration. One or (without advertising), free (with advertising).
more of these measures typically forms the payment
basis.
Websites
Classifieds
Online classifieds are typically text listings for specific Most of us think about website design in terms of
types of products/services — automobiles, jobs, real attractiveness, ease of navigation, effective organiza-
estate, time-sensitive auctions. Example: The free tion. For marketers, website design is critical for two
Craigslist, Nextdoor networks of local community very different customer-focused reasons — finding
sites command huge audiences. the website in alignment to search; enjoying an
optimal experience with the firm’s brand, messaging,
Video at the website.
As bandwidth increases, so does Internet video. Firms
place videos on their own, affiliate websites; also on The Website Experience
branded channels in public sites — YouTube. Videos At a minimum, the firm’s website is a form of mass
can be advertising focused, humorous, designed for communications (brochure-ware), but it can also
PR purposes. Increasingly, firms link video adver- enable sales promotion by automating offers for
tising directly to commercial websites to accelerate demos, discounts, free samples, upgrades. Regardless,
the consumer buying process. As more commercial the website’s true potential is its ability to function
TV-show episodes migrate to the Internet, video as an anchor for attracting, engaging customers;
advertising choices will increase dramatically. building brand equity; making sales. Websites allow
firms to generate product awareness, provide product
Placing Advertisements information aligned to user preferences, explain/
Many firms automate digital advertising strategy by allow customers to touch/interact with firm offers/
using programmatic advertising to decide whether service people. Website design comprises words,
146 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

pictures, videos, but may also host blogs, webinars, Blogs

podcasts; they may also offer branded games, free
assessments, mobile apps. Cookies, related identifi- Blogs are online platforms for audience communi-
cation technologies track user behavior, preferences, cation. Blog posts are discrete entries, typically dis-
other data that marketing can use to personalize/vary played in reverse chronological order — most recent
messaging. first. Blog posts typically allow for reader response,
hyperlinking to other digital content/resources.
Websites often allow customers to secure access/ Marketers usefully identify two blog categories —
register for information, premier content. These firm blogs, independent bloggers.
features encourage customers to interact with the
• Firm blogs offer the firm an effective way of
firm, share/recommend content.
communicating with interested parties: People sign
up as followers to receive alerts to new blog posts.
Website Design
Some firms have millions of followers, due in part
Simple websites are inexpensive to establish/take
to followers forwarding/sharing blog posts with
down. Websites optimized to attract the right visitors
their digital networks. Firm blogs have two key
and provide an attractive, engaging experience may
purposes: Generate leads through opt-in subscrip-
ultimately be more cost-effective. Well-crafted web-
tion; build brand image. By continually posting
sites help identify customer needs. By gathering the
interesting/compelling content, the firm gains
right data, they help the firm develop/refine customer
reputation/scores higher on search engine rankings.
preferences/product specifications. Websites are often
critical during customer evaluation, choice. Firms • Independent bloggers provide opinionated
use the Internet to generate sales directly; many commentary on matters that interest them. They
merchants — Netflix, Wessex Press — exist only on may blog for personal fulfillment or for external
the Internet. Since websites know no geographic rewards. These blogs are often highly specialized —
boundaries, many small firms now have global reach. but may attract large followings. They offer the firm
two distinct opportunities:
Some websites are morphing into quasi-personal
• The firm may feed content/news to bloggers
communication (QPC), embracing interaction/
for use in their blog posts. Technology firms
feedback without human involvement, usually via
often provide bloggers with advance versions
artificial intelligence. QPC allows firms/customers to
of new products, hoping to generate favorable
communicate on one-on-one basis, while reducing
commentary.
service costs.

[404t]

Mexico Grill On Box – Digital

Marketing for Subscribers
Grill on Box (GoB) is a subscription-based, male-focused, GoB integrates all digital marketing efforts to drive
Mexican gourmet grilling experience. GoB delivers all website traffic — for all purchases. GoB designed
needed ingredients for grilling, direct to consumers. GoB its website to deliver an optimal visitor experience by
successfully used digital marketing for positioning and for enacting a simple yet responsive design — adapted
increasing its subscriber base. GoB is active on social to different screen sizes/types. GoB’s website offers
media, especially Facebook, providing visually appealing simple check-out for any device. At the firm-blog section,
video advertisements — consumers see current box followers receive additional data about ingredients
preparations, and the mouth-watering final product. GoB for each GoB edition, plus grilling-related news.
operates a strong opt-in email marketing campaign, GoB’s active/strategic use of various digital marketing
maintaining relationships with current/potential customers approaches enabled creation of a solid market position
via a twice-weekly newsletter. Subscribers receive special and differentiation from competition.
email promotions when GoB launches new box editions.
GoB offers discounts to first-time opt-in customers.
 CHAPTER 15 MASS COMMUNICATIONS, DIGITAL MARKETING 147

• Blog posts may offer attractive options for increasingly download apps, games. Marketers may
hyperlinks, placing online advertisements. embed advertising within apps/games, develop
branded games.
As Brandweek has reported, some firms — Nike,
Dr Pepper, Mazda, SBC — have found blogging an • Website marketing, search. Originally, websites
easy, cheap way to keep customers engaged with were configured for personal computers. As smart-
their brands. Microsoft lets 1,000 developers set phones, tablets proliferate, specially designed web-
up personal blogs to build customer relationships. sites now create superior user experiences, opening
But this approach can backfire if bloggers view firm up many formerly static options for mobile
actions as placing commercial interests in a non- consumers. Responsive website design — creating
commercial domain. optimum customer experience regardless of device
type/screen size — is a crucial issue.
• QR (Quick Response) codes. QR codes are
Mobile Marketing two-dimensional images consumers may scan with
smartphones. The scan takes consumers directly to
Not long ago, if people used mobile devices at firm content. [429v] Check it out.
all, they made telephone calls. By some estimates,
today roughly half of all Internet traffic flows
through smartphones, other mobile devices. Mobile
marketing is the fastest-growing advertising channel;
• Location-based services. Embedded GPS chips,
it will increase considerably in importance as mobile
other technologies identify smartphone loca-
device sales grow.
tions. The best advertising message can now
be personalized by location. Some retailers use
Mobile Messages
Bluetooth-enabled beacons to communicate with
Mobile devices offer marketers two primary options:
smartphones inside the store; retailers also secure
• Short message service (SMS). Short text messages shopping behavior data, analogous to website
(up to 160 characters) remain stored until the user navigation.
opens the mobile device.
• Multimedia message service (MMS). Similar to
SMS but may include graphics, audio, video. Measuring Success
Marketers must make good choices in order to The growth of digital media has spawned a host of
gain customer engagement. They may send unso- new effectiveness measures. Many measures relate
licited messages — spam — but response rates are to website traffic; some focus on more conventional
low. Most reputable firms use permission-based/ advertisements in digital form; others focus on social
opt-in alternatives. Users subscribe to services media campaigns. Some measures concern out-
— Foursquare; complete website registration — puts — related to sales/profits; other measures are
Groupon, Shopkick; or verify passwords/activity for intermediate — related to customer actions prior to
sites like Facebook/consumer banking. Consumers purchase. These measures help track/manage per-
can elect to receive advertisements, coupons of the formance of the firm’s most vital digital marketing
day, loyalty points, promotions, other benefits — assets — Table 15.3, also Chapter 20.
feedback options, games, minidramas, music, polls,
quizzes, ringtones, sports information, videos. Future A particular feature of digital marketing is the
mobile communications will only be limited by prevalence of A/B testing. The firm offers two
designer creativity. versions, measures their relative success. So long
as statistical controls are appropriate, A/B testing
Mobile Marketing Factors enables firms to improve digital marketing
Mobile marketing comprises several factors that performance.
differentiate it from digital marketing:
• Apps, games. As smartphone power increases/
multiple screen sizes become available, consumers
148 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Table 15.3 Selected Digital Media Measures

Output Measures
• Average margin • Sales — by hour, day, week, month, quarter, year
• Average order size (market basket) • Shopping cart abandonment rate (%)
• Conversion rate (%) • Closed-loop data (ability to tie marketing to sales to
• New customer orders versus returning customer sales source)

• Product affinity — products purchased together • Lead generation

Intermediate Measures
Advertising Social Media Websites
• Affiliate performance rates • Blog (other) traffic • Chat sessions initiated
• Brand or display advertising • Number of followers/fans • Daypart monitoring (when site visitors
click-through rates • Number/quality of product reviews come)
• Pay-per-click traffic volume • Texting subscribers • Newsletter subscribers
• Qualified reach • Brand perception (how do people • Page views per visit
• Engagement score respond to firm) • Search engine ranking (by keyword),
• Richer prospect data click-through rate

• Lead attribution • Time on site

• Traffic source
• Unique visitors versus returning
visitors
• Website traffic — number of visitors

Endnotes 3 Creativity is different from impact. Advertising campaigns may

1 Founder of Wanamaker department store, Philadelphia, 1875. earn creativity awards yet fail to achieve objectives.
Statement also attributed to Lord Leverhume, founder of
4 Source: ZenithOptimedia. Advertising expenditure breakdown
Unilever.
by geographic area ($billions): North America — 165; Western
2 H.E. Krugman, “What Makes Advertising Effective?” Harvard Europe — 104; Asia Pacific — 121; Central/Eastern Europe —
Business Review, 53 (March–April 1975), pp. 96–103, is the classic 25; Latin America — 33; Middle East/North Africa — 4; rest of
advertising effectiveness article. world — 11.
 CHAPTER 15 MASS COMMUNICATIONS, DIGITAL MARKETING 149
[776t]

Costa Rica Costa Rica Vacations –

Sharing Testimonials via Social Media
Costa Rica Vacations (CRV) (founded 1999) offers provide testimonials, but not bribed. CRV received about
personalized vacations; CRV is one of Costa Rica’s 10 additional reviews weekly. By 2017, CRV had posted
largest travel agencies (more than 100 employees). CRV’s 200 reviews. CRV uses these reviews to develop more
growth is, in part, due to its pioneering early adoption of personalized-post-trip relationships with customers. The
an online strategy. focus — What more can we do for you? — continued
Initially, CRV focused on search engine optimization Facebook-initiated testimonial interactions. Of course,
(SEO), implementing strategies and enabling CRV’s some reviews are negative; CRV defined a protocol to
website to achieve high page rankings in organic search respond personally to such reviews.
on Google/Bing. Appearing high on the first page CRV’s testimonial initiative was a major success, in
increased CRV’s ability to attract traffic. Additionally, CRV part by integration into other digital marketing channels
paid — pay per click — for advertising to appear for — website/email campaigns. CRV’s conversion rate
preselected keywords. from website visits increased significantly. Referrals/
Despite being an early-digital-marketing adopter, repeats increased from 6 percent to 12 percent. Fifteen
CRV was not active on popular social media sites — percent of customers completing CRV’s survey now leave
Facebook, Instagram. Analysis of its target market and testimonials on Facebook.
service portfolio revealed that most CRV customers were
from Canada, Great Britain, U.S.; 40-to-60 years old; QUESTIONS
increasingly active on Facebook. 1. How has CRV’s digital strategy helped in differentiating
CRV placed a Testimonials tab on its Facebook page from other other companies?
— visitors see a wall dedicated to customer reviews/ 2. To address its market target of 40- to 60-year-olds from
comments. To secure testimonials, CRV uses email Canada, Great Britain, U.S., CRV adopted a strong
to survey clients post-vacation; the final item requests Facebook strategy. Suppose CRV decided to target
a Facebook testimonial. As an incentive, each month millennials, what changes would you make in its digital
CRV awards an Amazon gift card for the most helpful strategy?
testimonial. CRV carefully tested the gift-card amount;
at the sweet spot, clients felt comfortable/motivated to
 CHAPTER 16

Directing, Managing
Field Sales Efforts
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 16 is the third of three chapters in Part B Marketing’s Role in Field Sales Efforts
of Imperative 4 — Design the Market Offer. Part B
focuses on communicating customer value. Chapter This book’s title is Marketing for Latin American
16 addresses directing, managing field sales efforts. Managers in the 21st Century, so why do we include
a chapter on directing, managing field sales efforts?
In many firms, the sales force is the only group Aren’t there enough dedicated books on selling/sales
specifically charged with, and compensated for, management? Of course! But one in nine Americans
generating sales revenues. Field salespeople efforts works in sales.1 Thus, understanding sales/sales man-
are the firm’s critical persuasive component. Some agement roles, aligning selling efforts with marketing,
sales forces are huge. Several U.S. life insurance firms is more crucial than ever.
each employ more than 10,000 salespeople; GE, IBM,
Pfizer each employ tens of thousands of salespeople Marketing and sales must be on the same team, each
around the world. performing its own critical functions. We do not
pretend this is easy. Marketing and sales often have
In B2B marketing, the field sales force has always different perspectives. Marketing tends to have a
been critical; salespeople typically introduce long-term, more strategic view; sales must deliver
products/services directly to end users. Business short-term revenues.
customers increasingly want vendors to possess real
expertise in their specific industries/functions. They Creative tension is often beneficial for firm perfor-
expect salespeople to help solve business problems, mance, but badly coordinated sales strategies can
not just sell widgets. In turn, many B2B vendors have lead to distracting internal competition among
expanded product lines, added solutions specialists product managers. A multiproduct firm may have
to help knit together disparate products/services into several product-market strategies, each comprising
integrated offers. several market-segment strategies. The sales strategy
must integrate these various market strategies into
By contrast, in B2C, mass communications/digital sales strategies reflecting a broad range of products/
marketing are often the main communication services sold to several market segments.
channels for reaching consumers; the sales force
plays a supporting role. But as the retail industry Well-managed firms implement processes to tightly
concentrates, a few large retailers/distributors coordinate marketing, sales efforts. They encourage
secure significant power; B2C field sales efforts are disciplined communications/reporting, create
increasing. Some FMCG firms now spend more joint assignments, rotate jobs, colocate marketing/
heavily on direct selling/relationship management to sales personnel, improve sales force feedback. The
wholesalers/retailers than on advertising to con- sales force retains responsibility for securing deep
sumers! Example: At P&G, more than 400 persons customer insight, proposing actionable solutions,
work exclusively with Walmart. accessing resources to solve customer problems.
Marketing develops market plans with significant

150
 CHAPTER 16 DIRECTING, MANAGING FIELD SALES EFFORTS 151

sales force input, in sync with the overall market Perhaps the most critical leadership function is
planning process. Senior marketing/sales managers encouraging salespeople to live the mission —
meet frequently to hammer out realistic/coordinated providing a rationale for the sales job over and
marketing/sales objectives, priorities in a spirit of above financial rewards. Salespeople who inter-
cooperation. Some firms even appoint sales/mar- nalize a greater purpose build credibility, trust with
keting coordinators; their job is to ensure effective customers; they develop a powerful differentiator for
senior marketing/sales manager interactions. defeating competitors.

Leading Sales Efforts2 SALES FORCE MANAGEMENT

The sales management job is to make salespeople To mount an effective selling effort, six sales force
successful. All sales managers, junior and senior, management tasks are critical. Tasks 1, 2, 3 address
should lead from the front, spending time in the field developing sales strategy; tasks 4, 5, 6 deal with imple-
with salespeople — coaching, inspecting, observing, menting sales strategy. We then discuss strategic/key
teaching, selling. Sales managers should empower account management.
salespeople to take initiative, by fostering a culture of
acting like it’s your own business. The most effective
sales managers innovate new ways of delivering Developing Sales Strategy
customer value; help drive entry into attractive
markets; spearhead evolution of new sales models/ Task 1 Set, Achieve Sales Objectives
sales organizations. Sales objectives are desired results. They derive from
To secure the best results, sales leaders treat human the strategic focus in the market-segment strategy:
resource expenditures as investments; they view Increase customer retention, increase customer use,
selling as a training ground for general management. attract customers from competitors, secure new
The most effective leaders advance the science of sales business. Achieving sales objectives is the sales force’s
and the art of the customer relationship. They make central task. The firm makes profits, survives/grows,
fact-based decisions, like allocating sales resources — enhances shareholder value only by selling products/
salespeople, strategic/key account managers, telesales services to customers. Sales objectives turned into
— across market segments/sales channels. They specific performance requirements are sales quotas.
leverage sophisticated data, intellectual capital by:
Defining Sales Objectives
• Using internal data sources to garner insight on
The firm may choose among several sales perfor-
customers/customer behavior.
mance measures. Most firms set sales objectives in
• Supplementing firm products with advisory terms of sales revenues (dollars) or sales units. But
services to offer customer solutions. focusing solely on sales can short-change profits;
• Building specialist expertise to fashion/develop hence, profitability objectives — profit contribution
customer solutions. (gross profits less direct sales force costs) — are also
• Working with specialists to install/implement popular. Well-set sales objectives specify how much,
solutions for customers. by when the sales force must meet performance
targets.
Sales leaders understand viscerally that customer
success drives firm success. They create a risk-taking Relating Sales Objectives to
culture where failed experiments for delivering Marketing Objectives
customer value are accepted, expected. They penalize Integrating market strategy with sales strategy is
repeated mistakes, but celebrate/reward learning a difficult challenge for many firms. A useful way
from honest mistakes. They hire, develop people of driving integration is to rigorously translate
willing to try, fail, learn. Sales leaders discover/ marketing objectives into sales objectives.
develop best practice, by following the fail or scale
principle.
152 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Breaking Down Sales Objectives The firm should choose sales objectives carefully,
Typically, the sales force breaks down overall sales based on the business, firm strategic situation.
objectives into control units — sales regions, sales
districts, individual sales territories. Senior sales Task 2 Determine, Allocate Selling Effort

managers gain significant insight by comparing The best way to determine/allocate selling effort is by
actual sales performance versus sales objectives for examining the makeup/functions of the sales force:
these control units; they see if a particular region,
district, territory is performing well or poorly. Sales Force Size
The firm should employ the right number of well-
Firms also establish sales objectives in time units
trained, motivated salespeople. Managing headcount
— quarterly, monthly, weekly. Calendarizing allows
is typically a crucial HR function; sales managers
the firm to monitor performance continuously; it
often wage difficult internal battles to optimize
sets the stage for making course corrections when
sales force size. Figure 16.1 shows an underlying
performance falls short of objectives — Chapter 20.
conceptual framework — sales response function.
When selling effort is low, the firm makes few sales
Alternative Sales Performance Measures
— A. As selling effort increases, sales increase — B.
Sales-/profit-based objectives are the most popular
Ultimately, sales top out at a maximum level — C —
performance measures, but other metrics have value:
even if the firm were to add extra sales people — D.
• Close rate — proportion of sales attempts resulting The firm should continue hiring until the marginal
in actual sales. revenue from adding a salesperson equals that sales-
• Customer retention — proportion of customers at person’s marginal cost. Many sales managers find this
start of year that are still customers at end of year curve intuitively reasonable, but do not know their
— opposite of customer defection (churn). Relates sales force position on the curve. Two approaches to
to customer lifetime value (CLV) — Chapter 2. the sizing decision:
• Customer satisfaction — specific metrics focusing Experimental. Sales managers change sales force size,
on customer experience. then see what happens. Two broad hypotheses follow:
• Market share — performance versus competitors. 1. Sales force is too small, perhaps at B.
• Price realization — extent to which the firm 2. Sales force is too large, perhaps at D.
achieves planned price levels.

Figure 16.1 The Sales Response Function

C D

B Peak
Sales

Threshold Slope

Effort
 CHAPTER 16 DIRECTING, MANAGING FIELD SALES EFFORTS 153

Sales managers should decide what criteria would Figure 16.2 Portfolio Model for
support/reject each hypothesis, then select one or Determining Required Selling Time
more sales districts/regions for trial — increase/
decrease sales force size — and similar districts/
High
regions as controls. If the experimental data support

Customer Potential
hypothesis 1, the firm should add salespeople; if the Number of
data support hypothesis 2, the firm should reduce Customers
Medium
sales force size. Required
Selling Time
Analytic. Three steps:
Low
1. Determine total number of selling hours required
to achieve sales objectives. Two broad approaches Medium Low
High
for calculating required number of selling hours:
Firm Share
single-factor model, portfolio model:
• Single-factor model. Table 16.1 classifies current/
potential customers into categories — A, B, C, D
But salespeople conduct many activities beyond
(column I) according to a single value measure
selling. Assume salespeople spend just 30 percent
— sales potential (II). Multiplying number of
of time actually selling; annual selling hours per
customers (III) by selling time per category
salesperson = 2,300 × 30% = 690 hours.
(IV) gives the required annual selling time per
category (IV). Summing column (V) entries 3. Calculate required sales force size. Total number
yields required selling time for all customers — of selling hours required (Table 16.1) = 44,100,
44,100 hours (VI). divided by available selling hours per salesperson
= 690: 44,100 / 690 = 64 salespeople.
• Portfolio model. Customers and selling time are
classified on multiple dimensions; Figure 16.2 In practice, this calculation provides a ballpark
illustrates customer potential, firm share. The estimate for sales force size. The firm should expect
firm trisects each dimension — low, medium, some variation from actual size, but significant
high — then identifies customer numbers in variation demands consideration/action.
each matrix cell (III), required selling time per
customer (IV). From this point on, calculations Sales Force Activities
for single-factor/portfolio models are identical. The main sales force job is making sales. But claims
2. Determine available selling hours per sales- on salesperson time include checking credit/
person. Sales managers must calculate the time inventories, collections, customer service, delivering
available for selling per annum. To illustrate: products, education/training, gathering market
365 days less 104 (weekends) less 31 (holidays/ intelligence, internal communications, meetings,
vacations) = 230 × 10 hours per day = 2,300 qualifying sales leads, receiving payments, record-
hours. keeping, report writing, sales planning, travel. In

Table 16.1 Illustration: Single-Factor Model for Calculating Required Selling Time

Customer Sales potential, Number of customers, Selling time per customer Required selling time
category, I II III annually, IV annually, III × IV = V
A >$2M 100 accounts 100 hours 10,000 hours

B $250K to $2M 250 accounts 50 hours 12,500 hours

C $10K to $250K 800 accounts 12 hours 9,600 hours

D <$10K 3.000 accounts 4 hours 12,000 hours

Total 44,100 hours (VI)

154 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

many firms, even the best salespeople spend less than differ across market segments, the firm should offer
20 percent of time face-to-face with customers trying different value propositions across market segments.
to make sales. Hence, salespeople selling multiple products to
multiple segments must employ multiple sales
Firms regularly deploy technology to improve
approaches. Aided by sales/marketing managers,
salesperson effectiveness. Most salespeople use
salespeople should develop approaches for specific
e-mail, laptop/tablet computers, smartphones; they
customers, competitive threats.
have standardized slide shows/interactive web-based
demos for presentations. Other devices/applications All sales approaches are more effective when sales-
— Salesforce.com — enable advertising coordination, people earn customer trust. Two main components:
best-practice/knowledge sharing, delivery of well-
designed sales literature/working models, scheduling Tailoring Sales Messages for
reseller/customer/sales force training/meetings, Different Customer Targets
technical support, trade show participation. Virtual Customer needs, competitive offers drive the sales
meeting applications — GoToMeeting, Skype, approach. Sometimes customers are clear about
Google Hangouts — reduce travel time by allowing needs; other times, individual decision-makers/
remote face-to-face sales meetings. Sales managers influencers have different perspectives. Sales-
should develop guidelines specifying salesperson people must decide whom to target; they must
time commitment to various activities. also decide how to tailor sales messages for each
person. Examples: Procurement — price; engineers
Time allocation differs across sales territories. Sales-
— product design; manufacturing — production
person activities also evolve based on customer life
efficiency. The salesperson must orchestrate the sales
cycle, other variables.
approach for each customer role/individual. Social
media can help isolate response patterns, provide
Selling Effort Allocation
salespeople with useful clues.
Selling effort (selling time) should mirror the
structure of sales objectives. If the firm sets sales
Designing a Process to Explain Benefits/
objectives by product, it should allocate selling
Values
effort by product. If the firm sets sales objectives by
Selling is a process for facilitating customer buying.
product/market segment, it should allocate selling
A standardized process is undesirable, but sales
effort by product/market segment.
managers should guide salespeople’s approaches
As with sales objectives, the firm should break down via well-designed training programs, coaching,
selling effort allocations by individual control units counseling. Good sales managers break the selling
— sales regions, sales districts, sales territories. Sales task into discrete easy-to-learn steps that follow a
managers must make these selling effort allocations, strategic sequence:
then ensure salespeople stick to guidelines. Left to • Set call objectives. Know the desired results from
individual salespeople, such decisions are unlikely to each sales call at each stage in the buying process.
optimize firm performance. Many salespeople use pre-call planning processes to
set call objectives.
Telesales/Live Chat
• Determine sales interview tone. Decide how
Many firms have reduced sales costs by adding
strident/aggressive to be in different situations.
telesales/live chat departments. Telesales functions
differ markedly from firm to firm — lead genera- • Elicit needs. Develop procedures, including market
tion, interfacing with potential/current customers, research, to elicit/identify customer needs.
partnering with the field sales force. • Present product benefits/customer solutions.
Present benefits/values in the context of customer
Task 3 Develop Sales Approaches needs.
The value proposition — Chapter 8 — anchors the • Handle objections. Anticipate, address
sales approach — the central message the salesperson customer objections. Objections differ across
delivers to customers. Because customer needs products/customers.
 CHAPTER 16 DIRECTING, MANAGING FIELD SALES EFFORTS 155

• Close the deal. Learn how to close a sale — ask for Task 4 Design the Sales Organization
the order. Learn when to accept rejection, move
Task 4 addresses sales organization design; firm
to another customer; learn how to better qualify
choices should reflect strategic realities. Example: If
prospects.
the product line is complex/heterogeneous, perhaps
A more recent, but controversial, approach — the the firm should have multiple sales forces. Three
Challenger Model — recommends that salespeople critical questions:
challenge customers.3 Regardless, specific influence
principles may help persuade customers: Should the Firm Conduct Its Own Selling
• Liking — people buy from people they like. Effort, or Outsource to Others?
Many firms outsource functions — call centers,
• Reciprocity — if you give, people give back.
computer systems, financial processes, legal, payroll,
• Social proof — people follow the lead of others. production operations, security. Should the firm
• Consistency — people fulfill commitments outsource selling effort? Three crucial issues:
(especially public, written). • Control. Employee-based sales forces are more
• Authority — people defer to experts. likely to follow managerial direction. Outsourced
• Scarcity — people value what is scarce.4 agents, brokers, reps earn commissions; hence,
the firm may exercise little control over time
allocations, effort.
• Cost. Employee-based sales forces typically incur
[326t] [572t] substantial fixed costs — salaries, travel/entertain-
ment, sales management, overhead allocations
— regardless of sales. Third-party sellers on com-
mission are a variable cost — no sales, no costs!
• Flexibility. To modify an employee-based sales
Mexico Grupo Bimbo force takes time — onboarding salespeople, equip-
ment. Third-party sellers typically work with strict
performance criteria, short-term contracts; hence,
Grupo Bimbo (GB), founded 1945 as a small
relatively easy termination.
bakery, is today a multinational firm — more than
100 umbrella brands, 10,000 products, 130,000
[716t]
employees, 165 plants, 52,000 sales routes, 2.5
million points of sale. In Mexico alone, Bimbo has
850,000 points of sale in tienditas (small stores,
corner stores). To drive revenues, Bimbo offers
many services — presales, sales through cell Colombia Mary Kay
phones, sales through periodic customer visits, daily
deliveries, night supply, rack-space optimization, Mary Kay (MK) (formed 1963) is a U.S.-based multinational
exhibits, specialized support for the traditional cosmetics firm; MK follows rules set by the World Federation
supermarket channel. Bimbo optimizes product of Direct Selling Associations. Independent beauty
offerings for each sales channel. consultants (consultoras de belleza independientes) make
catalog sales to consumers. MK — 3.5 million saleswomen,
annual revenues US$4 billion — operates in 35 countries:
Latin America — Argentina, Brazil, Mexico. MK entered
Colombia — Barranquilla, Bogota, Bucaramanga, Cali,
Implementing Sales Strategy Medellin — in 2015; direct competitors — Avon, Natura,
Tasks 1, 2, 3 address developing sales strategy. Tasks 4, Yanbal. MK’s objective was 3,000 independent consultants
5, 6 focus on implementing sales strategy —ensuring in three years. (Colombia has one million catalog sellers.) MK
the sales force delivers the planned levels/types of achieved its objective in 11 days! MK offered salespeople
selling effort. higher profit margins, and allowed prepurchase product
testing.
156 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

How Should the Firm Organize/Reorganize Task 5 Create Critical Organizational Processes
an Employee-Based Sales Force?
All sales organizations employ processes — sales
Three interrelated variables for organizational design:
planning, pipeline analysis, sales forecasting, evalua-
• Desired degree of centralization/decentralization tion methods, reward systems — to help implement
• Number of management levels planned selling effort. Today, many firms enable
• Managerial span of control these processes using powerful tools/analytics —
Salesforce.com.
Specialization is one of the most important design
variables. Should the firm specialize selling effort? If Sales Planning
so, how? The firm should actively engage salespeople in a
• Unspecialized. We generally consider two organiza- detailed sales planning process.
tion forms as unspecialized — salespeople face no • Top down — senior sales managers work with
geographic bounds in searching for sales opportu- regional/district sales managers to decompose
nities; the firm organizes territories by geography. overall firm sales objectives into individual control
In both cases, salespeople sell all products to all units — sales regions, districts, territories. They
customers, for all applications. also decide broad selling effort allocations by
• Specialized. Specialization takes various forms — product, market segment.
product, maintenance/new business, distribution • Bottom up — salespeople analyze territories, work
channel, market segment, customer importance/ with district sales managers to agree on objectives,
size (strategic/key accounts). Generally, specialized develop sales action plans.
selling effort leads to higher sales, but also higher
selling costs. Pipeline Analysis, Sales Forecasting
The sales pipeline (SP) comprises stages in the selling
How Should the Firm Design process; customers move from prospects (potential
Sales Territories? customers) to buyers. SP serves as a systematic,
Within the sales organization structure, the firm visual approach to categorizing potential customers
must design/redesign sales territories. Frequent through the selling process. Pipeline analysis tracks
territory design changes are undesirable; they disrupt success as customers traverse these stages to actual
customer-salesperson relationships. Four standard sale. IBM’s pipeline — Figure 16.3 — comprises:
design steps embrace sales potential, salesperson
• Discover. Salesperson: Believes customer intends to
workload:
buy.
• Design by sales potential. The firm identifies
• Identify. Customer: Interested in IBM as supplier.
geographically contiguous territories with roughly
equal sales potential. Some trial territories are geo- • Validate. Customer: States a need, buying vision.
graphically larger than others. Example: Equivalent • Qualify. Project sponsors: Work with IBM team on
potential territories for Xerox may be a few blocks preliminary solution.
of midtown Manhattan, or several Western states. • Conditional agreement. Project sponsors:
• Calculate workload. Use sales-effort allocation Conditionally approve proposed IBM solution.
decisions (Task 2) to determine workload. From the • Business won. Customer, IBM team: Sign contract.
initial territory design, some salespeople have time
• Customer expectations met. Customer: Satisfied
left over; other salespeople have insufficient time.
with purchase, installation moves forward. IBM
• Adjust initial design for workload. Make territory receives payment as scheduled.
design adjustments to optimize sales potential,
salesperson workload. Individual pipeline systems use various stages, but
operate similarly, tracking success at different stages.
• Continuous monitoring. Sales managers monitor
Rigorous pipeline analysis leads to better sales
salespeople/territories, adjust periodically.
forecasts.
 CHAPTER 16 DIRECTING, MANAGING FIELD SALES EFFORTS 157

Figure 16.3 IBM Sales Pipeline

Discover

Identify

Validate

Qualify

Conditional agreement

Business won

Customer expectations met

Software applications allow salespeople/sales Sales reward systems vary widely. Components:
managers to track/manage sales pipelines, decide • Financial compensation. Various combinations of
where additional resources are appropriate. These three financial rewards:
applications have many tools for better analyzing
• Base salary. Paid regardless of sales performance
customer data, securing insight.
(in the short run).
We cannot overstate the importance of good sales • Bonus. Paid for achieving sales quota — typically
forecasting. At a minimum, good forecasts are target sales revenues (sometimes profit).
important for financial budgeting, production
• Sales commission. Variable compensation based
planning. Poor forecasting can lead to significant
on sales (or profits).
problems.
• Recognition. This important reward is relatively
Evaluation Methods inexpensive, but can be a powerful motivator.
The most critical evaluation measure for sales- Creative sales managers recognize salespeople for
people is sales performance versus sales objectives. various performances — highest revenues, best
Sales managers should also assess selling effort — sales growth, most profitable sales. Many firms
quantity, quality. Are salespeople working hard? Are recognize high performers annually with member-
they working smart? Most good sales management ship in a President’s Club, including a trip (with
systems allow managers to customize dashboards to spouse) to an exciting destination.
track metrics on direct sales activity — calls per day, • Promotions, work assignments. Promotions, more
calls per account, time at new accounts. interesting job possibilities are highly motivating
for some salespeople.
Reward Systems
Generally, financial compensation is a salesperson’s
Reward systems are powerful motivators for sales-
most important motivator. By developing a fair,
people. In a truly motivating system, salespeople will
consistent compensation plan, the firm drives the
answer YES to these questions:
behavior it desires.
• Can I achieve my sales objectives?
• Do I value the rewards I will earn for meeting these Task 6 Staff the Sales Organization

objectives? Salespeople are one of the firm’s most important

• Do I believe I will truly receive the rewards I earn? resources. Sales managers must ensure the sales force
is fully staffed, all territories filled, at all times. Sales
• Is the reward system fair?
managers must plan for natural attrition, dismissal,
158 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

promotions/transfers. They should inventory sales-

than to regular customers. Winning/losing an SKA
people — develop candidate pipelines — ready to fill
is a significant organizational event. In most SKA
a territory when one opens up.
programs, strategic account managers (SAMs) are
Many firms have a policy of recruiting salespeople responsible for building/sustaining relationships with
internally; they may create career paths in related individual strategic accounts.
departments — sales support, customer service.
Successful SKA programs adopt the congruence
Others recruit externally, continually interviewing
model. Critical decisions:
candidates to bring fresh perspectives/expertise.
• Strategy. Deciding firm commitment to the SKA
Staffing process steps to hire, prepare effective program, overall resource allocation, number of
salespeople: strategic accounts, revenue/profit targets, types of
• Recruiting. Sizing, defining the pool from which to firm/SKA relationships.
select salespeople. • Organization structure. Concerned with SKA
• Selecting. Using criteria to choose salespeople from program placement, reporting structure, interfaces
the recruitment pool. with other functions.
• Training. Ensuring salespeople have the knowledge, • Human resources. Securing/training/retaining
skills, abilities to be effective. appropriate SAM personnel.
• Coaching. Continuous efforts by first-line sales • Systems and processes. Methodologies for helping
managers to improve selling effectiveness. SAMs do their jobs — SKA planning systems,
• Retaining. Maintaining high-performing customer profitability measurement, bench-
salespeople. marking, best-practice sharing.

• Replacing. Weeding out poorly performing

salespeople; filling vacancies.
Endnotes
1 U.S. Bureau of Labor Statistics.
2 Sourced from N. Capon, G. Tubridy, Sales Eats First, Bronxville,
Strategic/Key Account Management NY: Wessex, 2011. [746e]
3 M. Dixon, B. Adamson, The Challenger Sale: Taking Control of the
Realizing the 80:20 rule applies to revenue, profit Customer Conversation, New York: Penguin, 2012. [654e]
distributions, many firms implement strategic/ 4 R. Cialdini, The Psychology of Persuasion, New York: William
key account (SKA) programs. These firms identify Morrow, 1993. Cialdini developed these principles from extensive
the most important current/potential customers, field research including going undercover as a used-car salesman.
then provide additional resources, greater attention
 CHAPTER 16 DIRECTING, MANAGING FIELD SALES EFFORTS 159
[169t]

Colombia Quala
Quala (formed 1980) initially focused on milk substitutes, Quala’s sales strategy includes a focus on
now produces more than 29 brands in seven product ventas callejeras — street sales. Salespeople take
classes — beverages, frozen beverages, desserts and advantage of red signals in traffic lights to make sales
jellies, foods, home care, personal care, snacks. Quala to motorists throughout Colombia; popular products
operates in seven additional Latin American countries — — Bonice, Popetas, Vive 100, Yogoso. Prices range
Brazil, Dominican Republic, Ecuador, Guatemala, Mexico, from COP$1,500 to $2,000 (US$0.6 to 0.7). Sales
Peru, Venezuela. Quala’s mission: Mastering categories commission averages 30 percent. Salespeople are
of mass consumption, building leading and profitable independent agents; they secure products from Quala
brands, offering a proposal superior to the Local Popular distributors.
Consumer.
Quala is one of Colombia’s 100 largest firms — 2016 QUESTIONS
COP$1.38 billion (US$470 million); one of 25 largest 1. How does Quala’s traffic-signal selling model affect brand
employers — 3,800. Quala has 190,000 direct retail perceptions?
customers in more than 900 Colombian municipalities. 2. How do you assess the compensation system for Quala’s
Quala asserts that more than 43 million Colombians have independent agents?
tasted/used a Quala product at least once in their lives,
mostly its flagship Caldo Doña Gallina brand.
160

SECTION 4 — IMPERATIVE 4 / PART B — KEY MESSAGES

Chapter 14
The communications program is critical for • What key messages do we want to get across
implementing market strategy. Three sources of (varying by communications target)?
miscommunication: • What communications tools shall we use
• Encoding — the firm does not send the intended (examining effectiveness of many options)?
message. • What communications budget shall we set?
• Distortion — the communication process distorts • When is the right time to communicate
the sent message. (considering seasonality/other factors)?
• Decoding — the receiver misperceives/
The firm’s core challenge is to integrate various
misunderstands the received message.
elements of the communications strategy to form a
The firm has four categories of communications coherent whole. Four types of integration:
options: • Communications tools for all targets in a single
• Personal — mainly salespeople, telemarketing/tele- market segment.
sales, service personnel
• Communications with other marketing
• Traditional mass — advertising, direct marketing, implementation variables — product/service, dis-
packaging, publicity & public relations, sales pro- tribution, price.
motion
• Communications for all targets in several market
• Word of mouth — among customers/potential
segments.
customers, traditional/digital social media
• Communication tools for all targets — market
• Digital — e-mail; search, blogs, social media;
segments, markets, businesses, corporate.
advertising — display, classifieds, video; websites;
mobile marketing

To develop a communications strategy, the firm must

answer six critical questions:
• Who are our communications targets (directly
related to firm offers; not directly related)?
• What are our communications objectives (varying
by communications target, market strategy)?
 161

Chapter 15
• Advertising works via hierarchy-of-effects models • Digital marketing is the fastest-growing
incorporating awareness, knowledge, liking/ communications medium.
preference, trial, purchase, repeat purchase. • E-mail advertising is a close cousin of direct mar-
• High-involvement, low-involvement products have keting.
different hierarchies. • Mass communication comprises mainly firm-to-
• A well-developed advertising strategy requires customer communications. Digital communication
answers to seven critical questions: also embraces customer-to-firm, customer-to-
• Communications target. Who are we trying to customer communications.
influence? • Search, blogs, social media offer opportunities for
• Advertising objectives. What are we trying to current, potential customers to find the firm, its
achieve? products/services.
• Messaging. What message(s) should the • In addition to search, the major forms of Internet
communications target receive? advertising are display, classifieds, video.
• Execution. How shall we communicate the • The firm should design its website for findability
message? and the customer experience.
• Media selection, timing. Where, when shall we • Mobile marketing allows people to be online
place our advertising? without geographic constraints.
• Advertising budget. How much shall we spend on
• Mobile devices allow consumers to receive messages
advertising?
based on geographic location — outside the store,
• Evaluation. How shall we test our advertising, within the store.
measure its effectiveness?
• The core of the advertising message should reflect Videos related to Chapter 15
the positioning statement in the market-segment • Advertising [546v]
strategy. (Joseph T. Plummer — Columbia Business School)
• Advertising messages embrace many rational/ • Buzz Marketing [393v]
emotional approaches. (Mark Hughes — Buzz Marketing)
• Key issues for media selection are reach, frequency, • Internet Marketing [472v]
impact. (Jeremy H. Kagan — Columbia Business School)
• The firm should approach the marketing budget • Social Media [677v]
from a marginal analysis perspective; it should limit (Peter Propp, consultant)
rule-of-thumb approaches.
• Securing Social Media Followers [321v]
• The creative brief is the critical interface between (BritMums)
the firm and the advertising agency.
• Digital Marketing [227v]
• Direct marketing (DM), publicity & public (David Bain, digital marketing expert)
relations (P&PR), sales promotion (SP) are mass
communications approaches that supplement/
replace advertising.
162

Chapter 16
• The marketing/sales interface should be seamless. Videos related to Chapter 16
• Successful sales managers are true leaders. • Consultative Selling [863v]
• Effective sales managers must successfully complete (Eric Baron — The Baron Group)
six tasks. • Sales Force Compensation [183v]
• Developing sales strategy: (Dave Cichelli — The Alexander Group)
• Task 1. Set and achieve sales objectives. • Managing Strategic (Key) Accounts [268v]
• Task 2. Determine and allocate selling effort. (Hajo Rapp — Siemens AG)
• Task 3. Develop sales approaches. • Becoming a Strategic Partner [175v]
(Gus Maikish — IBM)
• Implementing sales strategy:
• Task 4. Design the sales organization.
• Task 5. Create critical organizational processes.
• Task 6. Staff the sales organization.
• Many firms are developing strategic/key/global
account programs for their most valuable
customers.
 SECTION 4

Implementing the Market Strategy

IMPERATIVE 4
Design the Market Offer

PART C: DELIVERING CUSTOMER VALUE

CHAPTER 17

Distribution, Retailing, Wholesaling

PART D: GETTING PAID FOR CUSTOMER VALUE

CHAPTER 18

Critical Underpinnings of Pricing Decisions

For key messages from Section 4, Imperative 4 – Parts C and D, see page 186.
Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 17

Distribution, Retailing,
Wholesaling
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 17 is the single chapter in Part C of Within a direct channel, the supplier is solely respon-
Imperative 4 — Design the Market Offer. Part C/ sible for all channel operations, especially inter-
Chapter 17 addresses delivering customer value by facing with consumers/end users. In indirect channel
focusing on distribution, retailing, wholesaling. systems, supplier performance depends on channel
intermediaries.
Firm products reach customers through direct and
indirect distribution channels. This chapter proceeds by first examining distribution
• Direct — supplier to consumers/end users. systems dynamics, then fundamentals for retailing,
wholesaling.
• Indirect — can be highly complex, involving many
intermediaries.1

Retailing is sale of products/services from DISTRIBUTION SYSTEMS AND

individuals/organizations to consumers/end users. THEIR EVOLUTION
Wholesalers and other distribution entities are
important intermediaries, sitting between suppliers Table 17.1 identifies intermediaries that facilitate
and retailers/end users. supplier products/services reaching consumers/end
users. A distribution channel comprises a subset
Distribution intermediaries fulfill many different of these entities; the functions they perform, their
functions and frequently enjoy mutually benefi- interrelationships are continually in flux. Changes in
cial relationships with suppliers. But supplier and customer needs, competitor actions, environmental
distributor goals rarely overlap completely; hence, forces exert pressure. Leading indicators of
distribution systems are riddled with conflict, power impending change — unhappy consumers/end users,
inequalities. complacent intermediaries, new technologies, poor

Table 17.1 Definitions of Selected Distribution Entities*

Distribution Entity Distribution Entity Description

Agents, brokers, Have similar functions. Generally, these entities sell products; do not take title/physically
manufacturers’ handle goods. They may work for supplier/customer/be impartial between supplier and
representatives customer.
Banks and finance firms Provide financing for customers to aid in purchasing products.
Distributors Provide promotional support for suppliers, especially for selective/exclusive distribution.
Often a synonym for wholesaler, conduct similar functions.
Retailers Display, sell products to consumers. May operate at fixed location — bricks & mortar stores
— as traditional direct marketer/on the Internet.
Shipping companies Transport products.
Warehouse operators Receive/inventory products, arrange product pickup, often break bulk — resell to retailers/
industrial businesses.
Wholesalers Primarily buy, take title, store, physically handle goods in large quantities. Usually break bulk.
* Developed in part from American Marketing Glossary of Terms

163
164 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

logistics, unexplored channels. Power inequalities functions — physical movement — occur several
may prevent firms from implementing distribution times. Regardless, the firm should align incentives
innovations. Yet no distribution system lasts forever; to motivate distribution channel entities to perform
new approaches/technologies that add value/reduce required functions.
costs can unseat market leaders.

Ultimately, customer needs drive distribution

arrangements. Early in the life cycle, products are Distribution Channels: Direct, Indirect
often unreliable; service needs are high; customers The firm may select from several alternative channel
need help to choose and use the product. Later, designs — Figure 17.1:
requirements diminish as customers become more
• Direct channels. Suppliers manage most contact
self-sufficient.
with consumers/end users.
The effectiveness of any distribution system changes • Indirect channels. Intermediaries — distributors,
over time as customer tastes, technology evolve, but wholesalers, retailers — play important roles in
suppliers often have difficulty making adjustments. transferring products to consumers/end users.
Hence, firm distribution arrangements often remain Some indirect channels have a single intermediary;
unchanged for many years. others have multiple intermediaries.

Reaching Consumers through

DEVELOPING DISTRIBUTION Direct Channels
STRATEGY Direct distribution methods, combined with CRM
systems/data analytics, are powerful alternatives to
To develop distribution strategy, the firm must make indirect distribution, particularly in B2C.
several critical decisions regarding distribution
functions, channels, intermediaries. Face-to-Face. Direct customer contact can provide
suppliers insight into customer needs. In advanced
Distribution Functions economies, direct selling/distribution costs are often
too high for consumer goods. Mary Kay, Tupperware
Distribution closes gaps in physical location and time successfully sell/deliver products direct to consumers.
between factory-finished products and consumers/
Direct Marketing, Mass Media, Telemarketing/
end users. Sometimes the supplier undertakes a
Telesales. The firm makes contact with individual
particular function; other times intermediaries/end
users do so. In complex distribution channels, some consumers; they receive products directly by package

Figure 17.1 Reaching Consumers: Direct, Indirect Channels

Supplier

Direct Indirect

Direct Sales Specialized

Internet Distributor
retail store

Face-to-face Direct Wholesaler Wholesaler

marketing
Telemarketing
Mass media Wholly owned Franchise Retailer Retailer Retailer

Consumers
 CHAPTER 17 DISTRIBUTION, RETAILING, WHOLESALING 165

delivery from remote locations. Whether outbound sufficient inventory to satisfy both predictable and
communications — firm→customer — or inbound unpredictable demand can be expensive; hence,
— customer→firm, message centralization gives the firms use innovative approaches to meet demand at
firm greater control, cost efficiency. acceptable costs.

Digital Distribution. The Internet is the fastest-

growing inbound communications method for many
product forms/classes. Digital search, distribution Distribution Channel Breadth
often offer lower prices for many products, reduced Distribution channel breadth refers to the number of
costs; they disintermediate wholesalers/bricks & channel members the firm uses at a particular dis-
mortar retailers. tribution level — wholesalers, retailers. The firm can
Specialized Retail Distribution. The supplier controls
increase/decrease channel breadth as required. Three
product display, customer experience in wholly broad distribution-channel-breadth options:
owned/franchise retail outlets. The franchisee agrees Intensive Distribution. The firm maximizes number/
to implement the franchisor’s brand strategy, pays type of outlets. Examples: Convenience goods —
fees. snacks, soft drinks.

Exclusive Distribution. When customers are willing

Reaching Consumers through
Indirect Channels to search, travel, the firm should choose a few
Many B2C products reach consumers via distribu- prestigious outlets. These retailers provide brand
tors, wholesalers; retailers provide physical location/ equity, service, attractive shopping experiences.
time value. By constructing product assortments Selective Distribution. This approach is a compro-
from many suppliers, indirect channels reduce mise between intensive and exclusive distribution.
customer search costs; they may also provide Too many outlets can lead to excessive inter-outlet
superior shopping experiences. Indirect channels competition; too few outlets and firm products are
may add brand value, market access that would difficult to find.
otherwise be very expensive (or impossible) to
secure. Efficiencies from using channel partners The firm should also consider different types of
also reduce supplier costs. Domestic partners can be distribution. It should especially seek new distribu-
invaluable for firms venturing abroad. tors when customers have preferred outlets.

Regardless, adding new distributor types can be

Reaching Organizational Customers positive — driving growth/expansion — or neg-
B2B firms also use both direct and indirect ative. When the firm distributes through multiple
distribution to reach organizational customers: channels, channel crossing can be serious. Customers
Direct Distribution. Firms sell directly to end secure product information in channel A, try the
users through proprietary outside sales forces, product in channel B — showrooming ; then purchase
telemarketing/telesales, direct marketing, the in channel C. Channels A, B provide customer service
Internet. Suppliers use various transportation — but only channel C earns revenues.2 This problem
methods to deliver products. is increasing as Internet commerce grows.
Indirect Distribution. Suppliers reach customers,
especially small businesses, through retail operations.
Example: Electrical, home-building, plumbing sup- Criteria for Selecting,
pliers reach customers via Home Depot/Lowe’s. More Evaluating Intermediaries
generally, many firms reach customers via distribu-
The firm should clearly specify the functions, perfor-
tors/wholesalers.
mance standards distributors must meet. Would-be
Distribution speed is increasingly important. Firms distributors can then fairly assess their capabilities
use just-in-time manufacturing/inventory systems, versus supplier requirements. To improve success, the
business process management, lean six sigma, other supplier should set clear criteria for potential distrib-
techniques to increase operating efficiencies. Holding utors3 — market coverage; managerial competence;
166 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

aggressiveness, enthusiasm, initiative; size; credit to all customers, they may encounter compliance
standing, financial condition; general reputation problems. The supplier can better direct distributors
among suppliers/customers; selling capability; agree- by varying commissions by product/customer type.
ment to forgo competitive products; enthusiasm for The supplier can also tie evaluation/compensation
firm products. directly to contract requirements — maintain inven-
tory levels, achieve sales levels, provide customer
service, secure customer satisfaction.
Putting It All Together:
The Distribution Strategy
Power in Distribution Systems4
As the firm makes decisions regarding distribution Power, conflict are endemic in distribution systems.
functions, channels, intermediaries, it develops its Power — one channel member’s ability to get another
distribution strategy. Figure 17.2 shows an eight-step member to act as it wants. Typically, some channel
method. members have more power than others; they also
have different objectives. When a supplier is more
powerful, it can impose demands. Example: Micro-
MANAGING DISTRIBUTION soft sets many conditions for PC manufacturers.
CHANNELS Similarly, powerful intermediaries may exert power
when they enjoy strong market positions. Figure 17.3
Ensuring top performance from distributors day by
shows several entities in a distribution system. Each
day can be a significant challenge. Issues:
may possess more power than the others.

Intermediary Compliance
Conflict in Distribution Systems
The firm must ensure channel intermediaries
Distribution channel members often have multiple
stick to their agreements, implement its market
organizational relationships; hence, the potential
strategies. When suppliers compensate intermedi-
for conflict is high. Operational conflict occurs daily
aries with standard commissions for all products

Figure 17.2 Step-by-Step Approach to Developing, Implementing Distribution Strategy

1. Identify consumer/
end-user segments
2. Identify, prioritize
8. Clearly assign segment requirements
distributor territories regarding channel
functions

7. Appoint distributors — 3. Benchmark supplier,

trade off securing competitor channel
market coverage, avoiding capabilities; compare with
channel conflicts customer requirements

6. Elaborate 4. Creatively identify channel

channel overlaps– options for each target
make serious segment — consider switching
choices costs, potential conflicts
5. Evaluate benefits,
costs of various
channel options
 CHAPTER 17 DISTRIBUTION, RETAILING, WHOLESALING 167

Figure 17.3 Channel Member Power Relationships across the Supply Chain

Raw Material Manufacturers/ Distributors/ Consumers/

Providers Brand Owners Wholesalers Retailers
End Users

— shipments, invoice errors, unfulfilled promises, The Partnership Model

unacceptable product quality. Operational conflicts
are annoying, frustrating, channel disrupting, so When firms exercise power, generate strategic
most members try to minimize them. Real-time conflict, the underlying assumption is a zero-sum
systems for tracking/viewing distribution data can game. If the firm wins, another channel member
alleviate some conflicts. loses, and vice versa. The partnership model assumes
the possibility of a positive-sum game. By developing
Sometimes firms take actions to generate strategic trust, working together, several channel members
conflict, gain advantage — upstream with suppliers, win; there are no losers.
downstream with customers. Strategic con-
flict changes the dynamics between suppliers, By developing partnerships, channel members
distributors/wholesalers, retailers. can establish joint strategic goals — cutting costs,
reducing supply-chain inventory, while limiting
Downstream Conflict stockouts. Better forecasting allows retailers to offer
• End users/retailers go direct to suppliers — seek better more efficient product sets, conduct more effective
prices, eliminate distributors. promotions, eliminate heavy discounts on unsold
• New megadealers/high-revenue retailers shift power merchandise. By working with retailers, suppliers can
from distributors/manufacturers. achieve lower production/distribution costs, better
• Distributors/buying groups disrupt channel use promotional funds.
relationships by offering private-label products.
• Independent buying groups increase buying power for
member retailers.
RETAILING
Upstream Conflict
• Suppliers go direct to end users, eliminate distributor.
• Internet circumvents need for distributors; but may Value Retailers Offer
cause conflict/confusion for end users.
Although all channel entities are important for
• Supplier adds new distributors to achieve better market
penetration.
success, retailers hold pride of place. Retailers have
direct day-by-day interaction with consumers; they
are not only important for making sales, they may
also be valuable information sources — consumers,
Planning for Power Changes competitors, complementers, distributors.
All things equal, the firm is better off having a Retailers offer consumers several types of value:
stronger (versus weaker) power position relative to
• Product assortment. Retailers choose the set
channel intermediaries. If the firm initiates strategic
of products/services to offer consumers, hence
conflict, it must assess the likely impact on other
providing choice value. Retailer assortments
channel members, anticipate potential responses. A
may be broad — spanning many product forms/
strong negative response may hurt the supplier.
168 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

classes — or narrow — a single/few product forms Direct Marketing

— specialty stores. A retailer may feature many Similar to the traveling store, the store comes to the
products of a certain type — deep — or just a consumer, with a twist. Differences:
few — shallow — Figure 17.4. Products offered by • Product examination. Generally, consumers
retailers may derive from a range of suppliers, or as cannot physically examine products before
few as one — direct distribution. purchase; some direct marketers build free returns
• Customer experience. Retailing is a service, into their value propositions.
conforming to various service characteristics — • Time delay. Typically, several days elapse between
Chapter 12. Retail service elements vary widely. purchase and receipt of products.
Physical stores differ on multiple dimensions —
Consumers/end users learn about product offerings
external/internal appearance, personal service,
in several ways — Chapter 15.
product display, product selection, payment
systems. The consumer experience may include • Mass media. Direct marketers advertise in various
extras — playgrounds (McDonald’s); the ability to media — magazines, newspapers, radio, television
try products before purchase — in-store driving (QVC). Common feature: The advertisement/
ranges for golf equipment, wine tasting. infomercial asks consumers to buy directly from the
vendor.
• Accessibility. Time, place convenience are watch-
words for accessibility. Time convenience — hours • Direct mail. The firm reaches consumers through
of operation. Physical distance, travel routes are key mail/e-mail. Direct-mail marketers develop
elements for location, but superior transportation/ potential customer lists/buy targeted lists. Direct-
upscale parking alternatives may make more distant mail marketing is relatively inexpensive, but
retailers quite convenient. An important con- response rates are very low.
venience element may also be the presence of other • Telemarketing/telesales is a form of direct
stores — complementary/competitive. marketing communication — by telephone.
Some firms are transforming outbound telesales-
people into inbound salespeople — text, audio,
Alternative Retail Forms video — through their websites.

Retailers interface with consumers in many ways: Internet Retailing

Similar to direct marketing, consumers make pur-
Traveling Retail Stores chase decisions virtually, then wait for delivery. The
The store comes to consumers — Avon ladies, pet firm has two core challenges:
grooming, food trucks.
• Persuade consumers to visit its website.
• Provide a compelling website experience that
encourages purchase.

Figure 17.4 Product Assortment Types — Exemplars

Assortment Breadth
Narrow Broad

Traditional Department
Shallow Many Local Stores
Store — Macy’s

Assortment
Depth

Specialty Store — Major Internet

Deep
Foot Locker Retailer — Amazon
 CHAPTER 17 DISTRIBUTION, RETAILING, WHOLESALING 169

Major differences from conventional direct • Ownership, number of stores. When individuals,
marketing: families, small groups own retail operations, they
• Assortment. Product assortments can be very large. frequently focus on a single store. Multiple estab-
Low-cost storage, direct delivery allows Internet lishments — chains — generally require corporate
retailers to profit from the long-tail effect.5 ownership/franchising. A critical decision for
chains is degree of local autonomy for individual
• Product display. The Internet offers many oppor-
stores/store groupings to adapt to local conditions,
tunities for virtual product display — replicas of
versus greater efficiency from centralized decision-
physical displays, videos of products in use — the
making.
firm may easily customize, update. Some Internet
retailers encourage consumers to design products
directly online, try different clothing styles/colors
virtually. Retail Store Location
• Comparison shopping. The easy ability to switch Location, location, location is the mantra for
among websites enables comparison shopping. many fixed-location retailers. Fast-food chains —
McDonald’s, Starbucks — invest heavily in location
Internet shopping options range from large multi-
research.
product global chains — Amazon, Alibaba — to
small specialist retailers. Consumers must wait for The combination of ease of access, retail concentra-
purchased goods, but same-day delivery is increasing. tion has driven modern forms of retail infrastructure:
• Main Street. This retail infrastructure (including
Fixed-Location Retail Stores central business districts, strip malls) combines ease
Physical (bricks & mortar) stores are by far the most of access, retail concentration. Many stores are non-
widespread retailing form, the largest source of retail competitive; they may even be complementary. The
activity. Retail stores are responsible for a high per- presence of several complementary stores, offering
centage of GDP in most countries; they employ vast a wide variety of products/services, is attractive for
numbers of personnel. All physical retail stores have consumers with shopping lists. In many cities, local
one element in common: Product displays are real, merchants form trade associations to collabora-
not virtual. [106v] tively encourage shoppers to visit their stores.
Variations across fixed-location retail stores: • Outdoor malls. Frequently, these derive from
• Physical product/service. Retail establishments Main Street infrastructures. Many cities improve
offer a bewildering variety of physical goods, but shopping experiences by closing streets to traffic,
many physically large retail operations provide creating town/lifestyle centers. Examples: Clis Road
services — hairdressers, nail salons, restaurants, — Sendai, Japan; Ala Moana Center — Hawaii;
theaters, sport stadiums. Sawgrass Mills — Florida; Nanjing Road —
Shanghai. Some malls — Woodbury Commons,
• Establishment size. Range from very small stores —
New York (tourist favorite) — were constructed
convenience outlets, specialty stores — to massive
specifically to ban automobiles.
hypermarkets, superstores.
• Indoor malls — extend the purpose of outdoor
• Assortment. Product assortments vary by depth,
malls by protecting shoppers from the physical
breadth — Figure 17.4.
environment — winter cold/storms, heat/humidity.
• Product display. Some warehouse outlets provide
only open shipping boxes; other stores spend
extensively on display design. Many stores attempt Contemporary Retailing Trends
to guide consumers so they come in contact with as
much merchandise as possible. The retail industry is changing. Modern trends:
• Service type, level. Service levels vary — simply
Growth of Internet Shopping
receiving payment to offering a high degree of
Increasingly, people around the world secure prod-
attention. Self-service is generally more cost-
ucts/services via the Internet (globally). Increases
effective, but can add value — airport check-in.
170 SECTION 4 IMPLEMENTING THE MARKET STRATEGY
[###t]

Nicaragua Flor de Caña

Flor de Caña (sugarcane flower) is a premium rum brand CLN has developed several services around the Flor
manufactured and distributed by Compañía Licorera de de Caña brand — Flor de Caña Tour and Route, The
Nicaragua (CLN) (founded 1937). Originally a sugarcane Museum of Rum, luxurious golf-and-spa resorts, airport,
estate, Flor de Caña has received numerous awards, banks, insurance. CLN also launched an innovation
and is well known globally. CLN is a member of the challenge for new product development in three
25-company Pellas Group — operations in 10 countries, categories — product design and souvenirs, clothing
sales in 40 countries — competing in agribusiness, fashion, food and cocktails. Successful ideas earn
communications, finance, healthcare, real estate, US$4,000.
shopping malls, technology, trade.

ULTRA PREMIUM COLLECTION SUPER PREMIUM COLLECTION PREMIUM COLLECTION

in convenience, ability to visualize options are key Integrated Physical/Digital Operations

drivers. Mobile devices, social media are supportive; Retailers are combining positive features of Internet
they enhance communications/consumer ability to shopping, bricks & mortar stores to enhance
act on recommendations quickly. Low prices; broader customer value. [371v] Recognizing inventory
product assortments — supermarket products; limitations, physical stores are installing Internet
improved logistic systems, including home-delivery terminals so consumers may search more broadly.
alternatives — neighborhood retailers as distribution Retailers with both physical and Internet locations
points, locker systems — are all positive factors. [663v] increasingly allow local pickup/same-day delivery of
Internet orders. Other evolutions:
Tracking Shopping Behavior • Enhanced self-managed Internet shopping
Technology is driving firm understanding of experience via real-time personal interaction.
customer behavior at retail. [994v] Most consumers Many Internet stores now offer instant chat with
accept cookies — allow Internet behavior tracking; a representative; sometimes live conversation —
Internet retailers profile shoppers, then make audio, video. As GPS-enhanced smartphones pro-
personalized offers. Physical stores — especially liferate, retailers can send offers based on proximity
supermarkets — make similar offers; they use store to buying location. Such targeted communications
cards to profile customers via shopping basket promise to enhance store traffic by personalizing
analysis. Tracking ability will improve as securi- the shopping experience.
ty-camera feeds evolve into marketing research
• Many physical-store retailers transact Internet sales
devices. Tracking store/aisle entry/departure can aid
— proprietary websites, store fronts on Amazon,
staff scheduling/shelf display. Cameras assessing age,
eBay. A few Internet retailers use brand strength to
gender, ethnicity offer greater possibilities, though
open physical stores — Amazon, eyeglass specialist
such devices raise serious privacy issues.
 CHAPTER 17 DISTRIBUTION, RETAILING, WHOLESALING 171

Warby Parker. Such firms offer shoppers real-time, increased P2P transactions. Examples: Alibaba,
personalized offers, promotions digitally while in eBay, Angie’s List, Craigslist connect people with
the store! products/services to sell with people wanting to
buy. EHarmony, Match.com, OkCupid, Tinder help
Globalization of Retailing people find each other. New business models —
Compared to other industries, retailing has been Airbnb, Uber — have seen enormous success in the
slow to globalize, but is now globalizing rapidly. sharing economy.
Major chains — Carrefour, Tesco, Walmart —
now operate in many countries around the world. Evolution in Purchasing, Payment Systems
German grocery discounters Aldi, Metro each have Technology is driving significant changes that
a significant global presence. Many fast-food, snack improve the customer experience. Simply swiping
brands have become ubiquitous via franchising. Of a card is giving way to optical scanning; small tran-
course, some local retailers are well entrenched and sponders (perhaps attached to a key chain) take the
outperform foreign entrants; Walmart ultimately place of physical cards; payments by smartphone,
withdrew from Germany, South Korea. various Apple devices (Apple Pay) are growing
quickly. In online shopping, services like PayPal,
Peer-to-Peer Transactions (P2P) one-click purchasing at sites like Amazon, Groupon
Retailers sell products/services to consumers, but simplify, safeguard the buying process even more.
many retail transactions involve just individuals. In Relatedly, for frequently purchased products —
many cases, buyers/sellers find each other; in other groceries — websites retain purchase histories to
cases, agents/brokers fulfill the matching function. simplify consumer selection.
Today, the Internet provides the infrastructure for

[###t]

Mexico Modular City Home & Deco

Modular City Home & Deco (MCHD) (founded 2017) Three out of four Mexican millennials follow a brand
is a retail store located on a busy avenue connecting in social media. Hence MCHD opened an online store
new residential and commercial areas in Monterrey. right away, and soon found that many customers bought
Constructed from railway containers, MCHD offers a furniture online. MCHD discovered that many customers
fresh, colorful look, and even includes a food truck. engaged in significant channel switching: Compare
Owned by a millennial couple, MCHD targets millennials products/prices online, then purchase in the store — 76
— couples, professionals, college students — living percent; shop in the store, compare products/prices
alone or with roommates. online, then buy at the online store — 61 percent;
compare products/prices using mobile devices when in
the store — 50 percent. By understanding its customer
targets, MCHD has been able to evolve channel options
so it reaches them effectively.
172 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Retail Profitability Illustration: Suppose product cost, C = $50; required

retail margin, M = 40 percent — 0.4.
Retailers use many different measures to assess per-
P = $50/(1 – 0.4) = $50/0.6 = $83.33
formance. Some are intermediate measures; others
are output measures — Chapter 20; Table 17.2 shows Retailer typically selects a more conventional price,
a selection. Perhaps the most significant measure is perhaps $79.50 or $84.95, rather than the price
retail profitability. Many people are confused about suggested by mechanically applying the formula.
profit margin definitions, the right performance met-
rics. Let us try to clear up misunderstandings. Profitability
The retailer must be sure to choose the correct
Table 17.2 Alternative Retail Metrics metric for measuring retail profit performance. Many
Intermediate Measures
retailers state percent retail margin as return on
sales — profit/sales. In many firms, the fundamental
Number of shoppers
profitability metric is return on investment (ROI) —
Length of visit
profit/investment.
Average purchases per customer visit
Return on Investment
Number of customers per day
Output Measures ROI = Profit/Investment
Sales per square foot We can modify this equation by inserting sales on
Sales per linear foot (supermarkets) both the top and bottom lines:
Same-store sales growth ROI = Profit/Sales × Sales/Investment.
Sales per average inventory (inventory turns)
For simplification, we assume the retailer’s major
investment is in inventory. Then,
Margins
Profit/Sales = Retail Margin — M
Retailers make profit margins on the goods they sell.
Sales/Investment = Inventory Turns — IT
Typically we express retail margins as a percentage, in
one of two ways — both correct, but we must know ROI = M × IT
which we are talking about. Simple illustration: Retailers have two basic ways to improve ROI —
Retail Price = $100 increase retail margin, improve inventory turns.
Retailer’s Cost = $ 80 Supermarkets often complain about poor margins —
Unit Margin = $ 20 suppose, on average, M = 2 percent. But suppose also
that inventory turns over every 2 weeks = 26 times
What is the retailer’s percentage margin? per year. ROI = 2% × 26 = a healthy 52 percent!
• Percent markup on cost = 20/80 × 100 = 25 percent
• Percent margin on retail price = 20/100 × 100 =
20 percent WHOLESALING
Although percent markup on cost seems more
Wholesalers sit between suppliers — producers,
intuitive, retailers typically express margins as
other intermediaries — and customers — retailers/
percentage of retail selling price — in this example,
industrial end users. Retailers, industrial end users
20 percent. Of course, margin percentages expressed
secure products from wholesalers. To be effective,
in this manner are always lower (20% < 25%)!
wholesalers, other distribution intermediaries
(agents/brokers, distributors, warehouse operators)
Setting Retail Price
conduct many activities — Table 17.1, p. 163.
The retailer sets the retail price. Key inputs: retailer’s
product cost, required percent retail margin. The wholesaler must provide value to both suppliers
and customers. Figure 17.5 shows that, in the absence
Let: C = retailer’s product cost ($); P = Retail Selling
of a wholesaler, each supplier must develop a rela-
Price ($); M = Retail Margin (stated as a decimal)
tionship with each retailer/end user, and vice versa.
Then: P = C + (P × M) P (1 – M) = C
P – (P × M) = C P = C/(1 – M)
 CHAPTER 17 DISTRIBUTION, RETAILING, WHOLESALING 173

Figure 17.5 The Value of Wholesalers

Retailers/ Retailers/
Suppliers End Users Suppliers Wholesaler End Users

Value to Suppliers • Insight into customer requirements. By virtue of

direct retailer/end-user relationships, wholesalers
Wholesalers offer two main values: learn what products are selling, what consumers/
• Market access. Reaching retailers/end users is end users require. Wholesalers may feed these data
difficult if not impossible for many small suppliers/ to suppliers for product modification/new product
distributors. Wholesalers know which retailers are development.
appropriate for supplier products; they maintain
necessary relationships.

[###t]

The Caribbean, Central America,

Colombia PriceSmart
PriceSmart (PS) is a U.S.-based warehouse-price-club Colombia (7), Costa Rica (6), El Salvador (2), Guatemala (3)
chain operating in Colombia, several Central American and Honduras (3), Nicaragua (2), Panama (5), Aruba (1), Barbados
Caribbean countries, and U.S. territories. PS is a regional (1), Dominican Republic (3), Jamaica (1), Trinidad and Tobago
leader; its purpose is to offer a U.S.-style membership (4), U.S. Virgin Islands (1).
shopping experience for members providing U.S., international, PS’s five distribution centers (DCs), strategically located —
regional, and locally sourced merchandise. PS bases its Colombia, Costa Rica, Panama, Trinidad, U.S. — are critical
success on two premises: Customers will pay a membership to PS’s success. DCs act as regional hubs, concentrating and
fee; customers will buy products in bulk. dispersing merchandise: Total warehouse space — 450,000
The PriceSmart Experience comprises four fundamental square feet; annual traffic — 20,000 ocean containers. PS
principles: The Smart Choice — store atmosphere/product uses its warehouse store and DCs to operate a successful
selection create a different and unique experience; High online operation.
Quality, Low Prices — an everyday-low price philosophy;
Keep It Simple — display merchandise in original packaging; QUESTIONS
All Under One Roof — groceries, produce, food court, 1. What main factors explain PS’s success in Central America?
appliances, sporting goods, automotive products. 2. What role do DCs play in PS’s success?
PS’s regional focus, continuous expansion, and lack 3. What are PS’s key challenges?
of direct competition has allowed it to develop competitive 4. Could a viable challenger to PS emerge? What entry strategy
advantage. By 2017, PS operated 39 warehouse clubs: could be successful?
174 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Value to Retailers/End Users Example: Etsy Wholesale is an Internet site for hand-
made, vintage, artisan items. Small-scale producers
Wholesalers offer several values to retailers/end users: secure access to thousands of retailers; retailers
• One-stop shopping. Rather than maintain rela- secure access to thousands of suppliers. Etsy’s low
tionships with multiple suppliers, retailers/end 3.5 percent markup, customer service helps retain
users focus on one — the wholesaler. Reducing suppliers, keeps prices low for retailers. [780v]
the number of connections offers numerous
advantages — fewer salespeople calling, consoli-
dated deliveries, lower transportation costs, fewer Endnotes
invoices. 1 From interviews with Cisco executives and data from V.K.
Rangan, Transforming Your Go-to-Market Strategy, Boston, MA:
• More effective procurement. The more cutting- Harvard Business School, 2006. [193e]
edge wholesalers continually reduce lead times; 2 P.F. Nunes, F.V. Cespedes, “The Customer Has Escaped,” Harvard
they drive down procurement costs for customers. Business Review, 81 (November 2003), pp. 96–105. In response
These wholesalers offer sophisticated online to showrooming, in 2012 Target stopped distributing Amazon’s
Kindle. [215e]
ordering systems, including automatic reordering
3 From R.M. Pegram, Selecting and Evaluating Distributors,
processes for frequently purchased items. reproduced in B. Rosenbloom, Marketing Channels: A
• Enhanced assortments. In addition to offering Management View (8th ed.), Stamford, CT: Cengage Learning,
2013. [385e]
individual products, wholesalers provide value in
4 This section benefited from D. Ford, L.E. Gadde, H. Hakansson,
the entire product assortment. Some wholesalers A. Lundgren, I. Snehota, P. Turnbull, D. Wilson, Managing
offer specialized assortments for key customers. Business Relationships, Chichester, UK: Wiley, 1988. The seminal
work on power identified five bases — coercive, reward,
• Consulting. Some wholesalers provide busi- legitimate, referent, and expert; J.R.P. French, B. Raven, “The
ness advice to retail customers — location, store Bases of Social Power,” in D. Cartwright, A. Zander, Group
design, product assortment, pricing, best-practice Dynamics. New York: Harper & Row, 1959.

inventory/financial management. 5 C. Anderson, The Long Tail, New York: Random House, 2010*.
[738e]
 CHAPTER 17 DISTRIBUTION, RETAILING, WHOLESALING 175

[###t]

Mexico Etisign
Etisign (Etimex Group, founded 1985) serves Mexico’s C-stores). Potential opportunities for Etisign comprise
retail sector with a broad product line — storefront traditional and specialty retail stores, and wholesalers.
signage, labels, price tags, fixtures, gondolas, store In recent years, Etisign has faced increased
furnishing, equipment, store design services. Etisign competition, by sector. Furniture: JM Romo, JM Villegas,
helps major Mexican retail chains (modern channels) with Ovelar, Racavi, Madix, Checkpoint, Creavisa Metálicos
in-store design and product merchandising to increase Dávila; Accessories: JM Romo, JM Villegas, Ovelar,
productivity (sales per square foot). An especial Etisign Racavi, Holders, Checkpoint. Point-of-sale: Creavisa,
focus is point-of-sale and related solutions. and Moldex, among others. Mostly, competitors target
Contemplating growth options, Etisign’s CEO large retail chains. Etisign has not targeted traditional
assessed the Mexican economy as expecting sustained mom-and-pop retail stores. Indeed, no major competitor
moderate growth for the next few years. Positive provides equipment and merchandising services to this
indicators include stable interest rates and inflation, segment, nor comprehensive point-of-sale solutions.
young population, good education system, low costs. Etisign is considering making a strategic investment
Other positive features were denationalization of the in this market segment — with appropriate product
energy sector, notably new C-stores with gas stations. development. Etisign has identified two targets: primary
Conversely, the future of NAFTA could be a negative, — stand-alone (independently owned) retail stores;
along with increased competition leading to margin secondary — hotel stores and restaurants/coffee shops
reductions. with retail areas.
Mexico’s retail industry contributes 17 percent of Etisign’s CEO wonders if the firm should address
national GDP. The largest retail format (47 percent) is these markets and, if so, what approach it should take.
traditional mom-and-pops — 1,035,000 abarrotes,
tienditas, changarros. Modern channels comprise major QUESTIONS
retail chains: specialty stores — 16 percent (56 national 1. What type of channel could Etisign develop?
chains); department stores — 10 percent (16 national 2. What strategy could Etisign follow regarding distribution
chains); self-service supermarkets — 29 percent (22,000 channel breadth?
 CHAPTER 18

Critical Underpinnings
of Pricing Decisions
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 18 is the sole chapter in Part D of Imperative Perceived Customer Value

4 — Design the Market Offer. Part D/Chapter 18
addresses getting paid for customer value by focusing When increased competition brings more options,
on critical underpinnings of pricing decisions. customers invariably seek lower prices. As customers
turn elsewhere, the firm may believe it has a pricing
Pricing is critical for earning profits, creating problem. More likely, it has a perceived value problem
shareholder value.1 Pricing is pivotal for entering — the firm delivers insufficient value or has not
new markets, introducing new products, changing established a good price/value relationship. To
firm objectives/strategy. Indeed, price decisions have determine possible actions, we focus on creating,
greater profit impact than any other marketing-mix measuring, capturing value, then turn to a closely
lever — Figure 18.1. Price affects: associated issue — price sensitivity.
• Profit margin = price less cost.
• Unit sales — via the demand curve. Creating Value
Chapter 8 shows the value proposition is central to
• Unit costs via unit volume changes, scale
market strategy. The firm creates value in its offer
economies.
primarily in the marketing mix — Chapters 11–17
• Customer quality/value perceptions. — product, promotion, distribution.
Pricing strategy is the overall approach to setting Price may also create value by contributing to brand
prices. Four critical underpinnings: Perceived image. Products like Apple’s iPod, Rolex, Rolls-Royce
customer value, costs, competition, strategic objectives. are all perceived as desirable brands. On a hot day you
Too much emphasis on a single element leads to may value a cold Coke at $3; but maybe not if other
suboptimal pricing — the destructive, downward soft drinks are available for less.
pricing spiral that can follow from an excessive focus
on competitors. Skilled pricing executives assess all
factors before developing pricing strategy.

Figure 18.1 How Pricing, Other Levers Affect Profits*

Creates operating profit

1% improvement in: improvement of:

Price 11.0%

Variable Cost 7.8%

Unit Sales 3.3%

Fixed Cost 2.3%

*Based on 2,463 companies in the Compustat database.

176
 CHAPTER 18 CRITICAL UNDERPINNINGS OF PRICING DECISIONS 177

Measuring Value Economic Analysis — Economic Value for the

Measuring value customers perceive is critical. If Customer (EVC). Many B2B firms use EVC —
you don’t understand customer value perceptions, maximum price customers will pay — to calculate
you cannot make informed pricing decisions. economic value of new products. EVC analysis
Approaches: depends critically on competitive products in the
customer’s choice set. EVC helps clarify firm options:
Direct Value Assessment. Simply ask customers what
Should the firm add more value for a higher price/
they would pay for various products. Downward
provide less value for a lower price? Chapter 4 shows
response bias is a concern, but carefully phrased
an EVC calculation.
questions can provide helpful data.
Price Experiment. The firm offers the test product
Dollarmetric Method. For each pair of options,
at different prices in different market areas —
customers say which they prefer/how much extra
geographic locations — A/B testing. Sales levels at
they would pay. Summing positive/negative differ-
different prices reflect customer value.
ences reveals relative values. Table 18.1 shows the
responses for products A, B, C, D.
Capturing Value
Table 18.1 Illustrative Data from the Dollarmetric Method The firm incurs many costs to develop an offer; it
creates value if costs are less than customer perceived
Options Preferred Extra Price for
Compared Option Preferred Option value. Figure 18.2 shows how price apportions value.
A, B B $10 High prices: The firm retains most value. Low prices:
A, C C $13 The firm transfers most value to customers.
A, D A $ 5
B, C C $ 3 Figure 18.2 Customer Value Map

B, D B $ 8 Customer
Upper
C, D C $12 perceived
bound
value
We calculate customer relative value for these Customer
surplus value
options:
Price
• Extra price is positive for the preferred option,
Supplier
negative for nonpreferred option.
surplus value
Lower Supplier
• Each option has three comparisons. Sum the extra costs
bound
prices for each option.
• Divide the sums of extra prices by three to
calculate average extra prices. The average extra
Most firms develop new products, then figure out the
prices customers are prepared to pay for the four
price. Some firms use a different approach. Example:
options are:
Avon starts with the value it wants a new product to
A = –10 – 13 + 5 = –18/3 = –6 deliver to customers, then sets a target price. Avon
B = 10 – 3 + 8 = 15/3 = +5 translates this price into cost parameters that enable
C = +13 + 3 + 12 = 28/3 = +9.3 it to meet profit targets.
D = –5 – 8 – 12 = –25/3 = –8.3
• Using the least valued option as the base, find Customer Price Sensitivity
the difference between the base and the average Sometimes, reducing price a little — increasing
extra price for each option. This figure is what the customer value a little — may drive a major sales
customer would pay over the base. increase — price sensitivity. Other times, a price
change does not affect sales — price insensitivity.
D is the least valued option, so the base is –8.3. The
Classical microeconomics focuses on price sensitivity
extra prices for the other options are:
at the market level; we also discuss individual price
A = (–6) – (–8.3) = $2.3 sensitivity.
B = 5 – (–8.3) = $13.3
C = 9.3 – (–8.3) = $17.6
178 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Market-Level Price Sensitivity. Marketers use demand Defensibility. Legally acceptable; often required for
curves to assess elastic/inelastic demand: government/other cost-plus contracts.
• Price elasticity. Price goes down a little, unit sales Disadvantages generally outweigh the advantages:
increase significantly. Price goes up a little, unit
sales decrease significantly. Profit Limitations. Customer value has no role in price
setting. Consider the following illustration:
• Price inelasticity. Unit sales do not change much,
even with significant price changes — critical raw Illustration: Cost-Plus Pricing for
materials, electricity, heart pacemakers. Capital Equipment Item

Variable costs $400,000

Total fixed costs $300,000
$25 $25 Total costs $700,000
Price Price
$20 $20 Standard markup: 15% of costs $105,000
Price $805,000
50 100 75 80
Unit Sales Unit Sales • Price is too low. Customers value the offer at more
Price Elastic Price Inelastic than the cost-plus price — suppose $900,000. The
$805,000 cost-plus price forgoes $95,000 profit on
each sale.
Individual Customer Price Sensitivity. Markets are
rarely homogeneous. Some customers place high • Price is too high. Customers value the offer at less
value on an offer; other customers value it less. Some than the cost-plus price — suppose $750,000. They
consumers are price sensitive — low disposable will not purchase at $805,000. The firm forgoes
income, facing financial demands. Some B2B cus- $50,000 profit on each item it could have sold at
tomers are price sensitive — competitors cut prices, $750,000.
profits under pressure. Customers with full informa- In this illustration, the firm sets prices incorrectly —
tion on alternatives, benefits/values, prices tend to be it has not assessed customer value. Cost-plus pricing
more price sensitive than those with less information. leads to overpricing in price-sensitive markets,
underpricing in price-insensitive markets. Cost-plus
pricing also leaves the firm vulnerable to competitors.
Understanding Costs By estimating firm costs, mark ups, competitors can
predict firm prices, and act accordingly.
Costs are important for setting prices. After all, costs
represent half of the profit equation: Profit = sales Inappropriate Treatment of Fixed Costs. Firms
revenues – costs. In practice, many firms use costs frequently classify costs as fixed, variable:
for setting prices, but do so inappropriately. Because • Variable costs. Vary directly with the quantity of
you must understand these issues, we start with sales/production. Typical costs: Direct labor, raw
them. Then we show how the firm should use costs in materials, sales commissions, utilities to power
pricing decisions. production machines.
• Fixed costs. Do not vary with the quantity of sales/
Using Costs Inappropriately:
production, within a reasonable range. Typical
Cost-Plus Pricing
costs: Overhead, allocated items — depreciation,
Despite its popularity, cost-plus is the wrong way to
rent, salaries, SG&A (selling, general, administrative
set prices.2 Cost-plus pricing proceeds by identifying
expenses).
product costs, then adding a predetermined profit
margin (markup). Advantages: Cost per unit = variable cost per unit plus fixed cost
per unit. Variable cost per unit is relatively straight-
Profitability. All sales seem profitable; price must, by
forward, but calculating fixed cost per unit is illogical.
definition, be greater than costs.
1. Fixed cost per unit = fixed costs/sales units.
Simplicity. If
the firm knows its costs, pricing is
2. Sales units depend on the price.
simple. Anyone can do the math.
3. Hence, setting price requires price as an input.
 CHAPTER 18 CRITICAL UNDERPINNINGS OF PRICING DECISIONS 179

Arbitrary Roles for Costs. Suppose the firm has two Appropriate Roles for Costs
businesses: A is comfortably profitable; B is not. Cost-plus pricing is the lazy way to set prices. But
Corporate may modify overhead allocations: A — costs do play an important role in setting prices —
increase; B — reduce. Corporate reduces B’s fixed three situations:
costs, but increases A’s. Such financial machinations
Birth Control. For new product introductions,
are typical of firms striving to even out profits across
forecast profit margin must meet/exceed a financial
products, but such actions are highly demotivating to
criterion — hurdle rate — typically related to cost of
A’s managers.
capital. The firm bases cash-flow estimates on target
Mismatch with Market Realities. When demand prices, unit sales, costs. The relevant costs are fully
falls, logic suggests the firm should lower prices. loaded costs, embracing all incremental costs related
Pure cost-plus pricing does not agree. As sales fall, to the new product, including incremental overhead
the firm spreads fixed costs over lower quantities; allocations.
fixed costs per unit increase — and so must price!
Death Control. When considering dropping a
When demand surges, logic suggests the firm should
product, the marginal cost — cost to make, sell one
raise prices; fixed costs per unit decrease — and so
additional unit — is critical. Marginal cost includes
must price! Variable markups based on demand can
all variable costs plus some incremental fixed costs;
partially solve this problem.
marginal cost excludes all allocated overhead.
Relatedly, marginal cost is the floor price.

Profit Planning. Birth control, death control are

special cases; the major role for costs is profit
planning. The firm explores various possible prices;
[143t] [436t] it estimates unit sales, unit costs, then forecasts sales
revenues, profits. Generally, the firm selects the
profit-optimizing price.

Competition
Mexico Grupo Modelo The firm should always consider competitor prices.
Basing price on competitor prices is legal and ensures
Grupo Modelo (GM) (acquired by Anheuser-Busch price parity. But focusing too heavily on competitor
InBev, 2013) owns the most valuable alcoholic pricing strategies has distinct disadvantages:
beverage brand in Latin America — Corona Extra.
• Price parity with competitors devalues attributes/
In Mexico, GM’s major competitor is Cerveceria
features, benefits/values. Such pricing tends to
Cuauhtemoc Moctezuma (CCM) (merged with
commoditize products, leading customers to focus
Heineken, 2012). Prior to these acquisitions/mergers,
buying decisions on price.
both firms spent heavily on brand promotions: GM —
Victoria, Pacifico; CCM — Indio Tecate, Sol. Market • Excessive price focus may lead to losses for both
shares (2016): GM — 56 percent, CCM — 44 percent, firm and competitors.
craft beers — 1 percent. Despite small market share, Generally, the firm should not focus on beating com-
in 2015–6, craft beer growth averaged 50 percent. In petitor prices; it should focus on beating competitor
2016, GM made strategic alliances with craft breweries offers — product, promotion, distribution — as well
— Tijuana, Mexicali, Bocanegra. In 2017, CCM made as price. The firm should attempt to make offers with
a strategic alliance with Primus. Mexican independent greater value per unit price than competitors.
craft beer producers were concerned about these
strategic alliances; they feared GM’s and CCM’s pricing
power. Indeed, in some supermarkets, GM reduced its
craft beer prices significantly.
180 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

How Will Competitors Respond to Strategic Objectives

Firm Price Changes?
Assessing likely competitor price response is always Strategic objectives are a major component of market
important — raise, hold, lower? But in oligopolies strategy. Each major option relates to a particular
with few major competitors, high fixed costs, low pricing strategy:
variable costs — airlines, many highly capital
intensive industries — it is vital. When several Sales/Market-Share Growth
competitors have poor profits, sometimes one firm The firm offers high customer value — value/price
cuts price to increase sales units, better cover fixed ratio superior to competitors — penetration (low)
costs. Competitors follow, prices spiral downward. pricing. Conditions:
Warnings/other signals — Chapter 5 — may preempt • Deep pockets to absorb initially low profit margins.
competitors, but can raise antitrust issues. • Desire to deter competitors.
• Good ability to cut costs in the future.
Responding to Competitor Price Reductions
Firm response depends on market position. Gen- • Price-elastic market.
erally, strong firms should match price cuts only • Sufficient capacity to fulfill increased demand.
after exhausting other options. But weak firms with
minimal sustainable differential advantage may have
to respond right away. Firms with dominant market
shares often face price competition from small com-
petitors/new entrants. These competitors may believe
the leader:
• Has not carefully managed costs; assumes its costs
are lower. [384t] [992t] [642t]

• Does not know individual product costs — is

unable to allocate overhead.
• Will not retaliate directly — it would sacrifice
profits on its much larger unit sales.

Unless demand is price elastic, the firm should

minimize direct price-cutting responses. Options: Peru Bitel
• Price options — price retaliation in a different
Peruvian mobile telephone market shares (2013):
segment; selective price cuts; introduce a lower-
Movistar — 55 percent; Claro — 40 percent; Entel
priced fighter brand. If these options fail, cut prices
— 5 percent. In July 2014, Viettel (Vietnam) entered
across the board.
Peru with its Bitel brand — high-speed, low-price
• Nonprice options — signal to competitors; invest mobile Internet, serving low-income residential users
in fixed-cost expenditures to reinforce market and locations not covered by competitors. January
position; clarify/reinforce price/quality relation- 2014 average per minute prepaid rates — PEN$0.33
ship; change the basis of competition — bundling; (US$0.10); Bitel’s entry price — PEN$0.14 (US$0.04).
reduce customer bargaining power — make pricing End 2014, market shares had not changed significantly;
opaque — price per meter versus price per yard. If Bitel — 1 percent.
these actions fail, the firm may have to withdraw, In 2015, Bitel offered several promotions — free
partially/completely. Facebook access via mobile phones for 60 days; 10
additional free minutes for customers recharging at
least PEN$0.3 (US$0.09). Bitel also offered Bitel-brand
discounted smartphones. In early 2017, Peruvian
market shares: Movistar — 45 percent; Claro — 31
percent; Entel — 13 percent; Bitel — 10 percent.
 CHAPTER 18 CRITICAL UNDERPINNINGS OF PRICING DECISIONS 181

Profits Improper Approaches

The firm provides less value to customers; it retains Cost-Plus. Since the pricing decision concerns a new
more value for itself as profit. Firms use this skim product, Ace must consider the fully loaded cost —
(high)-pricing approach when products have patent $160,000. Commonly used markups in the furnace
protection — pharmaceuticals — or offer high value industry range from 75 percent to 50 percent.
— pioneering high-technology products. Options:
75 percent markup:
Cash Flow Price = $160,000 × 1.75= $280,000 — exceeds Beta
If the firm plans market withdrawal, maximizing
50 percent markup:
cash flow is often a good short-term strategic
Price = $160,000 × 1.5 = $240,000 — less than Beta
objective. Chapter 9 discusses harvesting products for
short-term cash-flow maximization. Competitive Equivalence. Strict competitive
equivalence suggests Ace match Beta’s price, at
$260,000. But Ace offers considerable extra value.
Approaches to Pricing If Ace sets price at $260,000, it should sell lots of
To frame the right approach, we turn to improper furnaces. But does a $260,000 price represent appro-
methods — cost-plus/competitive equivalence. priate value-sharing between Ace and customers?
Then we introduce the correct methodology using a
fictional example — Ace Furnace (Ace). Ace is setting The Right Way to Set Price
price for a new manufacturing furnace. Ace believes Figure 18.3 diagrams the three-step approach:
the furnace offers superior value versus competitor 1. Determine maximum price — EVC from Ace’s
Beta. Table 18.2 shows data Ace collected. Customer furnace — $360,000. A rational customer should
startup costs/postpurchase costs are the same for Ace be indifferent between an Ace furnace at $360,000
and Beta. and a Beta furnace at $260,000.

Table 18.2 Data for Price Setting Collected by Ace Furnace

Beta Furnace price $260,000

Ace Economic value to the customer (EVC) $360,000
Ace Direct out-of-pocket cost: variable, fixed $100,000
Ace Fully loaded cost, including overhead allocations $160,000

Figure 18.3 Ace: Pricing Analysis for New Furnace

$360,000 Economic value to the customer (EVC): Maximum price

Toehold price

Maximum profit price

$260,000
Price

High market-share price

$160,000 Fully loaded manufacturing cost: Minimum price

$100,000 Direct out-of-pocket cost

182 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

2. Determine minimum price — Ace’s fully loaded counts on many factors — firm/customer relation-
cost — $160,000 — the floor price for Ace’s ship, inventory, matching competitors, quantity,
product. selling effort, timing.
3. Set price based on strategic objectives, likely Less visible ways to change price include allowances
competitive response. Possible strategic objectives: — advertising, selling effort, trade-ins/returns. Credit
• Toehold. Ace wants market presence, perhaps in a availability, terms — time to pay, interest rates — can
small high-price segment. Ace sets price around be potent pricing tools, especially during inflation.
$320,000: Sales — low; profit margin — high; The firm should recognize toolkit items are differen-
likely price response from Beta — none. tially important across customers. A cash discount
• Profit. Ace has greater ambition, so price is applied when the firm receives the order may be very
closer to Beta’s $260,000. Because Ace offers attractive!
greater customer value, it may price from
$260,000 to $280,000. Prices significantly above Pocket Prices, Price Waterfalls
$260,000 signal Beta; Ace wishes to avoid price Some firms use toolkit items appropriately, but many
competition. firms have poor control systems for tracking use.
Hence, these firms may not know their pocket prices
• Market share. Ace is ready to fight Beta. At
— the money they actually receive (in their pockets).
$260,000 and below, Ace offers significantly
When B2B firms conduct pocket-price analysis,
greater customer value. Such lower prices
they are often surprised to find a broad price range,
encourage a strong response from Beta. Ace must
but little rationale about who receives lowest prices
plan how to address Beta’s likely actions.
— small customers receive large discounts; large
To approach changing price for an existing product customers receive small discounts. The price waterfall
— Financial Analysis for Marketing Decisions — — Figure 18.4 — illustrates how pricing-toolkit
308p, 325v. elements cumulate to produce the pocket price. [166v]

To optimize pricing, the firm must understand

The Pricing Toolkit the pocket price for each customer, the way these
prices develop, then take appropriate action to bring
Tactical pricing is the ongoing stream of pricing
pricing-toolkit items into line.
decisions the firm makes on a daily basis. Gener-
ally, strategic pricing drives good tactical pricing.
Table 18.3 shows the pricing toolkit — the tools
to make price adjustments, often for individual Alternative Pricing Methodologies
customers. Undisciplined toolkit use can impact firm Price Discrimination – Variable Pricing. The firm
performance. optimizes profits by setting different prices for
different customers/market segments — some pay
Sometimes the firm wants price changes to be
more, others pay less. The firm can amplify this effect
highly visible — to customers, competitors; other
by designing multiple offers with different values.
times, they should be secret. Firms often set highly
Example: AmEx offers various personal credit cards
visible list prices (rate cards, rack rates), then apply
— green, gold, platinum, black — different values
discounts, rebates; actual prices may be 20–40
at successively higher prices. Relatedly, the firm may
percent (or more) off list. The firm can base dis-

Table 18.3 Selected Tools in the Pricing Toolkit

Acceptable currency Company shares Guarantees and warranties Price stability

Allowances Credit Inventory carrying costs Returns
Barter Credit terms Leasing Slotting fees**
Bundling and unbundling Discounts List price
Buy-backs Freight Markdown money*
* Agreements by suppliers to make payments to retail customers if they offer discounts to consumers
** Payments by suppliers to retailers for shelf space in stores
183 SECTION 4 IMPLEMENTING THE
CHAPTER
MARKET18STRATEGY
CRITICAL UNDERPINNINGS OF PRICING DECISIONS 183

Figure 18.4 Hypothetical Price Waterfall for Consumer Durables Manufacturer Averaged over All Accounts
(average discount from standard list price — percent)

100 8.6
5.4
7.4
1 8 9 10 11
6.2 5 6 7
2 72.4 1.5 2.0 2.5
3 1.5 3.5
4 1.5 2.8 57.1

1. Wholesaler discount 5. Cash discount   9. Annual volume

rebate
2. Supply house discount 6. Factor discount
10. Insurance
3. Retailer discount 7. Cooperative advertising
11. Freight
4. Special promotion 8. Spiffs for retail salespeople

Standard Invoice Price Pocket Price

List Price

benefit from an inflexible single price: Salespeople • Dutch auction. Prices start high; the seller reduces
have no price discretion; aggressive customers cannot price until a buyer bids.
negotiate price discounts. • Internet auction. Typically use either English,
Dynamic Pricing — a special case of price discrimi- Vickrey approaches. Internet auctions may take
nation when demand varies over time. Some prices several days, hence significant monitoring costs.
change predictably — cities set road/bridge tolls • Reverse auction. Used for purchasing. The
higher during rush hours. Algorithms adjust others customer states requirements; suppliers bid to
(like fares) based on demand, availability/capacity — provide products. Prices go down; the lowest
airlines, Uber (surge pricing). bidder wins.

Variable-Rate versus Flat-Rate Pricing. Firms selling

services can price by use — variable rate; or by time Setting the Actual Price
period — flat rate. Example: Commuter travel — by
the ride (variable), monthly/seasonal (flat). Variable Setting the actual price raises several important
prices may earn greater revenues, but flat-rate prices issues:
are generally easier (less costly) to administer. Some
Fees, Surcharges
firms — credit cards, smartphone service — com-
Used to increase pocket prices, especially in difficult
bine variable-/flat-rate pricing.
economic times. Revenues/profits increase, but overly
Customer-Driven Pricing. The customer names the aggressive fees may cause customers to go elsewhere.
price; the firm can accept, reject. Customer-driven
pricing has significant potential in service businesses Promotional Pricing versus Steady Pricing
— travel, hotels — where suppliers cannot inventory Sales may be sensitive to short-term price promo-
offers. tions. In loss-leader pricing, retailers deliberately take
losses on some products to build customer traffic.
Auction Pricing. Customers compete with each other
But promotions can have negative effects:
to purchase products.
• Brand image. The promotion negatively affects
• English auction. Prices start low; potential buyers
brand image, especially upscale/luxury brands.
bid up the price. Auctioneers seek the buyer willing
to pay the highest price — secondhand items. • Diversion. Retailers, distributors divert products
to noncompeting outlets, often in different
• Vickrey auction. A sealed-bid English auction —
geographies — impacts firm strategy.
the winning bidder pays the price offered by the
second-highest bid — Google AdWords. • Hidden costs. Frequent price promotions can be
difficult, costly to administer. Relatedly, addressing
184 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

competitor price promotions via price-matching Gray-Market Pricing

guarantees is difficult to implement consistently Gray markets undercut firm strategy. Gray markets
across many outlets. develop when the firm sells similar products in
• Poor forecasting. Demand exceeds forecast; different markets at different prices. Customers buy
customers are upset. in the low-price market, then resell in the high-price
market (diversion) — Chapter 17. [824v]
• Time-shifting. Customers buy for inventory; avoid
paying full price later.
Topsy-Turvy Pricing
Generally, the firm provides product/service value;
Psychological Pricing
the customer pays. This relationship shifts in topsy-
For many customers, the psychological distance
turvy pricing. Example: The orthopedic surgeon
from $9.95 to $10.00 is greater than from $10.00 to
provides service to an NFL team, but pays for the
$10.05; hence, many firms set prices to end with 95
privilege of being the team’s official orthopedic
(or 99) cents.
surgeon.
Pricing Bases
Transfer Pricing
Most industries have accepted bases for setting
Firms set transfer prices among businesses/geo-
prices, typically by individual product. Changing the
graphic subsidiaries. Example: Australian firm
price basis may offer advantage. Example: Some B2B
shipping to a sister subsidiary in Italy. Import duties,
firms share risk with customers by gain sharing —
taxes are important issues in setting transfer prices.
receive partial payment in customer profits earned
with their products/services. Example: Customers
may pay advertising agencies by results rather than
Endnotes
the traditional percentage of billings.
1 Good pricing texts include T.T. Nagle, J. Hogan, J. Hale, The
Strategy and Tactics of Pricing: Growing More Profitably, Upper
Saddle River, NJ: Pearson, 2011* [653e]; R. Holden, M. Burton,
Special Topics in Setting Prices Pricing with Confidence: 10 Ways to Stop Leaving Money on the
Table, Hoboken, NJ: Wiley, 2010*. [576e] For classic pricing
works, A.D.H. Kaplan, J.B. Dirlam, R.F. Lanzillotti, Pricing in Big
We examine several special pricing topics:
Business, Washington, DC: Brookings Institution, 1967* [556e];
J. Dean, “Pricing Policies for New Products,” Harvard Business
Complementary Product Pricing Review, 28 (November–December 1950), pp. 28–36. [257e]
Complementary products are used together. Histori- 2 E. Shim, E.F. Sudit, “How Manufacturers Price Products,”
Management Accounting, (February 1995), pp. 37–39 [520e]
cally, Gillette priced razors low, razor blades high, but
report more than 80 percent of U.S. manufacturers use cost-plus
strong differential advantage from recent innovations pricing — 7 percent use fully allocated costs.
lets Gillette price each component high.
 CHAPTER 18 CRITICAL UNDERPINNINGS OF PRICING DECISIONS 185
[412t] [264t] [347t]

Mexico Aeroméxico

Aeroméxico’s (AM) (founded 1934) mission is to provide 2014: AM continued to maintain prices at 15 to 20
value to customers and other stakeholders, by offering percent above low-price airlines; advertising presented
excellent service. Faced with competitive threats, AM far AM as Mexico’s Premium airline. Competitor advertising
prefers value enhancements to price reductions. like Volaris focused on price; Interjet emphasized AM’s
high prices; Viva Aerobus offered many price promotions.
1994: AM focused on service/punctuality to avoid price
competition with main rival, Mexicana. AM introduced 2016: Domestic market shares: AM — 32 percent;
a customer loyalty program; it also made alliances to Volaris — 28 percent; Interjet — 23 percent; VivaAerobus
reduce fixed costs, including a commercial cooperation — 12 percent; Magnicharters — 2 percent; others — 3
agreement with Delta. In 2000, AM and Delta became percent. Jet fuel prices/peso exchange rate issues led
founding partners of the SkyTeam Alliance along with Air airlines to increase prices: Aeroméxico — 5 percent;
France and Korean Air. Interjet — 6 percent; VivaAerobus — 15 percent; Volaris
reduced prices by 2 percent. Industry observers believed
2005–7: Mexico privatized government-owned airlines:
Volaris’ price reduction resulted from ultra-low-cost
Mexicana (2005) — acquired by Grupo Posadas; AM
business model, increased average aircraft seating,
(2007) — acquired by Grupo Banamex (owned by
acquisition of additional planes.
Citibank). The Mexican government opened passenger
air transportation to new airlines; low-price airlines entered
QUESTIONS
— Interjet (December 2005), Volaris (March 2006),
VivaAerobus (December 2006). AM continued serving the 1. How price sensitive is the domestic Mexican airline

premium segment. market?

2. What were AM’s strategic objectives in 1994, 2010, 2014?
2009–10: Following the global economic crisis (2008–9),
passenger traffic leveled off. Market shares: AM — 32
percent; Mexicana — 27 percent; Volaris —13 percent;
Interjet — 13 percent; VivaAerobus — 6 percent; Aviacsa
— 5 percent; others (regional airlines) — 5 percent. In
2010, Mexicana ceased operations.

Domestic Market Sizes (million passengers)

50

45
41.8
40
37.1
35 32.9
30.5
30 27.4 27.6 28.1
24.4 24.5 25.5
25
22.2
19.8
20

15

10

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
186

SECTION 4 — IMPERATIVE 4 / PART C — KEY MESSAGES

Chapter 17
• Distribution channels continuously evolve; the firm • Retailers offer customers product assortments,
can gain differential advantage by innovating its customer experiences, accessibility.
distribution arrangements. • Consumers may choose among many different
• In developing distribution strategy, the supplier retailing forms.
must make crucial decisions in four areas: • Different types of fixed-location retail operations
• Distribution functions. What exactly must be done vary on several dimensions.
in the distribution channel? • The success of a fixed-location retail store depends
• Distribution channels: Direct or indirect? Should in part on neighboring stores, the overall physical
the firm deal directly with consumers/end users? environment.
Or use intermediaries? If so, which ones?
• Retailing continues to evolve along several
• Distribution channel breadth. How many dimensions.
intermediaries should the supplier select at each
• Retailers should choose carefully among available
distribution level?
performance measures.
• Criteria for selecting, evaluating intermediaries.
How should the firm decide whether a particular • Successful wholesalers offer significant value to
intermediary is appropriate for its products? suppliers, retailers/end users.

• Implementing strategy through distributors can

Videos related to Chapter 17
be challenging. The supplier must clarify channel
member responsibilities, understand potential • The Future of Retailing [155v]
distributor problems, take steps to gain compliance. (Mark Cohen — Columbia Business School)

• Typically some channel members have more power • Shopping [198v]

than others; each has options to improve its posi- (Devora Rogers — TEDx WakeForestU)
tion. Distributors/wholesalers, manufacturers/brand
owners, retailers, consumers/end users may each
become channel captains. Many firms are moving to
partnership models where each member gains.
• Operating conflict is endemic in distribution
channels, but most firms work at reductions.
Strategic conflict is more serious; may lead to
significant change in channel relationships.
• The Internet is driving many changes in
distribution.
 187

SECTION 4 — IMPERATIVE 4 / PART D — KEY MESSAGES

Chapter 18
• Pricing is a big deal. Pricing decisions have a major • To set price for a new product, the firm should start
impact on profits. with perceived customer value; consider costs; then
• Four critical considerations should enter firm factor in competitors, its strategic objectives.
pricing decisions: • Many pricing-toolkit elements are available for
• Perceived customer value. The firm must make key setting the actual price.
decisions about creating, measuring, capturing • Undisciplined use of pricing-toolkit elements leads
value. The firm must understand customer price to price-waterfall problems. Appropriate systems,
sensitivity. pricing discipline address these problems.
• Costs. Many firms use cost inappropriately by • The firm should consider many issues in assessing
implementing cost-plus approaches to setting pricing methodologies, setting actual prices.
prices. Costs have three proper roles — birth
control, death control, profit planning. Videos related to Chapter 18
• Competition. Critical firm issues are predicting • Pricing [365v]
how competitors will respond to firm price (Reed Holden — Holden Advisors)
changes; deciding how to respond to competitor
• Pricing [982v]
price reductions (increases). The firm has avail-
(Spencer Lum — ground-glass.com)
able several price and nonprice actions.
• Strategic objectives. The firm has three major • The Pain of Paying [422v]
options for optimizing performance — sales (Fuqua School of Business, Duke University)
revenues/market-share growth, profits, cash flow. • Segmented Pricing [256v]
(Hitendra Wadhwa — Columbia Business School)
 SECTION 4

Implementing the Market Strategy

IMPERATIVE 5
Secure Support from Other Functions

CHAPTER 19

Ensuring the Firm Implements

the Market Offer as Planned

IMPERATIVE 6
Monitor, Control Execution/Performance

CHAPTER 20

Monitoring, Controlling
Firm Performance, Functioning

For key messages from Section 4, Chapters 19 and 20, see page 206.
Marketing for Latin American Managers in the 21st Century
SECTION 1: MARKETING AND THE FIRM

CHAPTER 1
Introduction to Managing Marketing

CHAPTER 2
The Value of Customers

SECTION 2: FUNDAMENTAL INSIGHTS FOR STRATEGIC MARKETING

CHAPTER 5
TRANSITION
CHAPTER 3 CHAPTER 4 Insight about
TO STRATEGIC
Market Insight Customer Insight Competitors, Company,
MARKETING
Complementers

SECTION 3: STRATEGIC MARKETING

IMPERATIVE 1 IMPERATIVE 2
Determine, Recommend Which Markets to Address Identify, Target Market Segments

CHAPTER 6 CHAPTER 7
Identifying, Choosing Opportunities Market Segmentation, Targeting

IMPERATIVE 3
Set Strategic Direction, Positioning

CHAPTER 8
CHAPTER 9 CHAPTER 10
Market Strategy – Integrating Firm
Managing through the Life Cycle Managing Brands
Efforts for Marketing Success

SECTION 4: IMPLEMENTING THE MARKET STRATEGY

IMPERATIVE 4
Design the Market Offer
Part A: Providing Customer Value

CHAPTER 12
CHAPTER 11 CHAPTER 13
Managing Services,
Managing the Product Line Developing New Products
Customer Service

Part B: Communicating Customer Value

CHAPTER 14 CHAPTER 15 CHAPTER 16

Integrated Marketing Mass Communications, Directing, Managing
Communications Digital Marketing Field Sales Efforts

Part C: Delivering Customer Value Part D: Getting Paid for Customer Value

CHAPTER 17 CHAPTER 18
Distribution, Retailing, Wholesaling Critical Underpinnings of Pricing Decisions

IMPERATIVE 5 IMPERATIVE 6
Secure Support from Other Functions Monitor, Control Execution/Performance

CHAPTER 19 CHAPTER 20
Ensuring the Firm Implements Monitoring, Controlling
the Market Offer as Planned Firm Performance, Functioning
 CHAPTER 19

Ensuring the Firm Implements

the Market Offer as Planned
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 19 is the sole chapter for Imperative 5 — Some externally oriented firms differentiate offers
Secure Support from Other Functions. Chapter 19 from tough competitors via customer service
addresses ensuring the firm implements the market excellence. Example: Nordstrom (department
offer as planned. To execute well, the firm should store) is rightly famous for employees’ customer
seamlessly align various functional areas/implemen- service zeal. Careful employee selection, enlightened
tation programs with market strategies. Much diffi- management, supportive incentive systems
cult execution effort relates to organization structure, encourage right behavior. The quest for differential
systems/processes, human resource practices. advantage must be central and ongoing.
Chapter 1 shows securing appropriate alignment is
much easier when the firm has customer-focused Finance
values leading to a true external orientation. Chapter Financial decisions, controls play a critical role in
19 presents a model for creating/maintaining an managing the broader operations of any successful
external orientation, including specific action steps. firm. Externally oriented firms galvanize finance and
Throughout the chapter, we show how several accounting functions; they contribute to marketing
externally oriented firms became successful by efforts in many ways — helping to assess, quantify
achieving excellence in particular functional areas. market opportunities.

Invoicing/billing systems can be a major customer

problem, but a good place to seek differential
Functional Excellence in Successful advantage. Flexible billing, offering customized
Externally Oriented Firms invoicing/terms often help sustain customer
What does it take to deliver customer value, secure retention.
differential advantage? Successful firms deploy
resources, expertise to build core competence in Human Resources
those functions that are essential to delivering Human resources (HR) is a vital function for any
customer value. business, but some firms create differential advan-
tage; they develop/motivate workforces to achieve
Customer Service high excellence levels. Managing human resources
Increased competition has made customer service is especially important in services firms, where
strategically important for delivering customer value; employee-customer interaction is constant, ongoing.
securing differential advantage; attracting, retaining, Many consulting firms claim HR advantages are the
growing customers. Yet, at many firms, customer most sustainable; excellence in recruiting, selecting,
service does not report to marketing. This may not onboarding, talent management is difficult to copy.
matter when external orientation is the firm’s dom- Example: GE, IBM are well known for developing
inant philosophy. But poor inconsistent customer successive generations of business leaders; many
service generates customer dissatisfaction, especially former GE executives become CEOs of major
if expectations are high; it can destroy an otherwise corporations.
effective market strategy.

189
190 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Operations/Supply Chain • Manufacturing. Perhaps the world’s best-known,

Internal operations/supply-chain management most-discussed, most-praised industrial operation.
are important areas for improving external focus, Toyota’s system has spawned many books; is a
especially in services. All contemporary approaches model of Total Quality Management (TQM).
to teaching operations start with firm strategy, • Dealer management, customer service. Toyota
then design systems by working backward from invests heavily in dealers, customer service. All
the market; the operations system is a great place franchised dealers must adhere to Toyota guidelines
for securing differential advantage. Examples: for exceptional service; renewed agreements depend
Alcoa continuously introduces innovation into on adherence.
operating processes, based on forecasting customer
needs/requirements. Walmart largely built its
success on highly efficient operations/supply-chain
TRANSFORMING TO AN
management.
EXTERNAL ORIENTATION
Research, Development Culture eats strategy for breakfast.
R&D breakthroughs, innovation culture have given — Peter F. Drucker
birth to many great firms. When the firm man-
To achieve success in increasingly competitive
ages the R&D/marketing interface well, the impact
markets, the firm must focus resources to deliver
can be dramatic. Examples: 3M has a formidable
customer value, secure differential advantage. In
record for innovation, combined with successful,
the final analysis, nothing else matters. The most
even ingenious, marketing. Apple, the world’s most
successful firms develop an external orientation
valuable brand, is based on a continuous innovation
culture.
culture.
Externally oriented firms look outward; they focus
Sales on customers, competitors, complementers, broader
Chapter 16 discusses many aspects of the sales environmental forces. These firms know current
function; it shows how innovation in sales can be products, processes are key reasons for past/present
the key to success. B2C: Firms have gained differ- success. They also know that, as external environ-
ential advantage from innovative selling efforts ments change, they must be flexible to make internal
— loyalty programs, creative sales channels. B2B: changes — organization structure, systems/processes,
Firms like IBM, DHL are driving successful growth human resources — to adjust to new market realities.
by innovating with strategic/key/global account Rather than fearing change, externally oriented firms
programs. Premium services derived from better/ know change is inevitable; they welcome change as
faster data in CRM systems provide differential a challenge; they understand change spawns new
advantage by enabling salespeople to offer customers opportunities — their lifeblood.
greater value.
It’s one thing to recognize value in an external
orientation; it’s quite another to change the status
Integrated Systems
quo. Some successful corporate leaders believe
Functional areas can bring success to externally
instilling an external orientation is a critical part
oriented firms. Some firms succeed, not because of a
of their jobs; they institute change-management
single strong suit, but because they integrate efforts
processes to accomplish this task.
from multiple functions. Example: Toyota bases its
high performance on three integrated systems: Figure 19.1 shows the standard inverted pyramid
• Research, development. Begins with extensive used by externally oriented firms — SAS, Nordstrom.
investigation into customer demographics/lifestyle The framework places customers at the top, to
trends. These data feed into four research-and- reinforce their critical role in firm success.
design studios — Japan, U.S. (2), Europe; they
compete for best design in a target market segment.
 CHAPTER 19 ENSURING THE FIRM IMPLEMENTS THE MARKET OFFER AS PLANNED 191

Figure 19.1 Framework for Developing an External Orientation

Customers
(needs, wants, priorities)

Human Resource Management

Internal Architecture
(recruit, select; train, develop, work processes,
career paths, recognition, reward)

Systems/Processes
Values Values
Organization Structure
(job design, reporting relationships)

External Focus
Strategy

Vision, Mission

Values, Vision, Mission, Strategy bottom of the pyramid — developing/reworking

external elements we discuss earlier — Chapter 6:
Many firms use a values statement to emphasize
• Vision. A description of the firm’s ideal future state.
a customer-focused culture to reinforce customer
Good vision statements set a broad direction —
preeminence. Values are a common set of beliefs
they inspire employees for the long run.
to guide the behavior of all organization members,
in all functions. Some values are hard — easily • Mission. Guides search for market opportunities. A
measured — profitability, market share. Other values well-developed mission keeps the firm focused in a
are soft — customer preeminence, integrity, respect limited arena where success is likely.
for others, trust. • Strategy. The firm’s game plan for the market,
pointing the way to external firm actions. The
All framework elements must reflect, reinforce
market strategy specifies objectives, target market
company commitment to an external orientation.
segments, positioning statements.
Many organizational transformations begin at the

[782t]

Mexico Amazon – ¡Sí Se Puede!

Amazon launched its Mexican Spanish-language site (2013) selling challenge: average delivery times across Mexico — several days.
Kindle e-books. In 2015, Amazon dramatically increased offerings Amazon constructed distribution centers near key urban areas
— baby products, consumer electronics, health/personal care, — Guadalajara, Mexico City, Monterrey. By end 2017, Prime
kitchen/home tools, home improvement, music/movies/TV series/ members (subscription service) enjoyed free one-day delivery
video games, printed books, sports/outdoor products. Regardless, in Guadalajara, Mexico City, Puebla, Querétaro; free two-day
the dominant U.S. online retailer faced serious challenges in delivery nationwide. Also, Amazon delivered to 99 percent of
Mexico: Mexico zip codes, even remote villages in Guerrero, Michoacan.
• Payments. In 2015, more than 50 percent of Mexicans age 15 • Brand awareness. Prior to Amazon’s Mexican entry, a significant
and over did not use bank services; only 21 percent had credit number of Mexicans had purchased from other Amazon country
cards. Amazon partnered with convenience-store-chain Oxxo websites — mainly U.S. Regardless, most Mexicans had never
(more than 14,000 outlets); consumers purchased prepaid Oxxo purchased online; others had purchased at websites of bricks-
cards/Amazon gift cards for cash, then used these cards to and-mortar retailers they knew — Walmart. Initial advertising and
purchase online. Amazon’s offer led many Mexicans to try Amazon, then become
• Delivery. Fast delivery was a key Amazon value and a strong loyal customers — wide product variety (especially for rural
potential competitive advantage versus domestic online retailers residents), fast delivery, convenient payment methods.
like Mercado Libre. But poor infrastructure was a significant
192 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Organizing the Firm’s Reporting relationships vary by firm, industry. Most

commonly, heads of sales, marketing report to a
Marketing Efforts
marketing/sales VP, or roll up at a more senior level.
To execute the market strategy, the firm must design Functional organizations tend to work best when
the marketing organization’s internal architecture. markets/products are homogeneous — many small
Some traditional structures still have great value, but firms.
contemporary approaches are breaking new ground.1
Product/Brand Management Organization. As firms
become more complex, they require specialized
Traditional Organizational Models
responsibility for products/brands/markets. In this
Functional Marketing Organization. The firm places
model, originally developed by P&G, product/brand
activities like advertising, promotion, distribution, managers develop market plans for products/brands;
marketing administration, marketing research, new they are responsible for sales, market share, profits,
product development in a marketing department — but do not control all resource inputs — Figure 19.3.
Figure 19.2. Marketing is usually separate from the Internal brand manager competition for resources
sales force; also from functions like accounting, HR, spurs extra effort. Unfortunately, brand manager
production, R&D. turnover may undermine coherent strategies.

Figure 19.2 Functional Marketing Organization

VP Marketing
and Sales

Sales Marketing
Manager Manager

New Product Marketing

Sales Regional
Development Research
Administrator Sales Managers
Manager Manager

Marketing
Distribution
Administration
Manager
Manager

Advertising
and Promotion
Manager

Figure 19.3 Product/Brand Management Marketing Organization

General
Manager

Technical Sales
Personnel Operations Finance
Research Systems Legal Planning
Manager Manager Manager
Manager Manager

Marketing Manager,
Marketing Manager, Marketing Manager,
New Product
Established Products Frozen Novelties
Development Group

PGM, PGM, Dessert PGM, New

Packaged Enhancers &
Desserts Ingredients Products

PM, PM, PM, PM, PM, PM, PM, PM, PM, PM,
PM,
Jell-O Jell-O New Cool Dessert Pudding Gelatin Fruit ’n New New
Bakers
Gelatin Pudding Products Whip Ingredients Pops Pops Cream Bars Products Products
 CHAPTER 19 ENSURING THE FIRM IMPLEMENTS THE MARKET OFFER AS PLANNED 193

Category-Management Organization. This model Newer Nontraditional Organizational Models

attempts to address problems with product/brand Inclusion Organization. The firm groups many
management organizations by leveraging success activities under marketing. Example: British Airways
from strong brands to weaker brands. The category- introduced this approach by adding operations to
management organization directs multiple brands in its marketing function. This organization form has
a complementary manner. spawned the chief revenue officer (CRO), respon-
Market-Segment Organization. More externally sible for all customer-facing activities. Example:
focused than preceding options; managers are At Andersen Windows & Doors, marketing, sales,
responsible for individual market segments. The presales service, postsale service, last-mile logistics
market-segment organization may overlie marketing/ directly report to the CRO.
sales functions. Business Process Organization. The reengineering
Combined Product/Brand Management, movement spurred some firm attempts to organize
Market-Segment Organization. Product/brand, around business processes — Figure 19.5.2 The firm
market-segment organizations each omit one crucial retains a classic functional structure, but much
dimension. Product/brand — no one is specifically organizational output results from cross-functional
responsible for market segments; market segment teams. Marketing’s major responsibilities are brand
— no one is specifically responsible for individual development, innovation, related strategic tasks.
products/brands. In the combined organization, Cross-functional teams facilitate a heightened
segment managers are responsible for market external orientation throughout the firm.3
segments; product/brand managers are responsible
for individual products/brands — Figure 19.4.

Figure 19.4 Combined Marketing Organization

Marketing
Vice
President

Director, Director,
Market Product
Segments Management

Manager, Manager, Product Product Product

Manager,
Household Industrial Manager, Manager, Manager,
Apparel
Textiles Products Nylon Polyester New Fiber

Figure 19.5 Business Process Organization — Example from a Unilever Subsidiary

Business
performance

Brand development

Supplier Business Customer

planning/ Information
People management development
strategy management

Supply chain

Total quality
194 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Customer-Management Organization (CMO). This creating an external orientation, improve marketing

organization focuses specifically on customers — insight/effectiveness, optimize sales force efforts,
Figure 19.6. We expect CMOs to become more pop- help secure differential advantage. Perhaps the most
ular as the CLV concept — Chapter 2 — becomes popular hard systems in major firms are enterprise
more widespread, along with greater focus on resource planning (ERP). ERP software contains
customer retention. customer-focused modules; it attempts to integrate
data from many departments/functions across the
In CMOs, customer portfolios are pillars; brands,
firm. ERP uses a single computer platform serving
other functions serve customer portfolios. Product/
individual departmental needs; it makes information
brand managers continue to manage brand assets,
available to others. Hard systems are also the core of
but support customer managers by developing
supply-chain management, leading to better supply/
products/brands to increase CLV.
demand matching, reduced inventories, fewer stock-
The firm may implement CMO at the corporate outs, less customer disappointment. Benefits from
level, or in individual businesses, but there are trade- hard systems:
offs. At corporate, customer management may be • Customer information. Data are more readily avail-
ineffective because salespeople/account managers do able; employees better understand customer needs.
not possess deep understanding across the corporate
• Customer intimacy. CRM systems provide
business portfolio. In focusing only at the business
significant information about customer purchase
level, the firm may be unable to develop an inte-
histories, buying patterns, firm interactions. These
grated corporate-wide offer.
data sources, analytic tools alleviate the soul-less
anonymity of transaction-based markets.
• Customer effort. User-friendly computer systems
Systems/Processes
are not just for employees. Many firms use exter-
All firms use systems/processes to produce organi- nally facing systems for customers to access product
zational outputs, on a continuum from hard systems information, order online. The firm gets closer to
— capital-resource intensive — to soft systems — customers, reinforces the brand. Customers save
human-resource intensive. Many customer inter- time, effort; purchasing risk is reduced.
actions involve combinations of hard/soft systems.
Although customer-facing systems are generally Soft Systems
improving, many improvement options remain. People-based soft systems can also help the firm be
more externally oriented. Consider planning: Good
Hard Systems planning is collaborative, participative; it involves
Hard systems improve operational efficiency, reduce cross-functional commitment at several managerial
costs. But hard systems can also contribute to levels. A good planning system produces measures

Figure 19.6 Transition from Brand Management to Customer Management

Top B1
Management Top
B2 Management
Advertising
Brand-
Marketing research B3
Management
Manufacturing
System
R&D B4
Customer-
B1 B2 B3 B4 Management
Advertising System
Marketing research
Manufacturing
R&D

Customer Portfolios CP1 CP2 CP3 CP4

 CHAPTER 19 ENSURING THE FIRM IMPLEMENTS THE MARKET OFFER AS PLANNED 195

that encourage organizational employees to look Disseminating best practices, expertise, knowledge
beyond their narrow silos. across the firm can be a major challenge. Contem-
porary methods: Specially tagged databases for
A good planning process is externally driven.
easy search; collaborative communities of practice
Planning commences by emphasizing insight into
— experts share information; virtual meeting
the market, customers, competitors, complementers,
technology for spur-of-the moment knowledge-
environmental forces. A well-developed situation
sharing; meetings designed to break down barriers,
analysis, based on these precepts, forces an external
facilitate knowledge transfer.
orientation; it helps deliver solid planning assump-
tions. Firms building market strategy using the • Benchmarking. Best practices frequently occur at
Chapter 8 framework become more externally competitors, customers, suppliers, firms in other
focused. Try it yourself! industries. Benchmarking projects identify critical
firm processes, then seek best-in-class experts so
Optimizing Firm Systems/Processes as to improve their own processes. The Columbia
More important than any individual system/process Initiative for Managing Global Accounts enabled
are methodologies for evolving, integrating systems/ 3M, Citibank, Deloitte, HP, Lucent, Milliken,
processes to drive an external orientation: Saatchi and Saatchi, Schneider Electric to bench-
mark one another’s programs.
• Best-practice transfer. A best-practice system helps
identify/transmit superior expertise, knowledge, • Reengineering. This process examines funda-
processes across the firm. Multibusiness, multi- mental assumptions about firm systems/processes,
national firms offer rich terrain for identifying then seeks alternative approaches for redesign,
best practices. Example: Samsung’s system com- improvement. The critical question: Can a new
municates hundreds of best-practice examples process reduce costs/increase customer value? Most
company-wide. successful firms have made major commitments to
process-based reengineering.

Global Carbon Neutral by 2025

Spurred by the 17 United Nations Sustainable efficient coding (program runs faster); 100 percent
Development Goals (SDGs) (2015), many firms globally renewable energy — green cloud — for data centers and
built sustainability into strategic planning. Global other facilities. SAP targets carbon neutrality by 2025 by
enterprise software leader SAP allocates significant avoid, reduce, compensate methods:
resources to help reach SDGs — governments, firms, • Avoid creating greenhouse gases. Example: virtual
people. SAP initiatives align with its vision and purpose — telecommunication.
To help the world run better and improve people’s lives.
• Reduce by driving efficiency and reducing emissions.
SAP creates technology/builds products so customers
Examples: efficient data centers, carpooling/sharing,
increase resource productivity/transform businesses to
e-mobility.
reduce carbon output, and leads by example.
SAP has ambitious carbon targets, driven by • Compensate by extending successful models.
sustainability initiatives: car fleets — electric vehicles; Examples: embedded internal carbon-pricing model for
employee carpooling/bike sharing; LEED (Leadership CO2-free train/air travel; carbon-neutral fuel cards for
in Energy and Environmental Design) certification in company cars.
infrastructure projects. SAP’s emission-cutting programs:
[687t]
196 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Managing Human Resources • Bureaucracy. As firms grow, departmentalization,

task specialization creep in; they are efficient ways
HR processes provide many opportunities for to complete repetitive tasks. Firms must weigh
emphasizing an organization-wide external focus. efficiency against agility to serve customers well.
An external orientation should follow from hiring They should introduce sensing mechanisms to
the right people, supporting high performance, identify, address market opportunities.
developing/managing career transitions effectively.
• Centralization versus decentralization.
Workforce measurement systems should be tightly Centralization, standardization can have great
linked to reward systems. When customer-focused value, especially for cost reduction. Excessive
measures drive incentive compensation, the external decentralization can leave the firm lacking clear
orientation effort has real teeth. Examples: Microsoft, focus. Deciding which activities are better central-
Xerox each report excellent results using customer ized, which are better decentralized — closer to the
satisfaction measures. customer — is a critical firm challenge.
• Excessive focus on organizational efficiency. Many
firms work hard to reduce costs by improving orga-
SUSTAINING AN nizational efficiency. An organizational culture too
EXTERNAL ORIENTATION dominated by techniques like six sigma can become
internally focused, less innovative, then drive out
Many industry leaders have stumbled badly, lost
behaviors that address external changes.
preeminent positions. Why? The stories are strikingly
similar: The firm originally gained leadership by • Functional divisions. Functional heads must
delivering customer value, securing differential recognize the importance of cross-functional
advantage. The firm developed, focused resources, cooperation.
core competencies, expertise toward this goal. • Functional view of marketing. The firm must
The firm was externally oriented, but then things distinguish between marketing as a philosophy and
changed. marketing as a department. Achieving integration
demands coordination among many different
Past success held the firm back; it could not sustain
functional departments.
an external orientation, adjust to the new reality. The
original leader had superior technology, scale econ- • Internal politics. The CEO/business head must
omies, substantial buying power, well-established actively support instituting an external orientation;
brands. But the new leader changed the rules — new the leader should frequently communicate this
business model, product design, technology. support. If this does not occur, managerial power-
seeking may override customer centricity.
Getting everything right is difficult. Remember, a
• Misaligned incentives. People in organizations do
chain is only as strong as its weakest link. For perfect
what is inspected of them, not what is expected of
integration of the entire market offer, the firm should
them! The firm should link rewards/incentives to
execute every moment of truth flawlessly — not
customer-centric goals, metrics.
merely satisfy customers, but delight them. Poor
performance on some dimensions can overwhelm For long-run success, the firm must be responsive
world-class performance on others. yet dynamic, learning but not forgetting, under-
standing of human behavior yet demanding of high
Sustaining an external orientation is a little easier if
performance, customer-sensitive yet competitive,
the firm understands the most common challenges to
shareholder-value-creating but not short-sighted.
sustainable success:
Examples: As CEO, Jack Welch lifted performance
• Accounting systems. The firm must produce data at an already highly regarded GE to an entirely new
in a form that supports an external perspective. level. In one of his more famous exhortations, Welch
Despite advances in business intelligence, many stated: “I want managers who manage with their
firms measure profits only by product; they should face to the customer and their backside to the CEO!”
also measure profits by customer/customer group. At IBM, customer-focused Lou Gerstner restored
 CHAPTER 19 ENSURING THE FIRM IMPLEMENTS THE MARKET OFFER AS PLANNED 197

the fallen computer giant to its former glory with a

Endnotes
services vision. Leadership counts! Leaders must not
1 C. Homburg. J.P. Workman Jr., O. Jensen, “Fundamental Changes
just talk the talk, they must walk the walk — spread in Marketing Organization: The Movement Toward a Customer-
an external orientation throughout the firm. Focused Structure,” Journal of the Academy of Marketing Science,
28 (2000), pp. 459–478. [224e]
Jeff Bezos is always on the list of dynamic, visionary, 2 M. Hammer, J. Champy, Reengineering the Corporation: A
leaders as Amazon continues to be considered the Manifesto for Business Revolution, Grand Rapids, MI: Zondervan,
most customer-centric company in the world. Amazon 2009*. [521e]

has a long-term track record of growth, delivering 3 M. de Swaan Arons, F. van den Driest, K. Weed, “The Ultimate
Marketing Machine,” Harvard Business Review, 91 (July–August
shareholder value. 2014). pp. 55–63. [811e]

[289t]

Venezuela Kimberly-Clark
U.S. multinational Kimberly-Clark’s (KC) Venezuelan Venezuelan president Nicolás Maduro on state television:
subsidiary produced several hard-to-find consumer “48 hours ago, without notice, a U.S. company
staples — diapers, napkins, toilet paper. Consumer called Kimberly-Clark, violating national laws and
goods shortages were common in Venezuela; the ruling the constitution, fired almost 1,000 workers from its
socialist government capped prices for many basic production plant, closed the door, and left the country,”
products below production costs; companies sustained Maduro added: “The government will support the
heavy losses. Desperate shoppers routinely spent long workers now in control of the plant.”
hours outside stores seeking essentials. Simultaneously,
black-market traders offered products for many times Uni Global Union:
their sticker prices. “On Friday July 8, 2016, the Maracay Kimberly-Clark’s
In July 2016, after several decades operating in plant management sent the personnel home saying
Venezuela, KC announced suspension of production. the machines would be stopped until Monday due
By then, several multinational firms had already ceased to repair work. The next day, the employees received
operations in Venezuela — Bridgestone, Ford, General text messages from the company, inviting them to
Mills, General Motors, Procter & Gamble. The exit phone 0-800-612-3796 to receive important news.
decision was not easy for KC executives. Precipitating Then, workers found a voice message telling them
reasons: lack of primary materials, fixed prices, inflated Kimberly-Clark had indefinitely halted their operations in
production costs — labor, packaging, raw materials. Venezuela, ending the labor relationship with them, and
KC also faced challenges communicating its decision transferring the severance pay over bank deposits.”
to stakeholders — customers, employees, suppliers,
unions. What was the right message, right media, right QUESTIONS
timing? Deciding these issues required a significant 1. How should KC have answered the Venezuelan
internal coordination — finance, human resources, government’s accusations?
marketing, operations. KC’s challenge was enhanced by 2. How should KC have communicated its exit decision to
government control of the media. News of KC’s departure stakeholders?

was presented in several ways.

 CHAPTER 20

Monitoring, Controlling
Firm Performance, Functioning
For complimentary material, see Axcess Vids codes at www.axcessvids.com

Chapter 20 is the sole chapter for Imperative 6 — Monitor/control should not occur at managerial
Monitor, Control Execution/Performance. whim; the firm should build a monitor/control
philosophy into its DNA. This is not simple; it may
take considerable time/effort to assemble infra-
Key Principles of structure for an effective system. Measurement is
Monitor/Control Processes crucial; we discuss many types of measures. But the
You have likely heard this popular management best-designed measures have no impact unless the
saying — If you can’t measure it, you can’t manage it. firm also implements a process for developing stan-
People in organizations tend to do what is inspected dards, assessing results against those standards, then
of them, not what is expected of them. Hence, good take appropriate action. Effective monitor/control
monitor/control processes are critical for ensuring processes rest on five core principles:
people do what they are supposed to do, so the right
Focus on Market Levers;
actions lead to the right results. Monitoring focuses
Develop Alternative Plans
on measuring how well the firm is conducting
Market levers flow from the market strategy, imple-
various business aspects. Control is concerned with
mentation plans. Common levers: Add/replace
making changes/adjustments so the firm improves
salespeople; modify advertising, branding, distribu-
performance. Monitor/control processes are the most
tion; introduce new products, new pricing. The firm
powerful means of changing individual behavior,
allocates resources, takes actions to achieve planned
enhancing long-term results.
performance. Actual performance versus stan-
Chapter 20 focuses on two complementary areas: dards tells if firm resource allocations/actions were
Firm Performance. Is the firm achieving planned
successful. Monitor/control efforts should focus on
results? — the standards against which the firm market levers. If actual results fall below standards,
measures actual results. All things equal, if actual the firm should be ready with alternative plans.
results meet/exceed standards, performance is
Generally, Implement Steering Control,
satisfactory; the firm continues to operate as planned.
Not Postaction Control
If actual results are below standards, the firm should
Steering control and postaction control are different
modify actions.
monitor/control approaches. Firms using postaction
Firm Functioning. To achieve desired results, the control wait a preset time period, then compare
firm allocates resources, takes actions. Is the firm actual results against standards. If results are unsatis-
functioning well? For greater insight, we drill down factory, they take corrective action. Firms exercising
into three aspects: postaction control typically develop annual market
• Implementation. Did the firm execute its plans? plans, set standards by quarter, but increased envi-
• Strategy. Is the market strategy well-conceived? ronmental change, complexity are driving reduced
time periods.
• Processes. Are managerial processes well designed?

198
 CHAPTER 20 MONITORING, CONTROLLING FIRM PERFORMANCE, FUNCTIONING 199

In contrast, steering control is dynamic, contin- Model Relationships among Input,

uous, anticipatory. Firms using steering control Intermediate, Output Measures
set standards for measures like sales, market share, To gain insight, monitor/control systems must
profit, then calendarize by month, week, even day. distinguish between cause and effect. Suppose we
These firms set control limits for performance; they observe increased advertising spending and increased
continually compare actual results against standards. sales. One interpretation: Advertising was effec-
Because they also track leading indicators, these firms tive — increased advertising caused increased sales.
are more market responsive. Alternative interpretation: Increased sales caused
increased advertising — advertising budget is a fixed
Use the Right Performance Measures percentage of sales! To ensure the firm makes valid
at the Right Organizational Levels inferences, it must distinguish among:
The firm should measure performance at multiple • Input measures — actions the firm takes
organizational levels — corporate, geographic region,
• Intermediate measures — customer actions,
business, market segment, marketing function,
state-of-mind changes
customer, sales region, sales district, sales territory.
Organizational position should largely drive the data • Output measures — performance variables —
employees receive, access. Senior managers do not sales, profits
typically require performance variances by sales- Market levers provide input measures. Figure 20.2
person, but they should have the ability to make deep shows how input measures lead to output measures.
dives. Many problems may lie beneath the surface Inputs affect intermediates; intermediates affect
—iceberg principle. Figure 20.1 shows how accept- outputs. Generally, collecting data on input, output
able performance in a sales region (northeast) masks measures is relatively easy; securing data on inter-
unacceptable performance at deeper organizational mediate measures is more resource-intensive. Output
levels. To improve overall performance, the firm measures are lagging indicators — rearview mirror.
must isolate problem areas — appropriate indicators, Intermediate, input measures are leading indicators
good data, expert analysis. — what should happen.

Figure 20.1 The Iceberg Principle in a National Sales Force

National

Sales Regions

Northeast South Midwest West

Sales Districts

New Jersey/
Capitol New York New England
Pennsylvania

Sales Territories

Williams Busch Grant Mapes Canatos Hornig

Key Excellent Superior Acceptable Needs Improvement Unacceptable

Figure 20.2 Relationship among Control Measures

Input Intermediate Output

Measures Measures Measures
200 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Tie Compensation to Performance 5. Measure results — collect, integrate, analyze data

The performance-to-compensation linkage is the — distribute results.
final, but critical, piece of the monitor/control puzzle. 6. Compare results against standards; identify gaps,
Developing the performance-to-compensation variances — identify performance gaps, variances.
linkage is not easy. When compensation design is
7. Understand, communicate performance gaps —
poor, employees optimize individual performance,
circulate performance-gap data, interpretation
compensation; their actions — failing to cooperate
to executives responsible for taking action. Some
across functional boundaries, businesses (Chapter
gaps will be positive — results exceed standards;
19) — may harm the firm.
other gaps will be negative — results are inferior
to standards.
8. Generate, evaluate alternatives — for corrective
Critical Elements of the
actions to close gaps. Large positive gaps may
Monitor/Control Process require higher performance standards; negative
Figure 20.3 shows nine repeatable yet distinct stages gaps may require lower standards.
for any monitor/control process1: 9. Select alternatives, take action — final process
1. Identify the process to control — clarify focus. stage; ushers in a new cycle.
2. Decide, define measures — input, intermediate, Monitor/control processes are not one-time events.
output variables. The firm optimizes motivated behavior when
3. Develop measurement system — to collect, standards are moderately challenging; too-easy or
integrate, analyze relevant data; distribute results. too-difficult standards reduce motivation. Too-
4. Set standards — for each measure. Generally, difficult standards may lead to aberrant behavior
standards flow from action programs related to by employees, especially if compensation is directly
market strategy. involved.

Figure 20.3 The Monitor-and-Control Process

1
Identify
the process 2
to control Decide,
define measures

8
Generate, 9 3
evaluate alternatives Select Develop
alternatives, measurement
take action system

7
Understand,
communicate
performance
gaps
4
Set
standards

6
Compare
results against
standards; identify 5
gaps, variances Measure
results
 CHAPTER 20 MONITORING, CONTROLLING FIRM PERFORMANCE, FUNCTIONING 201

focus on measures that exclude allocations — profit

MONITORING, CONTROLLING contribution, direct product profit.
FIRM PERFORMANCE
Profit Contribution — sales revenues less variable
costs. To earn positive net profits, profit contribution
Output Measures must exceed fixed costs.
Recall: Output measures are the final results the firm Direct Product Profit. Direct product profit assesses
wants to achieve. These measures can be hard — profit performance after taking into account fixed
objectively assessed; or soft — rating scales requiring costs. The firm separates fixed costs into two parts:
more interpretation. costs directly related to the product — direct fixed
costs (would disappear if the product were dropped);
Internal Hard Measures: Sales allocated costs — indirect fixed costs (would remain
Overall measures of sales units, revenues, growth if the product were dropped). Direct product profit
rates are important, but breaking down by sales equals profit contribution less direct fixed costs.
region, district, territory provides greater insight.
Two alternative sales revenue breakdowns: Profit Return Measures. Some firms prefer profit-
return measures versus absolute measures. Two
Revenue Predictability. A useful three-way
popular measures are return on sales (ROS), return
classification:
on investment (ROI).
• Continuous. Revenue the firm expects to receive on
a regular week-by-week/month-by-month basis. Internal Hard Measures:
• Periodic. Sales are infrequent, but can be forecast Customer Profitability
— capital equipment, seasonal goods. Most firms have systems to measure product
• Episodic. Unanticipated — events cannot be profitability; some are rudimentary, others are
forecast — building materials sales following a highly sophisticated. By contrast, relatively few firms
hurricane. measure profits from customers across products.
Attracting, retaining, growing customers is critical to
Penetration versus Growth. Many firms distinguish
firm health; the firm should understand customer-
sales based on current business — penetration; sales profitability dynamics.
from new business — growth.

Issues with Measures. We consider three topics: Internal Hard Measures: Summary
Sales, profit measures provide good data on firm
• Different sales measures. At a minimum, the firm
performance, but lack an external benchmark.
should measure sales units and sales revenues. Both
Market-based measures address this issue.
measurements are necessary to distinguish between
revenue growth based on sales-unit growth versus
External Hard Measures: Market Share
revenue growth based on price increases.
Market-based measures compare firm performance
• Sales quality. Sales to some customers are more directly against competitors. Market share —
important than sales to other customers. measured in units, revenues — is the most common
• Accuracy, consistency of sales measures. The firm market-based measure. Additional measures are
must measure sales units/revenues accurately, relative market share (BCG portfolio matrix —
consistently from period to period. Chapter 11), market occupancy ratio — Table 20.1.

Internal Hard Measures: Product Profitability Soft Measures

Achieving good sales performance is important, but The firm should regularly take the customer pulse.
management is generally more interested in profits. Customer satisfaction, attitudes are widely used soft
Unfortunately, the most common profit measure — output measures. Because many soft measures are
bottom-line profit — may not be terribly useful for tied to hard measures — customer satisfaction to
assessing marketing effectiveness. The firm should sales — they can be valuable intermediate measures.2
202 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Table 20.1 External Measures of Firm Performance

Measure Calculation Information Provided

Market share (MS) (%) Firm sales/All competitor sales Market position versus all competitors

Relative market share (RMS) (%) Firm sales/Sales of major competitor(s) Market position versus major
competitor(s)
Market occupancy ratio (MOR) (%) Number of firm customers/ Breadth of firm-customer relationships
Total number of customers

Net Promoter Score (NPS) is a widely used soft The best intermediate measures are leading
measure, derived from a single question. [521v] indicators of output performance; they should result
How likely is it that you would recommend XXXX to from a tested customer purchase model: inputs →
a friend or colleague? intermediates → outputs. Intermediate measures are
particularly important in long-cycle sales processes
0 = not at all likely; 10 = extremely likely.
— major capital goods. Tables 20.2, 20.3 provide
NPS = percentage of customers scoring 9 or 10 examples for sales force, advertising, respectively.
(promoters) minus percentage of customers scoring
0 to 6 (detractors).

Leading U.S. scores (2015): USAA — 80; Apple — MONITORING, CONTROLLING

70; Amazon — 69; Southwest Airlines — 66 FIRM FUNCTIONING
Firms using NPS also probe for the reasons behind In a well-developed monitor/control system, input
the score. measures are closely, explicitly linked to intermediate
measures. In turn, intermediate measures are closely,
explicitly related to output measures.
Intermediate Measures
The firm takes actions — inputs — to improve Input Measures
outputs. Intermediate measures sit between
inputs and outputs. The firm only achieves good Input measure performance depends on three aspects
output performance by securing good intermediate of firm functioning:
performance:
Implementation Control
• Input effect. The firm’s marketing effort must affect
Did the firm implement planned actions? The firm’s
the intermediate measure.
market strategy spawns many implementation
• Output effect. The intermediate measure must programs; these programs generate action plans
influence another intermediate measure/an in marketing-mix areas — product, promotion,
important output measure(s).

Table 20.2 Possible Intermediate Measures for the Sales Force

Measure Rationale
Commitments to co-op advertising Customers place resources at risk and make best efforts

Customer’s subjective impression of salesperson Indicator of future sales

interaction — telesales
Distribution breadth for products Securing distribution is necessary for end-user purchases

Entry on approved supplier list Customers purchase only from fully qualified suppliers

Factory trials agreed Customers will not buy without factory use experience

Proposals accepted Necessary step to win business

Retail displays accepted Good shelf positioning leads to sales

 CHAPTER 20 MONITORING, CONTROLLING FIRM PERFORMANCE, FUNCTIONING 203

Table 20.3 Possible Intermediate Measures for Advertising

Measure Information Provided

Awareness Degree of product/brand awareness

Liking Indicates positive feeling toward the product/brand

Interest Indicates likelihood of product/brand purchase

Product quality perception Perception of product/brand quality

Number of press mentions Indicates customer awareness

Message recall Indicates advertising effectiveness

distribution, price; also functional areas — Managerial Process Control

engineering, operations, R&D, technical service. Are the firm’s processes the best they can be? We
Marketing, other functional managers are typically address this question in Chapter 19. Here, we focus
responsible for ensuring the firm executes these explicitly on improving marketing functioning.
action plans. Table 20.4 illustrates possible sales force
The Marketing Audit.3 This approach embraces a
input measures.
comprehensive process for evaluating marketing
practices. To ensure confidences are kept, findings
Strategy Control
unbiased, outsiders typically conduct audits. A useful
Is the firm’s market strategy well-conceived, on target?
auditing framework has six parts, each spawning
The firm typically sets strategy for the medium/long
several questions:
run; it should not overreact to poor output perfor-
mance by making hasty changes. To measure strategy 1. Marketing environment. What changes are occur-
against implementation goals, postaction control is ring at customers, competitors, complementers,
generally superior to steering control. suppliers? What PESTLE trends — Chapter
3 — affect the industry? How do these changes/
The firm must explicitly recognize: Good output trends affect the firm? What are performance
performance requires good strategy, good imple- implications?
mentation. Poor output performance has many
2. Market objectives, strategy. Are the firm’s market
authors; management’s challenge is isolating the
objectives/strategy realistic, given the environ-
cause. The firm should conduct deep analysis across
ment, firm strengths? Do managers understand
many business aspects. No matter where the firm
objectives, strategy?
isolates problems — strategy, implementation —
something(s) must change. Some changes are more 3. Marketing implementation. How do firm offers
difficult than others — Figure 20.4. compare to competitor offers — product, promo-
tion, distribution, price? Does the marketing mix

Table 20.4 Possible Input Measures – Sales Force

Measure Measure Focus

Sales-planning-system implementation Ensure sales force plans time allocations

New product knowledge training Ensure sales force is competent to sell new products

Sales calls per day Ensure sales force is working hard

Sales calls on new accounts Ensure sales force spends time with target accounts

Sales territories vacant Ensure sales managers plan for attrition

Total expenses Manage sales force discretionary costs

204 SECTION 4 IMPLEMENTING THE MARKET STRATEGY

Figure 20.4 Inertia in Marketing-Mix Implementation

Distribution channels

Product strategy

Difficulty of Alteration
Pricing

Sales force

Advertising,
promotion

Few Many
Years of Unchanging Successful Practice

implement the market strategy? Are they mutually especially when they drive compensation. When
consistent? short-term profit is the only standard, performing
4. Marketing organization. Are job roles, respon- well is relatively easy — cut advertising/R&D for a
sibilities clear, consistent? Is recruiting, develop- couple of quarters. Of course, such actions hurt the
ment on track? Is senior management engaged firm in the long run.
with major customers? Do measurement, reward • Too many measures. Multiple measures cause
systems motivate performance? problems if they are unclear/conflicting. Employees
5. Marketing systems. How effective are firm have difficulty discerning required behavior; they
marketing systems — brand monitoring, com- may focus efforts on actions that impede reaching
petitor intelligence, customer database design, firm goals.5
pipeline management, tapping into social media? Well-balanced scorecards reflect a steering-control
6. Marketing productivity. How profitable are firm philosophy — balance input, intermediate, output
products, customers, segments? Should resource measures.
allocation be modified?
Many balanced scorecards focus on four measure-
Marketing audits can be a very effective diagnostic ment categories — financial; customer; internal
tool. business processes; learning, growth. Table 20.5
shows candidate variables for a global account
The Balanced Scorecard.4 The balanced scorecard is
management program.
an increasingly widespread approach for monitoring,
controlling firm performance/firm functioning. The firm should closely align scorecards for dif-
[462v] The balanced scorecard seeks a middle ground ferent functional areas, managerial levels. Carefully
between using too few measures and using too many. designed, aligned sets of measures improve firm
Each extreme can cause problems: chances of securing high performance.
• Too few measures. Managers may game the system
to optimize performance on those few measures,
205 SECTION 4 IMPLEMENTING
CHAPTER 20 THE
MONITORING,
MARKET STRATEGY
CONTROLLING FIRM PERFORMANCE, FUNCTIONING 205

Table 20.5 Candidate Variables for Balanced Scorecard Approach: Measuring the Global Account Program

Financial Internal Business Process

• Year-on-year revenue and profit growth • Percentage of customers with long-term contracts

• Sales expense as percentage of revenues • Percentage of customers with solutions contracts

• Process improvements from collaboration — summary
billing, product development

Customer Learning and Growth

• Customer satisfaction and loyalty • Number of best-practices adopters

• Customer access at C-level — CEO, CFO, CIO, COO • Improved management practices

Endnotes
1 W. Edwards Deming is widely credited as the founder of the 4 R.S. Kaplan, D.P. Norton, “Putting the Balanced Scorecard to
Quality movement. The famous Japanese quality prize is named Work,” Harvard Business Review, 71 (September–October 1993),
after Deming. pp. 134–142. For a more thorough, recent treatment: R.S. Kaplan,
2 Brand-health checks — Chapter 10 — fall into this category. D.P. Norton, Strategy Maps: Converting Intangible Assets into
[734e] Tangible Outcomes, Boston, MA: Harvard Business School, 2004.
[114e]
3 Former Columbia Business School professor Abe Shuchman,
mentor to the author, was one of the first writers on the 5 Another performance measurement problem — only comparing
marketing audit. A. Shuchman, “The Marketing Audit: Its Nature, against internal referents like prior years’ performance. A.
Purposes and Problems,” Management Report No. 32, Analyzing Likierman, “The Five Traps of Performance Measurement,”
and Improving Marketing Performance, New York: American Harvard Business Review, 87 (October 2009),
Management Association, 1959. pp. 96–101. [216e]
206

SECTION 4 – CHAPTERS 19 AND 20 – KEY MESSAGES

Chapter 19
• For long-run success, the firm must develop and Videos related to Chapter 19
sustain an external orientation. • Developing the Marketing Organization [557v]
• Firms with an external orientation often build (Samuel Moed — Bristol-Myers Squibb)
success on functional excellence — customer • Marketing at GE [220v]
service, finance, human resources, operations/the (Steve Liquori — Columbia Business School)
supply chain, R&D, sales. • Leading the Marketing Organization [943v]
• The model for developing an external orienta- (William Klepper — Columbia Business School)
tion contains external elements — vision, mis- • Marketing Careers [364v]
sion, strategy; internal architectural elements (Stanford Business School)
— organization structure; systems, processes; HR
• Developing and Implementing Strategy [766v]
practices. Customer-focused values help achieve
(Robynne Berg)
necessary alignment.
• The firm can achieve an external orientation only Audio related to Chapter 19
if all employees do their jobs with a keen under-
• Marketing Imperative 5 [131a]
standing that customers are central to success.
(Noel Capon — Columbia Business School)
• Most action in developing an external orientation
rests in the firm’s internal architecture.
• Sustaining an external orientation can be very
difficult. Past, current success contains the seeds
of future failure. Inability to adapt leads many
previously successful firms to fail.
• The firm must beware several impediments to
sustaining an external orientation: accounting
systems, bureaucracy, centralization versus
decentralization, excessive focus on organizational
efficiency, functional divisions, functional view
of marketing, internal politics, inward-oriented
marketing departments, misaligned incentives, the
social fabric of institutions.
 207

Chapter 20
The purpose of monitor, control systems is to The firm should monitor, control three types of
improve firm performance. Four key principles: measure:
• Focus on market levers, develop alternative plans. • Output measures — final results the firm wants
to achieve — hard, soft.
• Mostly implement steering control rather than
postaction control. • Intermediate measures — sit between input
and output measures; affect other intermediate
• Use the right performance measures at the right
measures/output measures.
organizational levels.
• Input measures — concerned with firm
• Model relationships among input, intermediate, functioning; explicitly linked to intermediate
output measures. measures. Input measures concern three types of
Critical stages in developing a monitor-and-control control:
process: • Implementation control
• Strategy control
• Identify the process to control.
• Managerial process control
• Decide, define measures.
• The marketing audit is a useful approach for
• Develop measurement system. evaluating marketing systems, processes.
• Set standards. • The balanced scorecard typically embraces input,
• Measure results. intermediate, and measures.
• Compare results against standards; identify gaps,
variances. Videos related to Chapter 20
• Understand, communicate performance gaps. • Monitor and Control [452v]
(Alan Fortier — Fortier & Associates)
• Generate, evaluate alternatives.
• Monitor and Control [302v]
• Select alternatives, take action.
(Ron Boire — Sony Electronics)

Audio related to Chapter 20

• Marketing Imperative 6 [973a]
(Noel Capon — Columbia Business School)
 Glossary

80:20 rule. 80 percent of a firm’s revenues come from 20 Advertising strategy. Specifies how the firm will spend
percent of its customers. An extension is the 80:20:120 rule resources to achieve advertising objectives and includes
— these 20 percent of customers earn the firm 120 percent decisions about target audience, advertising objectives,
of its profits. messaging, execution, media selections and timing,
20:80 rule. This rule follows directly from the 80:20 rule: advertising budget, and program evaluation.
20 percent of a firm’s revenues come from 80 percent of Alliances. Formal economic relationships between the firm
its customers. An extension is the 20:80:20 rule — these 80 and other entities (partners) — suppliers, customers, and
percent of customers are responsible for reducing the firm’s distributors.
profits by 20 percent. Alpha test. A new product test within the firm by company
ACCORD. An acronym for factors that affect the speed employees.
of new product adoption: Advantage, Compatibility, Angel investors. Wealthy individuals who provide funding
Complexity, Observability, Risk, and Divisibility. for new business ventures at a very early stage. Angel
Acquisition. A firm purchases another firm or business. investors typically invest before venture capitalists.
Acquisition cost (AC). The cost of attracting a new Antitrust. U.S. laws that prohibit actions to reduce
customer to the firm. competition.
Adoption curve. The sales trajectory for a new product or Auction pricing. A product’s price resulting from
product form. competition among potential buyers:
Advertising. Paid communications directed at a mass Dutch auction. Prices start high; the seller reduces price
audience. until a buyer bids.
Advertising agency. A third-party organization to which English auction. Prices start low and potential buyers bid
many firms outsource the development and execution of up the price.
their advertising. Reverse auction. The buyer states product requirements;
Advertising budget. The monetary amount to be spent on suppliers bid to provide the product, and prices go down.
advertising. Approaches to budget setting are: Vickrey auction. A form of sealed-bid English auction
Objective and task. A bottom-up approach focusing on where the winning bidder pays the price of the second-
advertising objectives and the tasks to be accomplished. highest bid.
Percentage of sales. A rule-of-thumb approach that Backward integration. A customer undertakes activities
sets the budget as a percentage of sales: current sales, currently performed by its suppliers.
anticipated next-year sales, or some combination. Balanced scorecard. A performance measurement system
Competitive parity. An approach that bases the budget that balances input, intermediary, and output variables.
on competitors’ spending. Beacons. Retailers use beacons, Bluetooth technology, and
Advertising effectiveness measures. Used to test the shopper’s smartphone to identify location within the
advertising effectiveness. Options include: store for communication and data gathering.
Recognition. Advertising that respondents recognize. Benchmarking. The practice of securing best practices from
Aided recall. Advertising that respondents remember outside the firm at other organizations.
with prompting. Benefits and values, categories of:
Unaided recall. Advertising that respondents remember Economic. Result from financial considerations of
without prompting. purchasing a product or service.
Advertising objectives. What the firm is trying to achieve Functional. Follow from the product’s design.
with its advertising: Psychological. Satisfy customer needs like status,
Intermediate objectives relate to the hierarchy-of-effects affiliation, reassurance, risk, and security.
models and include awareness, knowledge, liking or Search. Customers can gain good information before they
preference, trial, and emotional commitment (to a brand). purchase.
Output objectives. What the firm ultimately wants to Use. Customers do not know the value at the time of
achieve, like sales, repeat purchase, market share, and purchase.
brand loyalty. Credence. Customers do not know the value until long
after the purchase.

GL1
GL2 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Best-practice transfer. An approach to identifying and Brand-health check. A way of measuring the overall health
transmitting superior processes across the firm. of the brand.
Beta test. A new product test by cooperating customers. Brand image. The overall meaning that the brand has to
Big data. Collections of large and complex data sets that customers.
offer the possibility of gaining insight. Brand loyalty. The extent to which customers are
Blog. An Internet vehicle for individuals to offer opinions predisposed to make repeat purchases of the brand.
and receive feedback from others. Brand management. The practice of developing and/
Brand. The traditional definition is: a name, term, sign, or sustaining brand identity by designing and executing
symbol, or design (or letter, number, or character), or a marketing actions.
combination of them intended to identify the goods and Brand migration. The process of transferring the equity in a
services of one seller or group of sellers and to differentiate brand being retired to a surviving brand.
them from competition. A more customer-focused definition Brand personality. A set of enduring and distinct human
is: a collection of perceptions and associations that customers characteristics associated with a brand.
hold about a product, a service, or a company. This collection
Brand resilience. The ability of a brand to recover from
embodies values that create meaning for customers that
represent a promise of the experience customers expect when negative information.
they have contact with the brand. Brand strategy. The firm’s game plan for developing and
achieving objectives for the brand.
Brand architecture. The organizing structure for the firm’s
brand portfolio. Brand valuation. The process of putting a monetary value
on brand equity, typically firm brand equity (FBE).
Brand associations. The meanings the brand has for
customers. Branding. The attachment of a symbol to a product, service,
Brand awareness. The extent to which customers know
and/or organization that uniquely identifies the supplier
that the brand exists. and/or owner. The symbol may consist of words, a concept,
or an auditory or visual signal.
Brand broadening/leveraging. A branding approach for
Bundling. The firm sells a product and sets a price only
extending an existing brand into a new product form/class.
in combination with other products and/or services.
Brand commitment. Often used as a synonym for brand Unbundling — the firm sells products and sets prices for
loyalty. each item individually; Mixed bundling — the firm offers its
Brand equity. The classic definition is: a set of brand assets products as part of a bundle, but also individually.
and liabilities linked to a brand, its name, and symbol that Business-case analysis. Assesses the financial viability of a
add to (or subtract from) the value provided by a product or project, including various risk factors.
service to a firm and/or that firm’s customers. There are two
Business model. The way the firm creates value, generates
types of brand equity:
revenues, and incurs costs.
Customer brand equity is the value customers receive
from a brand, less the value they receive from a generic Business strengths. Capabilities, competences, and
product. Customer brand equity comprises value received resources the firm needs to be successful.
before purchase — prepurchase equity, and value Buzz marketing. A communications approach designed to
received after purchase — postpurchase equity. secure positive word of mouth — buzz — about the firm’s
Firm brand equity derives directly from customer brand products.
equity when the firm secures in its customers brand Calendarize. Partitioning sales objectives by time period
awareness, positive attitudes, high perceived quality, like quarter, month, or week.
positive word-of-mouth, intentions to purchase, purchase,
Candidate descriptor variables — segmentation
brand loyalty, positive brand image and associations (or
variables. Used to identify segments; typically fall into one
brand personality), and satisfaction.
of four categories: geography, demography, behavioral, and
Brand essence. The brand’s fundamental promise reflected sociopsychological.
in its brand identity. Capabilities, resources, competences. Three related terms
Brand experience. Customers’ subjective internal that embrace several factors the firm can use as the basis
(sensations, feelings, cognitions) and behavioral responses for securing differential advantage. Often called business
evoked by brand-related stimuli that are part of its strengths.
design and identity, packaging, communications, and CDI. See category development index.
environment.1
CLV. See customer lifetime value.
Brand extension. Broadening (leveraging) the brand to a
new product form/class. Chasm. The transition between making sales to innovating
and early-adopting customers, and to the mainstream
1 J.J. Brakus, B.H. Schmitt, L. Zarantonello, “Brand Experience: market. Products failing to cross the chasm do not realize
What Is It? How Is It Measured? Does It Affect Loyalty?” Journal their potential.
of Marketing, 73 (May 2009), pp. 52–68. [eg2]
 GLOSSARY GL3

Co-branding. An approach to branding typically involving Steering. A dynamic, continuous, and anticipatory
cooperation between two brands from different firms. system. The firm sets control limits for performance
Commercialization. The final step in bringing a new standards and compares results against standards on an
product to market. ongoing basis.

Communication process. The activities involved in sending Control unit. An element of the sales force for monitoring
and receiving information. and controlling sales activities and performance, like a sales
region, sales district, or sales territory.
Competitive data:
Cookie. A piece of text stored by a user’s web browser for
Level of. The organizational level for collecting data —
identification and authentication.
corporate, business unit, market, and market segment.
Core product. The central element in the firm’s offer of a
Type of. The sorts of quantitative and qualitative data the
firm can collect. physical product, like an automobile.
Secondary. Data that have been collected for another Core service. The central element in the firm’s service offer,
purpose. like overnight package delivery.
Primary. Data that require a focused acquisition effort. Cost of capital. The financial return the firm must earn to
recover its capital outlay. The cost of capital is a weighted
Competitive intelligence department. An organizational
average of the firm’s cost of equity and debt. In evaluating
unit that collects, analyzes, and distributes competitive
investment opportunities, the firm discounts expected
information.
future cash flows at its cost of capital.
Competitive intelligence system. A process to collect,
Costs, types of:
analyze, and distribute competitive information.
Direct. Occur because a particular product,
Competitor. Any organization whose products and services
organizational unit, or activity exists or is being
provide similar or superior benefits and values to the same
contemplated. Can be identified with, or directly linked
customers that the firm seeks to attract and retain. They
to, a product, sales territory, or function. Include all
may be:
variable costs and at least some fixed costs.
Current. Competitors that the firm faces today. Direct fixed costs. Costs directly related to the product.
Potential. Competitors that the firm may face tomorrow. These costs do not vary directly with the number of units
Direct. Offer similar benefits with similar products, sold, but are associated with individual products.
technologies, or business models. Fixed. Do not vary with the volume of sales or production
Indirect. Offer similar benefits with alternative products, over a reasonable range. Usually comprise overhead items
technologies, or business models. like managerial salaries, depreciation, and selling, general,
Competitor target. The organizational entity against which and administrative expenses (SG&A).
the firm decides to compete. Fully loaded. Incremental costs plus overhead charges.
Complementary products. Products that are used together Indirect. Relate to several products, organizational units,
like razors and razor blades, vacuum cleaners and bags, and or activities. Cannot be identified with a single product,
printers and toner cartridges. sales territory, or activity. Are always fixed costs.
Complementer. Any organization like independents and Marginal. The cost to make and sell one additional unit.
competitors whose actions can affect the firm’s sales. Includes all variable costs and some incremental fixed
costs, but excludes overhead charges.
Concentrated market. A market with few substantial
competitors. Programmed. Set and controlled by managers for a
planning period.
Concept definition. See product concept.
Standby. Do not change significantly without a major
Control, types of: change in operations.
Firm functioning. Asks the question, “Is the firm Variable. Vary directly with the volume of sales and
functioning well?” Three subareas are: production. Increase as volume increases and decrease as
Implementation. Did the firm implement its planned volume decreases.
actions? Counterfeiting. Illegal copying of a firm’s products.
Strategy. Is the firm’s market strategy well conceived and Creative brief. A contract between the firm and its
on target? advertising agency that provides parameters and
Managerial process. Are the firm’s managerial processes information for translating the firm’s market strategy into
the best they can be? an advertising message.
Performance control. Did the firm achieve its desired Cross-selling. Selling different products to a customer who
results? has already purchased from the firm.
Postaction. The firm waits until a preset time, then
compares actual results against standards.
GL4 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Customer. Any person or organization in the channel of Customer value map. A method of assessing a product’s
distribution or decision (other than competitors) whose price/value position by plotting relative customer value
actions can affect the purchase of the firm’s products and versus relative price for various competitive products.
services. Categories of customers include: Customer value, methods of assessing:
Current (today). The firm does business with these Dollarmetric method. A method for assessing customer
customers today. value. For several pairs of alternatives, the customer states
Potential (tomorrow). The firm hopes to do business which alternative she prefers and how much extra she
with these customers in the future. would pay.
Direct. Exchange money or other resources with the firm Direct value assessment. The firm simply asks customers
for its products. what they would pay for various products.
Indirect. Secure the firm’s products from intermediaries Economic value for the customer (EVC). The price the
like manufacturers or distributors. customer pays for a competitive product, plus the net
Macro-level. Organizational units like manufacturers, additional value the firm’s product provides. EVC is an
wholesalers, retailers, government entities, and families. upper bound for price.
Micro-level. Individuals with influence or decision- Perceived value analysis. The firm secures data directly
making authority within the macro-level customer. from customers, but sometimes experienced managers
Customer experience. A state, condition, or event that
provide best-guess data that can be validated later by
marketing research.
consciously affects a customer.
Price experiment. The firm offers the test product at
Customer insight. A deep and unique understanding of
different prices in different market areas, like geographic
customers’ needs and required benefits and values.
locations.
Customer lifetime. The estimated length of time a firm’s
Data mining. A quantitative approach to gain insight into
customer will remain a customer.
customers’ purchasing behavior as the basis for making
Customer lifetime value (CLV). The economic value to the specialized offers.
firm from a customer over the lifetime of its relationship.
Decision-making. Deviations from rationality:
CLV is the discounted future stream of profits the customer
generates. Hyperbolic discounting. As decision time approaches,
individuals reverse their preferences from larger rewards
Customer needs. A basis for identifying market segments.
received later to smaller rewards received earlier.
Customer needs, types of: Mental accounting. Consumers categorize funds
Latent. The customer is not consciously aware of these and resources in separate mental accounts and spend
needs. differently from these accounts.
Recognized. The customer is consciously aware of these Prospect theory. Individuals place greater weight on
needs; they may be expressed to others, or nonexpressed. potential losses than on equivalent value potential gains.
Customer profitability. The profit the firm earns from an Decision-making process (DMP). The individual stages
individual customer or group of customers. that members of the decision-making unit complete in
Customer relationship management (CRM). The ongoing making a purchase.
process of identifying and creating new value with Decision-making unit (DMU). The individuals involved in a
individual customers and sharing these benefits over a purchase decision.
lifetime of association with them. Defection rate (1–r). The rate at which the firm loses
Customer segment. A finer-grained group of customers customers from one time period to the next (also called
than a market segment. Within a market segment, the firm churn). Sometimes calculated as a probability. The opposite
might identify several customer segments. of retention rate.
Customer service. Any act, performance, or information Demand curve. A graph of the relationship between price
that enhances the firm’s core product or service. and volume showing price sensitivity.
Customer service strategy. An approach to delivering Demarketing. Firm efforts to reduce demand, typically
customer service based on understanding customers’ needs because of a supply/demand imbalance.
for customer service.
Development. The process of turning a product concept
Customer target. Individuals and/organizations that the into an actual product.
firm tries to make its customers. Digital communication. The electronic transmission of
Customer value. The utility a customer receives from digitally encoded information.
purchasing the firm’s product or service. Value is a higher- Direct marketing. A communications tool embracing many
level construct embracing several benefits the product ways of requesting a direct customer response. Includes
offers. traditional print and broadcast advertising as well as newer
digital options like e-mail and the Internet.
 GLOSSARY GL5

Direct product profit. Assesses profit performance after Exchange. The firm and its customers exchange value.
taking into account the fixed costs the product incurs. Through its products and services, the firm offers value
Discount rate (d). The rate at which the firm discounts to customers. Customers typically offer value to the firm
future earnings so as to calculate customer lifetime value. via their financial resources. If the firm and customer each
The discount factor is typically set equal to the firm’s cost accept the value offered by the other, an exchange occurs.
of capital. Expectations disconfirmation. A key feature of the
Distribution channel or Distribution. Encompasses the SERVQUAL model. Customer satisfaction is the difference
entities, interrelationships, and functions that members between expected quality and perceived quality.
perform, so that the supplier’s products reach customers. Experiment. A research approach where the researcher
Distribution channel breadth. The number of members at a manipulates one or more independent variables to assess
particular level in the channel system: the impact on a dependent variable.
Exclusive. A distribution strategy that focuses on a few External orientation. A firm with this orientation focuses
well-chosen outlets. on customers, competitors, complementers, and factors in
Intensive. A distribution strategy that maximizes the the external environment that could affect its future health.
number of outlets. Feature or attribute. A characteristic, function, or property
Selective. A sort of compromise between intensive and of the seller’s offer.
exclusive distribution. Feature/benefit/value ladder. A hierarchy that joins the
Distribution functions. The activities that the distribution product’s features with the benefits and values those
channel must perform. Concerned with the physical features deliver to customers.
product, information, and/or ownership. First-mover advantage. An advantage gained simply by
Distribution, method: being first. The firm may earn a leading reputation for
quality and/or gain superior market knowledge.
Direct. The supplier supplies products directly to
consumers and end users. Five-forces model. A set of forces impinging on the firm:
Indirect. Intermediaries like distributors, wholesalers, Current direct competitors. Satisfy customer needs
and retailers play a major role in transferring products to by offering similar benefits with similar products,
consumers and end users. technology, or business models.
Distribution, view of: New direct entrants. Offer similar products, but were not
previously competitors.
Broad view. Encompasses changes in state, physical
location, and time. Indirect competitors. Satisfy similar customer needs by
offering alternative products, technologies, or business
Narrow view. Encompasses mainly changes in physical
models.
location and time.
Suppliers. Provide the firm’s inputs.
Disutility of price. Refers to the fact that whereas customers
receive value (utility) from a product’s features/attributes, Buyers. Purchase the firm’s products.
they must give up economic resources. Price has negative Floor price. The price below which a firm should never sell
value or disutility. a product, typically the marginal cost.
Divest. Selling a business to another firm. Flower of customer service. Eight elements of customer
Dollarmetric method. A method for estimating the
service: safekeeping, order-taking, information,
monetary value of customer brand equity. consultation, billing, payment, exceptions, and hospitality.
Focus group. A small number of people, typically eight to
Downstream. The firm’s customers and its customers’
customers, etc. 12, assembled by a marketing researcher to secure insight
into customers’ needs and motivations.
Dynamic pricing. A special case of price discrimination
Follower. A firm that enters after the pioneer has created a
where the price varies over time.
new market.
Economic value for the customer (EVC). The price the
Forecasts, types of:
customer pays for a competitive product, plus the net
additional value the firm’s product provides. EVC is an Market. The predicted market-level sales in a future time
upper bound for price. period.
Entry barrier. Anything that forestalls or slows a firm’s entry Sales. The firm’s predicted sales in a future time period:
into a market. Bottom-up. A forecast that starts with customer-by-
Environmental influences. Factors external to the consumer
customer forecasts.
that affect decision-making, embracing culture, social class, Synthetic. A forecast that combines top-down and
other people, family, and the situation. bottom-up forecasts.
Top-down. A forecast that starts with a market-size
forecast.
GL6 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Forward integration. A supplier undertakes activities Hierarchy of needs. Developed by psychologist

currently performed by its customers. Maslow; needs are in five groups, ordered low to high —
Fragmented market. A market with many competitors. physiological, safety and security, social, ego, and self-
actualization.
Franchising. A distribution strategy in which the franchisor
develops a business model. Franchisees agree to implement Hospitable market. A market that is attractive to the firm.
the franchisor’s model and typically pay an initiation fee Human resource management (HRM). Processes for
and ongoing fees. managing people including recruiting, selecting, training
Global account manager (GAM). A person responsible for and development, work processes, talent management and
the firm’s most important global customers. career paths, and recognition and reward.

Global branding. A branding approach that uses a common Hurdle rate. A minimum return that any investment
brand around the world. opportunity must exceed.

Good market segments. Segments that satisfy five criteria: Iceberg principle. An analogy to the iceberg whereby good
differentiated, identifiable, stable, appropriate size, and aggregate performance in a unit or subunit can hide poor
accessible. performance elsewhere in the same unit.

Gray markets. A reseller offers the firm’s product in a Imitation. Copying a competitor’s strategy; often used in
market at a price lower than the firm’s price in that market. early-growth markets to surpass leaders.
Gross profit. Sales revenues less cost of goods sold. Implementation (of growth strategy). Alternative
approaches for the firm to achieve its objectives:
Gross rating points (GRPs). Combines reach and
Acquisition. The firm acquires another firm or a business
frequency. GRP = Reach × Frequency.
unit.
Growth path. Describes the route the firm or business
Equity investment. The firm takes an ownership position.
unit takes to achieve its growth objectives. Nine individual
approaches reduce to four basic options: Insourcing. The firm undertakes activities currently done
by others.
Market growth. Engage related and new customers with
existing products. Internal development. The firm develops the opportunity
in-house.
Market penetration. Focus on existing products in
existing markets. Licensing and technology purchase. The firm secures
access to technology developed by others. License — the
Product and market diversification. Bring new products
original firm maintains ownership. Technology purchase
to new customers.
— the firm gains ownership.
Product growth. Bring related and new products to
Outsourcing. The firm secures other firms to undertake
existing customers.
activities it previously conducted in-house so it can focus
Growth-share matrix. BCG’s portfolio analysis system; on higher return opportunities.
dimensions are forecast long-run market growth rate and
Strategic alliance. Two firms join together to develop a
relative market share. Product types in the growth-share
stronger combined entity.
matrix are:
Implementation programs. Alternative approaches for
Cash cows. High market shares in low-growth markets;
the firm to achieve its objectives. In the context of market
should generate cash.
strategy, these include the marketing mix and other
Dogs. Low market shares in low-growth markets; many functional programs.
dog products have poor financial performance, but some
Independent inventors. Innovators working independently
are respectable.
outside any corporate umbrella.
Stars. High market shares in high-growth markets;
comparatively rare. Many stars consume significant cash, Indicators, types of:
but should create generous returns later. Leading. Help managers assess if they are on track to
Problem children, question marks, lottery tickets, or achieve planned results.
wildcats. Low market shares in high-growth markets. Lagging. Measure what has already occurred.
Need a lot of investment and are high risk. Inhospitable market. A market that is unattractive to the
Harvest. The firm seeks short-term cash flow at the expense firm.
of sales and market share. Initial public offering (IPO). A company’s first sale of stock
Hierarchy-of-effects models. Describes how advertising to the public. Venture capitalists often sell equity stakes in
works for different types of products: an IPO.
High-involvement products. The purchase involves Innovation. Endowing human and material resources with
financial and/or psychosocial risks. new and greater wealth-producing capacity.
Low-involvement products. The purchase involves little
risk.
 GLOSSARY GL7

Innovation, types of: Late growth. Sales are still growing, but the rate of growth
Disruptive innovations. Developed from a new is slowing.
technology offering new and very different value Maturity. The sales growth rate ranges from flat to
propositions, initially for new applications and a limited growth in gross national product (GNP).
number of new-to-the-market customers. Decline. Overall sales decrease year by year.
Sustaining innovations. An innovation that improves the Liquidate. Closing down a business and selling its assets.
performance of established products along dimensions
Lock-in. The situation when customers are committed
valued by mainstream customers.
to buying from the firm. Lock-in customers have high
Insight. Securing understanding of strengths and switching costs.
weaknesses in order to gain strategic perspectives. Three
Logistics. The process of moving a product from point A
important types:
to point B:
Competitive insight is the ability to describe, evaluate,
project, and manage competitors. Outbound. Getting the product from the supplier to the
customer.
Company insight is the firm’s understanding of itself
— its advantages and disadvantages compared to the Inbound (reverse). Getting the product from the
competition. customer back to the producer.
Complementer insight is insight into any organization Loyalty programs. Methods that firms use to enhance
whose actions affect the firm’s sales. customer retention.
Integrated marketing communications. The integration of
Hard rewards. Denominated in dollars and cents, or
the firm’s various communications efforts, using various translatable points.
tools, for various communications targets. Soft rewards. Include toll-free information numbers,
restaurant seating, theater ticket availability, hotel room
Internal architecture. The firm’s organizational structure,
and airline seat upgrades.
systems and processes, and HRM practices.
Probabilistic rewards. The customer wins a large reward,
Internal orientation. A firm with this orientation looks
or zero.
inward. It focuses on internal functions like finance,
operations, sales, and technology (R&D), rather than Deterministic rewards. The customer accumulates
external factors. points, then collects the reward.
Margin. Embraces many specific definitions based on
Intrafirm competition. A type of competition where
different firm units compete with each other. revenues less costs.
Margin multiple. A quick way to calculate CLV if customer
IPO. See initial public offering.
margin, customer retention rate, and discount rate are
Just-in-time (JIT). An approach to reducing inventory by constant from time period to time period. CLV equals
making raw materials and parts deliveries shortly before use customer margin multiplied by the margin multiple.
in the production line.
Margins, types of:
Kenneling. The practice of purchasing low-share businesses
Unit margin. A term used by retailers and wholesalers
in low growth markets and placing them together. The
that measures the difference between the product’s selling
acquirer typically makes profits by rationalizing operations
price and its unit cost.
to achieve lower costs.
Percent margin on cost. The product’s margin divided
Kill point. A point where the firm must decide to proceed or
by the cost, stated as a percentage (not generally used by
drop the project.
wholesalers and retailers).
Lead users. Organizations and individuals who think up, Percent margin on selling price. The product’s margin
and may even prototype, new products. divided by the selling price, stated as a percentage.
Leapfrog. A way of surpassing the market leader by Wholesalers and retailers generally use this term.
developing innovative and superior products, and/or Inventory turnover (stockturn). The number of times
entering emerging market segments; often used in early- the firm sells average product inventory during the year.
growth markets.
Customer margin. Sales revenues less all attributable
Life cycles. A common means for describing the evolution customer costs.
of markets and products. Product-class and product-form
Market. Customers — people and organizations — who
life cycles are typically partitioned into several stages:
require goods and services to satisfy their needs. Customers
Introduction. The period from product launch until must have sufficient purchasing power and a willingness to
sales take off and grow at an accelerating rate. Total sales pay for the products that suppliers offer.
during introduction are generally low.
Market-factor testing. A process for exploring the effect of
Early growth. The period from sales take-off until the one or more marketing-mix elements on expected sales.
growth rate begins to slow. Typically performed in a simulated environment.
GL8 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Market insight. The understanding firms secure about Marketing mix. The traditional description of the tools
future market changes that lead to an appreciation of marketers use to construct an offer. They are often called
opportunities and threats. the 4Ps—product, place (distribution), promotion, and
Market levers. The actions the firm takes to achieve its price. Today, service is often treated separately to form 4Ps
performance standards. and an S.

Market occupancy ratio. A performance measure defined as Marketing myopia. The tendency for firms to have such
the ratio of firm’s number of customers to the total number an overly narrow view of their market that they miss
of customers. opportunities and/or fail to recognize threats.

Market offer. The package of benefits and values the firm Marketing principles. Guidelines for making good
offers to customers. marketing decisions:

Market-segment attractiveness. How attractive a segment

Selectivity and concentration. Because resources are
is to the firm. An individual segment may be differentially scarce, the firm should be selective in its choice of market
attractive to different firms. and market segment. It should concentrate its resources
against its chosen targets.
Market segmentation. A conceptual and analytic process
Customer value. Success in target market segments
for grouping actual and potential customers into market
depends on the firm’s ability to provide customers with
segments.
value.
Market share. The most common market-based
Differential advantage. To be profitable, the firm must
performance measure; compares the firm’s sales units or provide a net benefit, or cluster of benefits, to a sizable
revenues directly with competitors. group of customers, that they value and are willing
Market strategy. The firm’s game plan for addressing the to pay for, but cannot get, or believe they cannot get,
market. elsewhere. Competition eventually erodes away any
Market structure. The market, products serving the market, differential advantage—the firm must continually renew
and suppliers offering these products. its differential advantage.
Market tinkering. An approach to new product develop- Integration. The firm must carefully integrate and
ment in which a firm makes minor modifications to its coordinate all elements in the design and execution of
current products. its market strategy. Integration includes elements of the
marketing mix and the activities of all functions that play
Marketing. There are several related meanings:
a role in delivering promised benefits.
Philosophy. Marketing as a guiding philosophy for the
Marketing research, types of:
entire organization embraces an external orientation. It
recognizes that revenues from customers are the critical Primary. The firm collects data for the specific purpose
source of cash flows. of the study.
Imperatives. Marketing as six imperatives describes the Secondary. Based on data that has already been collected
specifics of the marketing job. These are the must-dos of for another purpose.
marketing. Qualitative. A flexible and versatile approach comprising
Principles. The firm must apply four marketing several techniques that is not concerned with numbers.
principles to do the marketing job well. They act as Often used for exploratory studies.
guidelines for making good marketing decisions based on Quantitative. A research approach that uses numerical
the six imperatives. data to test hypotheses.
American Marketing Association (AMA). The AMA Mass communication. Communications intended to reach
periodically redefines marketing. The 2004 definition a large audience via mass media.
stated, “Marketing is an organizational function and Means/ends tree. A diagrammatic method for outlining,
a set of processes for creating, communicating, and assessing, and choosing among various alternatives.
delivering value to customers and for managing customer
Measures, types of:
relationships in ways that benefit the organization and its
stakeholders.” In 2007, the definition became, “Marketing Input. Focus on actions taken by the firm — leading
is the activity, set of institutions, and processes for indicators.
creating, communicating, delivering, and exchanging Intermediate. Focus on actions that customers take —
offerings that have value for customers, clients, partners, leading indicators.
and society at large.” Output. Focus on performance variables like sales and
Marketing audit. A comprehensive process for evaluating profits — lagging indicators.
the firm’s marketing practices. Hard. Objectively measured like sales volume, profit, and
market performance.
Soft. Rating scale measures like customer satisfaction or
attitudes.
 GLOSSARY GL9

Media class. A group of closely related media — New idea processes. Methods for generating new ideas:
newspapers, TV, and billboards are each media classes. Structured thinking. Logical ways to create new product
Media objectives. What the firm wants to accomplish with ideas.
its media strategy: Unstructured thinking. A family of approaches that
Frequency. The average number of times a targeted attempt to break the mold and develop totally new ideas by
individual is exposed to the advertising. thinking outside the box.
Impact. The effect of an advertising message on the Nondisclosure agreement (NDA). Aka a confidentiality
target audience: Impact results from a combination of agreement; a contract promising to protect confidential
frequency, reach, and creativity. data disclosed during employment or other business
Reach. The number of targeted individuals exposed to the transaction.2
advertising message at least once. Opportunity costs. Costs incurred by not taking a course
Duplicated reach. The portion of the target audience of action. They are not out-of-pocket costs but represent
exposed to the advertising message from multiple media forgone profits due to inaction.
sources. Outsourcing. When the firm engages a supplier to conduct
Unduplicated reach. The portion of the target audience an activity previously done in-house.
exposed to the advertising message from a single source. Paid search. Online advertisers pay to appear next to and
Media schedule. The placement and timing of be associated with search results based on keywords. For
advertisements for the advertising program. example, an electronics retailer might pay to appear next to
Media vehicle. A specific exemplar of a media class — The searches for HDTVs.
New York Times and 60 Minutes are each media vehicles. Panel. A group of respondents who agree to provide data
Merger. Two firms join together to form a new entity. over time.

Miscommunication. Misperception and/or misunder- Partnership model. An approach to distribution channel

standing by a receiver of a message the sender intended to members that involves building cooperation and trust.
send. Problems may occur in: Penetration pricing. A long-run low-price strategy to grow
Encoding. Translating and interpreting the intended a market and secure high market share.
message into the actual sent message. Perceived customer value. The value the customer believes
Distortion. Receiving a different message from the the firm is delivering.
message that was sent. Performance gap (variance3). The difference between
Decoding. Misperceiving and/or misunderstanding the performance standards and actual performance.
received message because of selective attention, distortion, Performance objectives. Describe the business results the
and/or retention. firm hopes to achieve. A performance objective has two
Mission. Guides the firm’s search for opportunity so it can components:
focus on a limited number of areas where it is likely to be Strategic. The qualitative and directional results the firm
successful. wants to achieve. Strategic objectives typically fall into
Moment of truth. An interaction between a service customer three categories: growth and market share, profitability,
and service personnel. and cash flow.
Monolithic brand. The brand for a group of products Operational. Quantitative statements of business results
fulfilling many different functions. A corporate brand — the firm hopes to achieve that relate directly to the
for the firm as a whole — is a special case of a monolithic strategic objectives. How much is required and by when.
brand. Personal communication. Face-to-face communications
Multibranding. A brand architecture approach in which the with targeted individuals or groups.
firm uses multiple brands for its entries in various product PESTLE model. An acronym for identifying the
classes. environmental forces acting on an industry — Political,
Multifactor matrix. A portfolio analysis system that helps Economic, Sociocultural, Technological, Legal, and
the firm decide which segments to target by assessing the Environmental (Physical).
attractiveness of market segments and the extent to which Pioneer. A firm that creates new markets and is the first, or
the firm possesses the business strengths to succeed. among the first, with a new product form.
Native advertising. A form of online advertising in which Pipeline analysis. A method for tracking the firm’s
the advertisement is matched to the surrounding material performance at different selling process stages.
— like an article seemingly written by an editor.
Net Promoter Score (NPS). Widely used measure of
customer satisfaction derived from a single question 2 Definitions of noncompete and nondisclosure from Everyday
measured on a 0 to 10 scale: “How likely is it that you would Law for Everyday People, <www.nolo.com>. [eg3]
recommend XXXX to a friend or colleague?” 3 Not to be confused with the statistical term variance, as in mean
and variance.
GL10 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Pocket price. The amount of money the firm actually Topsy-turvy pricing. The supplier receives additional
receives — in its pocket. value from a customer so that suppliers pay a price, rather
Portfolio analysis. A method of evaluating investment than customers.
opportunities that arrays the firm’s products in two Transfer pricing. A price set for transactions among a
dimensions. firm’s business units.
Portfolio approach. Individual products play different roles Variable pricing. Setting different prices for different
in the firm’s portfolio. Some products generate growth and customers/segments.
market share, some products earn profits, and some deliver Variable-rate pricing. Pricing by use.
cash flow. Price skimming. A strategy of setting high prices even
Positioning. The heart of the market strategy that should though costs are falling. Often used in the early stages of the
create a unique and favorable image in the minds of target product life cycle.
customers. Positioning requires four key decisions: select Price waterfall. The reduction, by discounts and allowances,
customer targets, frame competitor targets, design the value from list price to pocket price.
proposition, and articulate the reasons to believe.
Pricing, and transportation:
Potentials, types of:
CIF (carriage, insurance, freight). The supplier pays the
Market. The maximum market-level sales that the firm cost, insurance, and freight.
expects in a future time period.
FOB (free on board). The customer pays freight,
Sales. The maximum sales that the firm could achieve in a insurance, and other charges.
future time period.
Pricing strategy. The firm’s overall approach to setting
Power. The ability of one channel member to get another to prices; should be based on four considerations — perceived
do what it wants it to do. customer value, costs, competition, and strategic objectives:
Preemptive. Acting before competitors. Penetration pricing. The firm sets prices close to costs as
Preliminary screening. The first stage for eliminating new it seeks growth and market share.
product ideas. Skim pricing. The firm keeps prices high to secure high
Price discretion. The firm’s ability to use several pricing margins.
approaches. Firms that offer high value but also have low Pricing toolkit. A set of pricing tactics for the firm to change
costs enjoy the most price discretion. a product’s price.
Price discrimination. Setting different prices for the same Product. Sometimes product refers to the core offer, both
product to different segments or customers. physical products and services. We use this shorthand in
Price sensitivity. Degree of change in volume related to much of the book. But tangible physical products can be
change in price: touched, worn, kicked, or sat upon; a service cannot.
Price-elastic market. Volume increases/decreases Product, types of:
significantly as price decreases/increases. Product class. A set of products offered by competing
Price-inelastic market. Volume is relatively insensitive to suppliers that serve a set of customer needs in a roughly
price changes. similar manner.
Price setting, types of: Product form. A group of products offered by competing
suppliers that are more closely similar in the way they
Competitive-driven pricing. Pricing based on
meet customer needs than products in a product class.
competitors’ prices.
Cost-plus pricing. Setting price by identifying costs and Product item. A uniquely identified product offered by
adding a satisfactory profit margin. the firm.

Customer-driven pricing. Customers name the prices Product line. A group of related products offered by the
they are prepared to pay. If the product is available, they firm.
must complete the purchase. Product cannibalization. Sales of the firm’s lower-margin
Deceptive pricing. False prices and prices that might product decrease sales of a higher-margin product.
confuse or mislead customers. Product concept. A description of a product idea that
Fees and surcharges. Extra charges such as bank fees for details the benefits and values the product should deliver to
ATM use or airline fees for checked bags. customers.
Flat-rate pricing. Pricing for a fixed time period. Product portfolio. Describes the set of products that the
Loss-leader pricing. Retailers deliberately take losses to firm or business unit offers.
build customer traffic. Product portfolio imbalance. The firm’s products are
Psychological pricing. A common retail practice of misbalanced between resource generating and resource
pricing just below a benchmark number, like $9.95 or consuming. In the growth/share matrix, this imbalance
$9.99 versus $10.00. refers to cash flows.
 GLOSSARY GL11

Product proliferation. The firm offers a large number of Reverse logistics. The process of returning used goods/
products. Often viewed as undesirable, but can act as a equipment from the point of use for disposal, refurbishing,
barrier against competitive entry. Sometimes confused with or remanufacturing.
market segmentation. Reward system. The way to compensate salespeople for
Profit contribution. The extent to which the product’s sales their efforts and performance. Includes elements like
revenues exceed variable costs. financial compensation, recognition, and promotions and
Programmatic advertising (media) (marketing). The firm work assignments.
automates buying and placing advertisements based on RPS. An acronym for rapid prototyping system. RPS is a
rules and filters to optimize reaching a desired audience — method for turning three-dimensional computer models
much used in digital communications. into three-dimensional physical objects.
Publicity. Communication for which the firm does not pay, Sales approach. The essential message that the salesperson
typically via the press. delivers to customers.
Public relations (PR). Communication that embraces Sales force management tasks. Six related jobs that sales
publicity but is broader — includes other ways of managing managers must complete to be effective.
the firm’s image to gain favorable responses. Task 1. Set and achieve sales objectives.
Pull. A communications approach that focuses on indirect Task 2. Determine and allocate selling effort.
customers. Task 3. Develop sales approaches.
Push. A communications approach that focuses on direct Task 4. Design the sales organization.
customers. Task 5. Create critical organizational processes.
Quasi-personal communication (QPC). Interaction and Task 6. Staff the sales organization.
feedback without human involvement, usually via artificial
Sales forecast. The firm’s predicted sales in a future time
intelligence software.
period:
Reasons to believe. Claims that support the firm’s value
Bottom-up. A forecast that starts with customer-by-
proposition. Should provide compelling evidence to make
customer forecasts.
the firm’s claims believable.
Top-down. A forecast that starts with a market-size
Reengineering. Examines fundamental assumptions about
forecast.
the way the firm conducts its activities. Seeks alternative
approaches for redesigning and improving the firm’s Sales objectives. The firm’s desired results — typically
processes. stated in terms of sales revenues, sales units, or profit
contribution.
Reference groups. Individuals and groups that influence
customers in their decision-making: Sales potential. The maximum sales that the firm could
achieve in a future time period.
Primary. Include family members and organizational
work groups. Sales promotion (SP). Activities providing extra customer
Secondary. Include club and church members and value, often for immediate sales. Includes:
professional organizations. Trade shows. Products displayed to large numbers of
customers at one time.
Aspirational. Those to which the customer would like to
belong. Product placement. Products placed in movies and TV
shows.
Relative market share (RMS). A dimensionless ratio used
in the growth-share matrix; the firm’s market share divided Sales quotas. Sales objectives stated in terms of specific
by the nearest competitor’s market share. performance requirements.
Retention rate (r). The rate at which the firm retains Sales response function. The relationship between selling
customers from one time period to the next. Sometimes effort and sales results.
calculated as a probability. The opposite of defection rate. Sales territory. A set of customers or geographic area
Return measures, types of: assigned to an individual salesperson.
Return on sales (ROS). Profit expressed as a percentage of Salesperson workload. The effort a salesperson must
sales revenues; may be calculated for net or gross profit. expend to complete assigned activities; a key variable for
Return on investment (ROI). Profit expressed as a designing sales territories.
percentage of investment; may be calculated for gross or Scenario. A descriptive narrative of how the future may
operating profit or net profit. evolve for a plausible option.
Return on stockholder equity (ROE). Profit expressed as Screening criteria. Aids for evaluating and selecting
a percentage of stockholder equity. opportunities. Important screening criteria are:
Return per linear foot (ROLF). Profit divided by the Objectives. What does the firm seek to achieve by
linear feet of shelf space. investing in the opportunity?
GL12 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Compatibility (or fit). Can the firm successfully address Signal. Information the firm sends to competitors, hoping
the opportunity? they will process the information and act accordingly.
Core competence. Can the firm use its core competencies Six sigma. A data-driven methodology for eliminating
or gain new core competencies? defects in any process.
Synergy. Can the firm use existing resources and earn SKU. See stock-keeping unit.
greater returns than a standalone entry?
Slotting fees. Payments that suppliers make to retailers for
Contribution to the venture portfolio. Does the providing shelf space for their products.
opportunity add positively to the set of opportunities the
Social media. Online tools and platforms that allow
firm is pursuing?
Internet users to collaborate on content, share insights and
Search engine optimization. An element of search experiences, and connect for business or pleasure. Involves
marketing strategy whose goal is to move the firm’s website multimedia and includes blogs, wikis, photo and video
link as high up the ranking list as possible. sharing, forums, and networks for meeting like-minded
Secondary market. Resale of a product or service. Most people.
financial markets are secondary markets. Spam. Unsolicited and unwanted e-mail messages.
Selling effort. The demands of the sales job. Methods to Span of control. The ratio of subordinates to supervisors.
estimate required selling effort include: For example, a sales manager supervising 10 salespeople
Single-factor model. Uses a simple classification of would be a span of 10 to 1.
customer importance. Special relationships. Informal economic relationships
Portfolio model. A more complex approach for between the firm and other entities such as government
estimating required selling effort. agencies, political parties, and public interest groups, as well
Sentiment analysis. The analysis of text to determine its as suppliers and customers.
polarity. Used by firms to examine comments about their Standalone brand. An individual brand with no apparent
brands in social media. relationship to any other firm brand.
Service. Any act or performance that one party can offer Standards. The firm’s planned results; criteria against
another that is essentially intangible and does not result which the firm measures its performance.
in the ownership of anything. Anything that cannot be
Stock-keeping unit (sku). A unique identifier assigned to a
dropped on your foot.
specific product or service.
Service equipment. Physical products needed to perform
Strategic account manager (SAM). A person responsible
the service.
for the firm’s most important customers.
Service facilities. Where the firm produces the service.
Strategic (or key) accounts. Customers that provide the
These facilities can be:
highest levels of current and/or potential sales and profits.
Offstage. Out of the customers’ sight.
Strategic alliance. A cooperative arrangement that pools
Onstage. Where customers experience deeds, the strengths of individual partner firms. Strategic alliances
performances, or efforts. range in formality from a new joint-venture firm to
Service guarantee. A promise about the service experience temporary, informal arrangements.
that includes elements of value if the firm does not keep its Strategic focus. Selected from a tree of alternatives and
promise. states broadly how the firm will achieve its performance
Service personnel. People who provide the service. objectives.
Service quality. The extent to which the firm’s service Strategic options. A variety of alternatives, each requiring
performance exceeds customers’ expectations. significant investment, among which the firm must choose.
SERVQUAL. A popular model and measurement device for Strategic sourcing. A discipline of specially designed
service quality based on several gaps. systems and processes for reducing the costs of purchased
Shadow system. Securing competitive information by materials and services.
having executives shadow specific competitors. Strategy for growth. A set of frameworks that helps the
Shareholder value. The total value to shareholders— firm decide which businesses to be in and which businesses
market capitalization—is measured by the market price of not to be in. Includes vision, mission, growth path, and
the firm’s shares times the number of shares outstanding. timing of entry.
Increasing shareholder value has become a mantra for many Supply chain. A coordinated system of organizations,
firms. people, activities, information, and resources that move a
Shareholder-value perspective. Management’s job is to product or service, physically or virtually, from supplier to
maximize returns for shareholders. The shareholder-value customer.
perspective is prevalent in many capitalist countries— Survey. A common technique for securing data by asking
particularly in the U.S. respondents questions.
 GLOSSARY GL13

Switching costs. The costs that a customer must incur to Type I error. A false positive error like investing in a project
switch from one supplier to another. Customers with high that fails or hiring a salesperson who performs poorly.
switching costs experience lock-in. Type II error. A false negative error like rejecting a project
Synergy. Occurs when the combined effect of two or more that would have succeeded or not hiring a salesperson who
elements is greater than the sum of their separate effects — would have performed well.
positive synergy. If the combined effect is less than the sum Umbrella branding. A brand architecture approach
of the separate effects, there is negative synergy. in which the firm uses a monolithic brand for several
Systems, types of: products, like a corporate brand.
Hard. Based on information technology. Upstream. The firm’s suppliers and its suppliers’ suppliers,
Soft. Based on employees. etc.
Tactical pricing. The ongoing stream of pricing decisions Value proposition. The heart of positioning that provides
the firm makes on a daily basis. a convincing answer to a deceptively simple question:
Target audience. The audience that the firm is trying to
Why should target customers prefer the firm’s offer to
reach with its advertising. competitors’ offers?
Values, types of. A common set of beliefs that guide the
Targeting. Deciding the market segments against which the
firm should concentrate its resources. behavior of the firm’s employees. Values can be:
Hard, like profitability and market share.
Technology, types of:
Soft, like integrity, respect for others, trust, and customer
Disruptive technology. A new technology offering new
preeminence.
and very different value propositions, initially for new
applications and a limited number of new-to-the-market Venture capitalists. Individuals and firms that provide
customers. funds for new early-stage businesses.
Sustaining technology. A new technology that Venture portfolio. The set of opportunities the firm decides
improves the performance of established products along to pursue.
dimensions valued by mainstream customers. Viral marketing. Marketing techniques that use preexisting
Telemarketing/Telesales. Communication by telephone, social networks to convey marketing messages.
usually viewed as a subset of personal communication: Vision. A description of an ideal future state; an
Inbound. Initiated by the customer. impressionistic picture of what the future should be:
Outbound. Initiated by the firm. Corporate vision. Focuses on the firm
Test marketing. Tests a full-scale product launch on a Business-unit vision. Focuses on the business.
limited basis. Wiki. A website that allows user to easily create and edit
Timing of entry. Denotes alternative entry stages in the interlinked websites. Uses include creating collaborative
product form life cycle: websites, powering community websites, and for knowledge
Pioneer. Creates new markets. management systems.
Follow-the-leader. Enters markets when they are growing Winback. Securing sales from a customer that previously
rapidly. defected.
Segmenter. Enters in the late-growth stage by matching Word-of-mouth (WOM) communication. Communication
offers to emerging customer needs. between and among current and potential customers.
Me-too. Enters mature markets.
Tracking study. A method of securing research data.
In a tracking study, aka a longitudinal study, a panel of
individuals agrees to provide responses periodically over
time.
 Index
Page numbers with an f refer to a figure; t refers to a table; n denotes an endnote. Bolded page numbers refer to a page range for a chapter.

Name Index Alicorp, 131 Caras, 36

Almaden, 73 Carrefour, 171
Altamirano, Amin, 123
AM (Aeroméxico), 139, 185, 185f CB (Co’munity Business), 56
Álvarez, Jorge, 123
Amazon Cemex, 92
Bacon, Francis, 117 acquisitions by, 56 Cerveceria Cuauhtemoc Moctezuma
Ballmer, Steve, 75 cross-selling by, 11 (CCM), 179
Basarab, Dave, xi as customer-centric company, 197 CheapTickets, 115
Bezos, Jeff, 197 as indirect competitor, 23 Cialis, 120
Burke, James, 142 investments during recessions, 3 Cisco, 3, 55, 119
in Mexico, 191 Citibank, 37, 195
Cadena, Gustavo, 123
one-click purchasing at, 171 Citigroup, 93
Carlzon, Jan, 110
physical stores, 170–171 Claritin, 55
Deming, W. Edwards, 205n1 shopping on, 169 Clorox, 80–81
Drucker, Peter vision statement of, 50 Coca-Cola, 7, 54, 85, 103
on business choices, 104 AmEx Platinum Card, 29, 72, 86, 87, 182 Colgate-Palmolive, 93
on customer orientation, 2 Andersen Windows & Doors, 193 Compañía Licorera de Nicaragua (CLN),
on innovation, 117 Angie’s List, 171 170
on marketing, 3 Apple Co’munity Business (CB), 56
attack website directed at, 114 Constant Contact, 143
Ellison, Larry, 115
founding of, 120 Converse, 105
Gerstner, Lou, 196–197 innovation at, 190 Coralac, 10
iPads, 20, 75 Corning, 50
Jobs, Steve, 75
iPhone, 44, 75 Corolla, 89
Lozano, Valeria, 120 iPod, 75, 176 Corona Extra, 179
iTunes, 11 Costa Rica Vacations (CRV), 149
Maduro, Nicolás, 197
MacBook Pro, 35 Craigslist, 145, 171
Maslow, Abraham, 28
Macintosh users group, 86 Crowne Plaza, 93
Plank, Kevin, 76 Newton, 20, 52 Cyzone cosmetics, 136
Samsung lawsuit, 77
Schmitt, Bernd, 139 De Beers, 23
Arm & Hammer, 80
Schultz, Howard, 50, 120 Dell, 30, 62
Armani, 87
Deloitte, 195
Vázquez, Lorena, 70 Aroma products, 82
DHL, 63, 116, 190
AS (AXA Seguros), 45
Wanamaker, John, 137 Dior, 87
Aspirin, 86
Welch, Jack, 79, 196 Disney, 50, 109, 110
Avon, 93
Dr Pepper, 147
AXA Seguros (AS), 45
DuPont, 50
Company/Brand Index Bacardi, 93
easyJet, 87
ABA Seguros, 45 Bambú straws, 120
eBay, 9, 88, 171
Absolut, 85 Banco Mercantil de Monterrey, 15
Editorial Televisa Ecuador (ETE), 36
Accenture, 109 Bancomer, 45
eHarmony, 171
Acer, 82 Band-Aid, 86
800Flowers, 11
ADT, 86 Banorte (BN), 15
Embrapii, 24
AdWords, 76 Bechtel, 122
Enterprise, 67
Aeroméxico (AM), 139, 185, 185f Belcorp cosmetics, 136
Ésika cosmetics, 136
Airbnb Ben & Jerry’s, 90
ETE (Editorial Televisa Ecuador), 36
branding by, 88 Best Buy, 61
Etisign (Etimex Group), 175
as disruptive innovation, 120 Big Cola, 7
Etsy Wholesale, 174
first-mover advantage of, 77 Bimbo, 155
Evian, 87
founding of, 120 Bing, 143–144
as indirect competitor, 23 Biro, 86 Fabuloso, 82
in sharing economy, 171 Bitel, 180 Facebook
technology use by, 80 Black & Decker, 93 acquisitions by, 55
Alamo, 67 Bodas (wedding service), 32 advertising through, 147
Alcoa, 27, 190 Bolshoi Ballet, 31 branding by, 132
Aldi, 171 Boston Consulting Group, 100 founding of, 120
AlEn, 82 British Airways, 124, 193 initial public offering by, 77, 88
Alibaba, 169, 171 Burger King, 83, 103 Falabella Group (FG), 91

IN1
IN2 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

Farmacias Guadalajara (FG), 12 Grupo ICA (Ingenieros Civiles Asociados) Loly in the Sky (Loly), 70
Federated Department Stores, 93 (GICA), 3 Louis Vuitton bags, 90
FedEx Grupo Lala (Lala), 65 Lucent, 195
customer lifetime value calculations for, 9 Grupo Modelo (GM), 179 Lyft, 20, 23, 120
direct marketing delivery options, 142 Grupo Romero, 131
Macy’s, 93
as follow-the-leader entrant, 52 Guinness, 50, 72
Mail Chimp, 143
online package tracking, 113
Harley Davidson, 86 Mapfre, 45
targets of, 71
Havaianas, 51 Marks & Spencer, 6
on-time delivery by, 87
Hertz, 67 Marlboro, 86
FG (Falabella Group), 91
Hewlett Packard Enterprise, 109 Mary Kay (MK) cosmetics, 155, 164
FG (Farmacias Guadalajara), 12
Hilton, 90 MasterCard, 72
Flash, 82
Holiday Inn, 90, 93 Match.com, 171
Flor de Caña, 170
Honda, 20, 81, 86, 93 Mattel Barbie dolls, 62
Florida Light and Power, 109
Hoover, 86 Mazda, 147
Ford
HP McDonald’s
automotive alliance of, 44
benchmarking by, 195 in Argentina, 83
differentiation by, 21
complementary products, 103 attack website directed at, 114
Jaguar purchase by, 89
founding of, 120 customer experience at, 168
Mercury abandoned by, 63
inkjet printers for maintaining market location research by, 169
vision statement of, 50
share, 54 negative associations with, 86–87
Foursquare, 147
services offered by, 108 soft drink choices by, 103
Free Tea-Black Tea, 7
HubSpot, 143 user groups, 63
GAJE (Grupo AJE), 7 MCHD (Modular City Home & Deco), 171
IBM
Gap, 114 McKinsey, 27
business leadership from, 189
GB (Grupo Bimbo), 94, 155 Men’s Health, 36
competitive sleuthing by, 37
GE Mercedes-Benz, 85
innovation at, 190
acquisitions by, 55 Merck, 106
performance at, 196–197
business leadership from, 189 MetLife, 45
product longevity of, 21
customer relationship building by, 29 Metro, 171
sales force of, 150
customer value from, 88 Microsoft
sales pipeline, 156, 157f
innovation at, 119 acquisitions by, 55
services offered by, 108, 109
Oracle’s customer service for, 115 attack website directed at, 114
Inline skates, 80
performance at, 196 blogging use by, 147
Intel
product longevity of, 21 complementary products, 44
branding by, 23
sales force of, 150 customer satisfaction measures use at,
Dell relationship with, 30
GeoPrizm, 89 196
as follow-the-leader entrant, 52
Getrag (automotive alliance), 44 lost opportunities by, 75, 117
founding of, 23
GFB (Grupo Financiero Banregio), 103 power of, 166
investments during recessions, 3
GICA. See Grupo ICA (Ingenieros Civiles regulatory issues, 77
Asociados) J&J, 55, 88, 103, 142 Milliken, 195
Gillette, 21, 52, 105, 184 Jaguar, 89 MK (Mary Kay) cosmetics, 155, 164
GM, 63, 89 jetBlue, 81, 87 Modular City Home & Deco (MCHD), 171
GM (Grupo Modelo), 179 JPMorgan Chase, 114 Monsanto, 80
GoB (Grill on Box), 146 Morgan Stanley, 93
Kellogg’s, 119
GOL Linhas Áreas, 39 MTV, 59
Kentucky Fried Chicken, 103
Google
Kimberly-Clark, 105, 197 Nemak, 84
AdWords, 144, 183
Kleenex, 86 Nestlé, 10
alpha tests of, 123
Kmart, 6 Netflix, 18, 115, 146
branding by, 88
Kodak, 81 New United Motor Manufacturing Inc.
as follow-the-leader entrant, 52
Kraft, 119 (NUMMI), 89
founding of, 120
Nextdoor, 145
funding for new ventures, 76 La Martina (LM), 74
Nike
as generic brand, 86 Lala (Grupo Lala), 65
blogging use by, 147
Hangouts, 154 Lands’ End, 142
branding by, 85, 86
market valuation of, 137 LATAM Airlines, 39
founding of, 120
regulatory issues, 77 L’Bel cosmetics, 136
scarcity as marketing tactic, 30, 105
as search engine, 143–144 LC Peru, 39
Nintendo, 44, 61
vision statement of, 50 Lego, 119
Nordstrom, 189, 190
GoToMeeting, 154 Lens Crafters, 62
Grill on Box (GoB), 146 Levi jeans, 86 OG (OxxoGas), 25
Groupon, 11, 147, 171 Levitra, 120 OkCupid, 171
Grupo AJE (GAJE), 7 Lexus, 9, 115 Omius jacket, 123
Grupo Bimbo (GB), 94, 155 Lillian Vernon, 142 Open Table, 77
Grupo Financiero Banorte, 15 L.L. Bean, 142 Oracle, 55
Grupo Financiero Banregio (GFB), 103 LM (La Martina), 74 OxxoGas (OG), 25
 INDEX IN3

P (Pumper), 83 Snickers, 105 Vodafone, 93

P&G Sony, 44 Volkswagen, 88
advertising of, 132 Southwest Airlines, 81, 87, 113 Volt (energy drink), 7
branding of, 91–92 Spirit, 82 Volvo, 86
customer/market insight expenditures Spotify, 80, 120, 145 VSR (Viña Santa Rita), 101
of, 3 Star Perú, 39
Walmart, 23, 150, 171, 190
funding for new ventures, 76 Starbucks
Warby Parker, 62, 170–171
innovation at, 119, 120 brand advocates of, 90
Waterford Crystal, 73
positioning of, 72 in Colombia, 110
Wells Fargo, 88
product versions by, 104 customer experience at, 31
Wendy’s, 103
size shrinking by, 105 founding of, 120
Wessex Press, 146
Walmart as key account, 150 location research by, 169
West Elm, 73
Pan Am, 88 Staxyn, 120
WhatsApp, 55
PayPal, 171 Stendra, 120
Wheaties, 86
Pellas Group, 170 SuKarne, 73
Whitestrips, 72
PepsiCo, 7, 18, 103, 119 Sun Light Laboratory (SULI) lamps, 126
Peruvian Airline, 39 Super Farmacias Guadalajara (SFG), 12 Xerox, 23, 196
Petroleos Mexicanos (Pemex), 25 The Swatch Group (TSG), 103
Yahoo! 143–144
Pfizer, 29, 121, 150
Taca Peru (Avianca), 39 Yamaha, 91
Pine-Sol, 81
Taco Bell, 103
Pinol, 82 Zappos.com, 56, 90, 143
Target, 85
Pizza Hut, 103 Zippo, 83
Ternium Mexico (TM), 131
Plan Seguro, 45
Tesco, 171
PN (Pumper Nic), 83
Pottery Barn, 73
3M, 119–120, 190, 195 Subject Index
Tide, 76, 88
Prada, 87 A/B testing, 147, 177
Time Inc., 104
PriceSmart (PS), 173 access/functionality interfaces, 104
Tinder, 171
Prudential, 141 accessibility, retailing, 168
TM (Ternium Mexico), 131
PS (PriceSmart), 173 accounting systems, soft skill challenges
Toyota
Pumper (P), 83 in, 196
brand value of, 89
Pumper Nic (PN), 83 acquisitions
branding by, 86
in adjacent markets, 54
Quaker, 51 competitive sleuthing by, 37
competitors from, 22
Quala, 159 core competency of, 54
of customers, 10, 11f
Qualitas, 45 customer service, 115
for gaining competencies, 55–56
in Latin America, 52
Reader’s Digest, 93 in mature markets, 83
Total Quality Management at, 190
Red Bull, 88 of small firms, 62
Triarc, 51
Ritz Carlton, 111 adjacencies, as insourcing candidates, 55
Tropicana, 105
Rolex, 176 adoption curve, 124–125, 125f
Tupperware, 164
Rolls-Royce, 176 advertising
Twitter, 132
Roundup, 80 about, 130–131, 137–141
Tylenol, 88, 104, 142
Ryanair, 81, 87, 141 agencies, 141
Uber audio, 131
Saatchi and Saatchi, 195
branding by, 88 blocking, 145
Sabritas (PepsiCo subsidiary), 18
as disruptive innovation, 120 budgeting for, 140–141
Sainsbury’s, 6
early growth stage of, 20 digital, 143–145
Salesforce.com, 50, 143, 154, 156
founding of, 120 evaluation of, 141, 147, 148t
Samsung, 52, 62, 77, 195
as indirect competitor, 23 expenditures for
SAP software, 195
IPO for, 77 with alternative response functions,
SAS, 190
in sharing economy, 171 141f
SBC, 147
technological barriers overcome by, 80 by geographic area, 148n4
Schering Plough, 55
Under Armour, 76 by major media class, 140f
Schneider Electric, 195
Unilever, 72, 92, 104, 132 hierarchy-of-effects, 138f, 139
Schneider Electric Mexico, 54
Unisys, 109 intermediate measures of success, 203t
Sears, 6
United Airlines, 114 media
Seguros Atlas, 45
UPS, 28, 85, 142 expenditures for, 140f, 141f
Seguros BBVA, 45
selection/timing of, 140
Seguros GNP, 45 Vans, 105
messaging/execution of, 139
Seguros Inbursa, 45 Versace, 87
strategy for, 138–142, 138t
Seguros Monterrey, 45 Viagra, 29, 120, 121
advertising response function (ARF),
SFG (Super Farmacias Guadalajara), 12 Victoria’s Secret, 142
140–141, 141f
Shell, 37 Viña Santa Rita (VSR), 101
airline competition, 39
Sheraton, 90 Vioxx, 106
airlines
Shopkick, 147 Virgin, 88, 111, 124
Latin American, 39
Sigma Alimentos (Sigma), 107 Virgin America, 81
ticket prices, 104
Skype, 154 Visa, 72
US, 81, 87, 113
Snapple, 51 Viva Airlines Peru, 39
IN4 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

aligning cross-functional support, 73 product sales with, 35 combined product/brand management,

alliances/special relationships, of quality/value perceptions of, 90 193, 193f
competitors, 41, 44 repositioning, 81, 93 commissions
alpha tests, 123 resilience of, 88 compliance problems, 166
angel investors, 76 strategic alliances of, 93 definition of, 157
attack websites, 114 sustaining, 90 with outsourcing, 155
attributes/features, of products/services, 28 uses of, 87f commoditizing products, 179
auction pricing, 183 Brazil, Russia, India, China, Indonesia communication. See marketing
audio advertising, 131 (BRICI) countries, 19, 81 communications
auditing budgeting communities of practice, 195
of brands, 86, 87 for advertising, 138, 140–141 companies
of marketing, 203–204 for communications, 135 about, 44
automotive clusters, 44 as fixed percentage, 199 assessment analysis, 44
sales forecasting for, 157 in business models, 2f
back office (operations) complementarity,
bundling, 104–105 compatibility (fit) of, 54
45
bureaucracy, soft skill challenges in, 196 monitoring/controlling, 198
backward integration, 23, 37–38, 55
BUSCH (believable, unique, sustainable, comparison shopping, 169
bad apple policy, 51
compelling, honest), 72 compatibility (fit), of products/company/
balanced scorecard, 90, 204, 205t
business extension/expansion, 51 market, 54
Baldridge quality award, 105
business lost/gained reviews, 40–41 competitive equivalence pricing, 181
banner advertising, 145
business model fundamentals, 2f competitive intelligence departments/
barriers
business process organization, 193, 193f systems, 40–41
economic, 80
business strengths competitor assessment analysis (CAA),
to entry/exiting, 21, 77, 84n1
assessing, 102f 42–43, 43t
behavioral barriers, 79–80
in declining markets, 83 competitors
believable, unique, sustainable, compelling,
market-segment attractiveness vs., 64, in business models, 2f
honest (BUSCH), 72
64f, 64t as complementers, 44–45
benchmarking, 195
business vision, 50 copying, 120
benefits, 28, 29–31
business-case analysis, 122 CRM data for, 14
best-practice transfer, 195
buyers current/potential, 38, 39f
beta tests, 123
as competitors, 37–38 customers as, 12
big data, 142, 145
in five-forces model, 22f direct/indirect, 21–23, 22f, 38, 39f
Bitly, 132
price pressure from, 23 of Etisign, 175
blogs/bloggers, 132, 146–147
seller relationships with, 35 greater value than, 6
bluetooth-enabled beacons, Smartphone
buzz-marketing, 132 insight into, 37–44
communication with, 147
challenges of, 37
bonuses, 157 CAA (competitor assessment analysis),
identifying, 37–39, 38f
bots, 145 42–43, 43t
describing, 41–42
bottom-up approach, 141, 156 calendarizing, sales, 152
evaluating, 42–43
brand police (brand czar), 90 candidate descriptor (segmentation)
intrafirm/internal, 39
brand-health checks, 90–91 variables, 59, 59t
managing, 43–44
branding questions, in strategic direction, 4 cannibalization, 6, 105
market strategies of, 42
brands CANSPAM Act (2003), 143
price reductions by, 180
aging/defunct, 93 capacity constraints, 12
projecting actions of, 43
aspirational, 89 capital, as replacement for labor, 35, 111
targeting, 72
associations with, 86–87, 90, 92n4 capital markets, 132
technological standards, collaboration
awareness of, 89–90 cartels, price pressure from, 23
on, 77–78
broadening (leveraging), 90, 92–93 cash flows, 68f, 181
complementarity
building through advertising, 137 category-management organization, 193
positive/negative, 103
calculating value of, 88–89, 89f celebrity advertising, 124
products/services pricing, 77, 103, 184
cost of, 92n6 centralization, soft skill challenges in, 196
complementers, 44–45
damage to, 88 Challenger Model of sales, 155
compromise effect, in purchasing, 32
franchising, 83 change-management processes, 190
concentration
leveraging, 84 channel crossing, 165, 171
of markets. See maturity stage
loyalty to, 90 channel partners, 165
of resources, 5
managing, 85–94, 90–93 channels
conglomeration, risk in, 51
about, 85–87 direct/indirect, 163, 164–165
congruence model, 158
building, sustaining, 89–90, 89f distribution. See distribution
consideration set, in purchasing, 32
equity/value of, 87–88 chief revenue officer (CRO), 193
consumer promotions, 131
levels of, 86f churn (defection) rates. See defection
contingency planning, 66
monetizing brand equity, 88–89, 89f (churn) rates
control units, sales, 152, 154, 156
migration of, 93 classifieds, online, 145
cookies (website), 146, 170
personality of, 86 click-through rates, 145
copyright vigilance, 105
piracy of, 105 close rate, 152
core competencies, 51, 54, 109
portfolios of, 90–91 CLV (customer lifetime value). See customer
corporate vision, 50
pricing damage to, 183 lifetime value
cost of goods sold (COGS), 122
 INDEX IN5

cost-plus pricing, 178, 181, 184n2 as moving target, 6 primary/secondary, 40

costs perceptions of, 176–178 processes for, 40–41
of advertising. See advertising of products/services, 28 qualitative/quantitative, 40
arbitrary roles for, 179 research and development vs., 4 segmentation use of, 60, 60f, 60t
of development, 122 segmentation/targeting as critical in, 4 databases, CRM, 13
of employees vs. third-party sellers, 155 in shareholder value, 1 DCAPS (distinct, compelling, authentic,
hidden, 183–184 customer-driven pricing, 183 persuasive, sustainable), 72–73
marginal, 179 customer-management organization, 194 decentralization, soft skill challenges in, 196
operating, 9 customers decision-making process, 31–33
variable/fixed, 81, 178, 201 acquisition costs of, 10, 11, 11f decision-making units, 26
counterfeiting, 105 behavior changes, 109 declining product sales, 20f, 21, 52, 53f, 76f,
creative briefs, advertising, 141 in business models, 2f 78f, 80f, 83–84
creativity as competitors, 12 decoy effect, in purchasing, 33
about, 139 complementary products for, 103 “deep dives,” into performance, 199
considerations for, 71 as complementers, 44 defection (churn) rates
impact vs., 140, 148n3 co-production by, 113 customer deletion as factor in, 11, 11f
in positioning statements, 72 current/potential, 11, 11f, 27 definition of, 8
credibility defection of. See defection (churn) rates patterns of, 10t
from high-profile customers, 9 direct/indirect, 27–28 as performance measure, 152
from word-of-mouth communications, as innovation source, 119 quality reflected in, 116
132 input from, 49 demand forecasting/modification, 110–111
CRM (customer relationship management). insight into, 26–36 Deming quality award, 109
See customer relationship as driver, 5–6 demographics
management identifying, 26–28, 27f Lala use of, 65
CRO (chief revenue officer), 193 needs/wants of, 26f, 28–31, 58–59, 60t, Nintendo use of, 61
cross-functional integration, 67 61–63 Samsung use of, 62
cross-functional support, 73 purchasing process, 26f, 31–33 deregulation, service sector growth from,
cross-selling, 11 organizational purchases, 34–35 109
culture/cultural groups Spanish-language magazines as design, support for, 5
of competitors, 41 example, 36 differential advantage
in customer insight, 24 interfaces for, 115 of competitors, 43
as purchasing influence, 33, 33f life cycles of, 63 elements of, 6
risk-taking in, 151 lock-in/stickiness of, 11 of market strategies, 66
customer brand equity, 87–88 loyalty programs, 14–15 value proposition as basis for, 72
customer experience macro/micro-level, 26 differential diagnosis, competitive, 41
differential advantage from, 31 negative impact of, 12 digital communications, 129, 130f, 132
retailing as, 168 perceptions of, 113f digital distribution, 165
See also service sector poaching of, 110 digital marketing
customer lifetime value (CLV) price sensitivity of, 177–178 advertising, 143–145
calculating/increasing, 8–10, 9t, 11f profit increases from, 9 challenges of, 145
CRM data for, 14 profitability of. See profitability e-mail, 143
of potential customers, 11 retention rates. See retention rates measures of, 148t
customer orientation, Drucker on, 2 role of, 111 direct attack, 82
customer relationship management (CRM) satisfaction measures direct mail, 168
about, 13–14 compensation based on, 196 direct marketing, 142, 164–165, 168
customer service in, 114–116 as performance indicator, 152, 196 direct product profit, 201
differential advantage from, 190 in pricing/profits, 9 direct value assessment, 177
segmentation uses for, 63 in retention rates, 11, 33 discount rate
customer service, 114–116 service sector, 108 as cost of capital, 8
excellence from, 189 SERVQUAL use for, 112, 112f, 112t in NPV/IRR, 100, 122
exceptional, 115–116 as segments-of-one, 62 patterns of, 9t
flower of, 114f self-selecting communications, 132 display space, FMCG maximization of, 104
types of, 114–115 on social media, 114 display/banner advertising, 145
See also service sector as sole revenue source, 2–3 disruptive innovations, 24, 117–118, 120
customer value suitability of, 12–13 dissonance reduction, 33
overview, 8–15 switching costs of, 77 distinct, compelling, authentic, persuasive,
customer lifetime value (CLV). See targeting, 70–72 sustainable (DCAPS), 72–73
customer lifetime value as value to other customers, 9 distribution, 163–175
customer relationship management. wholesaling value to, 173f, 174 definition of, 5
See customer relationship winback, 11, 11f entities in, 163t
management See also customer relationship intensive/exclusive/selective, 165
customers, current/potential, 11 management managing
loyalty programs, 14–15 intermediaries. See intermediaries
data gathering
selectivity, 12 partnership model, 167
competitive
in business models, 2f power/conflict in, 166–167
inferences from, 41, 42t
mapping, 177f retailing. See retailing
level/types of, 40–41
IN6 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

distribution (cont.) integration with, 6 gray market pricing, 184

of Spanish-language magazines, 36 marketing role in, 1 green strategies, 25
strategies for gross rating points (GRPs), advertising, 140
face-to-face distribution, 164
channel breadth, 165 groups, segments vs., 62
face-to-face sales, 129, 154
direct/indirect channels, 163–165, 164f growth
facilities/equipment, 109
evolution of, 163–164 penetration vs., 201
feature/benefit/value ladder, 28
functions of, 164 in strategic objectives, 68f
fees, 183
intermediaries. See intermediaries strategies for, 49–53
field sales, 150–159
steps in, 166f growth-path matrix, 50–51, 51f
leading, 151
systems for, 70–71, 81 growth-share matrix, 100–101, 101–102f
living the mission, 151
wholesaling, 172–174, 172f guarantees, as employee motivation, 110
marketing role in, 150–151
divestitures, 22, 83–84 guerrilla-marketing, 132
organization of, 156
divisibility, service sector, 111
performance. See performance hard measures, internal/external, 201, 202f
Dodd-Frank legislation, 25
strategic/key account management, 158 hard systems (capital-resource intensive),
dollarmetric method, 177, 177t
strategies for 194
domestic partners, 165
developing, 151–156 harvesting, 81–82, 83–84
domestic population shifts, 19
implementing, 156–158 hashtag searching, 144
downstream conflict, 167
See also sales headcount. See sales
downstream distribution, 70–71
fighter brands, 103, 104 hedge fund private equities, competition
Dutch auction, 183
finance orientation, 4 from, 22
dynamic pricing, 183
financial analysis hierarchy-of-effects, advertising, 138f, 139
early growth stage materials for, xi hospitable markets, 83
about, 20–21, 20f, 52, 53f methods for, 99–100, 100f hotels, branding of, 90
followers, 76f, 78–79, 78f financial compensation/reward system, 157 human resources
leaders, 76f, 77–78, 78f firewalls, 103, 104 customer service role of, 115
economic barriers, 80 firm brand equity, calculating, 88–89 differential advantage from, 189
economic benefits/values, 29 firm-driven barriers, 77 external orientation in, 196
economic forces, 23f, 24 first-mover advantages, 77, 122 as investments, 151
economic value added (EVA), 100 five-forces model, 21–23, 22f in service sectors, 111
economic value for the customer (EVC), floor price, 179 hurdle rate, 92, 100, 179
29, 30f, 177 follow-the-leader stage, 52, 53f
iceberg principle, 199, 199f
80:20 rule, 12 forecasting
idea libraries, 121
e-mail, advertising by, 132, 143 financial performance, 122
imitation, 79
emotional appeals, 139 long-run market growth, 101f
immigration, population-mix changes
employees sales, 157
from, 19
branding audits of, 87 forward integration, 23, 37–38, 55
implementation
as competitors, 22 4Ps (marketing mix), 4–5, 73, 204f
of marketing mix, 73
customer poaching by, 110 fragmented markets. See maturity stage
monitoring/controlling, 198
innovation competitions, 119 franchising
support for, 5
performance standards for, 116 of brands, 83
inclusion organization, 193
third-party sellers vs., 155 distribution by, 165
income/income distribution, 19
end users, wholesaling value to, 173f, 174 service sector growth from, 109
industry forces, 17f, 21–23, 22f
English auction, 183 by Sigma, 107
initial public offering (IPO), 77
enterprise resource planning (ERP), 194 fraud, in digital advertising, 145
innovation. See product development
entry front office (marketplace) complementarity,
input measures, 199–200, 202–205
barriers to. See mobility barriers 45
inseparability/perishability, service sector,
cost of, 63 frontline positions, 115
110–111
timing of, 52–53 functional benefits/values, 29
insourcing, 55
environmental forces, 17f, 23–25, 23f functional divisions/views, soft skill
Instagram, Aeroméxico advertising with,
environmental influences, in purchasing, challenges in, 196
139
33–34 functional marketing organization, 192, 192f
instant chat, 170
equity investments, in internal
gain sharing, 184 instructor supplemental material, xi
development, 56
gaming/war games, 40 insurance products, 45
EVA (economic value added), 100
GE/McKinsey screen, 111 intangibility of services, 108, 109–110
EVC (economic value for the customer),
gender segmentation, 15 integrated systems, differential advantage
29, 30f, 177
globalization from, 190
exit barriers. See mobility barriers
localization vs., 24 intellectual property loss, 105
expectations disconfirmation, 112, 116n1
of procurement, 34 interfaces, customer service, 115
external orientation
of retailing, 169–170 intermediaries, 163, 165–166
overview, 189–197
service sector growth from, 109 intermediate measures, 202, 202–203t
framework for, 191f
through websites, 146 internal development, 55
functional excellence from, 189–190
governments internal orientation, 1, 4
sustaining, 196–197
barriers imposed by, 77, 80 internal politics, external orientation
transforming to, 190–196
legal/regulatory systems of, 24 challenges in, 196
change as function in, 3
political forces within, 23–24 internal rate of return (IRR), 100
 INDEX IN7

Internet marginal cost, 179 product development, 117–126

auctions on, 183 market factors, 17 product lines, 99–107
customer service on, 115 market insight, 17–25 service sector, 108–116
keyword searching on, 144 about, 17 strategic marketing. See strategic
procurement use of, 34 building blocks for, 17f marketing
proliferation as non-issue on, 104 environmental forces, 17f, 23–25, 23f marketing mix (4Ps), 4–5, 73, 204f
retailing on, 168–169 industry forces, 17f, 21–23, 22f marketing myopia, 19
targeting via, 70–71 labor migration, 19 markets
Internet materials, x market structure, 17f, 18–19 about, 18
interrelationships, product, 103 product evolution, 17f, 19–21 business-case analysis for, 122
introductory stage, 20, 20f, 52, 53f, 76–77, market levers, 198 compatibility (fit) with, 54
76f, 78f market occupancy ratio, 201, 202t diversification of, 51
inventors, innovations purchased from, 120 market offers, designing/implementing, 4–5 entry/exit barriers. See mobility barriers
investments See also customer service; external exiting, 78, 79, 83
advertising as, 137 orientation; product development; geographic expansion of, 81
human resources as, 151 product lines; service sector growth of. See growth
invoicing/billing systems, differential market segmentation. See segmentation life cycles of, 19
advantage from, 189 market share, 152, 201, 202t penetration of, 51
IPO (initial public offering), 77 market strategies positioning of. See positioning
IRR (internal rate of return), 100 overview, 66–74 potential of, 19
elements of, 67 segmentation. See segmentation
joint technology agreements, 54
focus of, 69–70 size/structure of, 17f, 18–19
just-in-time manufacturing/inventory, 165
implementation of, 46f, 73 targeting. See targeting
Keep on Truckin’, 82–83 multisegment, 73–74 market-segment attractiveness
kenneling, 82 performance objectives, 67–69 assessing, 102f
key performance indicators, 110 positioning, 70–73 business strengths vs., 64, 64f, 64t
key/strategic account management, 115, 158 purpose of, 66–67 See also segmentation
keywords, in Internet searching, 144 of competitors, 42 market-segment organization, 194
kill points, 118 imperatives of, 1 Maslow’s hierarchy of needs, 28, 29t
See also strategies mass communications
labor
market-choice decisions. See opportunities overview, 137–148
capital as replacement for, 35, 111
market-factor testing, 123 advertising. See advertising
migration of, 19
marketing digital, 143–145
laddering features/benefits/values, 28
about, 2 direct marketing, 142
lagging indicators, output measures as, 199
auditing, 203–204 evaluation of, 147, 148t
late growth stage, 20f, 21, 53, 53f, 76f, 78f, 79
Drucker on, 3 mobile marketing, 147
Latin America, map of, i
imperatives of, 1, 4–5 publicity & public relations (P&PR),
leadership, surrendering, 78
mobile, 147 142
leading from the front, 151
organization of sales promotion, 143
leading indicators, 53, 163, 199, 202
non-traditional, 193–194 process for, 130f
lean six sigma, 165
traditional, 192–193 types of, 129, 130–131
leapfroggers, 79
as a philosophy, 1, 3–4 mass media. See media
LEED certification, 195
principles of, 1, 5–6 maturity stage
legal/regulatory forces, 23f, 24
sales integration with, 150–151 but not really, 76f, 78f, 79–81, 80f
licensing, 56
shareholder value and, 2–3 concentrated markets
life changes, CRM data for, 14
marketing communications, 129–136 followers, 76f, 78f, 80f, 82–83
life cycles. See product life cycles
about, 129 leaders, 76f, 78f, 80f, 81–82
liquidation, 83
integrating, 135, 135t fragmented markets, 21, 76f, 78f, 80f, 83
list prices, discounted, 182
objectives for, 134t life-cycle diagram, 20f
live conversation, 170
process for, 129–130, 129f timing of, 53, 53f
living the mission, 151
promotion as, 5 means/ends tree, 69–70, 69f
localization, globalization vs., 24
strategy for, 132–135, 132t media
location research, 169
tools for, 130–132, 130f, 134 direct marketing use of, 168
location-based advertising, 147
marketing essentials expenditures for, 140f, 141f
loss-leader pricing, 183
overview, 1–7 selection/timing of, 140
low-cost barriers, 77
customer value, 8–15 mergers, competition from, 22
management market strategies messaging
customer service emphasis of, 115 customer service, 114–116 e-mail, 132, 143
in the digital realm, 114 distribution, 163–175 encoding/decoding/distortion, 129f, 130
mishaps of, 88 external orientation, 189–197 mobile, 147
as strategic/key account managers, 115, field sales, 150–159 positioning in, 139
158 marketing communications, 129–136 tailoring, 154
Toyota, 115 mass communications, 137–148 me-too stage, 53, 53f
managerial process control, 203–204 performance monitoring/controlling, mind-set, of competitors, 42
map, of Latin America, i 198–205 misaligned incentives, external orientation
margin multiple (MM), 9 pricing underpinnings, 176–185 challenges in, 196
IN8 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

miscommunication, 129–130, 129f outsourcing of profits, 179

mission, in external orientation, 50, 191 about, 55 of sales, 156
MM (margin multiple), 9 benefits of, 35 pocket prices, 182
MMS (multimedia message service), 147 of call centers, 115 political, economic, sociocultural,
mobile marketing, 132, 147 of sales work, 155 technological, legal/regulatory,
mobility barriers, 21, 77, 84n1 service sector growth from, 109 environmental (physical). See
modular product design, 62 overhead PESTLE forces
moment of truth, 110, 196 allocation of, 179 political forces, 23–24, 23f
monitoring/controlling. See performance costs included in, 15n2 population size/mix, 19
monopolies customer deletion as factor in, 12 portfolios
inhibiting, 30 product deletion as factor in, 104 analysis methods, 100–102, 100–102f
innovation for circumventing, 120 ownership, service sector vs., 111 approaches, comparisons of, 102t
patents as, 77 of brands, 90–91
P&PR (publicity & public relations), 131,
price pressure from, 23 of products, 99–102, 122
142
multibranding, 91–92 positioning
package delivery options (freight/
multifactor matrix, 63–64, 64f, 102, 102f about, 4
downloading), 142
multimedia message service (MMS), 147 in advertising, 139
packaging
multipoint communications, 135 developing, 72–73
as advertising, 131
multisegment market strategies, 73–74 elements of, 70–71, 71f
disposal of, 33, 106
mystery shopping, 115 of market strategies, 70–73
page-ranking, by search engines, 144
segmentation, targeting, and, 58f
needs paid search, 143–144
positive-sum game, 167
of customers, 26f, 28–31, 58–59, 61–63 partial ownership, risk reduction with, 54
postpurchase customer service, 115
Maslow’s hierarchy of, 29t, 58–59 partners, as buyer-seller relationships, 35
postpurchase equity, 88
recognized/latent, 28 partnership model, 167
postpurchase processes, 33
net present value (NPV), 100 patents
preemptive strategies/signaling, 44, 75
net promoter score (NPS), 202 as monopolies, 77
preferred suppliers, 34
networks, competitive, 22, 41 vigilance of, 105
prepurchase customer service, 114
new direct entrants, 22–23, 22f, 37 pay per click, 144
prepurchase equity, 87
noncompete/nondisclosure agreements, 41 payback, 100
price parity, 179
nuclear family, as purchasing influence, penetration, growth vs., 201
price realization, as performance measure,
33, 33f penetration pricing, 77
152
performance
objectives price sensitivity, 177–178
of competitors, 42
of advertising, 138–139 price skimming, 77
customer perceptions of, 113f
of communications, 133–134, 134t price waterfalls, 182, 183f
forecasting, 54
of sales, 151–152 prices
key indicators, 110
in screening/evaluation, 53–54 cost-plus, 178, 184n2
monitoring/controlling, 198–205
obvious/hidden targets, 71 customer satisfaction factored in, 9t
about, 5
offstage personnel, 109 discrimination, 182–183
principles of, 198–200
oligopolies, 21, 180 elasticity of, 80, 84n3, 177–178
balanced scorecard, 90, 204
one-click social sharing links, 132 establishing, 5
elements of, 200
onstage personnel, 109, 115 flat-rate, 183
input measures, 202–205
OPEC, 23 pressure from suppliers/buyers, 23
intermediate measures, 202
operational conflict, 166–167 profits vs., 176f
output measures, 201–202
operational objectives, 68 reducing, 81
process for, 200, 200f
operations orientation, 3 setting, 172
objectives of, 67–69
operations system, differential advantage variable, 182–183
sales requirements/objectives, 151–152
from, 190 pricing underpinnings, 176–185
trade-offs, 122
opinion mining (sentiment analysis), 114 alternative methodologies, 182–183
versioning, 104
opportunities, 49–56 approaches to, 181–182
performance-to-compensation linkage, 200
growth strategies, 49–53, 49f competitors, 179–180
perishability/inseparability, service sector,
screening/evaluation of, 53–55 costs, 178–179
110–111
implemention of, 55–56 customer value, perceptions of, 176–178
permission-based subscriptions, 146, 147
opportunity costs, 75 price analysis, 181f
personal communications, 129, 130, 130f
opt-in subscriptions, 146, 147 pricing toolkit, 182, 182t
PESTLE forces, 23–25, 23f
organic (natural) search, 143–144 setting prices, 183–184
philosophy, marketing as a, 1, 3
organizational efficiency, soft skill strategic objectives, 180–181
pioneer stage, 20, 20f, 52, 53f, 76–77, 76f, 78f
challenges in, 196 primary/secondary data, 40
pipeline analysis, 156, 157f
organizations private equity, competition from, 22
piracy, 104
of competitors, 41 process control, 203–204
placing advertisements, 145
as complementers, 44 procurement process, 34–35
placing information, 131
distribution to, 165 product development, 117–126
planning
downsizing, 35 commercialization, 124
assumptions in, 46, 46f
growth, 2f innovation, 117–118
for contingencies, 66
purchasing by, 34–35 product adoption, 124–125, 125f
external orientation in, 195
output measures, 199, 201–202 stage-gate process. See stage-gate process
 INDEX IN9

product life cycles, 75–84 planning of, 179 trends in

overview, 75–76 prices vs., 176f globalization of, 170
stages of sales contribution to, 201 peer-to-peer transactions, 170
introduction/pioneering stage, 20, 20f, in strategic objectives, 68f physical/digital merged operations,
76–77, 76f, 78f, 80f timing of, 54 170–171
early-growth leaders, 20f, 76f, 77–78, trade-offs, 69–70, 69f purchasing/payment evolution, 170
78f, 80f programmatic advertising, 145 tracking behavior, 170
early-growth followers, 76f, 78–79, promotion, as communication, 5 value of, 167–168
78f, 80f promotional pricing, steady pricing vs., retention rates
late growth, 20f, 76f, 78f, 79, 80f 183–184 about, 11, 11f
maturity. See maturity stage psychological benefits/values, 29 with aging clientele, 63
in decline, 20f, 21, 76f, 78f, 80f, 83–84 psychological pricing, 184 definition of, 8
product lines, 99–107 publicity & public relations (P&PR), 131, increasing, 9–10
breadth of, 104 142 patterns of, 9t, 10t
interrelationships among, 103 purchasing process as performance measure, 152
life extension of, 105 influences on, 33–35 return on investment (ROI)
other issues, 104–106 roles in, 26–27, 27f definition of, 100
product portfolio concept, 99–102 steps in, 31–33, 31f as profit measure, 201
product placement, 124, 129, 131 push/pull strategy in retailing, 172
product/brand management organization, budgeting for, 135 trade-offs, 69–70, 69f
192, 192f for communications, 133, 133f, 138 return on sales (ROS), 201
product-form life cycles, 20–21, 20f in distribution systems, 71 revenue predictability, 201
products revenue/profit growth, 53–54
QR (quick response) codes, 132, 147
adoption of, 124–125, 125f reverse auctions, 34, 183
qualitative/quantitative data, 40, 59–60
cannibalization of, 105 rifle-shot marketing, 79
quality control
class/form/line/item, 18 risk
measuring, 116
commoditizing, 179 in product development, 121f, 122
postpurchase as early warning system,
compatibility (fit) of, 54 in screening/evaluation, 54
115
complementary, 184 risk-taking culture, 151
service sector, 112–114
definition of, 5 ROI (return on investment). See return on
quantitative (data crunching), 60
disposal of, 33, 106 investment
diversification of, 51 R&D ROS (return on sales), 201
diversion of, 183 in competing fields, 54 rural-urban migration, 19
evolution of, 17f, 19–21 continuous innovation from, 190
safety issues, 106
firewalls, 103, 104 customer value vs., 4
salaries, 157
growth of, 51 profitability and, 55
sales
improving, 80–81 rational appeals, 139
through blog opt-in subscriptions,
life cycles of, 19, 20f rationality, in purchasing, 32
146–147
mix changes, 105 reachability of targets, 71
evaluation of, 157
modular design for, 62 reach/frequency, advertising, 140
field sales. See field sales
packaging of. See packaging reader response, blogs, 146–147
forecasting, 19, 156, 157
profitability of, 201 reasons-to-believe statements, 72
as hard measures, 201
proliferation/simplification, 104 recessions, investments during, 3
iceberg principle, 199, 199f
quality of, 105 reference groups, as purchasing influence,
innovation in, 190
retail assortment of, 167–168, 168f, 169 33, 33f
intermediate measures, 202t
safety of, 106 referrals, 9
objectives of, 151–152
scarcity, 105 regulatory forces, 23, 23f
performance. See performance
services as. See service sector relative market share, 101f, 102, 201, 202t
pipeline analysis, 157f
size shrinking, 105 remanufacturing, 106
planning, 156
standardization of, 83 research and development. See R&D
potential of, 19
testing, 123–124 resources
product promotion in, 131, 143
upgrading, 105 allocation of, 67, 103
quotas, 151
use increases, 80 competitor commitments, 41
recruiting/hiring, 157–158
versioning, 104 in product development, 119
selling time requirements, 152–154, 153f
product-specific barriers, 77 responsive design, websites, 147
staff
profit contribution, 201 retailing
activities of, 153–154
profit curves, 21 alternative forms of
compensation/reward system, 157
profit margins, 8–9, 172 direct marketing, 168
face-to-face sales, 154
profitability fixed-location, 169
sales response function, 152f
of customers, 11–12 Internet retailing, 168–169
size of, 152–153
of products, 201 traveling, 168
steps in, 154–155
R&D and, 55 definition of, 163
in strategic objectives, 68f
of retailing, 172 location of, 169
tasks
salesforce.com use in, 15n1 metrics of, 172, 172t
setting objectives, 151–152
profits profitability of, 172
allocating selling effort, 152–154
about, 2 promotions, 143
developing approaches, 154–155
in business models, 2f in sharing economy, 171
IN10 MARKETING FOR LATIN AMERICAN MANAGERS IN THE 21st CENTURY

sales situational influences, in purchasing, 33f, 34 market strategies, 66–74

tasks (cont.) six sigma quality control, 111, 165, 196 opportunities, 49–56
designing the organization, 155–156 skunkworks projects, 118 product life cycles, 75–84
creating organizational processes, SMART (specific, measurable, achievable, segmentation, 57–65
156–157 realistic, timely), 68 transition to, 46
staffing the organization, 157–158 Smartphones, 20 strategic/key account management, 115, 158
territories, 156 smartphones, responsive website design strategies
from websites, 145–146 for, 147 advising on, 4
sales orientation, 3–4 SMS (short message service), 147 branding in, 4
sales revenues, in business-case analysis, 122 social class, as purchasing influence, 33, 33f changes, customer loss from, 12
scarcity value, as marketing technique, social media competitive, 42
30, 105 in advertising control of, 203
SDGs (Sustainable Development Goals), Aeroméxico use of, 139 in external orientation, 191
195 Costa Rica Vacations use of, 149 objectives of, 68, 68f
search engine optimization (SEO), 144 Grill on Box use of, 146 planning, 40
secondary markets, 106 types of, 131–132 preemptive, 75
segmentation customer reviews on, 33, 114 scenarios for, 75
overview, 57–65 customer service use of, 115 for sourcing, 34–35
characteristics of, 61–63 in marketing, 144, 144t See also market strategies
data for, 60f word-of-mouth communications structured/unstructured thinking, 121
levels of, 58 through, 132 suitability, of customers, 12–13
process for, 57–60 sociocultural forces, 23f, 24 superiority, sustainability of, 6
targeting, 63–64 soft measures, 201–202 suppliers
of digital advertising, 145 soft systems (human-resource intensive), buyer relationships with, 35
by gender, 15 194–195 as competitors, 37–38
in late growth stage, 79 spam filters, 143 as complementers, 44
market strategies for, 67f Spanish-language magazines, 36 in five-forces model, 22f
in maturity, 82 specialization, sales, 156 preferred, 34
vs. product proliferation, 104 specific, measurable, achievable, realistic, price pressure from, 23
segmentation, targeting, positioning, 4, 58f timely (SMART), 68 wholesaling value to, 173, 173f
segmenter stage, 53, 53f spiderweb diagram, 121, 121f supply chains, 167f, 190
segments-of-one, 62 stability, in screening/evaluation, 54 supply modification, 110–111
selectivity, 5, 11–13 stage-gate process support functions, types of, 5
senior executive customer service about, 118–119 surcharges, 183
involvement, 115 business-case analysis, 122 Sustainable Development Goals (SDGs),
sentiment analysis (opinion mining), 114 commercialization, 124 195
SEO (search engine optimization), 144 concept development, 121–122 sustaining technologies, 24, 117
serendipity, innovation from, 121 criteria, 119f synergy, positive/negative, 54–55, 73
service sector, 108–116 development, 122
tactical pricing, 182
about, 108 idea generation, 119–121
tailoring, of messages/service, 111, 154
characteristics of, 109–111 market-factor testing, 124
targeting
customer perceptions of, 113f product adoption curve, 124–125, 125f
about, 4
customer service. See customer service product testing, 123–124
of customers, 70–72
equipment/facilities/personnel, 109–110 screening, 121
of online advertising, 145
failure recovery, 114 stages in, 119t
segmentation, targeting, positioning,
growth in, 108–109 test marketing, 124
4, 58f
guarantees, 110 stakeholders, shareholders as, 2
of segments, 63–64
improvement, 80–81 startup entries
targets
products/services distinction, 108 angel investors for, 76
of capital markets, 132
quality of, 113 competition from, 22–23
of communication, 132, 133f, 138
SERVQUAL, service quality assessment, equity investments in, 56
tailoring for, 154
112, 112f venture capital for, 54, 76
technological barriers, 80
settling for second place, 79 steady pricing, promotional pricing vs.,
technological forces, 23, 23f
shadowing competitors, 41 183–184
technology
shareholder value steering control, 198–199
competitor collaboration on standards,
brand impact on, 91 stock-keeping unit (sku), 18
77–78
in business models, 2f strategic alliances, 23, 56
for customer service Infrastructure, 115
customer value role in, 1 strategic conflict, 167
purchase/sale of, 56
marketing and, 2–3 strategic marketing
service sector growth from, 109
product portfolio balance in, 99 brands, managing, 85–94
technology orientation, 4
sharing economy, 171 fundamentals of
telemarketing/telesales/live chat, 130, 154,
short message service (SMS), 147 companies, 44
164–165, 168
showrooming, 165 competitor insight, 37–44
third-party transmitters, 131
signaling, 44 complementers, 44–45
time availability, airline ticket prices, 104
signifiers, brands as, 85 customer insight, 26–36
time units, sales, 153
situation analysis, 46, 46f market insight, 17–25
 INDEX IN11

time value of money, 100 unwelcome complementers, 45 viral-marketing, 132

timing upstream conflict, 167 virtual meetings, sales, 154
of communications, 135 upstream distribution, 71 vision, in external orientation, 50, 191
of entry. See entry user experience, 33 visual-static/dynamic matter, 130
of profits, 54 voice-of-the-customer input, 49
value chain, 41, 41f
tolerance zone, 116n1
value propositions war games, 40
top-down approach, 141, 156
as communications basis, 134 warning signals, 44
topsy-turvy pricing, 184
designing, 72 web analytics, 132
Total Quality Management (TQM), 190
in sales, 154 web crawlers, 144
touch points, CRM, 13
values websites
tracking
characteristics of, 29–31 about, 145–146
with cookies, 146
creating, 173 Costa Rica Vacations use of, 149
customer responses over time, 141
in external orientation, 191 responsive design for, 147
in distribution systems, 167
measuring/capturing, 177 white spaces, 49
shopping behavior, 170
of products/services, 28 word-of-mouth communications (WOM),
trade shows, 131
variability, service sector, 111 9, 33, 129, 130f, 132
trademark vigilance, 105
variable pricing, 183
transfer pricing, 184 zero-sum game, 167
vendors, buyer relationships with, 35
trends, evolution of, 17
venture capital
20:80 rule, 12
portfolios, 55
Type I/II errors, 118–119
portfolios in, 122
umbrella branding, 91–92 for startups, 76
UN Sustainable Development Goals Vickrey auction, 183
(SDGs), 195 video, in advertising, 145