Strategic Marketing 8th Edition - TEXT BOOK

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The challenges oI providing superior value to customers have become critical to many companies
around the world in their eIIorts to achieve high levels oI perIormance. Delivering value requires
understanding markets, buyers, and competition, and deciding how to match the organizations
distinctive capabilities with promising value opportunities. Understanding markets and how they
will change in the Iuture is essential in guiding business and marketing strategies.
Strategic marketings demanding role in business perIormance is demonstrated in the market-
driven strategies oI successIul organizations competing in a wide array oI market and competitive
situations. Superior customer value, leveraging distinctive capabilities, responding rapidly to
diversity and change in the marketplace, developing innovation cultures, and recognizing global
business challenges are demanding initiatives that require eIIective marketing strategies Ior gaining
and sustaining a competitive edge. Strategic Marketing examines the concepts and processes in
designing and implementing market-driven strategies.

Gaining a competitive advantage requires providing superior value to customers. Several initia-
tives are necessary in achieving customer objectives.
Marketing strategy provides the concepts and processes that are essential in delivering superior
customer value.
Marketing is a major stakeholder in essential organizational core processesnew product
development, customer relationship management, value/supply-chain management, and business
strategy implementation.
The use oI cross-Iunctional teams to manage core business processes is rapidly changing the
role and structure oI the traditional hierarchical organization.
Collaborative relationship initiatives place new priorities on Iorging eIIective relationships
with customers, suppliers, value-chain members, and competitors.
Understanding customers, competitors, and the market environment requires the active
involvement oI the entire organization to manage market knowledge decisively.
Developing processes that enable the organization to continually learn Irom customers, com-
petitors, and other sources is vital to sustaining a competitive edge.
The powerIul technologies provided by the Internet and the World Wide Web, corporate
intranets, and advanced communication and collaboration systems Ior customer and supplier
relationship management underpin eIIective processes.
The environmental and ethical aspects oI business practice are critical concerns Ior individual
executives as well as their companies, requiring management direction and active involvement
by the entire organization.
Customer diversity and new Iorms oI competition create impressive growth and perIormance
opportunities Ior those Iirms that successIully apply strategic marketing concepts and analyses
in business strategy development and implementation. The challenge to become market-driven
is apparent in a variety oI industries around the world. Analyzing market behavior and matching
strategies to changing conditions require a hands-on approach to marketing strategy develop-
ment and implementation. Penetrating Iinancial analysis is an important skill oI the marketing
proIessional.
Strategic Marketing examines marketing strategy using a combination oI text concepts, appli-
cation processes, and cases to develop decision-making processes and apply them to business

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situations. The book is designed Ior use in undergraduate capstone management marketing
courses and in the MBA marketing core and advanced strategy courses.

Regardless oI business size and scope, competing in any market today requires a global perspective.
The eighth edition accentuates this global perspective. The author team provides an extensive range
oI global involvement. The shrinking time-and-access boundaries oI global markets establish new
competitive requirements. The rapid emergence oI powerIul new competitive Iorces throughout the
world, oIten Iacilitated by new business models, mandates an international viewpoint Ior executives
in most organizations. The global dimensions oI marketing strategy are integrated throughout the
chapters oI the book and also considered in several cases.
Customer relationship management (CRM) has been given special attention in this edition.
There is a new CRM Appendix to Chapter 7. The topic is also covered in several chapters.
Internet initiatives comprise a vital part oI the marketing strategies oI many companies.
Internet strategies are rapidly expanding in most companies. Because oI the nature and scope oI
the various uses oI the Internet, we have integrated this important topic into several chapters
rather than developing a separate chapter. Internet Eeatures are included in all chapters.
Brand leveraging coverage is examined along with related topics on brand identity, brand
strategy, and brand portIolio management. Sustaining and disruptive innovation strategies are
examined.
Special attention has been given to marketing metrics throughout the book. Similar emphasis
is placed on segmentation, positioning, and value creation.

Strategic Marketing uses a decision process perspective to examine the key concepts and issues
involved in selecting strategies. It is apparent that many instructors want to consider a marketing
strategy perspective that extends beyond the traditional emphasis on the marketing program (4Ps).
Coverage on services as well as goods is continued in the eighth edition. The length and design oI
the book oIIer Ilexibility in the use oI the text material and cases. Internet and Eeature applications
are also included in each chapter. They can be used Ior class discussion and assignments.
The book is designed around the marketing strategy process with a clear emphasis on analysis,
planning, and implementation. Part I provides an overview oI market-driven strategy and business
marketing strategies. Part II considers markets, segments, and customer value. Part III discusses
designing market-driven strategies. Part IV considers market-driven program development.
Einally, Part V examines implementing and managing market-driven strategies. Various decision
process guides are provided throughout the book to assist the reader in applying the analysis and
strategy development approaches discussed in the text.
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There are 28 new cases out oI a total oI 44. Many are well-known companies that students
should Iind both interesting and challenging. Shorter application-Iocused cases are placed at the
end oI each part oI the book. These cases are useIul in applying the concepts and methods dis-
cussed in the chapters, and they can be used Ior class discussion, hand-in assignments, and/or
class presentations. The cases consider a wide variety oI business environments, both domestic
and international. They include goods and services; organizations at diIIerent value-chain levels;
and small, medium, and large enterprises. The Ieatures in every chapter provide additional case
illustrations and inIormation Ior consideration and discussion.

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Many oI the cases examine the marketing strategies oI well-known companies. The cases
are very timely, oIIering an interesting perspective on contemporary business practice. These
companies have available extensive Iinancial and product inIormation on the Internet, which
expands analysis opportunities.
Part VI includes comprehensive cases that oIIer students a variety oI opportunities to apply
marketing strategy concepts. Each case considers several important strategy issues. The cases
represent diIIerent competitive situations Ior consumer and business goods and services as well
as domestic and international markets.
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The eighth edition oI Strategic Marketing Iollows the basic design oI previous editions.
Nevertheless, the revision incorporates many signiIicant changes, additions, and updated examples.
Every chapter includes new material and expanded treatment oI important topics.
Eeatures are included in each chapter. They Iollow a theme, emphasizing topics such as strategy,
ethics, Internet, cross-Iunctional relationships, innovation, and global applications.
Each chapter has been revised to incorporate new concepts and examples, improve readability
and Ilow, and encourage reader interest and involvement. Topical coverage has been expanded (or
reduced), where appropriate, to better position the book Ior teaching and learning in todays rapidly
changing business environment. An expanded set oI Internet and Eeature applications is included
at the end oI each chapter. Einancial analysis guidelines are in the Chapter 2 Appendix, and sales
Iorecasting materials are included in the Chapter 3 Appendix. A discussion oI customer relation-
ship management (CRM) is provided in the Chapter 7 Appendix.
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A complete and expanded teaching-learning portIolio is available on the Instructors Resource
CD-ROM. It includes an Instructors Manual with course-planning suggestions, answers to end-
oI-chapter questions, Internet application guidelines, Eeature application guidelines, instructors
notes Ior cases, and a multiple-choice question bank. A PowerPoint
presentation Ior each chapter

is also included on the CD-ROM. The PowerPoint presentations provide an organized coverage
oI the chapter topics.
This edition oI the manual has been substantially revised and expanded to improve its
eIIectiveness in supporting course planning, case discussion, and examination preparation.
Detailed instructors notes concerning the use oI the cases are provided, including epilogues
when available. Additional inIormation such as chapter summaries and case studies can be Iound
on the books Web site www.mhhe.com/cravens06.
The text, cases, Web site and Instructors Manual oIIer considerable Ilexibility in course
design, depending on the instructors objectives and the course Ior which the book is used.
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The eighth edition has beneIited Irom the contributions and experiences oI many people and
organizations. Business executives and colleagues at universities in many countries have inIlu-
enced the development oI Strategic Marketing. While space does not permit thanking each
person, a sincere note oI appreciation is extended to all. We shall identiIy several individuals
whose assistance was particularly important.
A special thank you is extended to the reviewers oI this and prior editions and to many
colleagues that have oIIered numerous suggestions and ideas. Throughout the development oI
the eighth edition, several individuals made important suggestions Ior improving the book.

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We are also indebted to the case authors who gave us permission to use their cases. We appreciate
the opportunity to include them in the book. Each author or authors are speciIically identiIied with
each case.
Special thanks to the management and proIessional team oI McGraw-Hill/Irwin Ior their
support and encouragement on this and prior editions oI Strategic Marketing: Andy Winston, as
publisher, has provided an important editorial leadership role; Editorial Assistant Jill OMalley,
has been a constant source oI valuable assistance and encouragement; Dan Silverburg provided
important marketing direction Ior the project; Trina Hauger guided the book through the various
stages oI production while Cara David polished the design.
Many students provided various kinds oI support that were essential to completing the revision.
In particular, we appreciate the excellent contributions to this edition made by Jose Guerra and
Andrew Soule, TCU graduate assistants. We also appreciate the helpIul comments and suggestions
oI many students in our classes.
We appreciate the support and encouragement provided by Shannon Shipp, Chair oI the TCU
Marketing Department and Howard Thomas, Dean oI Warwick Business School. Special thanks
are due to Connie Clark at TCU and Sheila Erost and Janet Biddle at Warwick University Ior
typing the manuscript and Ior their assistance in other aspects oI the project.
David W. Cravens
Nigel F. Piercy

The challenges Irom radical market change and ever Iiercer competition conIronting executives
around the world are complex and rapidly escalating. Market and industry boundaries are oIten
diIIicult to deIine because oI the entry oI new and disruptive Iorms oI competition. Customers
demands Ior superior value Irom the goods and services (products) they purchase are unprece-
dented, as they become yet more knowledgeable about products and more perceptive in the
judgments they make. External inIluences Irom diverse pressure groups and lobbyists have
increased dramatically in country aIter country. Major change initiatives are under way in many
industries ranging Irom aerospace to telecommunications. Innovative business models that alter
the traditional roles oI an industry are deIining a new agenda Ior business and marketing strat-
egy development. Companies are adopting market-driven strategies guided by the logic that all
business strategy decisions should start with a clear understanding oI markets, customers, and
competitors.
1
Increasingly, it is clear that enhancements in customer value provide a primary
route to delivering superior shareholder value.
2
Procter & Gamble (P&G), the household products giant, is an interesting example oI a com-
pany that was slow to adapt to major market changes and competitive initiatives in the 1990s.
P&G lost its lead market position in product categories such as diapers and toothpaste. By 2000
it was apparent that P&G needed to strengthen its market-driven strategy. P&Gs stock experi-
enced a 43 percent decline, growth had leveled, and proIit margins had declined. A. G. LaIley
was appointed chieI executive oIIicer (CEO) in the summer oI 2000. LaIleys market-driven
strategy initiatives have resulted in impressive market position gains and Iinancial perIormance.
The new CEO placed major emphasis on making the customer the Iocal point oI P&Gs total
operations.
3
Gaining an understanding oI the beneIits customers are seeking Irom products
is a high priority throughout the company. Management is encouraging innovation synergies
through collaboration between P&G business units to develop new products. Leveraging oI these
distinctive capabilities has resulted in several new products such as Crest Whitestrips, Dawn
Power Dissolver, and Tide Stain Brush. P&G has been unusually successIul in matching cus-
tomers value requirements with the distinctive capabilities oI its business units.
P&Gs perIormance since 2000 highlights the positive impact oI market-driven strategy. The
stock price is up Irom a low in 2000 oI $53 to $105 in mid-2004. Sales increased Irom $40 bil-
lion to nearly $50 billion in 2004. The Crest toothpaste brand regained its lead position Irom
Colgate, and P&G moved Irom IiIth position to the lead position with the Iams pet Iood brand.
P&Gs earnings displayed consistent increases during this period.
We begin with a discussion oI market-driven strategy, and its pivotal role in designing and
implementing business and marketing strategies. Then, we look closely at the importance and
process oI becoming market-oriented. Next, we examine the capabilities oI market-driven
organizations, Iollowed by discussion oI creating value Ior customers. Einally, we look at the

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Strategic Marketing
initiatives that are necessary to become market-driven, and the challenges that marketing exec-
utives Iace in making eIIective decisions in an era oI unprecedented complexity and change.

The underlying logic oI market-driven strategy is that the market and the customers that Iorm
the market should be the starting point in business strategy Iormulation. Considerable progress
has been made in identiIying market-driven businesses, understanding what they do, and meas-
uring the bottom-line consequences oI their orientation to their markets.
4
Importantly, as illus-
trated by P&G, market-driven strategy provides a companywide perspective, which mandates
more eIIective integration oI activities and processes that impact customer value. We examine
the characteristics oI market-driven strategy and discuss several issues associated with adopting
the strategy.
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A key advantage oI becoming market-oriented is gaining an understanding oI the market and
how it is likely to change in the Iuture. This knowledge provides the Ioundation Ior designing
market-driven strategies. Developing this vision about the market requires obtaining inIormation
about customers, competitors, and markets; viewing the inIormation Irom a total business per-
spective; deciding across business Iunctions how to deliver superior customer value; and taking
these actions to provide value to customers.
5
There is compelling support Irom research Iindings
and business practice indicating that market-driven strategies enhance business perIormance.
The major characteristics oI market-driven strategies are shown in Exhibit 1.1. The organi-
zations market orientation helps management to identiIy customers whose value requirements
provide the best match with the organizations distinctive capabilities. SuccessIul market-driven
strategy design and implementation should lead to superior perIormance Ior an organization.
Dell Inc.s successIul market-driven strategy is illustrative. Dells value-chain strategy combines
technologies Irom Intel, IBM, and MicrosoIt to serve customers eIIiciently and with state-oI-
the-art computer technology. Dell is able to introduce next generation products Iaster than its
competitors can because its market-driven strategy is developed around a direct sales, built-to-
order business design. This distinctive process capability is supported by eIIective supplier,
distribution, and service partnerships with other companies. Dells management understands its
customers since company personnel are in close contact with buyers who make inquiries and
place orders. Not only does Dell process some 500,000 calls each week, 65,000 corporate cus-
tomers are linked to Dell through their own Dell Premier Pages on the Internet. Dells 2004 sales
should exceed $47 billion.

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Becoming
Market-
Oriented
Achieving
Superior
Performance
Determining
Distinctive
Capabilities
Matching
Customer
Value
Requirements
to Capabilities

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Market-Driven Strategy
We examine each market-driven characteristic in the remainder oI the chapter. A discussion
oI relevant strategy concepts, methods, and applications is provided throughout the book, begin-
ning with the marketing strategy overview developed in Chapter 2.
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While our understanding oI market-driven strategy is Iar Irom complete, the available evidence
indicates a strong supporting logic Ior pursuing this type oI strategy.
6
Importantly, the charac-
teristics shown in Exhibit 1.1 oIIer guidelines Ior strategy development rather than advocating
a particular strategy. Market-driven strategy needs to be linked to the organizations unique
competitive strategy.
The achievements oI companies that display market-driven characteristics are impressive.
Examples include Dell Inc., Louis Vuitton, Southwest Airlines, Tesco PLC, TiIIany & Co., Wal-
Mart, and Zara. Many other companies are in the process oI developing market-driven strategies.
We examine successIul and unsuccessIul strategies oI several companies throughout the book,
to illustrate the underlying strategy concepts.
The development oI a market-driven strategy is not a short-term endeavor. A considerable
amount oI eIIort is necessary to build a market-driven organizational culture and processes.
Also, the methods oI measuring progress extend beyond short-term Iinancial perIormance meas-
ures. While Iinancial perIormance is important, it may not indicate whether progress is being
made in pursuing a successIul market-driven strategy. Responding to this need, balanced score-
card measures are being adopted by an increasing number oI companies.
7
The scorecard
approach includes the use oI customer, learning and growth, and internal business process meas-
ures as well as Iinancial perIormance measures. This approach recognizes that short-term cost
savings and proIit enhancements may undermine the achievement oI strategic goals and the
building oI superior customer value.

A market orientation is a business perspective that makes the customer the Iocal point oI a com-
panys total operations. A business is market-oriented when its culture is systematically and
entirely committed to the continuous creation oI superior customer value.
8
Importantly, achiev-
ing a market orientation involves the use oI superior organizational skills in understanding and
satisIying customers.
9
Becoming market-oriented demands ethical behavior within the organization and with cus-
tomers, suppliers, and other stakeholders. The Ethics Eeature describes the consequences oI
questionable ethical behavior concerning Boeing Co. executives relationships with an Air Eorce
procurement oIIicer.
Becoming market-oriented requires the involvement and support oI the entire workIorce. The
organization must monitor rapidly changing customer needs and wants, determine the impact oI
these changes on customer satisIaction, increase the rate oI product innovation, and implement
strategies that build the organizations competitive advantage. We now describe the characteris-
tics and Ieatures oI market orientation and discuss several issues in becoming market-oriented.
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A market-oriented organization continuously gathers inIormation about customers, competitors,
and markets; views the inIormation Irom a total business perspective; decides how to deliver
superior customer value; and takes actions to provide value to customers.
10
Importantly, these
initiatives involve cross-Iunctional participation. Market orientation requires participation by
everyone in the organization. An organization that is market-oriented has both a culture com-
mitted to providing superior customer value and processes Ior creating value Ior buyers. Market
orientation requires a customer Iocus, competitor intelligence, and cross-Iunctional cooperation
and involvement. This initiative extends beyond the marketing Iunction in an organization.

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Strategic Marketing
- - The marketing concept has proposed a customer Iocus Ior halI a century,
yet until the 1990s this emphasis had limited impact on managers as a basis Ior managing a busi-
ness.
11
There are similarities between the marketing concept and market orientation, although
the Iormer implies a Iunctional (marketing) emphasis. The important diIIerence is that market
orientation is more than a philosophy since it consists oI a process Ior delivering customer value.
The marketing concept advocates starting with customer needs/wants, deciding which needs to
meet, and involving the entire organization in the process oI satisIying customers. The market-
oriented organization understands customers preIerences and requirements and eIIectively
deploys the skills and resources oI the entire organization to satisIy customers. Becoming cus-
tomer-oriented requires Iinding out what values buyers want to help them satisIy their purchas-
ing objectives. Buyers decisions are based on the attributes and Ieatures oI the product that
oIIers the best value Ior the buyers use situations. A buyers experience in using the product is
compared to his/her expectations to determine customer satisIaction.
12
Dell Inc.s direct contact with its buyers is an important inIormation source Ior guiding
actions to provide superior customer value. The direct, built-to-order process used by
Dell avoids stocking computers that may not contain state-oI-the-art technology. Also, each
computer contains the speciIic Ieatures requested by the buyer. Dells competitors that market
their computers through distributors and retailers have higher costs because price reductions Ior
purchased components (e.g., chips) cannot be utilized on computers in inventory. Dells built-
to-order business model enables taking advantage oI lower prices and technology improvements
oI components.
A market-oriented organization recognizes the importance oI
understanding its competition as well as the customer:
The key questions are which competitors, and what technologies, and whether target customers
perceive them as alternate satisIiers. Superior value requires that the seller identiIy and understand
the principal competitors short-term strengths and weaknesses and long-term capabilities and
strategies.
13
Eailure to identiIy and respond to competitive threats can create serious consequences Ior a com-
pany. Eor example, Polaroids management did not deIine its competitive area as all Iorms oI
photography, concentrating instead on its instant photo monopoly position, and eventually
the company was outIlanked by digital photography. Had Polaroid been market-oriented its
management might have better understood the changes taking place, recognized the competitive
threat, and developed strategies to counter the threat. Instead, the company Iiled Ior bankruptcy.
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-- Market-oriented companies are eIIective in getting all
business Iunctions working together to provide superior customer value. These organizations are
successIul in removing the walls between business Iunctionsmarketing talks with research and
development and Iinance. Cross-Iunctional teamwork guides the entire organization toward
providing superior customer value.
- Companies that are market-oriented begin strategic analysis
with a penetrating view oI the market and competition. Moreover, an expanding body oI
research Iindings points to a positive relationship between market orientation and superior per-
Iormance.
14
Companies that are market-oriented display Iavorable organizational perIormance
compared to companies that are not market-oriented. The positive market orientation/perIorm-
ance relationship has been Iound in several studies.

Becoming a market-oriented company involves several interrelated requirements. The major
activities include inIormation acquisition, interIunctional assessment, shared diagnosis, and
coordinated action. The objective is to deliver superior customer value.
- Customer value is the trade-oII oI beneIits less the costs
involved in acquiring a product. The bundle oI beneIits includes the product, the supporting
services, the personnel involved in the purchase and use experience, and the perceived image oI
the product (brand). The costs include the price oI purchase, the time and energy involved, and
the psychic costs (e.g., perceived risk).
- A company can be market-oriented only iI it completely under-
stands its markets and the people who decide whether to buy its products or services.
15
Gaining
these insights requires proactive inIormation gathering and analysis. In many instances a wealth
oI inIormation is available Irom company records, inIormation systems, and employees. The
challenge is to develop an eIIective approach to gathering relevant inIormation that involves
participation oI all business Iunctions, not just sales and marketing personnel.
P&Gs CEO encourages employees to think oI brands as consumers rather than as scientists
seeking technical perIection.
16
Eor example, in 2004 the P&G baby care division launched a
new product line, Pampers Eeeln Learn Advanced Trainers, based on Iindings Irom the diaper-
testing center indicating that parents are Irustrated by lengthy toilet training experiences.
A key part oI inIormation acquisition is learning Irom experience. Learning organizations
encourage open-minded inquiry, widespread inIormation dissemination, and the use oI mutually
inIormed managers visions about the current market and how it is likely to change in the
Iuture.
17
Eor example, Intuits obsession with customer service gave its Quicken design team
revealing insights into the problems users encounter with the Quicken personal Iinance soItware
and the preIerences users have concerning soItware Ieatures. Making the Quicken soItware sim-
ple to use requires understanding market needs, extensive use testing, customer Ieedback, and
continuous product improvement.
-- ---- Zara, the Spanish apparel retailer, is very eIIective in
overcoming the hurdles oI getting people Irom diIIerent Iunctions to share inIormation about the
market and to work together to develop innovative products. Delivering superior customer value
at Zara involves all business Iunctions. Zara designs and produces some 12,000 apparel styles
each year, and each is available in stores in only Iour weeks. Zara stores renew nearly halI their
stock every two weeks. The short time span between new ideas and their transIormation into store
oIIerings is impressive. Zaras shared vision about customers and competition guides the design
process, and inIormation technology plays a vital role in Zaras success. Zaras business design
and operations are described in the Cross-Eunctional Eeature. Inditex sales were $5.6 billion in
2003, growing at a 25 percent rate.
18
Inditex opened 364 stores and launched Zara Home in 2003.
Zaras U.S. coverage includes stores in New York, Washington, Miami, Orlando, and Las Vegas.

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Strategic Marketing
-- Becoming market-oriented requires moving beyond inIor-
mation gathering and analysis to deciding what actions to take to provide superior customer
value. This involves shared discussions among company personnel and analysis oI alternatives
in meeting customer needs.
19
Cross-Iunctional collaboration Iacilitates diagnosis and coordi-
nated decision making and implementation. The speed oI Zaras new-product introduction and
inventory turnover highlights the importance oI all business Iunctions working together toward
a common purpose.
Becoming market-oriented oIten requires making major changes in the culture, processes,
and structure oI the traditional pyramid-type organization typically structured into Iunctional
units. Nonetheless, the mounting evidence suggests that the market-oriented organization has an
important competitive advantage in providing superior customer value and achieving superior
perIormance.
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IdentiIying an organizations distinctive capabilities (competencies) is a vital part oI market-
driven strategy (Exhibit 1.1). Capabilities are complex bundles oI skills and accumulated
knowledge, exercised through organizational processes, that enable Iirms to coordinate activities
and make use oI their assets.
20
The major components oI distinctive capabilities are shown in
Exhibit 1.2, using Southwest Airlines business model to illustrate each component.
The airlines growth and Iinancial perIormance are impressive. Although Southwest is the
Iourth largest U.S. airline, its market capitalization is greater than the total capitalization oI
AMR (American Airlines), Delta Airlines, and UAL Corp. Southwests revenues will approach
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$7 billion in 2005, compared to $5.6 billion in 2000. In contrast to the major airlines, Iavorable
net proIits were recorded during the same period.
Zaras new-product development process illustrates the retailers distinctive capabilities. The
new-product development process applies the skills oI the design team and beneIits Irom the
teams accumulated knowledge. Coordination of activities across business Iunctions during
new-product development is Iacilitated by inIormation technology. Eor example, Zaras product
designs take into account manuIacturing requirements as well as oIIering high Iashion products.
Assets such as Zaras strong brand image help to launch new products.
It is apparent Irom the Southwest Airlines and Zara examples that an organizations capabil-
ities are not a particular business Iunction, asset, or individual, but instead consist oI core
processes oI the organization. Michael Porter indicates that the essence oI strategy is in the
activitieschoosing to perIorm activities diIIerently or to perIorm diIIerent activities than
rivals.
21
His concept oI activity networks is consistent with viewing distinctive capabilities as
groupings oI skills and accumulated knowledge, applied through organizational processes. Dell
Inc.s direct-to-the-customer, built-to-order process is a distinctive capability that operates using
Dells skills and accumulated knowledge in coordinating the activities that comprise the process,
and beneIiting Irom Dells strong brand image in the personal computer market. The outcome oI
the process is the delivery oI superior customer value to the organizations that purchase Dells
computers (over 90 percent oI Dells buyers are businesses rather than consumers).
Organizational capabilities and organizational processes are closely related:
It is the capability that enables the activities in a business process to be carried out. The business
will have as many processes as are necessary to carry out the natural business activities deIined by
the stage in the value chain and the key success Iactors in the market.
22
We know that processes are not the same across industries or Ior businesses in the same
industry. Eor example, Dell Inc. and Hewlett-Packard have diIIerent processes, and the activity
networks Ior Dell will diIIer Irom those oI Wal-Mart. Compared to the retailer, Dell is at an

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Strategic Marketing
earlier stage in the value chain that links suppliers, manuIacturers, distributors/retailers, and end
users oI goods and services.
We now look more closely at the distinctive capabilities oI an organization, Iollowed by a dis-
cussion oI diIIerent types oI capabilities. Then, we examine the relationship between capabili-
ties and customer value.
- -
Understanding the organizations distinctive capabilities and how they relate to customers
value requirements are important considerations in marketing strategy design. Management
should place a companys strategic Iocus on its distinctive capabilities.
23
These capabilities
may enable the organization to compete in new markets, provide signiIicant value to customers,
and create market-entry barriers to potential competitors. Eor example Hewlett-Packard (H-P)
has a strong capability in ink-jet printer technology, which enabled the company to become the
world leader in computer printers. H-P leveraged this capability to develop the ink-jet Iax
through a strategic alliance with a Japanese partner, which contributed a distinctive capability
in Iax technology.
Capabilities are important Iactors in shaping corporate and business strategies. Many companies
are deciding what they do best, concentrating their strategies around their distinctive capabilities.
Eor example, in the late 1990s Tandy Corporation, aIter unsuccessIul ventures into computer man-
uIacturing, computer retailing, megastore electronics, and appliance retailing, exited Irom these
businesses and Iocused its growth initiatives on the core capabilities oI the Radio Shack retail
chain. The corporations name was changed to Radio Shack to provide brand Iocus.
A distinctive capability: (1) oIIers a disproportionate (higher) contribution to superior cus-
tomer value, or (2) enables an organization to deliver value to customers in a substantially more
cost-eIIective manner.
24
Southwest Airlines distinctive capability is its business design,
enabling the carrier to oIIer travelers low Iares in combination with satisIactory services.
An important issue is deciding which capability to emphasize.
25
How, Ior example, did
Wal-Marts management decide to invest heavily to build its inIormation and logistics system?
Why did Dell choose the direct sales, built-to-order business design? What supporting logic led
Hewlett-Packard to invest heavily in ink-jet technology and to position its printers against dot
matrix printers rather than laser printers? These choices are not always apparent, and may
involve developing new capabilities that oIIer the potential oI being distinctive.
The starting point in deciding which capability to pursue is identiIying and evaluating the
organizations existing capabilities. The three characteristics shown in Exhibit 1.3 are useIul
criteria Ior identiIying distinctive capabilities. The capability must be superior to the competi-
tion and diIIicult to duplicate. GORE-TEX Iabric technology satisIies these criteria. Moreover,
various applications oI GORE-TEX materials have been developed (e.g., Iabric Ior raincoats,

-
-
Superior to
the
competition
Applicable to
multiple
competitive
situations
Difficult to
duplicate
Desirable
Capabilities

-
medical supplies, and dental Iloss. A capability may not always be applicable to multiple com-
petitive situations, but in order to be sustainable it needs to be superior to competition and diIIi-
cult to duplicate. Multiple competitive situation applications add additional strength to the
capability.
- -
ClassiIying the organizations capabilities is useIul in identiIying distinctive capabilities. As
shown in Exhibit 1.4, one way oI classiIication is to determine whether processes operate Irom
outside the business to inside, inside out, or spanning processes. The processes shown are illus-
trative rather than a complete enumeration oI processes. Moreover, since a company may have
unique capabilities, the intent is not to identiIy a generic inventory oI processes.
The process capabilities shown in Exhibit 1.4 diIIer in purpose and Iocus.
26
The outside-in
processes connect the organization to the external environment, providing market Ieedback and
Iorging external relationships. The inside-out processes are the activities necessary to satisIy
customer value requirements (e.g., manuIacturing/operations). The outside-in processes play a
key role in oIIering direction Ior the spanning and inside-out capabilities, which respond to the
customer needs and requirements identiIied by the outside-in processes. Market sensing,
customer linking, channel bonding (e.g., manuIacturer/retailer relationships), and technology
monitoring supply vital inIormation Ior new-product opportunities, service requirements, and
competitive threats.
This process view oI capabilities highlights the interrelated nature oI organizational processes
and points to several important issues:
27
The market-driven organization has a clear external Iocus.
Capabilities typically span several business Iunctions, involving teams oI people.
Processes need to be clearly deIined and have identiIiable owners.
InIormation should be shared with all process participants.
Processes are interconnected to other processes and management needs to coordinate the
linkages.
While many companies are structured according to business Iunctions, an increasing number
are placing emphasis on cross-Iunctional processes. As companies alter their traditional organi-
zational hierarchies, they may retain Iunctional groupings (e.g., engineering, Iinance, marketing,
etc.), while placing emphasis on processes like those shown in Exhibit 1.4.

--
-
Source: Chart Irom George
S. Day, The Capabilities
oI Market-Driven
Organizations,
Journal of Marketing,
October 1994, 41.
Reprinted with permission
oI the American Marketing
Association.
Market sensing
Customer linking
Channel bonding
Technology monitoring
Customer order fulfillment
Pricing
Purchasing
Customer service delivery
New-product/service
development
Strategy development
Financial management
Cost control
Technology development
ntegrated logistics
Manufacturing/transformation
processes
Human resources
management
Environmental health
and safety
Spanning Processes
EXTERNAL
EMPHASS
NTERNAL
EMPHASS
nside-Out
Processes
Outside-n
Processes

-
Strategic Marketing
The organizational process view oI distinctive capabilities requires shiIting away Irom the
traditional specialization oI business Iunctions (e.g., operations, marketing, research and devel-
opment) toward a cross-Iunctional process perspective. Implications oI these changes include:
28
Managing and participating in process-driven organizations create new skill requirements and
challenges.
Eunctional organizations require individual skills in inIormation gathering, data analysis, and
external collaboration.
Process-driven organizations emphasize skills in relationship management, internal commu-
nication and persuasion, team building, inIormation interpretation, and strategic reasoning.
-
Value Ior buyers consists oI the beneIits and costs resulting Irom the purchase and use oI products.
Value is perceived by the buyer. Superior value occurs when there are positive net beneIits. A com-
pany needs to pursue value opportunities that match its distinctive capabilities. A market-oriented
company uses its market sensing processes, shared diagnosis, and cross-Iunctional decision mak-
ing to identiIy and take advantage oI superior value opportunities. Management must determine
where and how it can oIIer superior value, directing these capabilities to customer groups (market
segments) that result in a Iavorable capability/value match.
--
Customer value is the outcome oI a process that begins with a business strategy anchored in a
deep understanding oI customer needs.
29
The creation oI customer value is an important chal-
lenge Ior managers. The priority placed on customer value is the result oI companies experi-
ence with Total Quality Management, intense competition, and the increasing demands oI
customers. Several beneIits oI value initiatives reported by executives in a study conducted by
The ConIerence Board are shown in Exhibit 1.5. The purpose oI the study was to determine iI
companies are taking actions to improve customer value, and obtain an assessment oI the
results (beneIits) oI the value initiatives. Exhibit 1.5 oIIers positive evidence oI companies
proactive eIIorts to increase customer value. About halI oI the study respondents were Irom the
quality Iunction, nearly one-third Irom marketing, and the rest Irom other business Iunctions.
About 80 percent oI the participating companies were Irom the United States, and the remain-
ing Irom Europe.
We take a closer look at the concept oI customer value, and consider how value is generated.
Then we look at the progress being made in the value initiatives oI companies.

----
--
-
Source: Graph Irom

Kathryn Troy, Change
Management. Striving for
Customer Jalue (New
York: The ConIerence
Board, 1996), 6. Reprinted
with permission Irom
The ConIerence Board.
Great/very great, positive impact
Negligible or no positive impact
Ability to
retain
customers
Ability to build
long-term
customer
relationships
Ability to attract
new customers
Growth in
market share
Growth
in profit
Growth
in sales
Reduction in
customer
complaints
Growth in
product/service
innovation
67
64
49
48
47
42
24 23
21
24
8
9
36
19
18
56
100
80
60
40
20
0
Those choosing a moderate impact are not shown on the chart but account Ior the diIIerence between the percentages shown and 100 percent.

-
-
OIIering superior customer value is at the core oI the eBay business design. Consider how con-
ventional companies would have reacted to a proposal Ior this business only a Iew years ago.
eBays impressive customer value delivery is described in the Internet Eeature.
Buyers Iorm value expectations and decide to purchase goods and services based on their
perceptions oI products beneIits less the total costs incurred.
30
Customer satisIaction indicates
how well the product use experience compares to the buyers value expectations. Superior cus-
tomer value results Irom a very Iavorable use experience compared to buyers expectations and
the value oIIerings oI competitors.
--
As discussed earlier, the organizations distinctive capabilities are used to deliver value by diI-
Ierentiating the product oIIer, oIIering lower prices relative to competing brands, or a combina-
tion oI lower cost and diIIerentiation.
31
Deciding which avenue to Iollow requires matching
capabilities to the best value opportunities.
Consider, Ior example, Hewlett-Packards (H-P) very successIul ink-jet printer strategy
which positioned the printer as an alternative to dot matrix technology. H-Ps management
decided not to target laser printers by oIIering the ink-jet as a lower-cost option to laser printers.
The dot matrix strategy oIIered H-P a much larger market opportunity. The H-P product man-
agement teams vision about the market was correct in that dot matrix users would soon become
dissatisIied with the quality and capabilities oI the printers.
-
The ConIerence Board customer value survey indicates that a majority oI companies consider value
initiatives to be producing positive results. Strong progress was reported in the Iollowing areas:
Analyzing customer needs and instilling customer-Iocused behavior in Irontline employees
(70 percent or more);
Analyzing target markets and boosting service quality (60 to 70 percent);

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-


-
Strategic Marketing
Using cross-Iunctional teams to develop products and services (about halI);
Achieving operational excellence (about halI); and
Innovating (about halI).
32
Twenty-Iive oI the companies that have completed the implementation oI a value initiative
report major progress in instilling customer-Iocused behavior Ior employees not in Irontline con-
tact with customers.
33
These same companies indicate stronger perIormance in expanding mar-
ket share, innovation, and retaining customers, when compared to companies that are beginning
value initiatives. The companies that have value initiatives under way are becoming market-
oriented and leveraging their distinctive capabilities. The results oIIer substantial support Ior the
beneIits oI market-driven strategy.
Nonetheless, there is an important distinction between value and innovation. An Economist
Intelligence Unit Report in 1999 contained interviews with executives Irom many leading com-
panies throughout the world: What counts, conclude the participants, is value innovation. This
is deIined as creating new value propositions . . . that lead to increased customer satisIaction, loy-
alty andultimatelysustainable, proIitable growth. Market leaders are just thatpioneers.
34
Innovation in customer value coming Irom outside the traditional industry boundaries and
disrupting conventional ways oI doing business is underlined by Apples iPod and iTunes inno-
vations in recorded music described in the Strategy Eeature. While competitors prepare to
develop yet better ways oI delivering value to the consumer oI music, the success oI iPod illus-
trates the payoII oI eIIective value innovation (see accompanying iPod photo).

The discussion so Iar points to the importance oI becoming market-oriented, leveraging the dis-
tinctive capabilities, and Iinding a good match between customers value requirements and
the organizations capabilities. The supporting logic Ior these actions is that they are expected to
lead to superior customer value and organizational perIormance. Moreover, research evidence
indicates that these characteristics are present in market-driven organizations, which display
higher perIormance than their counterparts that are not market-driven.

-
A market-driven organization must identiIy which capabilities to develop and which invest-
ment commitments to make. These decisions can beneIit Irom:
a shared understanding oI the industry structure, the needs oI the target customer segments, the
positional advantages being sought, and the trends in the environment.
35
A major objective oI this book is examining the concepts and processes that are relevant in gain-
ing a shared understanding oI customers and deciding how to satisIy their needs and preIerences
by Iavorably positioning the organizations value oIIer.
- - -
Market orientation research, evolving business strategy paradigms, and the ConIerence Board
study all point to the importance oI market sensing and customer linking capabilities in achiev-
ing successIul market-driven strategies.
36

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-
Strategic Marketing
- - Market-driven companies have eIIective processes Ior
learning about their markets. Sensing involves more than collecting inIormation. It must be
shared across Iunctions and interpreted to determine what actions need to be initiated. Zaras
close contact with store managers by telephone and computer generates valuable inIormation Ior
diagnosis and action.
Developing an eIIective market sensing capability requires Iinding and processing inIorma-
tion Irom various sources. Sources must be identiIied and processes developed to collect and
analyze the inIormation. InIormation technology plays a vital role in market sensing activities.
DiIIerent business Iunctions have access to useIul inIormation and need to be involved in mar-
ket sensing activities.
- - There is substantial evidence that creating and maintain-
ing close relationships with customers are important in market-driven strategies.
37
These rela-
tionships oIIer advantages to both buyer and seller through inIormation sharing and
collaboration. Customer linking also reduces the possibility oI a customer shiIting to another
supplier. Customers are valuable assets.
Quintiles Transnational (services Ior drug companies) has very eIIective customer linking
capabilities.
38
Its drug testing and sales services are available in 27 countries. The company has
extensive experience in clinical trials and marketing. Quintiles customers are located in many
countries around the world. Ongoing collaborative relationships are essential to Quintiles suc-
cess. It oIIers specialized expertise, assisting drug producers to reduce the time necessary in
developing and testing new drugs.
---
Becoming market driven may require changing the design oI the organization, placing more
emphasis on cross-Iunctional processes. Market orientation and process capabilities require
cross-Iunctional coordination and involvement. Many oI the companies in the ConIerence Board
study discussed earlier made changes in organization structures and processes as a part oI their
customer value initiatives. The initiatives included improving existing processes as well as
redesigning processes. The processes that were primary targets Ior reengineering included sales
and marketing, customer relations, order IulIillment, and distribution.
39
This emphasis was no
doubt the result oI the extensive work during the last decade on quality improvement that was
concentrated in operations (manuIacturing and services).
The objectives oI the business process changes made by the companies in the ConIerence
Board survey were to improve the overall level oI product quality, reduce costs, and improve
service delivery.
40
Nine out oI the ten participating companies made changes in their business
processes as part oI their customer value eIIort. Interestingly, 42 percent oI the companies
change initiatives came Irom the top oI the organizations, while nearly as many initiatives (40
percent) were grass roots (bottom-up) approaches. This indicates the beneIits oI both top-down
and bottom-up initiatives.
Underpinning such changes and initiatives is the importance oI what has been called imple-
mentation capabilities, or the ability oI an organization to execute and sustain market-driven
strategy, and do so on a global basis.
41
In addition to Iormulating the strategies essential to deliv-
ering superior customer value, it is vital to adopt a thorough and detailed approach to strategy
implementation.
-
At the midpoint oI the Iirst decade oI the 21st century it is apparent that executives Iace unprece-
dented challenges in strategic marketing to cope with turbulent markets, competitive revolution,
and escalating customer demands Ior value superiority. In this chapter we describe the rationale
Ior market-driven strategy and its components as a business approach relevant to the new
challenges oI the present and Iuture.

-
Importantly, the personal demands Ior incisiveness and ingenuity in creating and implement-
ing innovative and robust marketing strategies should not be ignored. In addition to the techni-
cal skills oI analysis and planning required to implement market-driven strategy, capabilities Ior
understanding new market and competitor phenomena will be at a premium. Societal and global
change also mandates high levels oI personal integrity in managers and leaders, and the reIlec-
tion oI these qualities in the social responsiveness oI organizations.
-
The internationalization oI business is well recognized in terms oI the importance oI
export/import trade and the growth oI international corporations, particularly in the Triad, com-
prising North America, Europe, and Japan. However, Ior strategic marketing in the 21st century,
such a view oI the international marketing issue may be shortsighted. The most intriguing and
surprising challenges are likely to come Irom outside the mature Triad economies. It is impor-
tant to understand the degree and extent oI diIIerence between the developed economies and the
new world beyond.
Eor example, considerable attention is being given to the growing roles oI China and India
in the global economy. Consider that while the United States has a gross national income per
capita oI $35,400 and the United Kingdom has a comparable Iigure oI $25,510, the same indi-
cator oI individual income in India is $470 and in China is $960. Then compare the population
Iigures that show the United States has 293 million people, while India has 1.1 billion and
China has 1.3 billion. The implications oI these massive diIIerences are beginning to impact
dramatically.
Eor example, it is clear that major customers may source Irom countries with a massive cost
advantage in labor costs. In 2004, Wal-Mart was the worlds largest purchaser oI Chinese goods,
spending $15 billion in China in 2003, making the company Chinas IiIth largest trading part-
ner, ahead oI countries like Russia and Britain. Indeed, U.S. consumers are reacting to price diI-
Ierences Ior medical treatments by traveling abroad. While a heart bypass may cost $2535,000
in the United States, the operation is available in Thailand and India Ior $815,000.
42
However, what is less predictable are the other ways in which economic diIIerences may have
dramatic eIIects. Eor example, there has been some concern about the trend Ior Western-based
companies to outsource Iunctions like back-oIIice operations, call centers, and soItware devel-
opment to India and China to take advantage oI the low labor costs available.
43
Surprisingly, by
mid-2004 Indian companies had quickly purchased a dozen or more U.S. call centers and busi-
ness processing outsourcers in a Iorm oI reverse migration.
44
Consider, Iurther, that iI one important source oI proIitable growth is serving the worlds poor
proIitablyon the grounds that Iour billion people in the world have purchasing power oI less
than $2,000 per year
45
then the expertise to achieve this goal may be located within the devel-
oping world not in the advanced economies. The most important exports Irom countries like
India and China may well be new business models, which will impact established ways oI doing
business in the developed world.
It is apparent that a new kind oI transnational business organization is emerging, which is
eIIectively stateless.
46
Eor example, Trend Micro operates a computer virus center in low-
cost Manila with six smaller virus-response laboratories around the world, allowing this
Taiwanese/American/Japanese company to guarantee delivery oI inoculation against major viruses
in less than two hours. Similarly, the R&D expertise being deployed by Korean multinationals like
LG Electronics, Daewoo Electronics, Samsung Electronics, and Salus Biotech is being acquired in
Russia where Russian engineers have considerable expertise and work Ior very low wages.
47
It is illustrative oI changing global priorities that in an unprecedented break with industry
norms, GlaxoSmithKlein Biologicals, the worlds largest vaccine company, plans a south-Iirst
strategy with its vaccine productsthey will be introduced Iirst in Latin America and Asia, and
only subsequently in Europe. The eIIect is to take the vaccine Iirst to where it is needed most
and to achieve the companys goal oI being the vaccine maker Ior the world.
48

-
Strategic Marketing
The global marketplace is dynamic and changing in complex ways with Iundamental eIIects
on the competitiveness and viability oI companies in many sectors. Those who underestimate the
rate oI change and important shiIts in international relationships run the risk oI being outma-
neuvered.
-
The impact oI technology on business may also be underestimated. There is nothing surprising
in recognizing that technological advances will continue to produce new-product opportunities.
What is more surprising is the radical nature oI an increasing number oI those opportunities.
Consider, Ior example, the innovations described in Exhibit 1.6.
The skills and vision required to decide which radical innovation opportunities can be
successIully commercialized will be extremely demanding, and the risks oI Iailure will be high.
These examples identiIy innovations that have the potential to revolutionize a range oI diIIerent
industries. They demand a strategic perspective that accepts the potential Ior revolution but
balances this with commercial imperatives. The danger is that conventional approaches and
shortsighted management may miss out on the most important opportunities.

-

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1
Robin Yapp, The Hi-Tech Shirt That Youll Never Have to Wash, Daily Mail, June 15, 2004, 7.
2
Otis Port, Private Space Travel: We May Have LiIt OII, BusinessWeek, June 21, 2004, 48.
3
Digital Homes, BusinessWeek, Special Report, July 21, 2003, 5659.
4
Andy Dolan, SelI-Cleaning Window, Daily Mail, June 9, 2004, 17.

-

----
The demands on individuals with high levels oI personal integrity will likely increase in the
Iuture. Increasing levels oI transparency mandate that manager behavior should meet the high-
est standards. The penalties Ior Iailing to meet the highest standards are likely to be severe.
Growing emphasis is placed on corporate citizenship and the establishment and protection oI
secure corporate reputation as an asset with a Iinancial return associated.
49
Throughout our
examination oI the elements oI strategic marketing we emphasize the ethical and corporate
responsibility issues oI which a manager should be aware.
While these Iorces oI change describe a challenging yet exciting environment Ior strategic
marketing, across the world marketing proIessionals are Iinding new and better ways to respond
to the new realities, to deliver superior customer value to their markets, and enhance shareholder
value. Underpinning processes oI reinvention and radical innovation are principles oI robust
marketing strategy. The goal oI this book is to identiIy and illustrate these principles, and pro-
vide processes Ior responding to the challenges.
Market-driven strategies begin with an understanding oI the

market and the customers that Iorm the market. The charac-
teristics oI market-driven strategies include becoming market-
oriented, determining distinctive capabilities, Iinding a match
between customer value and organizational capabilities, and
obtaining superior perIormance by providing superior cus-
tomer value. The available evidence indicates a strong sup-
porting logic Ior adopting market-driven strategies,
recognizing that a long-term commitment is necessary to
develop these strategies.
Achieving a market orientation requires a customer Iocus,
competitor intelligence, and coordination among the business
Iunctions. Becoming market-oriented involves making major
changes in the culture, processes, and structure oI the tradi-
tional pyramid organization organized into Iunctional units.
Several interrelated actions are required, including inIormation
acquisition, sharing inIormation within the organization, inter-
Iunctional assessment, shared diagnosis, and decision making.
The objective oI market orientation is to provide superior cus-
tomer value.
Leveraging distinctive capabilities is a key part oI devel-
oping a market-driven strategy. Capabilities are organiza-
tional processes that enable Iirms to coordinate related
activities and employ assets using skills and accumulated
knowledge. Distinctive capabilities are superior to the com-
petition, diIIicult to duplicate, and applicable to multiple
competitive situations. Capabilities can be classiIied as out-
side-in, inside-out, and spanning processes. The outside-in
processes provide direction to the inside-out and spanning
processes by identiIying customer needs and superior value
opportunities.
The creation oI superior customer value is a continuing
competitive challenge in sustaining successIul market-driven
strategies. Value is the trade-oII oI product beneIits minus the
total costs oI acquiring the product. Superior customer value
occurs when the buyer has a very Iavorable use experience
compared to his/her expectations and the value oIIerings oI
competitors. The avenues to value may be product diIIerentia-
tion, lower prices than competing brands, or a combination oI
lower cost and diIIerentiation.
Becoming market-driven is a continuing process beginning
with deciding which capabilities to develop. Capabilities need
to be identiIied and analyzed, market sensing and customer
linking capabilities developed, and necessary organizational
changes implemented.
The new era oI strategic marketing creates several impor-
tant challenges Ior executives. Escalating globalization pres-
ents an array oI complex opportunities. Radical innovations
will produce many new product opportunities, requiring skill
and vision in deciding which options to pursue. Moreover, the
new era promises to increase the demands Ior ethical behavior
and social responsibility.
Our discussion oI the major components oI market-driven
strategy (Exhibit 1.1) provides an essential perspective con-
cerning the development oI business and marketing strategies.
In Chapter 2, we examine the major decisions necessary in
developing and implementing marketing strategy.

-
Strategic Marketing
-- ---
1. Discuss some oI the reasons why managing in an environ-
ment oI continuing change will be necessary in the Iuture.
2. Explain the logic oI pursuing a market-driven strategy.
3. Examine the relevance oI market orientation as a guiding
philosophy Ior a social service organization, giving partic-
ular attention to user needs and wants.
4. How do the organizations distinctive capabilities con-
tribute to developing market-driven strategy?
5. Discuss the relationship between customer value and a
companys distinctive capabilities.
6. What role does product/service innovation play in provid-
ing superior customer value?
7. How would you explain the concept oI superior customer
value to a new Iinance manager?
8. Suppose you have been appointed to the top marketing
post oI a corporation and the president has asked you to
-
1. George S. Day, The Capabilities oI Market-Driven
Organizations, Journal of Marketing, October 1994,
3752.
2. Peter Doyle, Jalue-Based Marketing-Marketing Strategies
for Corporate Growth and Shareholder Jalue (Chichester:
John Wiley, 2000).
3. Patricia Sellers, P&G: Teaching an Old Dog New
Tricks, Fortune, May 31, 2004, 167180.
4 Day, The Capabilities oI Market-Driven Organizations,
37.
5. Stanley E. Slater and John C. Narver, Market Orientation,
Customer Value, and Superior PerIormance, Business
Hori:ons, March/April 1994, 2227.
6. Day, The Capabilities oI Market-Driven Organizations.
7. See, Ior example, Robert S. Kaplan and David P. Norton,
1he Balanced Scorecard (Boston: Harvard Business
School Press, 1996).
8. Slater and Narver, Market Orientation, 22.
-
A. Read the Cross-Eunctional EeatureZara Moves New
Clothing Designs Irom Concept to Store Rack in Two
Weeks and identiIy the strengths oI Zaras business model.
Consider how other Iashion retailers might respond to
protect their market share.
B. Review the Strategy EeatureRevolution in the Music
Business and consider what is likely to happen next in the
music business. In particular, where do these innovations
and new types oI competition leave the music production
companies?
-
A. Discuss how Dell Inc.s Web site (www.Dell.com) sup-
ports its mission, value proposition, and brand image.
What advantages (and limitations) does the Web site pro-
vide to business buyers?
B. Go to www.travelocity.com and investigate the site. How
does travelocity.com collect inIormation about its
customers and how might this prove valuable to the com-
pany and ultimately the customer? What privacy issues
could arise?
C. Review the McKinsey & Co. Web site. Are there indica-
tions that the consulting company is market-oriented?
explain market-driven strategy to the board oI directors.
What will you include in your presentation?
9. Discuss the importance oI developing a strategic vision
about the Iuture Ior competing in todays business envi-
ronment.
10. Discuss the issues that are important in transIorming a
company into a market-driven organization.
11. How is the Internet likely to contribute to an organiza-
tions market-driven strategy in the Iuture?
12. Develop a list oI the personal challenges conIronting
the marketing executive, and consider the qualities and
capabilities that may be most relevant to meeting these
challenges.
9. George S. Day, Market-Driven Strategy. Processes for
Creating Jalue (New York: Eree Press, 1990).
11. Day, The Capabilities oI Market-Driven Organizations,
37.
12. Philip Kotler, Marketing Management, 8th ed.
(Englewood CliIIs, NY: Prentice-Hall, 1994), Chapter 2.
14. Rohit Deshpande and John V. Earley, Organizational
Culture, Market Orientation, Innovativeness, and Eirm
PerIormance: An International Research Odyssey,
International Journal of Research in Marketing 21,
2004, 322.
15. Benson P. Shapiro, What the Hell Is Market Oriented?
Harvard Business Review, November/December 1988, 120.
16. Sellers, P&G, 172.
17. George Day, Continuous Learning about Markets,
California Management Review, Summer 1994, 931.

-
18. Inditex! Spains World Beating Business Model,
BusinessWeek, June 7, 2004, 7879.
19. Shapiro, What the Hell Is Market Oriented? 122.
38.
21. Michael Porter, What Is Strategy? Harvard Business
Review, November/December 1996, 64.
38.
23. C. K. Prahalad and Gary Hamel, The Core Competence
oI the Corporation, Harvard Business Review, May/June
1990, 7991.
38.
25. Ibid., 3940.
26. Ibid., 4043.
27. Ibid.
28. Erederick E. Webster Jr., The Euture Role oI Marketing
in the Organization, in Reflections on the Futures of
Marketing, Donald R. Lehmann and Katherine E. Jocz
(eds.) (Cambridge, MA: Marketing Science Institute,
1997), 3966.
29. Kathryn Troy, Change Management. Striving for
Customer Jalue (New York: The ConIerence Board Inc.,
1996), 5.
30. Philip Kotler, Marketing Management, 9th ed., (Upper
Saddle River, NJ: Prentice-Hall, 1997), Chapter 2.
31. George S. Day and Robin Wensley, Assessing
Advantage: A Eramework Ior Diagnosing Competitive
Superiority, Journal of Marketing, April 1988, 120.
32. Troy, Change Management, 6.
33. Ibid., 6.
34. Laura Mazur, Wrong Sort oI Innovation, Marketing
Business, June 1999, 49.
49.
36. Ibid., 4345.
37. Ibid.
38. David W. Cravens, Gordon Greenley, Nigel E. Piercy, and
Stanley Slater, Mapping the Path to Market Leadership:
The Market-Driven Strategy Imperative, Marketing
Management, Eall 1998.
39. Troy, Change Management, 7.
40. Ibid.
41. Nigel E. Piercy, Marketing Implementation: The
Implications oI Marketing Paradigm Weakness Ior the
Strategy Execution Process, Journal of the Academy of
Marketing Science 13(213), 1999, 113131.
42. Over the Sea, Then Under the KniIe, BusinessWeek,
Eebruary 16, 2004, 2022.
43. Job Exports: Europes Turn, BusinessWeek, April 19,
2004, 2021.
44. Manjeet Kripalani, Now Its Bombay Calling the U.S.,
45. C. K. Prahalad and Allen Hammond, Serving the Worlds
Poor ProIitability, Harvard Business Review, September
2002, 4857.
46. Steve Hamm, Borders Are So 20th Century,
BusinessWeek, September 22, 2003, 7071.
47. Moon Ihlwan, Want Innovation, Hire a Russian,
BusinessWeek, March 8, 2004, 22.
48. Bruno Stevens, Big Pharma Booster Shot,
49. Roger L. Martin, The Virtue Matrix: Calculating the
Return on Corporate Responsibility, Harvard Business
Review, March, 2002, 6975.

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Business and marketing strategies are being altered and renewed in a wide range oI companies
by executives in their eIIorts to survive and prosper in an increasingly complex and demanding
business environment. Choosing high perIormance strategies in this environment oI constant
change requires vision, sound strategic logic, and commitment. Market-driven organizations
develop closely coordinated business and marketing strategies. Executives in many companies
are reinventing their business models with the objective oI improving their competitive advan-
tage. These changes include altering market Iocus, expanding product scope, partnering with
other organizations, outsourcing manuIacturing, and modiIying internal structure.
Strategic imperatives have shiIted to a priority emphasis on developing a superior capacity
Ior reinventing the business model. Key issues underpinning strategic choices are:
In many industries, the drivers oI radical, revolutionary change have created
most oI the new wealth over the last decade. Examples include JetBlue, Costco, and eBay.
To survive, existing companies must innovate with respect to their traditional
business models. P&Gs renewal initiatives are impressive as discussed in Chapter 1.
-The capacity Ior continuous reconstruction requires innovation with respect to
the organizational values, processes, and behaviors that systematically Iavor perpetuating the
past rather than innovation Ior renewal.
1
The strategic initiative pursued by Airbus, the European airplane giant, to achieve a dominant
position in the global aviation industry with its 555-seater super-jumbo airplane is an example
oI innovation-driven strategy. With its multinational production design, new technology to
reduce the weight oI the massive plane, and potential cost advantages Ior international airlines,
many industry analysts are positive concerning Airbus strategy, but some question the under-
lying Iorecast oI demand Ior the super-jumbo, upon which proIit depends. The companys strat-
egy is described in the Global Eeature.
Corporate strategy consists oI deciding the scope and purpose oI the business, its objectives,
and the initiatives and resources necessary to achieve the objectives. Marketing strategy is
guided by the decisions top management makes about how, when, and where to compete. This
should be a two-way relationshipwhile corporate strategy deIines strategic direction, allocates re-
sources, and deIines constraints on what cannot be done, executives responsible Ior marketing
strategy have a responsibility to inIorm corporate strategists about external change in the market
that identiIies opportunities and threats, as shown in Exhibit 2.1.

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Corporate, Business, and Marketing Strategy

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Strategic Direction
Resources
Constraints
Market Knowledge
Opportunities
Threats
Corporate
Strategy
Business and
Marketing
Strategy
Eor example, planning at IBM is complex because oI the sheer size and diversity oI the com-
panyrevenues in excess oI $80 billion and 315,000 staII. Marketing is closely involved with
the strategy oI evolving the company toward becoming a service business. Marketing planning
is carried out by marketing managers in brand/business units and customer-based organizations.

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Strategic Marketing
As they develop strategies around brands and customers, marketing managers have to bid Ior and
buy the resources they need Ior execution Irom the corporate level oI the organization.
2
Because oI this close relationship between diIIerent levels oI strategy, it is important to exam-
ine the major aspects oI designing and implementing business strategy.
We begin the chapter with a look at the nature and scope oI corporate strategy. A discussion
oI business and marketing strategy relationships Iollows. Next, the marketing strategy process is
described and illustrated. Einally, we examine the steps in preparing the strategic marketing plan.

We describe the characteristics oI corporate strategy and consider how organizations are chang-
ing. The section is concluded with a discussion oI the major dimensions oI corporate strategy.
-
It is important to reach a reasonable consensus concerning the nature and scope oI corporate
strategy. One authority, Michael Porter, indicates that an eIIective strategy should display these
characteristics:
Unique competitive position Ior the company.
Activities tailored to strategy.
Clear trade-oIIs and choices vis-a-vis competitors.
Competitive advantage arising Irom Iit across activities.
Sustainability coming Irom the activity system, not the parts.
Operational eIIectiveness as a given.
3
This concept oI strategy views distinctive capabilities as comprised oI business activities which
are aligned to Iorm processes. An example is Wal-Marts distribution system comprised oI
various activities such as tracking each item in inventory. Other examples are Dell Inc.s direct
personal computer sales and built-to-order process, and Southwest Airlines city-to-city business
design coupled with very eIIicient perIormance oI the activities needed to transport passengers
Irom point to point.
Corporate strategy consists oI the decisions made by top management and the resulting
actions taken to achieve the objectives set Ior the business. The major strategy components and
several key issues related to each component are shown in Exhibit 2.2. The issues highlight
important questions that management must answer in charting the course oI the enterprise.
Managements skills and vision in addressing these issues are critical to the perIormance oI the
corporation. Essential to corporate success is matching the capabilities oI the organization with
opportunities to provide long-term superior customer value.
It is apparent that in the 21st century marketing environments, companies are drastically alter-
ing their business and marketing strategies to get closer to their customers, counter competitive
threats, and strengthen competitive advantages. The challenges to management include escalat-
ing international competition, new types and sources oI competition, political and economic
upheaval, dominance oI the customer, and increasing marketing complexity.

In recent decades massive changes were made in the size and structure oI many business Iirms.
These changes are described as rightsizing, reengineering, and reinventing the organization.
The renewal (reIorming) oI the traditional organization typically moves through three phases:
vertical disaggregation, internal redesign, and network Iormation.
4
- Disaggregation reduces the si:e oI the organization by eliminat-
ing jobs and layers oI middle managers and leveling the hierarchy. The ConIerence Board, Inc.
reports that 90 percent oI its members downsized during the 1990s and about two-thirds oI the
executives representing a broad cross section oI business say downsizing will continue.
5

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-
The resulting Ilat corporation may organize its activities into a small number oI key processes
(e.g., new-product planning, sales generation, and customer service).
6
Alternatively, organiza-
tions may retain Iunctional departments, overlaying them with processes. Cross-Iunctional teams
manage the processes, and providing superior customer value is a key objective and measure oI
perIormance. Employees are encouraged to make regular contact with suppliers and customers.
- Organizational renewal is more than just reducing staII, eliminating
layers oI management, and adopting worker empowerment processes. The second phase alters
the internal design oI the organization. The new organization Iorms are lean, Ilexible, adaptive,
and responsive to customer needs and market requirements.
7
The altered business designs
involve innovation in designing products to meet customer needs, arranging supply and distri-
bution networks, and constantly staying in touch with the marketplace. A priority oI these organ-
izations is understanding customer needs, oIIering value to customers, and retaining customers.
- The third phase oI organizational change involves the Iorma-
tion oI relationships with other organizations and the use oI processes as the basic organizing
concept. Although interorganizational relationships are oIten present in the traditional organiza-
tion, companies are expanding these relationships with suppliers, customers, and even competi-
tors. These new organization Iorms are called networks since they involve several collaborative
arrangements. Networks are more likely to be launched by entrepreneurs, since the traditional
vertically integrated, hierarchically organized company Iinds diIIiculty in shiIting to the network

-
---
Source: Orville C. Walker,
Jr., Harper W. Boyd, Jr.,
and Jean-Claude Larreche,
Marketing Strategy
(Homewood, IL: Richard
D. Irwin, 1992), 38.
Copyright The
McGraw-Hill Companies.
Used with permission.
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Strategic Marketing
paradigm. TransIormation means Iewer people on the corporate payroll, diIIerent management
challenges, drastic cultural changes, and complex collaborative relationships with other organi-
zations. Nevertheless, traditional companies like IBM are successIully transIorming themselves
to more Ilexible and adaptive network Iorms. The Innovation Eeature describes how IBM is
using soItware alliances to compete with Oracle Corp.
-
Recognizing that there are several deIinitions oI corporate strategy, we utilize this deIinition:
Corporate strategy is the way a company creates value through the conIiguration and coordination
oI its multimarket activities.
8
This deIinition emphasizes value creation, considers the multimarket scope oI the corporation
(product, geographic, and vertical value-chain boundaries), and points to how the organization
manages its activities and businesses that Iall under the corporate umbrella. A key premise oI
this view oI strategy is that the multibusiness corporation must contribute to the competitive
advantage oI its units.
9
Thus, there needs to be a close relationship between the corporation and
the businesses that are part oI the Iirm.
A useIul basis Ior examining corporate strategy that is consistent with the earlier deIinition
consists oI (1) managements long-term vision Ior the corporation; (2) objectives that serve as
milestones toward the vision; (3) assets, skills, and capabilities; (4) businesses in which the
corporation competes; (5) structure, systems, and processes; and (6) creation oI value through
multimarket activity.
10
We examine each strategy component.
- Managements vision deIines what the corporation is and
what it does and provides important guidelines Ior managing and improving the corporation. The
Iounder initially has a vision about the Iirms mission, and management may alter the mission
over time. Strategic choices about where the Iirm is going in the Iuturechoices that take into
account company capabilities, resources, opportunities, and problemsestablish the vision oI
the enterprise. Developing strategies Ior sustainable competitive advantage, implementing them,
and adjusting the strategies to respond to new environmental requirements is a continuing
process. Managers monitor the market and competitive environment. The corporate vision
may, over time, be changed because oI problems or opportunities identiIied by monitoring. Eor

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example, IBMs management is placing major emphasis on consulting services as a direction oI
Iuture growth.
Early in the strategy-development process management needs to deIine the vision oI the
corporation. It is reviewed and updated as shiIts in the strategic direction oI the enterprise occur
over time. The vision statement sets several important guidelines Ior business operations:
11
1. The reason Ior the companys existence and its responsibilities to stockholders, employees,
society, and other stakeholders.
2. The Iirms customers and the needs (beneIits) that are to be met by the Iirms goods or
services (areas oI product and market involvement).
3. The extent oI specialization within each product-market area and the geographical scope oI
operations.
4. The amount and types oI product-market diversiIication desired by management.
5. The stage(s) in the value-added chain where the business competes Irom raw materials to the
end user.
6. Managements perIormance expectations Ior the company.
7. Other general guidelines Ior overall business strategy, such as technologies to be used and
the role oI research and development in the corporation.
- Objectives need to be set so that the perIormance oI the enterprise can be
gauged. Corporate objectives may be established in the Iollowing areas: marketing, innovation,
resources, productivity, social responsibility, and finance.
12
Examples include growth and
market-share expectations, improving product quality, employee training and development,
new-product targets, return on invested capital, earnings growth rates, debt limits, energy reduc-
tion objectives, and pollution standards. Objectives are set at several levels in an organization
beginning with those indicating the enterprises overall objectives.
The time Irame necessary Ior strategic change oIten goes beyond short-term Iinancial report-
ing requirements. Companies are using more than Iinancial measures to evaluate longer-term
strategic objectives, and nonIinancial measures Ior short-term budgets. The balanced score-
card approach provides an expanded basis Ior tracking organizational perIormance.
13
It con-
siders both long-term and short-term perIormance metrics. This method oI keeping score
includes objectives, measures, targets, and initiatives regarding Iinancial, customer, internal
business processes, and learning and growth perspectives. The balanced scorecard method is
being used by many companies as a basis Ior managing and evaluating market-driven strategies.
- As we discussed in Chapter 1, it is important to place a companys strategic
Iocus on its distinctive capabilities.
14
These capabilities may oIIer the organization the potential
to compete in diIIerent markets, provide signiIicant value to end user customers, and create
barriers to competitor duplication. Eor example, Hewlett-Packard developed a distinctive
capability in ink-jet printer technology, enabling the company to become the world leader in
printers.
We know that distinctive capabilities are important in shaping the organizations strategy. In
contrast to the diversiIication wave oI the 1970s, many companies are deciding what they do best
and concentrating their eIIorts on these distinctive capabilities. A key strategy issue is matching
capabilities to market opportunities. Capabilities that can be leveraged into diIIerent markets and
applications are particularly valuable. Eor example, the GoreTex high perIormance Iabric is used
in many applications Irom apparel to dental Iloss.
Acknowledging the constraining nature oI capabilities, resources, opportunities, and
problems, management has a lot oI Ilexibility in selecting the mission as well as changing it in the
Iuture. Sometimes the priorities and preIerences oI the CEO or the board oI directors may over-
ride Iactual evidence in selecting the business mission. Eor example, many oI the diversiIications

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Strategic Marketing
pursued by companies in the 1980s did not work well, and resulted in the restructuring and
downsizing oI many companies during the last decade.
--- - DeIining the composition oI the business provides direction Ior
both corporate and marketing strategy design. In single-product Iirms that serve one market, it
is easy to determine the composition oI the business. In many other Iirms it is necessary to separate
the business into parts to Iacilitate strategic analyses and planning. When Iirms are serving multi-
ple markets with diIIerent products, grouping similar business areas together aids decision making.
Business segment, group, or division designations are used to identiIy the major areas oI
business oI a diversiIied corporation. Each segment, group, or division oIten contains a mix oI
related products, though a single product can be assigned such a designation. The term segment
does not correspond to a market segment (subgroup oI end users in a product-market), which we
discuss throughout the book. Most large corporations break out their Iinancial reports into busi-
ness or industry segments according to the guidelines oI the Einancial Accounting Standards
Board. Some Iirms may establish subgroups oI related products within a business segment that
are targeted to diIIerent customer groups.
A business segment, group, or division is oIten too large in terms oI product and market com-
position to use in strategic analysis and planning, so it is divided into more speciIic strategic
units. A popular name Ior these units is the strategic business unit (SBU). Typically SBUs
display product and customer group similarities. A strategic business unit is a single product or
brand, a line oI products, or a mix oI related products that meets a common market need or a
group oI related needs, and the units management is responsible Ior all (or most) oI the basic
business Iunctions. The characteristics oI the ideal SBU are described in Exhibit 2.3. Typically,
the SBU has a speciIic strategy rather than a shared strategy with another business area. It is a
cohesive organizational unit that is separately managed and produces sales and proIit results.
Virgin Group is an interesting example oI the Iormation oI a large and diverse portIolio oI
business enterprises. The Iounder, Richard Branson, was knighted in England in 2000 Ior his
entrepreneurship initiatives in launching an array oI businesses under the Virgin Group corpo-
rate umbrella. With 200 separate companies, the Virgin brand identiIies hundreds oI products
Irom travel to Iinancial services to entertainment.
15
Core businesses are Virgin Atlantic, Virgin
Express (a Brussels-based discount airline), Virgin Blue (an Australian no-Irills airline), Virgin
Rail (running two oI Britains main train services), and Virgin Mobile (Britains Iastest-growing
mobile telephone company). New projects include Virgin USA, a discount airline business to Iill
the gaps leIt by Southwest and JetBlue, and Virgin Mobile USA, a joint venture with Sprint.
Branson describes his business as a branded venture-capital Iirm, and Ior most new ventures
he supplies the brand, a small initial investment and takes majority control while partner organ-
izations provide the main Iunding. Not all oI the Virgin Group initiatives have been successIul,
but the successes have made him a very wealthy entrepreneur.
In a business that has two or more strategic business units, decisions must be made at two
levels. Corporate management must Iirst decide what business areas to pursue, and set priorities Ior
allocating resources to each SBU. The decision makers Ior each SBU must select the strategies Ior
implementing the corporate strategy and producing the results that corporate management expects.
Corporate-level management is oIten involved in assisting SBUs to achieve their objectives.
Corporate strategy and resources should help the SBU to compete more eIIectively than iI the
unit operates on a completely independent basis. To remain competitive, corporations must
provide their business units with low-cost capital, outstanding executives, corporate R&D,
centralized marketing where appropriate and other resources in the corporate arsenal.
16
Corporate resources and synergies help the SBU establish its competitive advantage. The strate-
gic Iocus and priorities oI corporate strategy guide SBU strategies. Einally, top managements
expectations Ior the corporation indicate the results expected Irom an SBU, including both
Iinancial and nonIinancial objectives. When viewed in this context, the SBUs become the action
centers oI the corporation. One criticism oI the SBU concept is that distinctive competencies are

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-
not leveraged across a corporations businesses. However, the successIul vertical movement oI
the retailer Gap into the higher-quality/price apparel segment with Banana Republic and Old
Navy into the lower-quality/price segment suggests just the opposite. Both initiatives leveraged
Gaps competencies in design, outsourcing, and retail operations and merchandising.
-- --- This aspect oI strategy considers how the organiza-
tion controls and coordinates the activities oI its various business units and staII Iunctions.
17
Structure determines the composition oI the corporation. Systems are the Iormal policies and
procedures that enable the organization to operate. Processes consider the inIormal aspects oI the
organizations activities:
In establishing a Iirms inIrastructure, corporate managers have a wide array oI organizational
mechanisms at their disposal, Irom the Iormal boxes in an organization chart to the more subtle
elements oI corporate culture and style. Because every corporate strategy is diIIerent, there is not
one optimal set oI structures, systems, and processes.
18
The logic oI how the business is designed is receiving considerable attention because oI the
threats oI customers being attracted by designs that better satisIy their needs and requirements.
A business design is the totality oI how a company selects its customers, deIines and diIIeren-
tiates its oIIerings, deIines the tasks it will perIorm itselI and those it will outsource, conIigures
its resources, goes to market, creates utility Ior customers, and captures proIit.
19
The business
design (or business model) provides a Iocus on more than the product and/or technology, instead
looking at the processes and relationships that comprise the design. Eor example, Dells direct
built-to-order business design is viewed by many business buyers as oIIering superior value.
This part oI corporate strategy looks at whether
the strategy components create value through multimarket activity.
20
The strategic issues include
evaluating the extent to which a business contributes positive beneIits minus costs somewhere
in the corporation and whether the corporation creates more value Ior the business than might

--

---
Source: Orville C. Walker
Jr., Harper W. Boyd, Jr.,
and Jean-claud Larreche,
Marketing Strategy
(Homewood, IL: Richard
D. Irwin, 1992), 76.
Copyright The
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Strategic Marketing
be created by another owner. JC Penneys management decided in 2004 that its Eckerd retail
drug chain was not a good strategic Iit with the core business and the unit was sold to the CVC
drug chain.
---
During the 1990s many strategy guidelines were oIIered by consultants, executives, and
academics to guide business strategy Iormulation. These strategy paradigms propose a range
oI actions including reengineering the corporation, total quality management, building distinc-
tive competencies, reinventing the organization, and strategic partnering. It is not Ieasible to
review the various strategy concepts and methods that are available in many books, seminars,
and consulting services. The corporate strategy Iramework presented in this chapter oIIers a
basis Ior incorporating relevant strategy perspectives and guidelines.
An important issue is whether selecting a successIul strategy has a Iavorable impact on
results. Does the uncontrollable environment largely determine business perIormance or,
instead, will the organizations strategy have a major impact on its perIormance? SuccessIul
businesses can be Iound operating in very demanding market and competitive environments.
Examples include JetBlue Airlines (air travel), Samsung (electronics), and Wal-Mart (discount
retailing). OI course, Iavorable environments would Iurther enhance the perIormance oI these
companies.
The evidence suggests that strategic choices matter.
21
While environmental Iactors such as
market demand, intensity oI competition, government, and social change inIluence corporate
perIormance, the strategic choices made by speciIic companies also have a signiIicant impact on
their perIormance. Importantly, the impact may be positive or negative. Eor example, Kmart
held the leading market position over Wal-Mart in 1980, yet Wal-Mart overtook Kmart by
investing heavily in inIormation systems and distribution to develop a powerIul customer-driv-
en, low-cost retail network. Kmart declared bankruptcy in early 2002.
---
Strategic analysis is conducted to: (1) diagnose business units strengths and limitations,
and (2) select strategies Ior maintaining or improving perIormance. Management decides
what priority to place on each business regarding resource allocation and implements a strat-
egy to meet the objectives Ior the SBU. The strategic plan indicates the action agenda Ior
the business. An example oI a business plan outline is shown in Exhibit 2.4. The major
strategies shown in Part VI oI the plan include the strategic actions planned Ior business
development, marketing, quality, product and technology, human resources, manuIacturing/
Iacilities, and Iinance.
The strategic analysis guides establishing the SBUs mission, setting objectives, and deter-
mining the strategy to use to meet these objectives. The SBUs strategy indicates market target
priorities, available resources, Iinancial constraints, and other strategic guidelines needed to
develop marketing plans. Depending on the size and diversity oI the SBU, marketing plans may
either be included in the SBU plan or developed separately. II combined, the marketing portion
oI the business plan will represent halI or more oI the business plan. In a small business
(e.g., retail store, restaurant, etc.), the marketing portion oI the plan may account Ior most oI
the plan. Plans may be developed to obtain Iinancial support Ior a new venture, or to spell out
internal business and marketing strategies.
--- --
An understanding oI business purpose, scope, objectives, capabilities, and strategy is essential
in designing and implementing marketing strategies that are consistent with the corporate and
business unit plan oI action.

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The chieI marketing executives business strategy responsibilities include (1) participating in
strategy Iormulation, and (2) developing marketing strategies that are consistent with business
strategy priorities and integrated with other Iunctional strategies. Since these two responsibili-
ties are closely interrelated, it is important to examine marketings role and Iunctions in both
areas to gain more insight into marketings responsibilities and contributions. Peter E. Drucker
describes this role:
Marketing is so basic that it cannot be considered a separate Iunction (i.e., a separate skill or work)
within the business, on a par with others such as manuIacturing or personnel. Marketing requires
separate work and a distinct group oI activities. But it is, Iirst, a central dimension oI the entire
business. It is the whole business seen Irom the point oI view oI its Iinal result, that is, Irom the
customers point oI view.
22
Erederick E. Webster describes the role oI the marketing manager: At the corporate level,
marketing managers have a critical role to play as advocates Ior the customer and Ior a set oI
values and belieIs that put the customer Iirst in the Iirms decision making, and to communicate
the value proposition as part oI that culture throughout the organization, both internally and in
its multiple relationships and alliances.
23
This role includes assessing market attractiveness
in the markets available to the Iirm, providing a customer orientation, and communicating the
Iirms speciIic value advantages.

Marketing strategy consists oI the analysis, strategy development, and implementation
activities in:
Developing a vision about the market(s) oI interest to the organization, selecting market target
strategies, setting objectives, and developing, implementing, and managing the marketing
program positioning strategies designed to meet the value requirements oI the customers in each
market target.

Source: Excerpt Irom

Rochelle OConnor,
Facing Strategic Issues.
New Planning Guides and
Practices, Report No. 87
(New York: The
ConIerence Board,
1985), 32. Reprinted with
permission Irom The
ConIerence Board.

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Strategic Marketing
Strategic marketing is a market-driven process oI strategy development, taking into account
a constantly changing business environment and the need to deliver superior customer value.
The Iocus oI strategic marketing is on organizational perIormance rather than a primary concern
about increasing sales. Marketing strategy seeks to deliver superior customer value by combin-
ing the customer-inIluencing strategies oI the business into a coordinated set oI market-driven
actions. Strategic marketing links the organization with the environment and views marketing as
a responsibility oI the entire business rather than a specialized Iunction.
Because oI marketings boundary orientation between the organization and its customers,
channel members, and competition, marketing processes are central to the business strategy
planning process.
24
Strategic marketing provides the expertise Ior environmental monitoring, Ior
deciding what customer groups to serve, Ior guiding product speciIications, and Ior choosing
which competitors to position against. SuccessIully integrating cross-Iunctional strategies is
critical to providing superior customer value. Customer value requirements must be transIormed
into product design and production guidelines. Success in achieving high-quality goods and
services requires Iinding out which attributes oI goods and service quality drive customer value.
--
The marketing strategy analysis, planning, implementation, and management process that we
Iollow is described in Exhibit 2.5. The strategy stages shown are examined and applied in Parts
II through V oI the book. The strategic situation analysis considers market and competitor analy-
sis, market segmentation, and continuous learning about markets. Designing marketing strategy
examines customer targeting and positioning strategies, marketing relationship strategies, and
planning Ior new products. Marketing program development consists oI product, distribution,
price, and promotion strategies designed and implemented to meet the value requirements oI
targeted buyers. Strategy implementation and management consider organizational design and
marketing strategy implementation and control. We overview each part oI the strategy process
in the rest oI this chapter.
--
Marketing management uses the inIormation provided by the situation analysis to guide
the design oI a new strategy or change an existing strategy. The situation analysis is conducted
on a regular basis aIter the strategy is under way to evaluate strategy perIormance and identiIy
needed strategy changes.

--
Strategic
situation
analysis
Designing
marketing
strategy
mplementing
and managing
marketing strategy
Marketing
program
development

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-
- -- Markets need to be deIined so that buyers and
competition can be analyzed. Eor a market to exist, there must be (1) people with particular
needs and wants and one or more products that can satisIy buyers needs, and, (2) buyers willing
and able to purchase a product that satisIies their needs and wants. A product-market consists oI
a speciIic product (or line oI related products) that can satisIy a set oI needs and wants Ior the
people (or organizations) willing and able to purchase it. We use the term product to
indicate either a physical good or an intangible service.
Analyzing product-markets and Iorecasting how they will change in the Iuture are vital
to business and marketing planning. Decisions to enter new product-markets, how to serve
existing product-markets, and when to exit unattractive product-markets are critical strategic
choices. The objective is to identiIy and describe the buyers, understand their preIerences
Ior products, estimate the size and rate oI growth oI the market, and Iind out what companies
and products are competing in the market.
Evaluation oI competitors strategies, strengths, limitations, and plans is also a key aspect oI
the situation analysis. It is important to identiIy both existing and potential competitors.
Competitor analysis includes evaluating each key competitor. The analyses highlight the com-
petitions important strengths and weaknesses. A key issue is trying to Iigure out what each
competitor is likely to do in the Iuture.
Google Inc. provides an interesting example oI a company that has reinvented the Internet
search process to build a business now estimated to be worth $20 billion. Googles massive bank
oI servers process more than 3,000 searches every second oI the day. Launched in 1998, Google
powers over 50 percent oI all Web searches. The start-up was based on a breakthrough search algo-
rithm and a super-Iast search process. The Google Iounders kept their home page Iree oI advertis-
ing and links to other Web pages; scorned advertising in Iavor oI word-oI-mouth to build the brand,
and built a business out oI selling advertising alongside search results. Nonetheless, Google Iaces
major competitive initiatives.
25
The competitive situation Iacing Google is outlined in Exhibit 2.6.
- Market segmentation looks at the nature and extent oI diversity oI
buyers needs and wants in a market. It oIIers an opportunity Ior an organization to Iocus
its business capabilities on the requirements oI one or more groups oI buyers. The objective oI
segmentation is to examine diIIerences in needs and wants and to identiIy the segments (sub-
groups) within the product-market oI interest. Each segment contains buyers with similar needs
and wants Ior the product category oI interest to management. The segments are described using
the various characteristics oI people, the reasons that they buy or use certain products, and their
preIerences Ior certain brands oI products. Likewise, segments oI industrial product-markets
may be Iormed according to the type oI industry, the uses Ior the product, Irequency oI product
purchase, and various other Iactors.
Each segment may vary quite a bit Irom the average characteristics oI the entire product-
market. The similarities oI buyers needs within a segment enable better targeting oI the organi-
zations capabilities to buyers with corresponding value requirements. Eor example, active
individuals comprise an important market segment Ior Gatorade, the popular thirst-quenching
sports drink. Teenagers are an important market segment Ior carbonated beverages since they
have not yet developed strong brand preIerences.
- - One oI the major realities oI achieving business
success today is the necessity oI understanding markets and competition. Sensing what is
happening and is likely to occur in the Iuture is complicated by competitive threats that may
exist beyond traditional industry boundaries. Eor example, microwave dinners compete with
McDonalds Iast Ioods, CD-ROMs compete with books, and Iax transmission competes with
overnight letter delivery.
Managers and proIessionals in market-driven Iirms are able to sense what is happening in
their markets, develop business and marketing strategies to seize opportunities and counter

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Strategic Marketing
threats, and anticipate what the market will be like in the Iuture.
26
Several market sensing meth-
ods are available to guide the collection and analysis oI inIormation. Eor example, company
databases on customers created through Customer Relationship Management systems oIIer
valuable data mining opportunities.
- -
The strategic situation analysis phase oI the marketing strategy process identiIies market
opportunities, deIines market segments, evaluates competition, and assesses the organizations
strengths and weaknesses. Market sensing inIormation plays a key role in designing marketing
strategy, which includes market targeting and positioning strategies, building marketing
relationships, and developing and introducing new products. The Strategy Eeature describes
how BMW is rebuilding its positioning in the global premium automobile market.

---
Source: Ben Elgin,
Google, BusinessWeek,
May 3, 2004, 5056.
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- Marketing advantage is inIluenced by
several situational Iactors including industry characteristics, type oI Iirm (e.g., size), extent oI
diIIerentiation in buyers needs, and the speciIic competitive advantage(s) oI the company
designing the marketing strategy. The core issue is deciding how, when, and where to compete,
given a Iirms market and competitive environment.
The purpose oI the - is to select the people (or organizations)
that management wishes to serve in the product-market. When buyers needs and wants vary, the
market target is usually one or more segments oI the product-market. Once the segments are
identiIied and their relative importance to the Iirm determined, the targeting strategy is selected.
The objective is to Iind the best match between the value requirements oI each segment and the
organizations distinctive capabilities. The targeting decision is the Iocal point oI marketing
strategy since targeting guides the setting oI objectives and developing a positioning strategy.
The options range Irom targeting most oI the segments to targeting one or a Iew segments
in a product-market. The targeting strategy may be inIluenced by the markets maturity, the
diversity oI buyers needs and preIerences, the Iirms size compared to competition, corporate
resources and priorities, and the volume oI sales required to achieve Iavorable Iinancial results.
Deciding the objectives Ior each market target spells out the results expected by management.
Examples oI market target objectives are desired levels oI sales, market share, customer reten-
tion, proIit contribution, and customer satisIaction. Marketing objectives may also be set Ior the
entire business unit and Ior speciIic marketing activities such as advertising.
The targeting and positioning strategies used by ConAgra Inc. Ior the Healthy Choice Irozen
Iood line helped the new brand successIully enter the market in the early 1990s. The low-
calorie, low-cholesterol, low-sodium Irozen Iood line quickly gained a strong market position.
27
Erozen Iood is a very competitive supermarket category because Ireezer space in stores is limited.
Healthy Choice was introduced into the stagnant male-oriented Irozen dinner segment oI the mar-
ket. It was positioned as a health product. This positioning was successIul even though it conIlicts
with conventional marketing guidelines: The Iemale-oriented Irozen Iood is the rapid growth seg-
ment and health positioning had been used to describe poor-tasting, low-calorie brands. Health
is an issue oI great concern to men and the taste oI Healthy Choice is appealing to consumers who
try the brand. The new line oI Irozen Ioods gained an impressive 25 percent market share in the

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Strategic Marketing
$700 million Irozen dinner market. Healthy Choice extended its brand in the early 1990s to include
breakIast items, deli meats, and soups. By 1992 intense price competition, new products, and pro-
motion actions oI the competition eroded Healthy Choices share oI the Irozen dinner market,
demonstrating the realities oI competing against experienced Iood marketers. Nonetheless, during
the 1990s Healthy Choice built a strong brand position across several Iood categories.
The marketing program - - is the combination oI product, value-chain,
price, and promotion strategies a Iirm uses to position itselI against its key competitors in meet-
ing the needs and wants oI the market target. The strategies and tactics used to gain a Iavorable
position are called the marketing mix or the marketing program.
The positioning strategy seeks to position the brand in the eyes and mind oI the buyer and dis-
tinguish the product Irom the competition. The product, distribution, price, and promotion strat-
egy components make up a bundle oI actions that are used to inIluence buyers positioning oI a
brand. General Motors Corp.s (GMC) positioning problems with its automobile brands illus-
trate the strategic importance oI positioning. In 1995, GMC launched a major marketing eIIort
to reposition its brands. The objective was to identiIy the market segment targeted by each brand
and to develop a unique positioning strategy appropriate Ior the target. The problem is that GMs
car brands are perceived by many buyers to be very similar. The objective oI GMs new
strategy is to give each brand a distinct identity geared to the preIerences oI the brands market
target. GMs management decided to drop the Oldsmobile brand in 2000, apparently because
GM was unable to sustain a competitive position Ior the brand.
- - Marketing relationship partners may include end
user customers, marketing channel members, suppliers, competitor alliances, and internal teams.
The driving Iorce underlying these relationships is that a company may enhance its ability to
satisIy customers and cope with a rapidly changing business environment through collaboration
oI the parties involved. Relationship strategies gained new importance in the last decade as
customers became more demanding and competition became more intense. Building long-term
relationships with customers and value-chain partners oIIers companies a way to provide supe-
rior customer value. Although building collaborative relationships may not always be the best
course oI action, this avenue Ior gaining a competitive edge is increasing in popularity.
Strategic partnering has become an important strategic initiative Ior many well-known com-
panies and brands. Many Iirms outsource the manuIacturing oI their products. Examples include
Motorola cell phones, Baskin-Robbins ice cream, Calvin Klein jeans, Pepsi beverages, and Nike
Iootwear. Strong relationships with outsourcing partners are vital to the success oI these power-
Iul brands. The trend oI the 21st century is partnering rather than vertical integration.
- New products are needed to replace old products because oI
declining sales and proIits. Strategies Ior developing and positioning new market entries involve
all Iunctions oI the business. Closely coordinated new-product planning is essential to satisIy
customer requirements and produce products with high quality at competitive prices. New-
product decisions include Iinding and evaluating ideas, selecting the most promising Ior devel-
opment, designing the products, developing marketing programs, use and market testing the
products, and introducing them to the market.
The new-product planning process starts by identiIying gaps in customer satisIaction. The
diIIerences between existing product attributes and those desired by customers oIIer opportuni-
ties Ior new and improved products. Over the decades 3M Co. was recognized as one oI corpo-
rate Americas most inventive and innovative companies.
28
Surprisingly, this core strength
began to driIt in the last decade. 3M has not had a real winner since it launched Post-it Notes
nearly 25 years ago. The new CEO is aggressively working to renew 3Ms innovative culture
and processes through redirection oI R&D eIIorts, implementing Total Quality Management
(Six Sigma), and acquiring innovative companies. 3Ms innovation priorities highlight the
pivotal role oI new-product planning in business strategy.

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Market targeting and positioning strategies Ior new and existing products guide the choice oI
strategies Ior the marketing program components. Product, distribution, price, and promotion
strategies are combined to Iorm the positioning strategy selected Ior each market target. The
relationship oI the positioning components to the market target is shown in Exhibit 2.7.
The marketing program (mix) strategies implement the positioning strategy.
29
The objective
is to achieve Iavorable positioning while allocating Iinancial, human, and production resources
to markets, customers, and products as eIIectively and eIIiciently as possible.

-
-

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-7 - - -

-7- -
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-7-

-7 - - -


-
Positioning
strategy
Market
target
Distribution
strategy
Promotion
strategy
Price
strategy
Product
strategy

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Strategic Marketing
Products (goods and services) oIten are the Iocal point oI
positioning strategy, particularly when companies or business units adopt organizational
approaches emphasizing product or brand management. Product strategy includes: (1) develop-
ing plans Ior new products, (2) managing programs Ior successIul products, and (3) deciding
what to do about problem products (e.g., reduce costs or improve the product). Strategic brand
management consists oI building brand value (equity) and managing the organizations portIolio
oI brands Ior overall perIormance.
Nestle, the Swiss Iood company, has a successIul product and brand management strategy
Ior competing in world markets. As described in the Global Eeature, the companys brand
strategy includes responding to local preIerences, providing career tracks to keep managers in
the same regional areas, and applying global Iood processing technology to gain cost and
quality advantages.
- One oI the major issues in managing
the marketing program is deciding how to integrate the components oI the mix. Product, distri-
bution, price, and promotion strategies are shaped into a coordinated plan oI action. Each
component helps to inIluence buyers in their positioning oI products. II the activities oI these
mix components are not coordinated, the actions may conIlict and resources may be wasted. Eor
example, iI the advertising messages Ior a companys brand stress quality and perIormance, but
salespeople emphasize low price, buyers will be conIused and brand damage may occur.
Market target buyers may be contacted on a direct basis using the Iirms sales Iorce or by direct
marketing contact (e.g., Internet), or, instead, through a value-added chain (distribution channel)
oI marketing intermediaries (e.g., wholesalers, retailers, or dealers). Distribution channels are
oIten used in linking producers with end user household and business markets. Decisions that
need to be made include the type oI channel organizations to use, the extent oI channel manage-
ment perIormed by the Iirm, and the intensity oI distribution appropriate Ior the product or
service. The choice oI distribution channels inIluences buyers positioning oI the brand. Eor
example, expensive watches like the Rolex brand are available Irom a limited number oI retailers
with prestigious images. These retailers help to reinIorce the brands image.
Price also plays an important role in positioning a product or service. Customer reaction
to alternative prices, the cost oI the product, the prices oI the competition, and various legal
and ethical Iactors establish the extent oI Ilexibility management has in setting prices. Price
strategy involves choosing the role oI price in the positioning strategy, including the desired
positioning oI the product or brand as well as the margins necessary to satisIy and motivate
distribution channel participants. Price may be used as an active (visible) component oI
marketing strategy, or, instead, marketing emphasis may be on other marketing mix compo-
nents (e.g., product quality).
Advertising, sales promotion, the sales Iorce, direct marketing, and public relations help
the organization to communicate with its customers, value-chain partners, the public, and other
target audiences. These activities make up the promotion strategy, which perIorms an essential
role in communicating the positioning strategy to buyers and other relevant inIluences.
Promotion inIorms, reminds, and persuades buyers and others who inIluence the purchasing
process. Hundreds oI billions oI dollars are spent annually on promotion activities. This
mandates planning and executing promotion decisions as eIIectively and eIIiciently as possible.

Selecting the customers to target and the positioning strategy Ior each target moves marketing
strategy development to the action stage (Exhibit 2.5). This stage considers designing the
marketing organization and implementing and managing the strategy.
- - An eIIective organization design
matches people and work responsibilities in a way that is best Ior accomplishing the Iirms
marketing strategy. Deciding how to assemble people into organizational units and assign respon-
sibility to the various mix components that make up the marketing strategy are important

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inIluences on perIormance. Organizational structures and processes must be matched to the busi-
ness and marketing strategies that are developed and implemented. Organizational design needs to
be evaluated on a regular basis to assess its adequacy and to identiIy necessary changes.
Restructuring and reengineering oI many organizations in the 1990s led to many changes in the
structures oI marketing units. Organizational change continues to be an important initiative in the
21st century.
Marketing strategy implementation and control
consist oI: (1) preparing the marketing plan and budget; (2) implementing the plan; and
(3) using the plan in managing and controlling the strategy on an ongoing basis. The marketing
plan includes details concerning targeting, positioning, and marketing mix activities. The plan
spells out what is going to happen over the planning period, who is responsible, how much it will
cost, and the expected results (e.g., sales Iorecasts). We discuss the preparation oI the marketing
plan in the last section oI the chapter.
The marketing plan includes action guidelines Ior the activities to be implemented, who does
what, the dates and location oI implementation, and how implementation will be accomplished.
Several Iactors contribute to implementation eIIectiveness including the skills and commitment
oI the people involved, organizational design, incentives, and the eIIectiveness oI communica-
tion within the organization and externally.
Marketing strategy is an ongoing process oI making decisions, implementing them, and track-
ing their eIIectiveness over time. In terms oI its time requirements, strategic evaluation is Iar
more demanding than planning. Evaluation and control are concerned with tracking perIormance
and, when necessary, altering plans to keep perIormance on track. Evaluation also includes look-
ing Ior new opportunities and potential threats in the Iuture. It is the connecting link in the strate-
gic marketing planning process shown in Exhibit 2.5. By serving as both the last stage and the
Iirst stage (evaluation beIore taking action) in the planning process, strategic evaluation assures
that strategy is an ongoing activity.
Rubbermaid Inc. oIIers an interesting insight into evaluation and control. AIter more than a
decade oI superior perIormance, the company began to experience problems in 1995.
30
Sales
slowed down and proIits declined. Increases in the costs oI resin used in plastic products
triggered price increases to retailers. This irritated retailers, who reduced Rubbermaids shelI
space. The already slow consumer demand Ior housewares was Iurther impacted by higher retail
prices. Rubbermaids management implemented cost reductions, sped up new-product introduc-
tions, and increased promotions to consumers to move results closer to expectations.

The explosive growth oI Internet initiatives has resulted in a variety oI Web strategies which
may impact the business and marketing strategies oI existing Iirms, and lead to the Iormation oI
new business designs. We consider the reasons why the Internet is a major Iorce Ior change, and
discuss alternative Internet strategies Ior existing companies and new business ventures.

The Internet era provides a new way oI developing relationships between end user customers,
value-chain members, and alliance partners.
31
The Web oIIers a compelling opportunity to enhance
one-on-one relationships. These impressive knowledge systems enable organizations to link
pricing, product, design, and promotion inIormation with suppliers and customers.
Various strategic initiatives are altering the basic processes underlying business transac-
tions. The reverse auction is illustrative. The reverse designation is because prices are being
bid downward rather than upward. Suppliers oI business-to-business companies have the
opportunity via the Internet to oIIer competing bids to the customer. At the end oI the process
the low bid obtains the sale. Other Web-based initiatives are impacting buying processes. The
eIIects can be dramatic. Major corporate buyers like Boeing and Motorola have warned that

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Strategic Marketing
suppliers not making the transition to Web-based commerce may Iind themselves locked out
oI their businesses. The Covisint online exchange, Iormed by General Motors, Daimler-
Chrysler, and Eord and now including other auto manuIacturers, already links tens oI thou-
sands oI suppliers to these major customers, and is seen as a prototype Ior other industry-led
online exchanges.
It is apparent that the Internet has a pervasive potential Ior change that is likely to impact
a wide range oI products and businesses. The challenge Ior existing businesses is how to
capture the advantages oI the Internet without damaging important existing relationships.
Avon Products Corp.s challenges in sustaining its direct sales model while pursuing an Internet
strategy are illustrative. In 2000, aIter 115 years oI selling to the consumer at home, Avon changed
its strategy and took its products into department stores and shopping malls Ior the Iirst time.

While some authorities argue that the Internet will make conventional strategies obsolete, a more
compelling logic is that the Internet is a powerIul complement to traditional business and
marketing strategies.
32
Nonetheless, competitive boundaries are likely to be altered and compe-
tition will become more intense. Tesco, the leading British supermarket retailer, illustrates both
points. Tesco has adopted a bricks and clicks strategy Ior its Tesco Direct online business,
combining the strength oI its chain oI stores with Internet-based ordering. Groceries are selected
on a Web page reIlecting the customers local store, and are picked manually Irom the shelves
oI that same store Ior delivery to a customer. No additional warehousing or picking Iacilities are
required. Tesco is now leveraging its online customer base to sell a growing range oI high-
margin nonIood products, Irom Iresh Ilowers to apparel, as well as Iinancial services. They may
even sell automobiles by this route.
While there are various strategy initiatives regarding the Internet, they correspond to one oI
the Iollowing:
Eormation oI a separate business model as an independent venture or an initiative by an
existing company.
Amazon.com Inc. is an example oI the Iormer whereas Sabres Travelocity.Com venture was
initiated by an existing company.
Creation oI a separate value-chain channel direct Irom the producer to the end user.
Dell Inc. uses this Internet strategy.
Using the Internet as an inIormation resource.
This initiative is used by various organizations such as BusinessWeek.
Using the Web Ior advertising and sales promotion activities.
These activities may be provided Ior one or more sponsors by a Web-based enterprise that oIIers
users inIormation at no charge. Ad revenues support the enterprise.
An organization may pursue more than one oI the above initiatives, and the strategies may be
interrelated. Also, alliances may be Iormed between traditional companies and Internet ventures.
Independent Internet business models have experienced several Iailures. In more than a Iew
cases, the Iailures have been due to managements optimistic estimation oI patronage and the
Iailure to consider basic business and marketing strategy guidelines. The analysis oI Webvans
lack oI success in the Internet groceries market is described in the Internet Eeature. It is notable
that the most successIul Internet grocery business in the world is operated by Tesco in the United
Kingdom. The Internet channel is seen as only one way to reach the consumer, alongside
regular stores, not a separate business.
Internet strategy is Iurther considered in Chapters 10 and 13. Internet Eeatures are included
in many chapters.

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Marketing plans vary widely in scope and detail. Nevertheless, all plans need to be based on
analyses oI the product-market and segments, industry and competitive structure, and the
organizations value proposition. We look at several important planning issues that provide a
checklist Ior plan preparation.
--
Marketing plans are developed, implemented, evaluated, and adjusted to keep the strategy on
target. Since the marketing strategy normally extends beyond one year, it is useIul to develop
a three-year strategic plan and an annual plan to manage marketing activities during the year.
Budgets Ior marketing activities (e.g., advertising) are set annually. Planning is really a series oI
annual plans guided by the marketing strategic plan.
The Irequency oI planning activities varies by company and marketing activity. Market
targeting and positioning strategies are not changed signiIicantly during the year. Tactical
changes in product, distribution, price, and promotion strategies may be included in the annual
plan. Eor example, the aggressive response oI competitors to Healthy Choices successIul mar-
ket entry required changes in Con Agras pricing and promotion tactics Ior the Irozen Iood line.
--
Suppose that you need to develop a plan Ior a new product to be introduced into the national
market next year. The plan Ior the introduction should include the expected results (objectives),
market targets, actions, responsibilities, schedules, and dates. The plan indicates details and
deadlines, product plans, a market introduction program, advertising and sales promotion
actions, employee training, and other inIormation necessary to launching the product. The plan

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Strategic Marketing
needs to answer a series oI questionswhat, when, where, who, how, and whyIor each action
targeted Ior completion during the planning period.
-- - A marketing executive or team is responsible Ior
preparing the marketing plan. Some companies combine the business plan and the marketing
plan into a single planning activity. Regardless oI the Iormat used, the marketing plan is devel-
oped in close coordination with the strategic plan Ior the business. There is also much greater
emphasis today to involve all business Iunctions in the marketing planning process. A product
or marketing manager may draIt the Iormal plan Ior his/her area oI responsibility, coordinating
and receiving inputs Irom advertising, marketing research, sales, and other marketing specialists.
Coordination and involvement with other business Iunctions (R&D, Iinance, operations) are also
essential.
The choice oI the planning unit may vary due to the product-market portIo-
lio oI the organization. Some Iirms plan and manage by individual products or brands. Others
work with product lines, markets, or speciIic customers. The planning unit may reIlect how mar-
keting activities and responsibilities are organized. The market target is a useIul Iocus Ior plan-
ning regardless oI how the plan is aggregated. Using the target as the basis Ior planning helps to
place the customer in the center oI the planning process and keeps the positioning strategy linked
to the market target.

The ConIerence Board oIIers several examples oI plan Iormats in its excellent reports on mar-
keting planning.
33
Eormat and content depend on the size oI the organization, managerial respon-
sibility Ior planning, product and market scope, and other situational Iactors. An outline Ior a
typical marketing plan is shown in Exhibit 2.8. We take a brieI look at the major parts oI the
planning outline to illustrate the nature and scope oI the planning process. In this discussion the
market target serves as the planning unit.
This part oI the plan describes the market and its important
characteristics, size estimates, and growth projections. Market segment analysis indicates the
segments to be targeted and their relative importance. The competitor analysis indicates the key
competitors (actual and potential), their strengths and weaknesses, probable Iuture actions,
and the organizations competitive advantage(s) in each segment oI interest. The summary
should be very brieI. Supporting detailed inIormation Ior the summary can be placed in an
appendix or in a separate analysis.
- A description oI each market target, size and growth rate,
end users characteristics, positioning strategy guidelines, and other available inIormation use-
Iul in planning and implementation are essential parts oI the plan. When two or more targets are
involved, it is helpIul to indicate priorities Ior guiding resource allocation.
- - Here we spell out what the marketing strategy
is expected to accomplish during the planning period. Objectives are needed Ior each market
target, indicating Iinancial perIormance, sales, market position, customer satisIaction, and other
desired results. Objectives are also usually included Ior each marketing program component.
- The positioning statement indicates how
management wants the targeted customers and prospects to perceive the brand. SpeciIic strategies
and tactics Ior product, distribution, price, and promotion are explained in this part oI the plan.
Actions to be taken, responsibilities, time schedules, and other implementation inIormation are
included at this point in the plan.
Planning and implementation responsibilities oIten involve more than one person or depart-
ment. One approach is to assign a planning team the responsibility Ior each market target and
marketing mix component. Product and geographical responsibilities are sometimes allocated to
individuals or teams. The responsibilities and coordination requirements need to be indicated
Ior marketing units and other business Iunctions. Importantly, the planning process should

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-
encourage participation Irom all oI the areas responsible Ior implementing the plan. Contingency
plans may be included in the plan. The contingencies consider possible actions iI the anticipated
planning environment is diIIerent Irom what actually occurs.
- Einancial planning includes Iorecasting revenues and
proIits and estimating the costs necessary to carry out the marketing plan (see the Appendix to
Chapter 2 Ior Iinancial analysis details). The people responsible Ior market target, product,
geographical area, or other units should prepare the Iorecasts and budgets. Comparative data
on sales, proIits, and expenses Ior prior years is useIul to link the plan to previous results.
-- Planning Ior global operations is more complex than
domestic planning. The major phases oI planning Ior a multinational Iirm operating in several
countries are shown in Exhibit 2.9. The Iirst step in the planning process is the market opportu-
nity analysis. This may represent a major activity Ior a company that is entering a Ioreign
market Ior the Iirst time. Several applications are discussed in subsequent chapters. Because oI
the risks and uncertainties in international markets, the market assessment is very important Ior
both new market entrants and experienced Iirms.

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Strategic Marketing
Phase 1 determines which targets to pursue and establishes relative priorities Ior resource
allocation. Phase 2 Iits the positioning strategy to each target market. The objective is to match
the mix requirements to the needs identiIied and the positioning concept management selects.
Phase 3 consists oI the preparation oI the marketing plan. Included are the situation assessment,
objectives, strategy and tactics, budgets and Iorecasts, and action programs. Einally, in Phase 4,
the plan is implemented and managed. Results are evaluated and strategies adjusted when
necessary to improve results. Although the international market planning process is similar to
planning domestic marketing strategies, the environment is Iar more complex and uncertain
in international markets.
--
Source: Philip R. Catteora
and John L. Graham,
International Marketing,
12th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2005),
322. Copyright The
Environmental factors,
company character, and
screening criteria
Company character
Home country constraints
Host country(s) constraints
Philosophy
Objectives
Resources
Management style
Organization
Financial limitations
Management and marketing skills
Products
Other
Political
Legal
Economic
Other
Economic
Political
Competitive
Level of technology
Culture
Structures of distribution
Geography
Phase 1
Preliminary analysis and screening:
Matching company/country needs
Phase 2
Adapting the marketing
mix to target markets
Phase 3
Developing the
marketing plan
Phase 4
mplementation
and control
Matching mix
requirements
Product
Price
Promotion
Adaptation
Brand name
Features
Packaging
Service
Warranty
Style
Credit
Discounts
Advertising
Personal selling
Media
Message
Sales promotion
Distribution
Logistics
Channels
Marketing plan
development
mplementation,
evaluation,
and control
Situation
analysis
Objectives
Standards
Assign
responsibility
Measure
performance
Correct
for error
Objectives
and goals
Strategy
and tactics
Budgets
Action
programs
nformation derived from each phase, market research, and evaluation of program performance
Strategy Iormulation Ior the corporation includes: (1) deIining
the corporate mission and setting objectives, (2) determining
strategic business units, and (3) establishing strategy guide-
lines Ior long-term strategic planning oI the corporation and
its business units. Top management must select the corporate
strategy to move the Iirm toward its objectives. AIter imple-
menting the strategy, management considers how the strategy
is progressing and what adjustments are needed. SuccessIully
executing these steps requires penetrating and insightIul
analyses.
The corporate vision or mission statement spells out the
nature and scope oI the business and provides strategic direc-
tion Ior the corporation. The Iirms objectives indicate the
perIormance desired by management. II management decides
to move away Irom the core business, several paths oI corpo-
rate development are possible, including expansion into new
products and/or markets as well as diversiIication.
The available evidence indicates that well-Iormulated and
executed business strategies lead to superior perIormance.
While there are several approaches to strategy development,

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they share common Ieatures including the objective oI superi-
or customer value, achieving a market orientation, and
competing with distinctive capabilities.
Business unit strategies are guided by corporate strategy
guidelines. The process begins by considering each business
units market opportunity, position against competition,
Iinancial situation and projections, and strengths and
weaknesses. The situation analysis spells out the strategy
alternatives Ior the business unit. Management selects a
strategy and develops a strategic plan, which is then
implemented and managed.
Marketing strategy is an analysis, planning, implementa-
tion, and control process designed to satisIy customer needs
and wants by providing superior customer value. The Iirst
part oI the process includes product-market analysis, market
segmentation, competition analysis, and continuous learning
about markets. These analyses guide the choice oI marketing
strategy. Market deIinition establishes the overall competitive
arena. Market segmentation describes possible customer
groups Ior targeting by businesses. Competitor analysis looks
at the strengths, weaknesses, and strategies oI key competitors.
Continuous learning about markets supplies inIormation Ior
analysis and decision making.
Designing the marketing strategy is the second stage in
strategy development. The selection oI the people (or organiz-
ations) to be targeted is guided by the situation analysis. The
market target decision indicates the buyer groups whose needs
are to be satisIied by the marketing program positioning
strategy. The positioning strategy indicates how the Iirm will
position itselI against its key competitors in meeting the needs
oI the buyers in the market target. The relationship strategy
spells out the extent oI collaboration with consumers, other
organizations, and company personnel. New-product strategies
are essential to generate a continuing stream oI new entries to
replace mature products that are eliminated.
The third phase oI the strategy process consists oI market-
driven program development. SpeciIic marketing mix strate-
gies Ior products, distribution, price, and promotion must be
developed to implement the positioning strategy management
has selected. The objective is to combine the marketing
mix components to accomplish market target objectives in
a cost-eIIective manner.
The last phase oI the process consists oI marketing strategy
implementation and management. These activities Iocus on the
marketing organizational design and marketing strategy imple-
mentation and control. This is the action phase oI marketing
strategy.
The marketing plan spells out the actions to be taken, who
is responsible, deadlines to be met, and the sales Iorecast and
budget. The plan describes the marketing decisions and guides
the implementation oI the decisions, and the evaluation and
management oI the marketing strategy.
-
A. Examine the Web sites oI Borders (www.borders.com) and
Amazon (www.ama:on.com). Compare and contrast the
two approaches to using a Web site as part oI each com-
panys competitive strategy.
B. Examine the Web sites oI both ebay.com (www.ebay.com)
and uBid.com (www.uBid.com). Compare and contrast the
two approaches to using a Web site as part oI each com-
panys competitive strategy. Analyze the diIIerences and
similarities and suggest improvements as well as a mar-
keting strategy Ior the two companies (i.e., solely Internet-
based).
-
A. Review the material in the Global EeatureThe A380: A
Pan-European Plane. How can the risks being taken by
Airbus with this venture be justiIied? What are the
major concerns that should be monitored as the project
proceeds?
B. Consider the points in the Strategy EeatureBMW:
Positioning Premium Automobiles. How would you
describe BMWs market targeting and positioning
strategy? How does it compare to other premium car
producers?
-- ---
1. Top management oI companies probably devoted more
time to reviewing (and sometimes changing) their corpo-
rate vision (mission) in the last decade than in any other
period. Discuss the major reasons Ior this increased
concern with the vision Ior the corporation.
2. Discuss the role oI organizational capabilities in corporate
strategy.
3. What is the relationship between the corporate strategy
and the strategies Ior the businesses that comprise the cor-
porate portIolio?
4. Discuss the major issues that top management should con-
sider when deciding whether or not to expand business
operations into new business areas.
5. Discuss the environmental Iactors that should be assessed
on a regular basis by a large retail corporation like Target
Corp.
6. Discuss what you consider to be the major issues in
trying to divide a corporation into strategic business
units, indicating Ior each problem suggestions Ior over-
coming it.

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Strategic Marketing
-
1. Gary Hamel and Liisa Vlikangas, The Quest Ior
Resilience, Harvard Business Review, September 2003,
5263.
2. Anthony Marsella, Gerry Bell, Ian Ruddleston, and Merlin
Stone, Meeting Demand, Marketing Business, January
2004, 2224.
3. Michael E. Porter, What Is Strategy? Harvard Business
Review, NovemberDecember 1996, 74.
4. Raymond Miles and Charles Snow, Eit, Eailure, and the
Hall oI Eame, California Management Review, Spring
1984, 1028; and James Brian Quinn, Intelligent
Enterprise (New York: Eree Press, 1992), Chapter 5.
5. Preston Townley, Comments made by the ConIerence
Board CEO during an address at Texas Christian
University in Eort Worth, Texas, Eebruary 15, 1994.
6. George S. Day, Aligning the Organization to the Market,
in Reflections on the Future of Marketing, Donald R.
Lehmann and Katherine E. Joez (eds.) (Cambridge, MA:
Marketing Science Institute, 1997), 6793.
7. The Virtual Corporation, BusinessWeek, Eebruary 8,
1993, 98102.
8. David J. Collis and Cynthia A. Montgomery, Corporate
Strategy (Chicago: Irwin, 1997), 5.
9. Ibid., 7 and 8.
10. Ibid., 712.
11. Based in part on George S. Day, Strategic Market
Planning (St. Paul, MN: West Publishing, 1984), 1822.
12. Peter E. Drucker, Management (New York: Harper &
Row, 1974), 100.
13. Robert S. Kaplan and David P. Norton, 1he Balanced
Scorecard (Boston: Harvard Business School Press,
1996).
14. C. K. Prahalad and Gary Hamel, The Core Competence
oI the Corporation, Harvard Business Review, MayJune
1990, 7991; George S. Day, The Capabilities oI Market-
Driven Organizations, Journal of Marketing, October
1994, 3752.
15. Melanie Wells, Red Baron, Forbes, July 3, 2000,
151160; Kerry Capell and Wendy Zellner, Richard
Bransons Next Big Adventure, BusinessWeek, March 8,
2004, 1617.
16. This discussion is based on Boris Yavitz and William H.
Newman, What the Corporation Should Provide Its
Business Units, Journal of Business Strategy 3, no. 1
(Summer 1982), 14.
17. Collis and Montgomery, Corporate Strategy, 1011.
18. Ibid., 11.
19. Adrian J. Slywotzky, Jalue Migration (Boston: Harvard
Business School Press, 1996), 4.
20. Collis and Montgomery, Corporate Strategy, 1112.
21. Shelby D. Hunt and Robert M. Morgan, The Comparative
Advantage Theory oI Competition, Journal of Marketing,
April 1995, 115.
22. Drucker, Management, 63.
23. Erederick E. Webster, The Changing Role oI Marketing
in the Organization, Journal of Marketing, October
1992, 11.
24. George S. Day, Strategic Market Planning (St. Paul: West
Publishing, 1984), 3.
25. Ben Elgin, Google, BusinessWeek, May 3, 2004, 5056.
26. George S. Day, Continuous Learning about Markets,
California Management Review, Summer 1994, 931.
27. This example is based on D. John Loden, Megabrands
(Homewood, IL: Business One Irwin, 1992, 18485.
28. Michael Arndt, 3Ms Rising Star, BusinessWeek, April
12, 2004, 6370.
29. Webster, The Changing Role oI Marketing, 13.
30. Paulette Thomas, Rubbermaid Stock Plunges over 12
on Projected Weak 2nd Quarter ProIit, 1he Wall Street
Journal, June 12, 1995, B6.
31. The Iollowing discussion is based on material developed
by Dr. John R. Nevin, Granger Wisconsin Distinguished
ProIessor, University oI Wisconsin.
32. Michael E. Porter, Strategy and the Internet, Harvard
Business Review, March 2001, 6378.
33. David S. Hopkins, 1he Marketing Plan (New York:
The ConIerence Board Inc., 1981). See also Howard
Sutton, 1he Marketing Plan in the 1990s (New York: The
ConIerence Board Inc., 1990).
7. Develop an outline oI how you would explain the
marketing strategy process to an inventor who is Iorming
a new business to develop, produce, and market a new
product.
8. Discuss the role oI market targeting and positioning in an
organizations marketing strategy.
9. What is the relationship between the strategic plan Ior a
business in the corporate portIolio and the marketing plan
Ior the business?
10. You have been asked to develop a marketing plan Ior a
metro-bank that has six branch oIIices. How would you
approach this assignment?

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Several kinds oI Iinancial analyses are needed Ior
marketing analysis, planning, and control activities.
Such analyses represent an important part oI case prepa-
ration activities. In some instances it will be necessary to
review and interpret the Iinancial inIormation provided
in the cases. In other instances, analyses may be
prepared to support speciIic recommendations. The
methods covered in this appendix represent a group oI
tools and techniques Ior use in marketing Iinancial
analysis. Throughout the discussion, it is assumed that
accounting and Iinance Iundamentals are understood.
--
Various units oI analysis that can be used in marketing
Iinancial analysis are shown in Exhibit 2A.1. Two Iactors
oIten inIluence the choice oI a unit oI analysis: (1) the
purpose oI the analysis and (2) the costs and availability
oI the inIormation needed to perIorm the analysis.
--
Einancial measures can be used to help assess the pres-
ent situation. One oI the most common and best ways to
quantiIy the Iinancial situation oI a Iirm is through ratio
analysis. These ratios should be analyzed over a period
oI at least three years to discern trends.
-
Einancial inIormation will be more useIul to manage-
ment iI it is prepared so that comparisons can be made.
James Van Horne comments upon this need.
To evaluate a Iirms Iinancial condition and perIorm-
ance, the Iinancial analyst needs certain yardsticks.
The yardstick Irequently used is a ratio or index, relating
two pieces oI Iinancial data to each other. Analysis and
interpretation oI various ratios should give an experi-
enced and skilled analyst a better understanding oI the
Iinancial condition and perIormance oI the Iirm than
he would obtain Irom analysis oI the Iinancial data
alone.
1
As we examine the Iinancial analysis model in the next
section, note how the ratio or index provides a useIul
Irame oI reIerence. Typically, ratios are used to compare
historical and/or Iuture trends within the Iirm or to com-
pare a Iirm or business unit with an industry or other Iirms.
Several Iinancial ratios oIten used to measure business
perIormance are shown in Exhibit 2A.2. Note that these
ratios are primarily useIul as a means oI comparing:
1. Ratio values Ior several time periods Ior a particular
business.
2. A Iirm to its key competitors.
3. A Iirm to an industry or business standard.
There are several sources oI ratio data.
2
These
include data services such as Dun & Bradstreet, Robert
Morris Associates Annual Statement Studies, industry
and trade associations, government agencies, and invest-
ment advisory services.
Other ways to gauge the productivity oI marketing
activities include sales per square Ieet oI retail Iloor
space, occupancy rates oI hotels and oIIice buildings,
and sales per salesperson.
--

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Strategic Marketing
--
When the perIormance oI products, market segments,
and other marketing units is being analyzed, manage-
ment should examine the units proIit contribution.
Contribution margin is equal to sales (revenue) less
variable costs. Thus, contribution margin represents the
amount oI money available to cover Iixed costs, and
contribution margin less Iixed costs is net income. An
illustration oI contribution margin analysis is given in
Exhibit 2A.3. In this example, product X is generating a
positive contribution margin. II product X were elimi-
nated, $50,000 oI product net income would be lost, and
the remaining products would have to cover Iixed costs
not directly traceable to them. II the product is retained,
the $50,000 can be used to contribute to other Iixed costs
and/or net income.
--
The model shown in Exhibit 2A.4 provides a useIul
guide Ior examining Iinancial perIormance and identiIy-
ing possible problem areas. The model combines several
important Iinancial ratios into one equation. Lets exam-
ine the model, moving Irom leIt to right. ProIit margin
multiplied by asset turnover yields return on assets.
Moreover, assuming that the perIormance target is
return on net worth (or return on equity), the product oI
return on assets and Iinancial leverage determines per-
Iormance. Increasing either ratio will increase net worth.
The values oI these ratios will vary considerably Irom
one industry to another. Eor example, in grocery whole-
saling, proIit margins are typically very low, whereas
asset turnover is very high. Through eIIicient manage-
ment and high turnover, a wholesaler can stack up
impressive returns on net worth. Eurthermore, space
productivity measures are obtained Ior individual
departments in retail stores that oIIer more than one line,
such as department stores. The measures selected
depend on the particular characteristics oI the business.
-
As we move through the discussion oI Iinancial analy-
sis, it is important to recognize the type oI costs being
used in the analysis. Using accounting terminology,
costs can be designated as Iixed or variable. A cost is
fixed iI it remains constant over the observation period,
even though the volume oI activity varies. In contrast, a
variable cost is an expense that varies with sales over
the observation period. Costs are designated as mixed or
semivariable in instances when they contain both Iixed
and variable components.
--
This technique is used to examine the relationship
between sales and costs. An illustration is given in
Exhibit 2A.5. Using sales and costs inIormation, it is
easy to determine Irom a break-even analysis how many
units oI a product must be sold in order to break even,
or cover total costs. In this example 65,000 units at sales
--
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--
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- I -- - I --- -
--
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--
-
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-

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oI $120,000 are equal to total costs oI $120,000. Any
additional units sold will produce a proIit. The break-
even point can be calculated in this manner:
Price in the illustration shown in Exhibit 2A.5 is
$1.846 per unit, and variable cost is $0.769 per unit.
With Iixed costs oI $70,000, this results in the break-
even calculation:
To determine how many units must be sold to achieve
a target proIit (expressed in beIore-tax dollars), the
Iormula is amended as Iollows:
Using the same illustration as above and including
a target beIore-tax proIit oI $37,700, the target proIit
calculation becomes:
Break-even analysis is not a Iorecast. It indicates how
many units oI a product at a given price and cost must be
sold in order to break even or achieve a target proIit.
Some important assumptions that underlie the above
break-even analysis include the use oI constant Iixed
and variable costs, a constant price, and a single product.
In addition to break-even analysis, several other
Iinancial tools are used to evaluate alternatives. Net
present value oI cash Ilow analysis and return on invest-
ment are among the most useIul. Eor example, assume
there are two projects with the cash Ilows shown
in Exhibit 2A.6.
Though return on investment is widely used, it is
limited by its inability to consider the time value oI
money. This is shown in Exhibit 2A.7. Return on invest-
ment Ior both projects X and Y is 10 percent. However,
a dollar today is worth more than a dollar given in three
years. ThereIore, in assessing cash Ilows oI a project or
investment, Iuture cash Ilows must be discounted back
Target proIit units
$70,000
u
$ ,
$ . $ .
,
37 700
1 846 0 769
100 000 nnits
Target proIit units
Eixed costs Target proIit (beIore tax)
PPrice per unit Variable cost per unit
BE units units
$ ,
$ . $ .
,
70 000
1 846 0 769
65 000
Break-even units
Eixed costs
Price per unit Variable cost peer unit

-
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250
200
150
120
100
50
0
25 50 65 75 100 125
Number of units (000s)
Net profit
Variable costs
Fixed costs
Fixed costs
Break-even point
Profit
Sales
Total costs
S
a
l
e
s

a
n
d

c
o
s
t
s

(
$
0
0
0
s
)
Loss
- - -

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Strategic Marketing
to the present at a rate comparable to the risk oI the
project.
Discounting cash Ilows is a simple process. Assume
that the Iirm is considering projects X and Y and that its
cost oI capital is 12 percent. Additionally, assume that
both projects carry risk comparable to the normal busi-
ness risk. Under these circumstances, the analyst should
discount the cash Ilows back to the present at the cost oI
capital, 12 percent. Present value Iactors can be looked
up or computed using the Iormula 1/(1 i)
n
, where
i equals our discounting rate per time period and
n equals the number oI compounding periods. In this
example, the present value oI cash Ilows would be as
shown in Exhibit 2A.7.
Because both projects have a positive net present
value, both are good. However, iI they are mutually
exclusive, the project with the highest net present value
should be selected.

Einancial planning involves two major activities: (1) Iore-
casting revenues and (2) budgeting (estimating Iuture
expenses). The actual Iinancial analyses and Iorecasts
included in the strategic marketing plan vary consider-
ably Irom Iirm to Iirm. In addition, internal Iinancial
reporting and budgeting procedures vary widely among
companies. ThereIore, consider this approach as one
example rather than the norm.
The choice oI the Iinancial inIormation to be used Ior
marketing planning and control will depend on its rela-
tionship with the corporate or business unit strategic
plan. Another important consideration is the selection oI
perIormance measures to be used in gauging marketing
perIormance. The objective is to indicate the range oI
possibilities and suggest some oI the more Irequently
used Iinancial analysis.
Pro Iorma income statements can be very useIul
when one is projecting perIormance and budgeting.
Usually, this is done on a spreadsheet so that assump-
tions can be altered rapidly. Usually, only a Iew assump-
tions need be made. Eor example, sales growth rates can
be projected Irom past trends and adjusted Ior new
inIormation. Erom this starting point, cost oI goods can
be determined as a percentage oI sales. Operating
expenses can also be determined as a percentage oI sales
based on past relationships, and the eIIective tax rate as
a percentage oI earnings beIore taxes. However, past
relationships may not hold in the Iuture. It may be nec-
essary to analyze possible divergence Irom past rela-
tionships.
In addition, pro Iorma income statements can be used
to generate pro Iorma cash Ilow statements. It is then
possible to compare alternative courses oI action by
employing a uniIormly comparable standard cash Ilow.
--
The preceding sections oI this appendix detailed the
various Iorms oI traditional Iinancial analysis useIul in
marketing decision making. There are supplemental
Iorms oI analysis that can also be helpIul in diIIerent
types oI marketing decisions. These supplemental tech-
niques draw mainly Irom the management accounting
discipline and rely on data that are available only to
internal decision makers. Many oI the Iinancial analyses
in the earlier sections employed data Irom published
Iinancial statements.
- - -
- -

>
>

-

>
>

-

--

-
Only recently have marketing decision makers been
able to look to management accounting to provide an
additional set oI quantitative tools to aid in the decision
process.
3
These tools may be reIerred to collectively as
strategic management accounting practices. Simmonds
is generally credited with originating the term strategic
management accounting, which he deIines as the pro-
vision and analysis oI management accounting data
about a business and its competitors Ior use in develop-
ing and monitoring the business strategy.
4
Although
academic researchers may disagree about the speciIic
techniques which constitute strategic management
accounting, there are a wide selection oI management
accounting practices available Ior use in marketing
decision making. These practices are described in
Exhibit 2A.8 and include activity-based costing, attrib-
ute costing, benchmarking, brand valuation budgeting
and monitoring, competitor cost assessment, competi-
tive position monitoring, competitor perIormance
appraisal, integrated perIormance measurement, liIe
cycle costing, quality costing, strategic costing, strategic
pricing, target costing, and value-chain costing.
5
Exhibit 2A.8 also provides a description oI the vari-
ous marketing applications oI strategic management
accounting practices in terms oI speciIic decision-
making situations. Most oI these practices require the
marketing decision maker to gather inIormation
additional to that normally used Ior the preparation oI
external Iinancial statements. In most cases, this inIor-
mation is already available in the accounting inIorma-
tion system oI the Iirm. However, it may be necessary to
compile data Irom outside the Iirm in a more Iormalized
manner to perIorm analysis using some oI these strate-
gic management accounting practices.
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-
-
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-

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Markets are increasingly complex, turbulent, and interrelated, creating challenges Ior managers
in understanding market structure and identiIying opportunities Ior growth. Consider, Ior exam-
ple, the pervasive impact oI digital technology on computer, telecommunications, photography,
and oIIice equipment markets and competitive space. Rapid technological change, Internet
access, global competition, and the diversity oI buyers preIerences in many markets require
continuous monitoring to identiIy promising business opportunities, determine iI new technolo-
gies are disruptive, assess the shiIting requirements oI buyers, evaluate changes in competitive
positioning, and guide managers decisions about which buyers to target and how to position
brands to appeal to targeted buyers. A broad view oI the market is important, even when
managements interest centers on one or a Iew market segments within a particular market.
Understanding the scope and structure oI the entire market is necessary to develop strategy and
anticipate market changes and competitive threats. Understanding markets and how they are
likely to change in the Iuture are vital inputs to market-
driven strategies.
There is perhaps no better example oI the importance
oI understanding markets and developing a vision oI how
they are likely to change in the Iuture than the market
Ior cell phones. (See accompanying Samsung Electronics
phone advertisement). This market is only 20 years old, yet
is expected to dominate U.S. communications by 2005. In
2003 in the United States there were 147 million wireless
phones compared to 187 million traditional phone lines.
1
The rapid changes in the market are cannibalizing the
core businesses oI local telecommunications providers,
negatively impacting their revenues and proIits. Companies
that are not oIIering wireless services are conIronted
with even more severe challenges. Also on the horizon is
the expanding threat oI Internet phone services. The value
migration Irom traditional to cell phones is also a signiIi-
cant threat to telecom-equipment producers such as Lucent
Technologies and Nortel Networks. Consolidation oI
suppliers is likely in their eIIorts to cope with the changes
in the market and competitive space. Not surprisingly,
wireless suppliers revenues and proIits are growing
rapidly. An analysis oI expected market changes is
described in the Strategy Eeature.

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Fixed Income securities
Markets, Segments, and Customer Jalue
The mobile phone illustration highlights several important issues concerning markets. The
changes described show how competitive threats may develop Irom new business designs
(wireless providers). Importantly, the rapid growth oI cell phones points to the importance oI
market vision in assessing the nature and scope oI new competitive threats and guiding strategic
initiatives to counter the threats.
The chapter begins with a discussion oI how markets and strategies are interrelated, Iollowed by
an approach Ior determining product-market scope and structure. Next, we look at how buyers are
described and analyzed, and then we discuss competitor analysis. Guidelines Iollow Ior developing
a strategic vision about the scope and composition oI markets in the Iuture. Einally, we consider how
to estimate market size. Additional market Iorecasting guidelines are provided in Appendix 3A.
- -
Market knowledge is essential in guiding business and marketing strategies. Eirst, we look at
how markets impact strategy. Next, we examine the concept oI value migration, and how it
aIIects market opportunities. The section is concluded with a discussion oI developing a shared
vision about how the market is expected to change in the Iuture.
- -
Market changes oIten require altering business and marketing strategies. Managers that do not
understand their markets, and how they will change in the Iuture, may Iind their strategies
inadequate as buyers value requirements change and new products become available that better
satisIy buyers requirements. Many Iorces are causing the transIormation oI industries and are
changing the structure oI markets and nature oI competition. The drivers oI change include
deregulation, global excess capacity, global competition, mergers and acquisitions, new tech-
nologies, changing customer expectations, disintermediation, demographic shiIts, and changing
liIe and work styles.
2
These inIluences create both market opportunities and threats by altering
the nature and scope oI markets and competitive space. Market-driven companies proactively
alter their strategies to provide superior value to existing and new customers. Eor example,
PepsiCo shows impressive perIormance in understanding and catering to changing tastes in the
beverage and snacks market, rather than trying to change them. The company Iaces the Iacts
about market change and adapts products to them. To capitalize on the growing market Ior New
Age herbally enhanced beverages, PepsiCo acquired SoBe Beverages in 2001, and extended the
brand into an energy drink Ior the school-age marketSoBe No Eearand SoBe Euerte aimed

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Markets and Competitive Space
at the Hispanic market. Sabritas chips were brought in Irom PepsiCos Mexican subsidiary
targeting the Ioreign-born segment oI the 46 million strong U.S. Hispanic market. Sabritas U.S.
sales will exceed $100 million in 2004. The company deIines its mission as serving the
consumer, not protecting its existing brands.
3
Digital photography has had a major impact on the market Ior cameras and Iilm. Digital tech-
nology pushed Polaroid Corp. into bankruptcy. Kodak is making major shiIts in business and
marketing strategies to cope with unexpected large declines in Iilm sales by trying to reinvent
itselI Ior the Digital Age.
4
Kodaks management announced new investments oI $3 billion Ior
expanded digital initiatives in 2003. Drops oI 10 to 12 percent in Iilm sales were expected
annually through 2006. Some industry observers expected even more rapid sales declines. ProIit
margins are much lower Ior digital products. Kodaks managers recognized the digital threat, but
their vision about the Iuture did not anticipate the speed and magnitude oI digital market entry.
Digital technology requires major changes in the business and marketing strategies oI Euji,
Kodak, and other camera and Iilm companies. The rapid growth oI camera phone sales has
Iurther compounded the scope and complexity oI the market.

Value migration describes the process oI customers shiIting their purchases away Irom the
products generated by outmoded business designs to new ones that oIIer superior value.
5
Examples include value migration Irom conventional typewriters to word processing and
computers, reIerence books to CD-ROM Iormat, and Iull-service airlines to discount airlines.
Anticipating value migration threats is an essential aspect oI market-driven strategy.
Importantly, these threats may emerge Irom disruptive technologies that managers oI existing
products do not consider to be relevant competitive threats.
Value migration may aIIect a product category, a company, or an entire industry. Eorecasting
the exact nature, scope, and timing oI migration may be diIIicult but is, nonetheless, essential.
Eor example, Kodaks management did not Iorecast the rapid impact oI digital photography on
the imaging market. Market knowledge is a key input to assessing migration and disruptive tech-
nology trends. Value migration points to the close relationship between strategies and markets,
and the need to deIine and understand the market and competitive arena. The value migration
concept also highlights the importance oI constant organizational learning and implementing
strategy changes to proactively respond to value migration situations.
Eor-proIit colleges are an interesting example oI value migration Irom traditional universities
to publicly traded businesses that have displayed explosive growth during the last decade.
6
These
organizations comprise a new dimension in higher education. The top ten Ior-proIit colleges
have more than halI a million students. The typical Ior-proIit tuition charges are about $11,000
a year, midway between the average private and public university. The Ior-proIits target age
2030 working adults, and nearly one-halI are minorities. Some 10 percent oI Master oI
Business Administration students are enrolled in Ior-proIit programs. Eor-proIit students
comprise over 40 percent oI the online-degree market. Apollo Group/University oI Phoenix has
an enrollment oI 200,000 in regular programs and another 80,000 pursuing online degrees.

The activities involved in gaining an understanding oI markets are shown in Exhibit 3.1. The
Iirst step is to deIine the markets boundaries and describe its structure. Markets can be deIined
in many diIIerent ways, and they are constantly changing as illustrated by the telecommunica-
tions, photography, and higher education examples. We look at how buyers needs coupled with
product beneIits help to deIine product-markets, and we discuss several considerations in
Iorming product-markets. Steps 24 oI Exhibit 3.1 are discussed in Iollowing sections.

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The term product-market recognizes that markets exist only when there are buyers with needs
who have the ability to purchase goods and services (products) and products are available to
satisIy the needs. There is a compelling argument that competitive strength comes Irom putting
customer needs at the center oI a companys operations, and that this perspective should guide
management thinking about markets. Eor example, Progressive Insurance shows remarkable
sales growth and shareholder value creation by its Iocus on the most important needs oI its
customers. The Innovation Eeature describes how the company has changed its operations and
how it meets customer needs.
Intuitively, it is easy to grasp the concept oI a product-market, although there are diIIerences in
how managers deIine the term. Markets are comprised oI groups oI people who have the ability and
willingness to buy something because they have a need Ior it.
7
The ability to buy and willingness to
buy indicate that there is a demand Ior a particular product or service. People with needs and wants
buy the beneIits provided by a good or service to satisIy either a household or an organizational use
situation. A product-market matches people with needsneeds that lead to a demand Ior a good or
serviceto the product beneIits that satisIy those needs. Unless the product beneIits are available,
there is no marketonly people with needs. Likewise, there must be people who have a use situa-
tion that can be satisIied by the product. Thus, a product-market combines the beneIits oI a product
with the needs that lead people to express a demand Ior that product. ThereIore, markets are deIined
in terms oI needs substitutability among diIIerent products and brands and by the diIIerent ways in
which people choose to satisIy their needs. A product-market is the set oI products judged to be
substitutes within those usage situations in which similar patterns oI beneIits are sought by groups
oI customers.
8
The inIluence oI competing brands becomes stronger, the closer the substitutability
and the more direct the competition. The Eord Taurus competes directly with the Toyota Camry,
whereas in a less direct yet relevant way, other major purchases (e.g., vacation travel) compete with
automobile expenditures due to the consumers budget constraints.
As an example, a Iinancial services product-market Ior short-term investments may include
money market accounts, mutual Iunds, U.S. Treasury bills, bank certiIicates oI deposit, and other

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Defining the cope
of the Prodct
Mrket
Anlyzing
Mrket trctre
nd Compo-ition
E-timting How
the Mrket Will
Chnge in the
Ftre
Forec-ting
Mrket ize nd
Rte of Chnge

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short-term investment alternatives. II one type oI product is a substitute Ior another, then both
should be included in the product-market.
By determining how a Iirms speciIic product or brand is positioned within the product-
market, management can monitor and evaluate changes in the product-market to decide whether
alternate targeting and positioning strategies and product oIIerings are needed. In mapping the
product-market, it is essential to establish boundaries that are broad enough to contain all oI the
relevant product categories that are competing Ior the same buyer needs.
-
Product-market boundaries and structure provide managers with important inIormation Ior devel-
oping business and marketing strategies, and alert management to new competition. Considering
only a companys brands and their direct competitors may mask potential competitive threats or
opportunities.
A companys brands compete with other companies brands in
generic, product-type, and product-variant product-markets. The
includes a broad group oI products that satisIy a general, yet similar, need. Eor example, several
classes or types oI products can be combined to Iorm the generic product-market Ior kitchen
appliances. The starting point in product-market deIinition is to determine the particular need or
want that a group oI products satisIies, such as perIorming kitchen Iunctions. Since people with
a similar need may not satisIy it in the same manner, generic product-markets are oIten hetero-
geneous, containing diIIerent end user groups and several types oI related products (e.g., kitchen
appliances).
The includes all brands oI a particular product type or
class, such as ovens. The product-type is a product category or product classiIication that oIIers
a speciIic set oI beneIits intended to satisIy a customers need or want in a speciIic way.
DiIIerences in the products within a product-type (class) product-market may exist, creating
-
9
Eor example, electric, gas, and microwave ovens all provide heating Iunc-
tions but employ diIIerent technologies.
- In determining the scope oI the product-market, it is helpIul to
identiIy (1) the basis Ior identiIying buyers in the product-market oI interest (geographical area
and buyer characteristics such as age group), (2) the market size and characteristics, and (3) the
brand and/or product categories competing Ior the needs and wants oI the buyers included in the
product-market.

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The scope and structure (composition) oI a product-market can be determined by Iollowing the
steps shown in Exhibit 3.2. We consider how this process can be used to deIine the structure in
the kitchen appliance product-market. Suppose top management oI a kitchen appliance Iirm wants
to expand its mix oI products. The companys present line oI laundry and dishwashing products
meets a generic need Ior the kitchen Iunctions oI cleaning. Other kitchen use situations include
heating and cooling oI Ioods. In this example the generic need is perIorming various kitchen Iunc-
tions. The products that provide kitchen Iunctions are ways oI satisIying the generic need. The
breakout oI products into speciIic product-markets (e.g., A, B, C, and D) would include equip-
ment Ior washing and drying clothing, appliances Ior cooling Iood, cooking appliances, and dish-
washers. The buyers in various speciIic product-markets and the diIIerent brands competing in
these product-markets can be analyzed. The process oI mapping the product-market structure
begins by identiIying the generic need (Iunction) satisIied by the product oI interest to manage-
ment. Need identiIication is the basis Ior selecting the products that Iit into the product market.
A simpliIied example oI the product-market structure that includes the Iast-Iood market is
shown in Exhibit 3.3. A Iast-Iood restaurant chain such as McDonalds should consider more
than its regular customers and direct competitors in its market opportunity analysis. The con-
sumption need being satisIied is Iast and convenient preparation oI Iood. The buyer has several
ways oI meeting the need, such as purchasing Iast Ioods, microwave preparation in the home,
patronizing supermarket delis, buying prepared Ioods in convenience stores, and ordering take-
outs Irom traditional restaurants. The relevant competitive space includes all oI these Iast-Iood
sources. It is essential to analyze market behavior and trends in the product-markets shown in
Exhibit 3.3. Competition may come Irom any oI the alternative services.
-
The Iactors that inIluence how product-market boundaries are determined include the purpose
Ior analyzing the product-market, the rate oI changes in market composition over time, and the
extent oI market complexity.
- -- II management is deciding whether or not to exit Irom a business, primary
emphasis may be on Iinancial perIormance and competitive position. Detailed analysis oI the prod-
uct-market may not be necessary. In contrast, iI the objective is Iinding one or more attractive mar-
ket segments to target in the product-market, a much more penetrating analysis is necessary. When
diIIerent products satisIy the same need, the product-market boundaries should contain all relevant
products and brands. Eor example, the photography product-market should include digital cameras,

Start with the generic need satisfied by

the product category of interest to
management.
dentify the product categories (types)
that can satisfy the generic need.
dentify the specific product-markets
within the generic product-market.
A B C D

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other equipment, and services, and conventional cameras, Iilm, and services. Product-market
boundaries should be determined in a manner that will be oI strategic value, allowing management
to capitalize on existing and potential opportunities and to avoid possible threats.
- - Product-market composition may change as new
technologies become available and new competition emerges. New technologies oIIer buyers
diIIerent ways oI meeting their needs. Eor example, Iax technology gave people in need oI
overnight letter delivery an alternative way to transmit the inIormation. The entry into the market
by new competitors also alters market composition. Importantly, a Iocus by management on
existing markets may provide an incomplete strategic perspective.
10
Industry classiIications oIten do not clearly deIine product-market boundaries. Eor example,
people may meet their needs Ior Iood with products Irom several industries as shown in Exhibit 3.3.
Industry-based deIinitions do not include alternative ways oI meeting needs. Industry classiIications
typically have a product supply rather than a customer demand orientation. OI course, since indus-
try associations, trade publications, and government agencies generate a lot oI inIormation about
products and markets, inIormation Irom these sources should be included in market analysis.
However, market analysis activities should not be constrained by industry boundaries.
Three characteristics oI markets capture a large portion oI
the variation in their complexity: (1) the functions or uses oI the product required by the
customer, (2) the technology contained in the product to provide the desired Iunction, and (3) the
diIIerent customer segments using the product to perIorm a particular Iunction.
11
Customer function considers what the good or service does. It is the beneIit provided to the
customer. Thus, the Iunction provides the capability that satisIies the value requirements oI the
customer. Eunctions consider the types oI use situations each user encounters.
12
In the case oI
the personal computer, the Iunction perIormed may be entertainment Ior the household, e-mail
transmission, Internet purchasing, or various business Iunctions.
DiIIerent technologies may satisIy the use situation oI the customer. Steel and aluminum
materials meet a similar need in various use situations. The technology consists oI the materials and
designs incorporated into products. In the case oI a service, technology relates to how the service is
rendered. Voice calls can be sent via the Internet, traditional phone lines, and wireless phones.
Customer segment recognizes the diversity oI the needs oI customers in a particular product-
market such as automobiles. A speciIic brand and model wont satisIy all buyers needs and
wants. Two broad market segments Ior automobile use are households and organizations. These
classiIications can be Iurther divided into more speciIic customer segments, such as preIerences
Ior European-style luxury sedans, sport-utility vehicles, and sports cars.
It is helpIul to Iocus on the consumer (or organizational) end user oI the product when deIin-
ing the market, since the end user drives demand Ior the product. When the end users needs and
wants change, the market changes. Even though a manuIacturer considers the distributor to
which its products are sold to be the customer, the market is really deIined by the consumer and
organizational end users who purchase the product Ior consumption.

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permrket-
Microwve
oven-
Trditionl
re-trnt-
F-t food-
Convenience
-tore-

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Suppose you are a brand manager Ior a cereal producer. You know that brands like LiIe, Product
19, and Special K compete Ior sales to people who want nutritional beneIits Irom cereal. None-
theless, our earlier discussion highlights the value oI looking at a more complete picture oI how
competing brands like LiIe, Product 19, and Special K also may experience competition Irom
other ways oI meeting the needs satisIied by these brands. Eor example, a person may decide to
eat a Kelloggs Nutri-Grain cereal bar instead oI a bowl oI cereal, and the consumer may want
to vary the type oI cereal, such as eating a natural or regular type oI cereal. Because oI the
diIIerent product types and variants competing Ior the same needs and wants, the cereal brand
manager needs to develop a picture oI the product-market structure within which her/his brand
is positioned. Exhibit 3.4 describes an illustrative product-market structure Ior cereals. The
diagram can be expanded to portray other relevant product types (e.g., breakIast bars) in the
generic product-market Ior Iood and beverages.
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AIter determining the product-market structure it is useIul to develop proIiles oI end user buyers Ior
the generic, product-type, and product-variant levels oI the product-market. Buyers are identiIied,
described, their value requirements indicated, and external environmental inIluences (e.g., interest

-
Food nd beverge-
for brekf-t mel
Generic prodct
cl--
Prodct type
Vrint A
Vrint B
Brnd- Prodct 19 pecil K Life
Ntrl Ntritionl Pre-weetened Reglr
Redy to et
Cerel-

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rate trends) determined. Analysis oI the buyers in the market segments within a product-market is
considered in Chapter 4.
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Characteristics such as Iamily size, age, income, geographical location, sex, and occupation are
oIten useIul in identiIying buyers in consumer markets. Illustrative Iactors used to identiIy end
users in organizational markets include type oI industry, company size, location, and types oI
products. Many published sources oI inIormation are available Ior use in identiIying and describ-
ing customers. Examples include U.S. Census data, trade association publications, and studies
by advertising media (TV, radio, magazines). When experience and existing inIormation are not
adequate in determining buyers, research studies may be necessary to identiIy and describe
customers and prospects.
An interesting proIile oI the Russian middle class and illustrative product preIerences are
provided in the Global Eeature, divided into three income categories:
13
The estimates assume a
Iamily oI two parents and one child. The size oI the Russian middle class is estimated to range
Irom 8 to 20 percent oI that countrys 145 million people. This population group emerged Irom
the economic crisis Russia experienced in 1998, making size estimation diIIicult. The Russian
population inIormation is useIul in identiIying and describing buyers where income is a relevant
predictor oI purchases oI goods and services such as automobiles and vacation services.
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OIten, simply describing buyers does not provide enough inIormation to guide targeting and
positioning decisions. We also need to try to Iind out why people buy products and speciIic prod-
uct brands. In considering how customers decide what to buy, it is useIul to analyze how they
move through the sequence oI steps leading to a decision to purchase a particular brand. Buyers
normally Iollow a decision process. They begin by recognizing a need (problem recognition);
next, they seek inIormation; then, they identiIy and evaluate alternative products; and Iinally,
they purchase a brand. OI course, the length and complexity oI this process vary by product and
purchasing situation. Decisions Ior Irequently purchased products and Ior which a buyer has
past experience tend to be routine. One part oI studying buyer decision processes is Iinding out

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what criteria people use in making decisions. Eor example, how important is the brand name oI
a product in the purchase decision?
Illustrations oI the buying decision process stages Ior a consumer purchase and an organizational
purchase are shown in Exhibit 3.5. The consumer purchase involves a CD player, whereas the
organizational purchase is Ior a CD player component Irom an outside supplier. Both processes move
through the major process stages, but the issues and activities are quite diIIerent.
-
The Iinal step in building customer proIiles is to identiIy the external Iactors that inIluence buyers
and thus impact the size and composition oI the market over time. These inIluences include gov-
ernment actions (e.g., tax cut), social change, economic shiIts, technology, and other Iactors that
may alter buyers needs and wants. Typically, these Iactors are not controlled by the buyer or the

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Source: Eric N. Berkowitz,
Roger A. Kerin, Steven W.
Hartley, and William
Rudelius, Marketing, 5th
ed. (Chicago: Richard D.
Irwin, 1997), 192.
Copyright The
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Iirms that market the product, and substantial changes in environmental inIluences can have a
major impact on customers purchasing activities. ThereIore, it is important to identiIy the
relevant external inIluences on a product-market and to estimate their Iuture impact. During the
past decade various changes in market opportunities occurred as a result oI uncontrollable
environmental Iactors. Illustrations include the shiIts in population age-group composition,
changes in tax laws aIIecting investments, and variations in interest rates. Consider, Ior example,
the population trends Ior the 50 states in the United States Irom 1995 to 2025. Note that some
states (Exhibit 3.6) display high growth rates while others are declining in size.
- -
Describing customers starts with the generic product-market. At this level customer proIiles
describe the size and general composition oI the customer base. Eor example, the commercial air
travel customer proIile Ior a speciIied geographical area (e.g., South America) would include
market size, growth rates, mix oI business and pleasure travelers, and other general characteristics.
The product-type and variant proIiles are more speciIic about customer characteristics (needs and
wants, use situations, activities and interests, opinions, purchase processes and choice criteria, and
environmental inIluences on buying decisions). Normally, product-type analysis considers the
organizations product and closely related product types.
In developing marketing strategy, management is concerned with deciding which buyers to
target within the product-market oI interest, and how to position to each target. The customer
proIiles help to guide these decisions. The proIiles are also useIul in deciding how to segment
the market. More comprehensive customer analyses are undertaken in market segmentation
analysis, which we discuss in Chapter 4.

Competitor analysis considers the companies and brands that compete in the product-market oI
interest. Analyzing the competition Iollows the Iive steps shown in Exhibit 3.7. We begin
by determining the competitive arena in which an organization competes and describing the
characteristics oI the competitive space. Steps 2 and 3 identiIy, describe, and evaluate the
organizations key competitors. Steps 4 and 5 anticipate competitors Iuture actions and identiIy
potential new competitors that may enter the market.

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Source: U.S. Bureau oI the

Census, Population
Division, PPL-47.
AK
WA
MT
ND
D
MN
W NY
VT
NH
ME
MA
R
CT
NJ
DE
MD
DC
VA
NC
C
GA
AL
M
TN
KY
WV
PA
OH
M
N L
A
MO
AR
LA
TX
OK
K
NE
WY
D
NV
UT
CO
NM
AZ
CA
OR
FL
H
2.9 to 1.4
1.5 to 2.4
2.5 to 3.4
3.5 to 4.5
4.6 to 14.1
Percent

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Competition oIten includes more than the Iirms that are considered to be direct competitors, like
Coke and Pepsi. Eor example, the diIIerent levels oI competition Ior diet colas are shown in Exhibit
3.8. The product-variant is the most direct type oI competition. Nevertheless, other product cate-
gories oI soIt drinks also compete Ior buyers, as do other beverages. A complete understanding oI
the competitive arena helps to guide strategy design and implementation. Since competition oIten
occurs within speciIic industries, an examination oI industry structure is useIul in deIining the
competitive arena, recognizing that more than one industry may be competing in the same product-
market, depending on the complexity oI the product-market structure. Eor example, digital camera
competitors include traditional camera and Iilm producers and electronics Iirms like Hewlett-
Packard, Samsung, and Sony.

Evaluate key competitors. 3

4 Anticipate actions by competitors.
5
Identify potential competitors.
1 Define the competitive arena for the generic, specific, and variant product-markets.
Identify and describe key competitors. 2

-
Source: Donald R.
Lehmann and Russell S.
Winer, Analysis for
Marketing Planning, 4th ed.
(Burr Ridge, IL: Richard D.
Irwin, 1997), 22. Copyright
The McGraw-Hill
Companies. Used with
permission.
ce
crem
Reglr
col-
Beer
Diet
lemon-
lime-
Jice-
Video
rentl-
Coffee
Generic
competition:
beverge-
Bdget
competition:
food nd
entertinment
B-ebll
crd-
Bottled
wter
Frit
flvored
col-
Wine
F-t
food
Prodct form
competition:
diet col-
Prodct
ctegory
competition:
-oft drink-
Diet
Coke
Diet-Rite
Col
Diet
Pep-i
Lemon-
lime-

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- -- Competitor analysis is conducted Irom the point oI view oI a particular
Iirm. Eor example, a soIt drink Iirm such as Coca-Cola should include other beverage brands in
its industry analysis. This analysis looks at two kinds oI inIormation: (1) a descriptive proIile oI
the industry, and (2) an analysis oI the value-chain (distribution) channels that link together the
various organizations in the value-added system Irom suppliers to end users. Thus, the industry
analysis is horizontal and covers similar types oI Iirms (e.g., soIt drink producers), whereas the
value-chain analysis considers the vertical network oI Iirms that supply materials and/or parts,
produce products (and services), and distribute the products to end users.
The industry analysis includes: (1) industry characteristics and trends, such as sales, number oI
Iirms, and growth rates; and (2) operating practices oI the Iirms in the industry, including product
mix, service provided, barriers to entry, and geographical scope. An interesting example oI analy-
sis oI business magazine competitors in Erance is included in the Capital case (6-7) in Exhibits 6
through 11. The Capital case considers the possible launch oI a new business magazine.
Eirst, we need to identiIy the companies that comprise the industry and develop descriptive
inIormation on the industry and its members. It is important to examine industry structure
beyond domestic market boundaries, since international industry developments oIten aIIect
regional, national, and international markets. Eor example, comparison oI U.S. market shares
Irom 1984 to 1999 Ior personal computer (PC) manuIacturers is shown in Exhibit 3.9. Included
are the Home, Business, and Education markets.
14
U.S. and global PC producers are shown and
global producers are included in the others category. In 2001, global industry sales growth oI
PCs began to slow down, whereas handheld devices were experiencing rapid growth.
The industry identiIication is based on product similarity, location at the same level in the
value chain (e.g., manuIacturer, distributor, retailer), and geographical scope. The industry
analysis considers:
Industry size, growth, and composition.
Typical marketing practices.
Industry changes that are anticipated (e.g., consolidation trends).
Industry strengths and weaknesses.
Strategic alliances among competitors.
-- The study oI supplier and distribution channels is
important in understanding and serving product-markets. While producers may go directly to
their end users, many work with other organizations through distribution channels. The extent oI
vertical integration by competitor backward (supply) and Iorward toward end users is also use-
Iul inIormation. The types oI relationships (collaborative or transactional) in the distribution
channel should be identiIied and evaluated. The extent oI outsourcing activities in the value
chain is also oI interest. DiIIerent channels that access end user customers should be included in
the channel analysis. Eor example, the electronic distribution channel initiatives taken by
Charles Schwab & Co. to achieve the No. 1 online broker position are described in the Internet
Eeature. Case 1-2 describes Schwabs strategic challenges in 2002. By looking at the distribu-
tion approaches oI industry members, we can identiIy important patterns and trends in serving
end users. Value-chain analysis may also uncover new market opportunities that are not served
by present channels oI distribution. Einally, inIormation Irom various value-chain levels can
help in Iorecasting end user sales.
The use oI outsourcing oI manuIacturing and other business Iunctions expanded rapidly in the
United States and Europe during the last decade. By outsourcing, an organization may gain
strategic advantage by Iocusing on its core competencies, while outsourcing other necessary
business Iunctions to independent partners. Thus, analysis oI outsourcing activities may be an
important aspect oI competitor analysis.

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- DiIIerent competitive Iorces are present in the value-added chain. The
traditional view oI competition is expanded by recognizing Michael Porters Iive competitive
Iorces that impact industry perIormance:
1. Rivalry among existing Iirms.
2. Threat oI new entrants.
3. Threat oI substitute products.
4. Bargaining power oI suppliers.
5. Bargaining power oI buyers.
15
The Iirst Iorce recognizes that active competition among industry members helps determine
industry perIormance, and it is the most direct and intense Iorm oI competition. The aggressive
competition between Coke and Pepsi is illustrative. Rivalry may occur within a market segment
or across an entire product-market. The nature and scope oI competition may vary according to
the type oI industry structure. Eor example, competition in an emerging industry consists oI the
market pioneer and a Iew other early entrants. A mature industry like personal computers
includes many Iirms (Exhibit 3.9).
The second Iorce highlights the possibility oI new competitors entering the market. Existing
Iirms may try to discourage new competition by aggressive expansion and other types oI market

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Source: Peter Burrows,
Apple, BusinessWeek,
July 31, 2000, 108.

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entry barriers. The entry oI Wal-Mart into the supermarket business has substantially expanded
and intensiIied the competitive arena in this market.
The third Iorce considers the potential impact oI substitutes. New technologies that satisIy the
same customer need are important sources oI competition. Including alternative technologies in the
deIinition oI product-market structure identiIies substitute Iorms oI competition. This type oI analy-
sis is very important in assessing the impact oI disruptive technologies like digital photography.
The Iourth Iorce is the power that suppliers may be able to exert on the producers in an industry.
Eor example, the high costs oI labor exert major pressures on the commercial airline industry.
Companies may pursue vertical integration strategies to reduce the bargaining power oI suppliers.
Alternatively, collaborative relationships are useIul to respond to the needs oI both partners.
Einally, buyers may use their purchasing power to inIluence their suppliers. Wal-Mart, Ior
example, has a strong inIluence on the suppliers oI its many products. Understanding which
organizations have power and inIluence in the value chain provides important insights into the
structure oI competition. Power may be centered at any level in the channel, though producers
and retailers oIten display strong buying power. However, major component suppliers like Intel
may exert substantial inIluence on value-chain members.
A major consequence oI Michael Porters view oI competition is that the competitive arena
may be altered as a result oI the impact oI the Iive Iorces on the industry. The Iive competitive
Iorces also highlight the existence oI vertical and horizontal Iorms oI competition. The intensity
oI vertical competition is related, in part, to the bargaining power oI suppliers and buyers. The
location (level) oI an organization in its value chain and the extent oI its control over the channel
may have a major inIluence on the organizations marketing strategy. Indeed, a strategic
imperative may be to take action to change the impact oI competitive Iorces on a company, Ior
example through collaboration and alliance, rather than accepting the existing situation.

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--
Competitor analysis is conducted Ior the Iirms directly competing with each other (e.g., Nike and
Reebok) and other companies that management may consider important in strategy analysis
(e.g., potential market entrants). The rapid expansion oI competitor intelligence activities by
many companies in the last decade highlights the high priority executives place on monitoring
competitors activities.
16
Many companies around the world have developed very eIIective
intelligence units. The Eutures Group (business intelligence consultants) rates MicrosoIt as
having the most eIIective corporate intelligence capabilities. Motorola, IBM, P&G, and General
Electric also receive high ratings.
We now look at two major aspects oI competitor analysis: (1) preparing a descriptive proIile
Ior each competitor, and (2) evaluating the competitors strengths and weaknesses (Steps 2 and
3 oI Exhibit 3.7).
- A key competitor is any organization going
aIter the same market target as the Iirm conducting the analysis. American, Delta, and United
Airlines are key competitors on many U.S. routes and certain international routes. Key
competitors are oIten brands that compete in the same product-market or segment(s) within the
market (Coke and Pepsi). DiIIerent product types that satisIy the same need or want may also
actively compete against each other. Thus, microwave Ioods may compete with Iast-Iood
operators.
InIormation which is typically included in the competitor proIile is shown in Exhibit 3.10.
Sources oI inIormation include annual reports, industry studies by government and private
organizations, business magazines and newspapers, trade publications, reports by Iinancial
analysts (e.g., Jalue Line Investment Survey), government reports, standardized data services
(e.g., InIormation Resources, Inc., and Nielsen), databases, suppliers, customers, company
personnel, and salespeople. Industry trade publications (e.g., Aviation Week & Space
1echnology) are useIul in tracking industry trends, examining current issues, and obtaining
special research studies. Direct contact with the research directors oI trade publications is an
important source oI inIormation about the industry and key competitors.
It is important to gain as much knowledge as possible about the background, experience,
qualiIications, and tenure oI key executives Ior each major competitor. This inIormation
includes the executives perIormance records, their particular areas oI expertise, and the Iirms
where they were previously employed. These analyses may suggest the Iuture strategic initia-
tives oI a key competitor.
Market coverage analysis centers on the market segments targeted by the competitor and the
competitors actual and relative market-share position. Relative market position is measured by
comparing the share oI the Iirm against the competitor with the highest market share in the
segment. All segments in the product-market that could be targeted by the Iirm should be
included in the competitor evaluation.
The competitors past perIormance oIIers a useIul basis Ior comparing competitors. The
customer value proposition oIIered by the competitor Ior each segment is important inIormation.
This may indicate competitive opportunities as well as a possible threat. The competitors
distinctive capabilities need to be identiIied and evaluated.
Perceptual maps are useIul in analyzing the competitive positioning oI competing brands. A
perceptual map Ior the brands competing in the analgesics product-market is shown in Exhibit
3.11. Note the area oI vulnerability in the upper-right quadrant. Tylenol dominates the market,
but there may be opportunities Ior new competitor brands. The map indicates how competitors
are positioned relative to each other and alerts management to potential competitive threats.
An analysis oI each competitors past sales and Iinancial perIormance indicates how well the
competitor has perIormed on a historical basis. Competitor ratings are also useIul in the comparisons
(e.g., Consumer Reports). A typical period oI analysis is three to Iive years or longer depending

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on the rate oI change in the market. PerIormance inIormation may include sales, market share,
net proIit, net proIit margin, cash Ilow, and debt. Additionally, Ior speciIic types oI businesses
other perIormance inIormation may be useIul. Eor example, sales-per-square-Ioot is oIten used to
compare the perIormance oI retail stores. Operating cost per passenger mile is a popular measure Ior
airline perIormance comparisons.
Assessing how well competitors meet customer value requirements requires Iinding out what
criteria buyers use to rate each supplier. Customer-Iocused assessments are more useIul than rely-
ing only on management judgments oI value delivery. Measurement methods include customer
comparisons oI value attributes oI the Iirm versus its competitors, customer surveys, loyalty
measures, and the relative market share oI end use segments.
17
PreIerence maps like the one
shown in Exhibit 3.11 are useIul in comparing the competing brands Ior attributes that are impor-
tant determinants oI customer satisIaction.
Using the competitor inIormation, we can develop an overall evaluation oI the key competitors
current strengths and weaknesses. Additionally, the summary assessment oI distinctive capabilities
includes inIormation on the competitors management capabilities and limitations, technical and

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Source: William R. Dillon,
Thomas J. Madden, and
Neil H. Eirtle, Marketing
Research in a Marketing
Environment, 3rd ed. (Burr
Ridge, IL: Richard D.
Irwin, 1994), 36. Copyright
The McGraw-Hill
permission.
GentIeness
Tylenol
A-pirin Free
Excedrin
Bfferin
Byer
Ecotrin
Ancin
Extr-trength Byer
Extr-trength Ancin
Nprin
Advil
Efficacy
Are of
vlnerbility
Extr-trength
Tylenol

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operating advantages and weaknesses, marketing strategy, and other key strengths and limitations.
Since competitors oIten display diIIerent capabilities, it is important to highlight these diIIerences.
- -
Steps 4 and 5 in competitor analysis (Exhibit 3.7) consider what each key competitor may do in
the Iuture, and identiIy potential competitors. The inIormation obtained in the previous steps oI
the analysis should be helpIul in estimating Iuture trends, although possible strategy shiIts by
competitors may occur.
- - - Competitors Iuture strategies may continue
the directions that they have established in the past, particularly iI no major external inIluences
require changing their strategies. Nevertheless, assuming an existing strategy will continue is not
wise. Competitors current actions may signal probable Iuture threats.
An interesting development in the telecommunication market is the rapid growth in the use
oI Internet calling. The technology is called voice over Internet protocol (VOIP).
18
Eirst
introduced in 1995, VOIP experienced start-up problems but by 2003, the technology was a
rapidly growing share oI home and business markets. Accounting Ior nearly 3 percent oI global
phone calls, VOIP has so Iar had a small impact on the phone market. Nonetheless, industry
authorities expect the technology to become a signiIicant competitive threat. VOIP subscribers
in the U.S. are estimated to increase to eight times the 2003 level by 2004. Global Internet phone
subscribers are expected to exceed 17 million by 2008.
- New competitors may come Irom Iour major sources:
(1) companies competing in a related product-market; (2) companies with related technologies;
(3) companies already targeting similar customer groups with other products; and/or (4) compa-
nies competing in other geographical regions with similar products. Market entry by a new
competitor is more likely under these conditions:
High proIit margins are being achieved by market incumbents.
Euture growth opportunities in the market are attractive.
No major market-entry barriers are present.
Competition is limited to one or a Iew competitors.
Gaining an equivalent (or better) competitive advantage over the existing Iirm(s) serving the
market is Ieasible.
II one or more oI these conditions are present in a competitive situation, new competition will
probably appear.
-
Market development and competitive space may not Iollow clearly deIined and predictable
paths. Nonetheless, signals can be identiIied that are useIul in pointing to possible market
changes. Answers to the Iollowing questions may indicate the possibility oI a market changing
signiIicantly in the Iuture:
1. Are industry boundaries clear and static? Are customers and competitors identiIiable? Or are
industry boundaries blurring and evolving?
2. Do Iirms compete as distinct entities or as Iamilies oI suppliers and end product Iirms?
3. Is there competition Ior managing migration paths?
4. Is competition taking place at product line, business, and corporate levels? Do these levels oI
competition inIluence each other?
5. Can there be competition between clusters oI Iirms to inIluence standards and industry
evolution?
19

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It is useIul to distinguish between diIIerent phases in the development oI competition. In the initial
stage, companies compete in identiIying product concepts, technology choices, and building com-
petencies.
20
This phase involves experimentation with ideas, and the path to market leadership is
not clearly deIined. The digital photography market moved through this stage in the early 2000s.
Phase 2 may involve partnering oI companies with the objective oI controlling industry standards,
though these Iirms eventually become competitors. Einally, as the market becomes clearly deIined
and the competitive space established, the competition concentrates on market share Ior end prod-
ucts and proIits. The personal computer market is currently in this stage.

Increasingly, we Iind that change and turbulence, rather than stability, characterize many
product-markets. Moreover, as discussed above, it is oIten possible to identiIy the Iorces under
way that will alter industry structure. Though, these inIluences are not easily identiIied and
analyzed, the organizations that choose to invest substantial time and eIIort in anticipating the
Iuture create an opportunity Ior competitive advantage. Euji appears to have done a better job oI
anticipating the Iuture oI digital photography than has Kodak. Executives in market-driven
companies recognize the importance oI developing these capabilities.
Hamel and Prahalad oIIer a compelling blueprint Ior analyzing the Iorces oI change. While
the details oI their process cannot be captured in a Iew pages oI discussion; the Iollowing ques-
tions are illustrative oI the inIormation needed to anticipate the Iuture:
21
What are the inIluences (discontinuities) present in the product-market that have the poten-
tial to proIoundly transIorm market/competitor structure?
Investigate each discontinuity in substantial depth.
How will the trend impact customers?
What is the likely economic impact?
How Iast is the trend developing?
Who is exploiting this trend?
Who has the most to gain/lose?
What new product opportunities will be created by this discontinuity?
How can we learn more about this trend?
Eollowing the blueprint requires looking in depth at the relevant Iorces oI change in a
product-market and other markets that are interrelated. Anticipating the Iuture requires search-
ing beyond the existing competitive arena, Ior inIluences that promise to impact product-market
boundaries. The process requires the involvement oI the entire organization, and it demands a
substantial amount oI time. A company with a market orientation and cross-Iunctional processes
should be able to utilize these processes Ior anticipating the Iuture. Also, it is apparent that
developing a vision about the Iuture needs to be an ongoing process.
The Iorces oI change span across many markets, industries, and products. Illustrative situa-
tions that call Ior developing a process Ior anticipating the Iuture include understanding the
interlinkages oI traditional telecommunications with wireless phones, cable television, and the
Internet. The Iollowing observation is illustrative oI these challenges:
It is well accepted that the traditional television and PC will, in the not too distant Iuture, be one
product, capable oI multiple Iunctionsentertainment, education, or work. Sony, Philips, and
Matsushita would like to inIluence this migration Irom the consumer electronics perspective.
Silicon Graphics, Compaq, and Apple would like this migration to be inIluenced by the PC
industry. MicrosoIt would like the soItware producers to be in the drivers seat. Groups oI Iirms
starting Irom diIIerent vantage points have diIIerent preIerred routes toward the same goal, thus,
there is competition to inIluence the migration paths.
22

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An important part oI market opportunity analysis is estimating the present and potential size oI
the market. Market size is usually measured by dollar sales and/or unit sales Ior a deIined
product-market and speciIied time period. Other size measures include the number oI buyers,
average purchase quantity, and Irequency oI purchase. Three key measures oI market size are:
market potential, sales forecast, and market share.

Market potential is the maximum amount oI product sales that can be obtained Irom a deIined
product-market during a speciIied time period. It includes the total opportunity Ior sales by all
Iirms serving the product-market. Market potential is the upper limit oI sales that can be
achieved by all Iirms Ior a speciIied product-market. OIten, actual industry sales Iall somewhat
below market potential because the production and distribution systems are unable to completely
meet the needs oI all buyers who are both willing and able to purchase the product during the
period oI interest.
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The sales Iorecast indicates the expected sales Ior a deIined product-market during a speciIied time
period. The industry sales Iorecast is the total volume oI sales expected by all Iirms serving the
product market. The sales Iorecast can be no greater than market potential and typically Ialls short
oI potential as discussed above. A Iorecast can be made Ior total sales at any product-market level
(generic, product type, variant) and Ior speciIic subsets oI the product-market (e.g., market
segments). A company sales Iorecast can also be made Ior sales expected by a particular Iirm.
An interesting Iorecasting application is estimating the market Ior commercial aircraIt. The
lead-time in developing and producing these expensive products requires Iorecasts several years
into the Iuture. Moreover, passenger travel Iorecasts are needed to guide the aircraIt Iorecasts. The
Boeing Commercial Airplanes Group prepares an annual world Iorecast that includes 20-year air
travel and aircraIt sales projections. Boeings 20-year aircraIt Iorecast is shown in Exhibit 3.12.
The Boeing Current Market Outlook is a very complete analysis oI demand Ior commercial
airplanes and aviation support services. It is a useIul basic Iorecasting guide Ior the various
companies serving the commercial aviation market.

Company sales divided by the total sales oI all Iirms Ior a speciIied product-market determines
the market share oI a particular Iirm. Market share may be calculated on the basis oI actual sales
or Iorecasted sales. Market share can be used to Iorecast Iuture company sales and to compare
actual market position among competing brands oI a product. Market share may vary depending
on the use oI dollar sales or unit sales due to price diIIerences across competitors.
It is essential in preparing Iorecasts to speciIy exactly what is being Iorecasted (deIined
product-market), the time period involved, and the geographical area. Otherwise, comparisons
oI sales and market share with those oI competing Iirms will not be meaningIul. Additional
Iorecasting guidelines are provided in the Appendix to Chapter 3.

Since a companys sales depend, in part, on its marketing plans, Iorecasts and marketing strategy are
closely interrelated. Alternative positioning strategies (product, distribution, price, and promotion)
should be evaluated Ior their estimated eIIects on sales. Because oI the marketing eIIort/sales
relationship, it is important to consider both market potential (opportunity) and planned marketing
expenditures in determining the Iorecast. The impact oI diIIerent sales Iorecasts must be evaluated
Irom a total business perspective, since these Iorecasts aIIect production planning, human resource
needs, and Iinancial requirements.

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Eorecasting Internet purchasing usage is an interesting Iorecasting challenge. It was estimated
that by 2004 the 200 million Americans who had Web access would spend more than $120 billion.
23
Estimates Ior business-to-business Web purchases were in excess oI $1 trillion a year. The Internet
has also become an essential inIormation source Ior consumers beIore purchasing Irom retail stores.
Sales Iorecasts oI target markets are needed so that management can estimate the Iinancial
attractiveness oI both new and existing market opportunities. The market potential and growth
estimates gauge the overall attractiveness oI the market. The sales Iorecast Ior the companys
brand in combination with cost estimates provides a basis Ior proIit projections. The decision
to enter a new market or to exit Irom an existing market depends heavily on Iinancial analyses
and projections. Alternate market targets under consideration can be compared using sales
and proIit projections. Similar projections oI key competitors are also useIul in evaluating market
opportunities.

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Current Market Outlook
2004 (Seattle: Boeing
Commercial Airplanes
Group, June 2004), 3, 5.
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Analyzing markets and competition is essential to making sound
business and marketing decisions. The uses oI product-market
analyses are many and varied. An important aspect oI market
deIinition and analysis is moving beyond a product Iocus by
incorporating market needs into the analysts viewpoint.
Business strategies and markets are interrelated, and
companies that do not understand their markets and how they
are likely to change in the Iuture are at a competitive
disadvantage. EIIective market sensing is essential in guiding
business and marketing strategies. Value migration, the
process oI customers shiIting their purchases to new products
that better meet their needs, should be anticipated and counter
strategies developed. An essential part oI becoming market-
oriented is identiIying Iuture directions oI market change.
This chapter examines the nature and scope oI deIining
product-market structure. By the use oI diIIerent levels oI aggre-
gation (generic, product-type, and product-variant), products and
brands are positioned within more aggregate categories, thus
helping to better understand customers, product interrela-
tionships, industry structure, distribution approaches, and key
competitors. This approach to product-market analysis oIIers a
consistent guide to needed inIormation, regardless oI the type oI
product-market being analyzed. Analyzing market opportunity
includes (1) deIining product-market boundaries and structure,
(2) describing and analyzing end users, (3) conducting industry
and value-chain analyses (4) evaluating key competitors, and
(5) estimating market size and growth rates.
AIter the product-market boundaries and structure are deter-
mined inIormation on various aspects oI the market is collected
and examined. Eirst, it is useIul to study the people or organiza-
tions who are the end users in the product-market at each level
(generic, product type, and variant). These market proIiles oI cus-
tomers help to evaluate opportunities and guide market targeting
and positioning strategies. Next, we identiIy and analyze the Iirms
that market products and services at each product-market level to
aid strategy development. Industry and key competitor analysis
considers the Iirms that compete with the company perIorming
the market opportunity analysis. Thus, industry analysis Ior a
personal computer producer would include the producers that
make up the industry. The analysis should also include Iirms
*Percent oI total

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operating at all stages (levels) in the value-added system, such as
suppliers, manuIacturers, distributors, and retailers.
The next step in analyzing market opportunity is a compre-
hensive assessment oI the major competitors. The key com-
petitor analysis should include both actual and potential
competitors that management considers important. Competitor
analysis includes: (1) describing the company, (2) evaluating
the competitor, and (3) anticipating the Iuture actions oI
competitors. It is also important to identiIy possible new
competitors. Competitor analysis is an ongoing activity and
requires coordinated inIormation collection and analysis.
Developing a strategic vision about the Iuture and
how markets are expected to change is an important part oI
market opportunity analysis. The mounting evidence about
markets points to the critical importance oI understanding and
anticipating changes in markets. In gaining these insights, it is
useIul to view competition as a three-stage process oI experi-
mentation, partnering to set industry standards, and then pur-
suing market share and proIits. Analyzing the Iorces oI change
provides a basis Ior anticipating the Iuture.
The Iinal step in product-market analysis is estimating market
potential and Iorecasting sales. The Iorecasts oIten used in product-
market analysis include estimates oI market potential, sales Iore-
casts oI total sales by Iirms competing in the product-market, and
the sales Iorecast Ior the Iirm oI interest. This inIormation is
needed Ior various purposes and is prepared Ior diIIerent units oI
analysis, such as product category, brands, and geographical areas.
The Iorecasting approach and techniques should be matched to the
organizations needs. Eorecasting methods are discussed in the
Appendix.
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A. Airbus and Boeing are the primary competitors in the large
commercial aircraIt market. Discuss how the inIormation
available at Web sites (www.boeing.com and www.airbus.
com) may be useIul in competitive analysis. Market size
inIormation is available at: www.boeing.com/commercial/
cmo.
B. Visit Hoovers Web site (www.hoovers.com). Investigate
the diIIerent options Ior competitive and market analysis
provided. How can these online tools best be utilized?
What limitations apply?
C. Johnson & Johnson is currently competitive in the surgical
stent market (a device inserted surgically as an artery to
enable blood Ilow). The device is described in Case 2.4.
PerIorm an Internet analysis oI the stent market indicating
past and current unit sales levels and Iorecasts Ior
20042006.
D. Samsung Electronics is one oI the top producers oI cell
phones. Draw Irom Internet sources to prepare an analysis
oI the global cell phone market.
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A. Review the Strategy Eeature, A Wireless World, and
describe this industry in terms oI the competitive Iorces
we have discussed. Consider the issues to be examined by
telecom providers in building a strategic vision Ior the
Iuture.
B. Examine the material in the Internet Eeature, How Charles
Schwab & Co. Leverages Value-Chain Initiatives. How
does the growth oI online trading services change the ways
in which a company like Schwab should deIine its market
boundaries and competitive arena?
-- ---
1. Discuss the important issues that should be considered in
deIining the product-market Ior a totally new product.
2. Under what product and market conditions is the end user
customer more likely to make an important contribution to
product-market deIinition?
3. What recommendations can you make to the management
oI a company competing in a rapid growth market to help
it identiIy new competitive threats early enough so that
counterstrategies can be developed?
4. There are some dangers in concentrating product-market
analysis only on a Iirms speciIic brand and those brands
that compete directly with a Iirms brand. Discuss.
5. Using the approach to product-market deIinition and analy-
sis discussed in the chapter, select a brand and describe the
generic, product type, and brand product-markets oI which
the brand is a part.
6. Eor the brand you selected in Question 5, indicate the kinds
oI inIormation needed to conduct a complete product-
market analysis. Also suggest sources Ior obtaining each
type oI inIormation.
7. Select an industry and describe its characteristics, partici-
pants, and structure.
8. A competitor analysis oI the 7 UP soIt drink brand is being
conducted. Management plans to position the brand

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against its key competitors. Should the competitors consist
oI only other noncola drinks?
9. Outline an approach to competitor evaluation, assuming
you are preparing the analysis Ior a regional bank holding
company.
10. Discuss how a small company (less than $1 million in
sales) should analyze its competition.
11. Many popular Iorecasting techniques draw Irom past expe-
rience and historical data. Discuss some oI the more impor-
tant problems that may occur in using these methods.
12. What are the relevant issues a cross-Iunctional team
should consider in developing a strategic vision about the
Iuture Ior the organizations product-market(s)?
-
1. This illustration is based on A Wireless World, Busi-
nessWeek, October 27, 2003, 110111, 114, and 116.
2. C. K. Prahalad and Gary Hamel, Strategy as a Eield oI
Study and Why Search Ior a New Paradigm? Strategic
Management Journal, Summer 1994, 516.
3. Diane Brady, A Thousand and One Noshes, Business-
Week, June 14, 2004, 44.
4. No Excuse Not to Succeed, BusinessWeek, May 10, 2004,
96 and 98; William C. Symonds, The Kodak Revolt Is
Short-Sighted, BusinessWeek, November 3, 2003, 38.
Business School Press, 1996).
6. Cash-Low Universities, BusinessWeek, November 17,
2003, 71, 72, and 74.
7. This discussion is based upon suggestions provided
by ProIessor Robert B. WoodruII oI the University oI
Tennessee, Knoxville.
8. Rajendra K. Srivastava, Mark I. Alpert, and Allan D.
Shocker, A Customer-Oriented Approach Ior Determining
Market Structures, Journal of Marketing, Spring 1984, 32.
9. George S. Day, Strategic Marketing Planning. 1he Pursuit
of Competitive Advantage (St. Paul, MN: West Publishing,
1984), 72.
10. C. K. Prahalad, Weak Signals versus Strong Paradigms,
Journal of Marketing Research, August 1995, iiivi.
11. Derek E. Abell, Defining the Business. 1he Starting Point
of Strategic Planning (Englewood CliIIs, NV: Prentice
Hall, 1980).
12. George S. Day, Strategic Market Analysis: A Contingency
Perspective, Working Paper, University oI Toronto, July
1979.
13. Russias Middle Class, BusinessWeek, October 16,
2000, 79.
14. Peter Burrows, Apple, BusinessWeek, July 31, 2000, 108.
15. Michael E. Porter, Competitive Advantage (New York:
Eree Press, 1985), 5.
16. William Green, I Spy, Forbes, April 20, 1998, 91, 94,
96, 100.
17. George S. Day and Robin Wensley, Assessing Advantage:
A Eramework Ior Diagnosing Competitive Superiority,
Journal of Marketing, April 1998, 1216.
18. Peter Grant and Almar Latour, Circuit Breaker, 1he Wall
Street Journal, October 9, 2003, A1 and A9; Net Phones
Start Ringing Up Customers, BusinessWeek, December 29,
2003, 4546; Ken Brown and Almar Latour, Phone
Industry Eaces Upheaval As Ways oI Calling Change East,
1he Wall Street Journal, August 25, 2004, A1 and A8.
19. The Iollowing discussion is based on Prahalad, Weak
Signals, vi.
20. Ibid., 101102.
21. Gary Hamel and C. K. Prahalad, Competing for the Future
(Boston: Harvard Business School Press, 1994), 101.
22. Prahalad, Weak Signals, v.
23. E-Commerce Takes OII, 1he Economist, May 15, 2004, 9.

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The steps in developing sales Iorecasts consist oI
(1) deIining the Iorecasting problem, (2) identiIying
appropriate Iorecasting techniques, (3) evaluating and
choosing a technique, and (4) implementing the Iore-
casting system. A brieI review oI each step indicates
important issues and considerations.
1
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The requirements the Iorecasting method should satisIy,
and the output required must be decided. Illustrative re-
quirements include the time horizon, the level oI accuracy
desired, the uses to be made oI the Iorecast results, and the
degree oI disaggregation (nation, state, local), including
product/market detail, units oI measurement, and time
increments to be covered.
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Since several Iorecasting methods are available, each with
certain Ieatures and limitations, the users needs,
resources, and available data should be matched with the
appropriate techniques. Companies may incorporate two
or more techniques into the Iorecasting process.
Typically, one technique is used as the primary basis oI
Iorecasting, whereas the other technique is used to check
the validity oI the primary Iorecasting method. Also, tech-
niques oIIer diIIerent outputs. Some are eIIective in
obtaining aggregate Iorecasts, and others are used to
estimate sales Ior disaggregated units oI analysis (e.g.,
products). An overview oI the major Iorecasting tech-
niques is provided here in Eorecasting Techniques.
Many Iirms begin with very inIormal Iorecasting

approaches based on projections oI past experience cou-
pled with a subjective assessment oI the Iuture market
environment. As the Iorecasting needs increase, more
Iormalized methods are developed. Eactors that oIten
aIIect the choice oI a Iorecasting system include the type
oI corporate planning process used, the volatility and
complexity oI markets, the number oI products and mar-
kets, and the organizational units that have Iorecasting
needs.
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The major approaches used to prepare Iorecasts are
described brieIly. Eorecasting techniques generally
Iollow two basic avenues. The Iirst involves making
direct estimates oI brand sales. The second Iorecasts
brand sales as a product oI several components (e.g.,
industry sales and market share).
2
Several methods used
Ior Iorecasting sales are described below:
- A common approach
relies on a jury oI executive opinion to obtain
sounder Iorecasts than might be made by a single
estimator. To put the results in better perspective,
the jury members are usually given background
inIormation on past sales, and their estimates are
sometimes weighted in proportion to their
convictions about the likelihood oI speciIic sales
levels being realized.
- -- The sales personnel oI some
IirmsIield representatives, managers, or
distributorsare considered better positioned than
anyone else to estimate the short-term outlook Ior
sales in their assigned areas.
-- - Although the dispersion oI
product users in many markets (or the cost oI
reaching them) would make such an approach
impractical, some manuIacturers serving industrial
markets Iind it possible to poll product users about
their Iuture plans and then use that inIormation in
developing their own Iorecasts.
- -- In a Iamiliar
approach, the historical sales series may be broken
down into its componentstrends and cyclical and
seasonal variations, including irregular variations
which are then projected. Time-series analysis has the
advantage oI being easy to understand and apply.
However, there is a danger in relying on strictly mech-
anized projections oI previously identiIied patterns.
- -- Eor short-term
Iorecasting purposes, several advanced time-series
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methods have been generating new interest and
acceptance. Most rely on a moving average oI the
data series as their starting point, and requisite
computer soItware Iacilitates their use. The methods
include variants oI exponential smoothing, adaptive
Iiltering, Box Jenkins models, and the state-space
technique. All assume that Iuture movements oI a
sales series can be determined solely Irom the study
oI its past movements. However, certain oI these
methods have the alternative advantage oI being
able to take into account external variables as well.
- The econometric approach
provides a mathematical simpliIication, or model,
oI measurable relationships between changes in the
series being Iorecast and changes in other related
Iactors. Such models are employed most oIten in the
prediction oI overall market demand, thus requiring
a separate estimate oI a companys own share.
Increased interest in this approach reIlects a
growing concern with macroeconomic events as
well as a preIerence Ior spelling out assumptions
that underlie Iorecasts.
-- When developing Iorecasts
Ior intermediate or commodity products, some Iirms
are Iinding it advantageous to employ input-output
measures within comprehensive Iorecasting systems
that begin with macroeconomic considerations and
end with estimates oI industry sales. Still other
methodologies must be employed in such systems,
and specialists are required Ior the correct applica-
tion and interpretation oI input-output analysis.
- New products pose
special problems that are hard Ior the Iorecaster to
circumvent. A sales Iorecast Ior a new product may
rest upon any oI several bases, including results oI
marketing research investigations, assumptions
about analogous situations in the past, or assump-
tions about the rate at which users oI such products
or services will substitute the new item Ior ones
they are currently buying.
3
Several advantages and limitations oI the various
Iorecasting techniques are highlighted in Exhibit 3A.1.
A more comprehensive discussion oI Iorecasting
techniques is provided by David M. GeorgoII and
Robert Murdick, Managers Guide to Eorecasting,
Harvard Business Review, JanuaryEebruary 1986,
11020.
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Source: Mark W. Johnston and Greg W. Marshall, Sales Force Management, 7
th
ed. (New York: McGraw-Hill/Irwin, 2003), 131.
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Segmenting markets is a Ioundation Ior superior perIormance. Understanding how buyers needs
and wants vary is essential in designing eIIective marketing strategies. Segmenting markets may
be critical to developing and implementing market-driven strategy.
Eor example, in the early 1990s, traditional mainIrame computer manuIacturer IBM Iaced
sluggish sales and proIits. IBM was organized around product groups and powerIul geographi-
cally organized sales divisions. In 1991 the company restructured, driven by a new segmentation
approach to its markets. The company abandoned geographic sales regions as market segments,
because they did not provide a way to group customers with similar needs and were a poor basis
Ior target marketing. The Iocus Ior marketing strategy and eIIorts to stimulate market demand
became Industry Solution Units (ISUs), Iocusing on major industrial sectors: banking, insurance,
retail, government, utilities. The ISU organization at IBM helped to improve revenue perIorm-
ance by sharpening its market Iocus and providing clearer sales targets and positioning messages.
By 1994 IBM had moved back into proIitability. Much oI the market-driven culture change at
IBM has been linked to its move Irom a sales-led structure to one based on customer segments.
1
Moreover, the need to improve an organizations understanding oI buyers is escalating
because oI buyers demands Ior uniqueness and an array oI technology available to generate
products to satisIy these demands. Companies are responding to the opportunities to provide
unique customer value with products ranging Irom customized phone pagers Ior business users
to selI-designed greeting cards Ior consumers, and even postage stamps with customers own
photographs incorporated.
Buyers vary according to how they use products, the needs and preIerences that the products
satisIy, and their consumption patterns. These diIIerences create market segments. Market
segmentation is the process oI identiIying and analyzing subgroups oI buyers in a product-market
with similar response characteristics (e.g., Irequency oI purchase). Recognizing diIIerences
between market segments, and how they change, better and Iaster than competitors is an increas-
ingly important source oI competitive advantage.
Indeed, Ior companies producing consumer goods and services, the concept oI a one-size-Iits-all
mass market is no longer relevant. Many consumer markets show signs oI Iragmentation into
microsegments driven by diverse product preIerences and media usage and demanding right Ior
me in products purchased.
2
This is why Nike oIIers more than 300 varieties oI sport shoe, not just
one. Exhibit 4.1 illustrates some oI the pressures on consumer goods companies to Iocus on buyer
diIIerences in developing market-led strategy.
The most speciIic Iorm oI market segmentation is to consider each buyer as a market segment.
This is the basis Ior one-to-one marketing.
3
Such Iine-tuned segmentation is possible Ior an
expanding array oI goods and services due to mass customization techniques. It oIIers an excit-
ing new approach to serving the unique needs and wants oI individual buyers. Custom-designed

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products satisIy individual buyers needs and wants at prices comparable to mass-produced
products. The growing adoption oI Customer Relationship Management systems that integrate
all inIormation about each individual customer into a single location provides unprecedented
opportunities to learn about customer needs Irom their actual behavior.
Eor example, BMW collects and integrates customer data Irom a variety oI sources: new and
used car buying records, warranty and service records, BMW Iinancial services records, direct
mail and Internet sources, and external inIormation such as competitive sales data. The database
is used Ior several purposes. OIten it is used to predict when individual customers are likely to
change their cars. Response rates to BMW advertising have tripled because the marketing data-
base allows the company to segment and target customers accurately and to Iocus on those most
likely to respond.
4
Indeed, by coupling inIormation technology and production eIIiciencies, products are
designed to meet a customers needs at prices that are competitive with mass-produced products.
Eor example, a woman can walk into an Original Levi Store in New York, be measured by a
salesperson, and try on a Iew pairs oI jeans selected by computer Irom over 400 pairs to match
her speciIic measurements. II one does not provide a perIect Iit, the inIormation is put into the
computer to reIine the speciIications. The Iinal match is a perIect Iit at a price only $10 more
than the mass-produced jeans. Since stocking a supply oI each oI the 400 jeans in every store
would be very costly, the buyers pair oI jeans is shipped to the store or the buyer Irom the
distribution center. Similarly, Japanese bicycle manuIacturer Panasonic pioneered made to
measure bicycles, where the retail customer is measured as iI Ior a suit oI clothes and the
custom-made bicycle delivered to the store within a Iew days.
Decision makers Iace renewed dilemmas in making segmentation choices, driven by
escalating market complexity and turbulence. Many traditional assumptions about markets are
becoming obsolete. Consider the contrast in Exhibit 4.2 between the possible characteristics oI
complex and simple, and turbulent and stable markets. Clinging to erroneous assumptions that
markets are simple and stable is likely to critically undermine the ability oI an organization to
develop and implement eIIective market-driven strategy.
We begin the chapter with a discussion oI the role oI market segmentation in marketing
strategy, Iollowed by a discussion oI the variables used to identiIy segments. Next, we look at
the methods Ior Iorming segments, Iollowed by a review oI high-variety strategies. Einally, we
consider the issues and guidelines involved in selecting the segmentation strategy and in its
implementation.

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Source: Adapted Irom
Anthony Bianco, The
Vanishing Mass Market,
BusinessWeek, July 12,
2004, 68.

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Strategic Market Segmentation

Market segmentation needs to be considered early in the development oI market-driven strategy.
Segments are determined, customer value opportunities explored in each segment, organiza-
tional capabilities matched to promising segment opportunities, market target(s) selected Irom
the segment(s) oI interest, and a positioning strategy developed and implemented Ior each
market target (Exhibit 4.3). We examine each oI these activities to indicate the role oI segmen-
tation in the marketing strategy process.
-
Market segmentation is the process oI placing the buyers in a product-market into subgroups so
that the members oI each segment display similar responsiveness to a particular positioning
strategy. Buyer similarities are indicated by the amount and Irequency oI purchase, loyalty to a
particular brand, how the product is used, and other measures oI responsiveness. So segmentation
is an identiIication process aimed at Iinding subgroups oI buyers within a total market. The oppor-
tunity Ior segmentation occurs when diIIerences in buyers demand (response) Iunctions allow
market demand to be divided into segments, each with a distinct demand Iunction.
5
The term
market niche is sometimes used to reIer to a market segment that represents a relatively small
portion oI the buyers in the total market. We consider a niche and a segment to be the same.
Segmentation identiIies customer groups within a product-market, each containing buyers
with similar value requirements concerning speciIic product/brand attributes. A segment is a
possible market target Ior an organization competing in the market. Segmentation oIIers a com-
pany an opportunity to better match its products and capabilities to buyers value requirements.
Customer satisIaction can be improved by providing a value oIIering that matches the value
proposition considered important by the buyer in a segment.

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Brian Smith, Made to
Measure, 1he Marketer,
June 2004, 8.

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Importantly, market analysis may identiIy segments not recognized or served eIIectively by com-
petitors. There may be opportunities to tap into new areas oI value and create a unique space in the
market. Eor example, in Erance Accor has established the highly successIul Eormula 1 hotel chain
by building a new market segment in between the traditional strategic groups in the hotel market.
Traditional one-star hotels oIIer low prices, while two-star hotels oIIer more amenities and charge
higher prices. Accors analysis oI customer needs Iound that customers choose the one-star hotel
because it is cheap, but trade up Irom the one-star hotel to the two-star hotel Ior the sleeping envi-
ronmentclean, quiet rooms with more comIortable bedsnot all the other amenities that are
oIIered. Eormula 1 provides the superior sleeping environment oI the two-star hotel, but not the
other Iacilities, which allows it to oIIer this at the price oI the one-star hotel. By 1999, Eormula 1
had built a market share larger than the sum oI those oI the next Iive largest competitors.
6
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While broad competitive comparisons can be made Ior an entire product-market, more penetrat-
ing insights about competitive advantage and market opportunity result Irom market segment
analyses. Examining speciIic market segments helps to identiIy how to (1) attain a closer match
between buyers value preIerences and the organizations capabilities, and (2) compare the
organizations strengths (and weaknesses) to the key competitors in each segment.
Customer value requirements can oIten be better satisIied within a segment, compared to
the total market. Consider, Ior example, Atlas Air Inc., a transportation company that oIIers
outsourcing Ireight services Ior global air carriers. Launched in 1992, the Iounder identiIied
an emerging customer need because carriers were replacing older aircraIt with Iuel eIIicient
planes having halI the cargo space oI those being replaced.
7
Atlas customers include British
Airways, China Airlines, KLM, LuIthansa, Swissair, and SAS, all attracted by low cost and reli-
able services. Atlas carries Ilowers and shoes Irom Amsterdam to Singapore Ior KLM and Iish,
cattle, and horses Irom Taipei to Europe Ior China Air.
-
Market targeting consists oI evaluating and selecting one or more segments whose value require-
ments provide a good match with the organizations capabilities. Companies typically appeal to
only a portion oI the people or organizations in a product-market, regardless oI how many seg-
ments are targeted. Management may decide to target one, a Iew, or several segments to gain the

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Segments
Value opportunities
Capabilities/segment match
Targets
Positioning

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strength and advantage oI specialization. Alternatively, while a speciIic segment strategy is not
used, the marketing program selected by management is likely to appeal to a particular subgroup
oI buyers within the market. Segment identiIication and targeting are obviously preIerred.
Einding a segment by chance does not give management the opportunity oI evaluating diIIerent
segments in terms oI the Iinancial and competitive advantage implications oI each segment.
When segmentation is employed, it should be by design, and the underlying analyses should lead
to the selection oI one or more promising segments to target.
Recall the Chapter 2 description oI positioning strategy as the combination oI organizational
actions management takes to meet the needs and wants oI each market target. The strategy
consists oI product(s) and supporting services, distribution, pricing, and promotion components.
Managements choices about how to inIluence target buyers to Iavorably position the product in
their eyes and minds help in designing the positioning strategy.
The Strategy Eeature describes the segmentation and positioning challenges at Banana
Republic in the retail Iashion marketplace. A special problem at Banana Republic, owned by
Gap Inc., is to successIully position in a target market that does not lead to cannibalizing the
sales oI The Gap or Old Navyboth owned by Gap Inc.
Market segmentation lays the groundwork Ior market targeting and positioning strategies.
The skills and insights used in segmenting a product-market may give a company important
competitive advantages by identiIying buyer groups that will respond Iavorably to the Iirms
marketing eIIorts. The previous Atlas Air example is illustrative.
OI course, Iaulty segmentation reduces the eIIectiveness oI targeting and positioning decisions.
Eor example, in 2000 General Motors made the decision to axe the Oldsmobile brandthe oldest
auto brand in the United States. Although sometimes a symbol oI innovation and style, Oldsmobile
Iailed to establish a strong position in a long-term market niche or segmentit did not deliver the
class oI Cadillac and Buick nor the wider market appeal oI Chevrolet.
8
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Market segmentation may occur at any oI the product-market levels shown in Exhibit 4.4.
Generic-level segmentation is illustrated by segmenting supermarket buyers based on shopper
types (e.g., limited shopping time). Product-type segmentation is shown by the diIIerences in
price, quality, and Ieatures oI shaving equipment. Product-variant segmentation considers the
segments within a category such as electric razors.
An important consideration in deIining the market to be segmented is estimating the variation in
buyers needs and requirements at the diIIerent product-market levels and identiIying the types oI
buyers included in the market. In the Atlas Air example, management deIined the product-market
to be segmented as air Ireight services Ior business organizations between major global airports.
Segmenting the generic product-market Ior air Ireight services was too broad in scope. The market
deIinition selected by Atlas Air excluded buyers (e.g., consumers) that were not oI primary interest
to management while including companies with diIIerent Ireight service needs.
In contemporary markets, boundaries and deIinitions can change rapidly, underlining the
strategic importance oI market deIinition and selection, and the need Ior Irequent reevaluation.
- --
The process oI segmenting a market involves several interrelated activities and decisions begin-
ning with deIining the market to be segmented (Exhibit 4.5). It is necessary to decide how to
segment the market, which involves selecting the variable(s) to use as the basis Ior identiIying
segments. Eor example, Irequency oI use oI a product (e.g., Irequent, moderate, and occasional)
may be a possible basis Ior segmentation. Next, the method oI Iorming segments is decided. This
may consist oI managers using judgment and experience to divide the market into segments as
illustrated by the Atlas Air example. Alternatively, segments may be Iormed using statistical
analysis. The availability oI customer purchase behavior inIormation in CRM systems, Ior
example, provides a growing base Ior this analysis. Part oI Iorming segments is deciding
whether Iiner (smaller) segments should be used. Einally, strategic analysis is conducted on each
segment to assist management in deciding which segment(s) to target.
-
AIter the market to be segmented is deIined, one or more variables are selected to identiIy
segments. Eor example, the United States Automobile Association (USAA) segments by type oI
employment. Although unknown to many people, USAA has built a successIul business serving
the automobile insurance needs oI U.S. military personnel located throughout the world. USAA
has close relationships with its 2.6 million members using powerIul inIormation technology. The
USAA service representative has immediate access to the clients consolidated Iile, and the
one-to-one service encounter is highly personalized. USAA achieves a 98 percent retention rate
in its market chosen segment.
9
Eirst, we discuss the purpose oI segmentation variables, Iollowed by a review oI the variables
that are used in segmentation analyses.

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One or more variables (e.g., Irequency oI use) may be used to divide the product-market into
segments. Demographic and psychographic (liIestyle and personality) characteristics oI buyers
are oI interest, since this inIormation is available Irom the U.S. Census reports and many other
sources including electronic databases. The use situation variables consider how the buyer uses
the product, such as purchasing a meal away Irom home Ior the purpose oI entertainment.
Variables measuring buyers needs and preferences include attitudes, brand awareness, and
brand preIerence. Purchase-behavior variables describe brand use and consumption (e.g., size
and Irequency oI purchase). We examine these variables to highlight their uses, Ieatures, and
other considerations important in segmenting markets.
-- -
- - The characteristics oI people Iall into two major categories: (1) geographic
and demographic, and (2) psychographic (liIestyle and personality). Demographics are oIten more
useIul to describe consumer segments aIter they have been Iormed rather than to identiIy them.
Nonetheless, these variables are popular because available data oIten relate demographics to the
other segmentation variables. Geographic location may be useIul Ior segmenting product-markets.
Eor example, there are regional diIIerences in the popularity oI transportation vehicles. In several
U.S. states the most popular vehicle is a pickup truck. The truck belt runs Irom the upper Midwest
south through Texas and the GulI coast states. The Eord brand is dominant in the northern halI oI
the truck belt while Chevrolet leads in the southern halI.
Demographic variables describe buyers according to their age, income, education, occupation,
and many other characteristics. Demographic inIormation helps to describe groups oI buyers such
as heavy users oI a product or brand. Demographics used in combination with buyer behavior
inIormation are useIul in segmenting markets, selecting distribution channels, designing promotion
strategies, and other decisions on marketing strategy.
LiIestyle variables indicate what people do (activities), their interests, their opinions, and their
buying behavior. LiIestyle characteristics extend beyond demographics and oIIer a more
penetrating description oI the consumer.
10
ProIiles can be developed using liIestyle characteristics.

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Market to be
segmented
Decide how
to segment
Form segments
Finer segmentation
strategies
Strategic
analysis of
segments

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This inIormation is used to segment markets, help position products, and guide the design oI
advertising messages.
An array oI specialty magazines enables companies to identiIy and access very speciIic
liIestyle segments. Eor example, Peterson Publishing Co. publishes 23 monthlies, 9 bimonthlies,
and 45 annuals.
11
The companys magazine portIolio includes Motor 1rend, M1B (mountain
bikes), Circle 1rack, and 1een magazine. Specialty magazines match buyers liIestyle interests
with articles that correspond to the interests. Subscriber proIiles help companies match their
market target proIiles with the right magazine(s). Many oI the specialty magazines conduct
subscriber research studies that are useIul to companies targeting liIestyle segments. The avail-
ability oI new technologies also enables more general publications to create themed sections or
demographically targeted editions. Eor example, 1ime magazine can produce customized versions
oI its national editionat the extreme as many as 20,000 diIIerent versions oI a single issue.
12
The Global Eeature describes the success oI BMW in positioning its MINI as a liIestyle
vehicle, promoted through unconventional routes that Iit with buyer characteristics in this niche
oI the automobile market.
- Several characteristics help in segmenting business markets. The
type oI industry (sometimes called a vertical market) is related to purchase behavior Ior certain
types oI products. Eor example, automobile producers purchase steel, paint, and other raw
materials. Since automobile Iirms needs may vary Irom companies in other industries, this Iorm
oI segmentation enables suppliers to specialize their eIIorts and satisIy customer needs. Other
variables Ior segmenting organizational markets include size oI the company, the stage oI
industry development, and the stage oI the value-added system (e.g., producer, distribution,
retailer). Dell, Ior example, targets the Iollowing organizational segments: global enterprises,
large companies, midsize companies, government agencies, education, and small companies.
Organizational segmentation is aided by Iirst examining (1) the extent oI market concentration,
and (2) the degree oI product customization.
13
Concentration considers the number oI customers

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and their relative buying power. Product customization determines the extent to which the
supplier must tailor the product to each organizational buyer. II one or both oI these Iactors
indicate quite a bit oI diversity, segmentation opportunities may exist.
Boeing caters to the speciIic needs oI each air carrier purchasing commercial aircraIt. Eor
example, an airline ordering a 747 has a choice oI Iour conIigurations Ior the interior wall at the
Iront oI the rear cargo compartment.
14
This decision impacts how 2,550 parts are installed. While
Boeings eIIorts to provide customized designs are preIerred by its customers, the costs are high
and Boeing has had to evaluate the value/cost relationships oI its attempts to satisIy the needs oI
single airline segments.
-
Markets can be segmented based on how the product is used. As an illustration, Nikon, the
Japanese camera company, oIIers a line oI high perIormance sunglasses designed Ior activities
and light conditions when skiing, driving, hiking, Ilying, shooting, and participating in water
sports. Nikon competes in the premium portion oI the market with prices somewhat higher than
Ray-Ban, the market leader. Timex uses a similar basis oI segmentation Ior its watches.
Needs and preIerences vary according to diIIerent use situations. Consider, Ior example,
segmenting the market Ior prescription drugs. Astra/Merck identiIies the Iollowing segments
based on the type oI physician/patient drug use situation:
- ---customers such as managed care administrators who consider
economic Iactors oI drug use Ioremost.
physicians with standard patient needs centered around the treatment oI disease.
- --physicians Ior whom cost is paramount, such as those with a sizable number
oI indigent patients.
-people on the leading edge, oIten at teaching hospitals, who
champion the newest therapies.
15
A sales representative provides the medical thought leader with cutting-edge clinical studies,
whereas the cost-sensitive doctor is provided inIormation related to costs oI treatments.
Mass customization oIIers a promising means oI responding to diIIerent use situations at
competitive prices. Eor example, Lutron Electronics gives its buyers customized light dimmer
switches by programming desired Ieatures using computer chips built into the switchesthe
company holds 80 percent oI all dimmer patents, and has achieved a 75 percent market share,
with a product catalog including several thousand product variations in dozens oI colors.
16
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Needs and preIerences that are speciIic to products and brands can be used as segmentation bases
and segment descriptors. Examples include brand loyalty status, beneIits sought, and proneness to
make a deal. Buyers may be attracted to diIIerent brands because oI the beneIits they oIIer. Eor
example, seeking to generate additional revenues in the mid-1990s, Credit Lyonnaise, Erances
largest commercial bank, segmented and began targeting customers with annual incomes in excess
oI 500,000 Irancs ($100,000 at the time) that wanted quality service, Iinancial advice, and upscale
Iacilities.
17
Several new branch oIIices were designed to appeal to Credit Lyonnaises wealthy
clients. One oIIice in Bordeaux, called Club Tourney, had an elegant townhouse with salons where
clients met with advisors to discuss Iinancial needs. The branch served 100 wealthy clients.
- - Needs motivate people to act. Understanding how buyers satisIy their needs
provides guidelines Ior marketing actions. Consumers attempt to match their needs with the
products that satisIy their needs. People have a variety oI needs, including basic physiological needs
(Iood, rest, and sex); the need Ior saIety; the need Ior relationships with other people (Iriendship);

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and personal satisIaction needs.
18
Understanding the nature and intensity oI these needs is important
in (1) determining how well a particular brand may satisIy the need, and/or (2) indicating what
change(s) in the brand may be necessary to provide a better solution to the buyers needs.
- Buyers attitudes toward brands are important because experience and research
Iindings indicate that attitudes inIluence behavior. Attitudes are enduring systems oI Iavorable
or unIavorable evaluations about brands.
19
They reIlect the buyers overall liking or preIerence
Ior a brand. Attitudes may develop Irom personal experience, interactions with other buyers, or
by marketing eIIorts, such as advertising and personal selling.
Attitude inIormation is useIul in marketing strategy development. A strategy may be designed
either to respond to established attitudes or, instead, to attempt to change an attitude. In a given
situation, relevant attitudes should be identiIied and measured to indicate how brands compare.
II important attitude inIluences on buyer behavior are identiIied and a Iirms brand is measured
against these attitudes, management may be able to improve the brands position by using this
inIormation. Attitudes are oIten diIIicult to change, but Iirms may be able to do so iI buyers
perceptions about the brand are incorrect. Eor example, iI the trade-in value oI an automobile is
important to buyers in a targeted segment and a company learns through market research that its
brand (which actually has a high trade-in value) is perceived as having a low trade-in value,
advertising can communicate this inIormation to buyers.
- Perception is deIined as the process by which an individual selects, organizes,
and interprets inIormation inputs to create a meaningIul picture oI the world.
20
Perceptions are
how buyers select, organize, and interpret marketing stimuli, such as advertising, personal sell-
ing, price, and the product. Perceptions Iorm attitudes. Buyers are selective in the inIormation
they process. As an illustration oI selective perception, some advertising messages may not be
received by viewers because oI the large number oI messages vying Ior their attention. Eor
example, Exhibit 4.6 lists products where substantial proportions oI TV advertisements are
actively ignored or skipped using a personal video recorder. Negative attitudes and perception
may be a major barrier to communicating with consumers. Or, more simply, Ior example, a
salespersons conversation may be misunderstood or not understood because the buyer is trying
to decide iI the purchase is necessary while the salesperson is talking.
People oIten perceive things diIIerently. Business executives are interested in how their
products, salespeople, stores, and companies are perceived. Perception is important strategically
in helping management to evaluate the current positioning strategy and in making changes in this

-
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-
Source: Survey oI the
15 largest U.S. television
markets in 2003 by CNW
Marketing Research Inc.
reported in Anthony
Bianco, The Vanishing
Mass Market,
BusinessWeek, July 12,
2004, 65.
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positioning strategy. Perception mapping is a useIul research technique Ior showing how brands
are perceived by buyers according to various criteria. We discuss how preIerence mapping is
used to Iorm segments later in the chapter.
-
Consumption variables such as the size and Irequency oI a purchase are useIul in segmenting
consumer and business markets. Marketers oI industrial products oIten classiIy customers and
prospects into categories on the basis oI the volume oI the purchase. Eor example, a specialty
chemical producer concentrates its marketing eIIorts on chemical users that purchase at least
$100,000 oI chemicals each year. The Iirm Iurther segments the market on the basis oI how the
customer uses the chemical.
The development oI CRM systems oIIers Iast access to records oI actual customer purchase
behavior and characteristics. CRM and loyalty programs are generating insights into customer
behavior and segment diIIerences, and providing the ability to respond more precisely to the
needs oI customers in diIIerent segments. Eor example, Consodata is a CRM company working
Ior the Jigsaw consortium oI some oI the largest Iast-moving consumer goods companies in the
world. Unilever, Kimberley-Clark, and Cadbury Schweppes are sharing the costs oI a giant data-
base that can divide countries into any size segment and determine exactly who lives there,
where they shop, what they buy, their liIestyles, and attitude data. Initial applications are in the
precise merchandising oI supermarket shelves to reIlect local segment characteristics.
Similarly, Accor, the Erench-based hotel group, has adopted sophisticated business intelligence
systems Ior its SoIitel and Novotel hotels in the United States. (See accompanying SoIitel adver-
tisement). The potential beneIit is to identiIy diIIerent customers preIerences, to diIIerentiate and
to customize. Using survey data, records oI guests visits
and preIerences or problems, the data are mined to draw
up golden nugget maps to identiIy which customer
segments have major potential, which already have been
heavily exploited, and which have limited potential.
21
More
details about CRM as a source oI market understanding are
given in the Appendix to Chapter 7.
Since buying decisions vary in importance and com-
plexity, it is useIul to classiIy them to better understand
their characteristics, the products to which they apply, and
the marketing strategy implications oI each type oI
purchase behavior. Buyer decisions can be classiIied
according to the extent to which the buyer is involved in the
decision.
22
A high-involvement decision may be an expen-
sive purchase, have important personal consequences, and
impact the consumers ego and social needs. The decision
situation may consist oI extended problem solving (high
involvement), limited problem solving, or routine problem
solving (low involvement). The characteristics oI these sit-
uations are illustrated in Exhibit 4.7.
These categories are very broad since the range
oI involvement covers various buying situations. Even
so, the classiIications provide a useIul way to compare
and contrast buying situations. Also, involvement may
vary Irom individual to individual. Eor example, a high-
involvement purchase Ior one person may not be such Ior
another person, since perceptions oI expense, personal con-
sequences, and social impact may vary across individuals.

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Exhibit 4.8 summarizes the various segmentation variables and shows examples oI segmentation
bases and descriptors Ior consumer and organizational markets. As we examine the methods used
to Iorm segments, the role oI these variables in segment determination and analysis is illustrated.
-
The credit card division oI American Express (AMEX) identiIies market segments based
on purchase behavior. One group oI cardholders pays the annual Iee Ior the card but rarely
(or never) uses it.
23
This group oI zero spenders is made up oI (1) those who cannot aIIord much
discretionary spending, and (2) those who use cash or competitors cards. AMEXs objective is
to identiIy the second group oI potential buyers because they oIIer card usage opportunities and
may potentially give up their card. AMEX uses selI-selecting incentive oIIers (e.g., two Iree
airline tickets Ior heavy card use over six months) to identiIy the valuable nonuser cardholders.
While this segmentation approach is expensive, it costs less than obtaining a new customer to

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Source: Eric N. Berkowitz,
Roger A. Kerin, Steven W.
Hartley, and William
Rudelius, Marketing, 5th
ed. (Chicago: Richard D.
Irwin, 1997), 156.
Copyright The
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replace one who leaves AMEX. It also does not require using expensive marketing research to
identiIy cardholders with the ability (Iinancial) to use their cards.
The requirements Ior segmentation are discussed Iirst, and then the methods oI segment
Iormation are described and illustrated.
-
An important question is deciding iI it is worthwhile to segment a product-market. Eor example,
Gillette has successIully adopted a one product Ior all strategy in the razor market. While in
many instances segmentation is a sound strategy, its Ieasibility and value need to be evaluated.
Nonetheless, the growing Iragmentation oI mature mass markets into segments with diIIerent
needs and responsiveness to marketing actions may mandate segmentation strategy. Corres-
pondingly, the growth oI narrowcast mediacable television and radio; specialized magazines;
cell-phone and personal digital assistant screens; and the Internetmakes major changes in the
costs oI reaching market segments. Segment targets that could not traditionally be reached with
communications and product variants to match their needs at reasonable costs to the seller may
now be accessible targets.
24
Eor example, the Internet Eeature describes how Monster.com has reinvented the recruitment
agency business by its use oI the Internet to match jobseekers with relevant employment oppor-
tunities in a way which no traditional business model can rival. Jobseekers can be categorized
by type oI job sought (e.g., sales, accountancy) and level, and these groups can be matched with
employers in 20 diIIerent countries at great speed and with absolute precision.
It is important to decide iI it is worthwhile to segment a product-market. Eive criteria are
useIul Ior evaluating a potential segmentation strategy.
-- - Determining diIIerences in the responsiveness oI the buyers in the
product-market to positioning strategies is a key segment identiIication requirement. Suppose
the customers in a product-market are placed into Iour groups, each a potential segment, using

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a variable such as income (aIIluent, high, medium, and low). II each group responds (e.g.,
amount oI purchase) in the same way as all other groups to a marketing mix strategy, then the
Iour groups are not market segments. II segments actually exist in this illustration, there must be
diIIerences in the responsiveness oI the groups to marketing actions, such as pricing, product
Ieatures, and promotion. The presence oI real segments requires actual response diIIerences.
Simply Iinding diIIerences in buyers characteristics such as income is not enough.
Eor example, income is useIul in Iinding response diIIerences in India. A study conducted by a
New Delhi think tank identiIies a premium segment in the Indian consumer market.
25
Eamilies with
an annual income in excess oI 1 million rupees ($29,200 at the time oI the study) have as much
buying power as a U.S. Iamily with three times the same income. Living costs Ior the Indian Iam-
ily are very low (e.g., two-bedroom apartment Ior $130 a month). The premium segment is a prom-
ising target Ior luxury goods brands like Mercedes-Benz, Cartier, and Christian Dior. There are
600,000 Indian households in the premium segment, including 200,000 in Bombay (now Mumbai).
Several Japanese, U.S. and European auto manuIacturers plan to produce luxury cars in India.
- It must be possible to identiIy the customer groups that exhibit
response diIIerences, and sometimes Iinding the correct groups may be diIIicult. Eor example,
even though variations in the amount oI purchase by customers occur in a market, it may not be
possible to identiIy which people correspond to the diIIerent response groups in the market. While
it is usually Ieasible to Iind descriptive diIIerences among the buyers in a product-market, these
variations must be matched to response diIIerences. Recall AMEXs approach to identiIying
cardholders with buying power who use the card inIrequently. Incentives are used to attract
nonuser cardholders with buying power.
- A business must be able to aim a marketing program strategy at each
segment selected as a market target. As discussed earlier, specialty magazines oIIer one means oI
selective targeting. Ideally, the marketing eIIort should Iocus on the segment oI interest and not be
wasted on nonsegment buyers. Cable television, magazine, and radio media are able to provide cov-
erage oI narrowly deIined market segments. The Internet oIIers great potential Ior direct marketing
channels to reach specialized segments. Similarly, databases oIIer very Iocused access to buyers.
-- Segmentation must be Iinancially attractive in terms oI
revenues generated and costs incurred. It is important to evaluate the beneIits oI segmentation.
While segmentation may cost more in terms oI research and added marketing expenses, it should
also generate more sales and higher margins. The objective is to use a segmentation approach
that oIIers a Iavorable revenue and cost combination.
Eor example, British-based ICI Eertilisers experienced substantial losses in the late 1980s, but
rebuilt its business around an innovative market segmentation strategy. Research showed that
Iarmers priorities in Iertilizer purchasing were dominated by price only in 10 percent oI cases;
instead, Iarmers were more inIluenced by advanced technology, loyalty to traditional merchants,
and loyalty to brands. ICI created new product ranges around these needs, restructured the business
around these ranges, and built impressive proIitability.
26
Einally, the segments must show adequate stability over time so that
the Iirms marketing eIIorts will have enough time to produce Iavorable results. II buyers needs
change too Iast, a group with similar response patterns at one point may display quite diIIerent
patterns several months later. The time period may be too short to justiIy using a segmentation
strategy. However, this question is also one where the impact oI narrowcast media and advanced
production technology may drastically reduce the time over which a segment target needs to be
stable Ior it to be an attractive target.
The distinction between product
diIIerentiation and market segmentation is not always clear. Product differentiation occurs when
a product oIIering is perceived by the buyer as diIIerent Irom the competition on any physical or
nonphysical product characteristic, including price.
27
Using a product diIIerentiation strategy, a

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Iirm may target an entire market or one (or more) segments. Competing Iirms may diIIerentiate
their product oIIerings in trying to gain competitive advantage with the same group oI targeted
buyers. Market targeting using a diIIerentiation strategy is considered Iurther in Chapter 6.
-
Segments are Iormed by: (A) grouping customers using descriptive characteristics and then
comparing response diIIerences across the groups, or (B) Iorming groups based on response
diIIerences (e.g., Irequency oI purchase) and determining iI the groups can be identiIied based
on diIIerences in their characteristics.
28
Exhibit 4.9 illustrates the two approaches. Approach A
uses a characteristic such as income or Iamily size believed to be related to buyer response. AIter
Iorming the groups, they are examined to see iI response varies across groups. Approach B
places buyers with similar response patterns into groups and then develops buyer proIiles using
buyer characteristics. We describe each approach to show how it is used to identiIy segments.
-
AIter the product-market oI interest is deIined, promising segments may be identiIied, using
management judgment in combination with analysis oI available inIormation and/or marketing
research studies. Consider, Ior example, hotel lodging services. Exhibit 4.10 illustrates ways
to segment the hotel lodging product-market. An additional breakdown can be made
according to business and household travelers. These categories may be Iurther distinguished
by individual customer and group customer segments. Groups may include conventions, corpo-
rate meetings, and tour groups. Several possible segments can be distinguished. Consider, Ior
example, Marriotts Courtyard hotel chain. These hotels Iall into the midpriced category and are
targeted primarily to Irequent business travelers who Ily to destinations, are in the 40-plus age
range, and have relatively high incomes.
When using the customer group identiIication approach, it is necessary to select one or more
oI the characteristics oI people or organizations as the basis oI segmentation. Using these
variables, segments are Iormed by (1) management judgment and experience, or (2) supporting
statistical analyses. The objective is to Iind diIIerences in responsiveness among the customer
groups. We look at some oI the customer grouping methods to show how segments are Iormed.
Managements knowledge oI customer needs is
oIten a useIul guide to segmentation. Eor example, both experience and analysis oI published
inIormation are oIten helpIul in segmenting business markets. Business segment variables include

-
Characteristics
of people and
organizations
Use situation
Buyers needs
and preferences
Purchase
behavior and
loyalty
A. Start with
identifiers of
customer groups
B. Start with
customer response
profile

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-
type oI industry, size oI purchase, and product application. Company records oIten contain inIor-
mation Ior analyzing the existing customer base. Published data such as industry mailing lists can
be used to identiIy potential market segments. These groups are then analyzed to determine iI they
display diIIerent levels oI response.
Segmenting using management judgment and experience, the Italian Iashion producer and retailer
Prada markets an expensive array oI dresses, handbags, hats, shoes, and other womens apparel.
29
The
best-selling $450 backpacks are designed to appeal to aIIluent women that do not want to Ilaunt their
status. Each knapsack has a small triangular logo. Pradas products oIIer an antistatus (liIestyle)
appeal to a segment oI aIIluent women. The luxury retailer has 47 stores including 20 in Japan and
two in the United States. Pradas goods are also sold in department stores.
-- -- -- Another method oI Iorming segments is to identiIy customer
groups using descriptive characteristics and compare response rates (e.g., sales) by placing the
inIormation in a table. Customer groups Iorm the rows and response categories Iorm the columns.
Review oI industry publications and other published inIormation may identiIy ways to break up a
product-market into segments. Standardized inIormation services such as InIormation Resources
Inc. collect and publish consumer panel data on a regular basis. These data provide a wide range
oI consumer characteristics, advertising media usage, and other inIormation that are analyzed by
product and brand sales and market share. The data are obtained Irom a large sample oI households
through the United States. Similar statistical data are available in many overseas countries.
InIormation is available Ior use in Iorming population subgroups within product-markets. The
analyst can use many sources, as well as managements insights and hunches regarding the
market. The essential concern is whether a segmentation scheme identiIies customer groups that
display diIIerent product and brand responsiveness. The more evidence oI meaningIul diIIer-
ences, the better chance that useIul segments exist. Cross-classiIication has some real advantages
in terms oI cost and ease oI use. There may be a strong basis Ior choosing a segmenting scheme
that uses this approach. This occurs more oIten in business and organizational markets, where
management has a good knowledge oI user needs, because there are Iewer users than there are
in consumer product-markets. Alternatively, this approach may be a Iirst step leading to a more
comprehensive type oI analysis.

--

-
Elite/super
premium
Upscale
premium
Midpriced
Vacation
LOCATON
Extended stay
Meeting
Overnight lodging
Economy

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- The availability oI computerized databases oIIers a wide range oI
segmentation analysis capabilities. This type oI analysis is particularly useIul in consumer market
segmentation. Databases are organized by geography and buyers descriptive characteristics.
They may also contain customer response inIormation as shown in the AMEX cardholder
illustration. Databases can be used to identiIy customer groups, design eIIective marketing
programs, and improve the eIIectiveness oI existing programs. The number oI available databases
is rapidly expanding, the costs are declining, and the inIormation systems are becoming user
Iriendly. Several marketing research and direct mail Iirms oIIer database services.
-- Mobil Corporation studies buyers in the gasoline market to
identiIy segments. The Iindings, including inIormation obtained Irom over 2,000 motorists, are
summarized in Exhibit 4.11. The research identiIied Iive primary purchasing groups.
30
Interestingly, Mobil Iound that the Price Shopper spends an average oI $700 annually, compared
to $1,200 Ior the Road Warriors and True Blues. Mobils marketing strategy is to oIIer gasoline
buyers a quality buying experience, including upgraded Iacilities, more lighting Ior saIety,
responsive attendants, and quality convenience products. The target segments are Road Warriors
and Generation E3, involving a major eIIort in convenience stores and reduced time at the gas
pump based on the Mobil Speed Pass. The test results Irom the new strategy raised revenues by
25 percent over previous sales Ior the same retail sites.
As shown by the proIiles described in Exhibit 4.11, needs and preIerences vary quite a bit
within a market. Trying to satisIy all oI the buyers in the market with the same marketing
approach is diIIicult. Analyzing both the customer and the competition is important. SpeciIic
competitors may be better (or worse) at meeting the needs oI speciIic customer groups
(e.g., Mobils Road Warriors). Einding gaps between buyers needs and competitors oIIerings
provides opportunities Ior improving customer satisIaction. Also, companies study competitors
products to identiIy ways to improve their own.
By identiIying customer groups using descriptive characteristics and comparing them to a
measure oI customer responsiveness to a marketing mix such as product usage rate (e.g., number
oI Iax ink cartridges per year), potential segments can be identiIied. II the response rates are

- - -
Source: Alanna Sullivan, Mobil Bets Drivers Pick Cappuccino over Low Prices, 1he Wall Street Journal, January 30, 1995, B1. Wall Street Journal. Central Edition |StaII Produced
Copy Only| by Alanna Sullivan. Copyright 1995 by Dow Jones & Co Inc. Reproduced with permission oI Dow Jones & Co Inc. in the Iormat Textbook via Copyright Clearance Center.
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similar within a segment, and diIIerences in response exist between segments, then promising
segments are identiIied. Segments do not always emerge Irom these analyses, because in some
product-markets distinct segments may not exist, or the segment interrelationships may be so
complex that an analysis oI these predetermined groupings will not identiIy useIul segments.
Product diIIerentiation strategies may be used in these situations.
In an era oI increased globalization, it is also important to recognize that segmentation has an
international dimension in many markets. This is not simply country diIIerences, Ior example,
diIIerences in sizes oI products like apparel and household Iurniture based on ethnic identity in
overseas countries. Roper Starch Worldwide, based on interviews about core values with 1,000
people in each oI 35 countries, identiIy six global consumer segments, existing to varying degrees
in each country:
Strivers: Place more emphasis on material and proIessional goals than do the other groups.
Devouts: Tradition and duty are very important.
Altruists: Interested in social issues and social welIare.
Intimates: Value close personal and Iamily relationships.
Fun seekers: High consumption oI restaurants, bars, movies.
Creatives: Strong interest in education, knowledge, and technology.
The global study Iound that people in diIIerent segments generally pursued diIIerent activities,
purchased diIIerent products, and used diIIerent media.
31
- - -- -
The alternative to selecting customer groups based on descriptive characteristics is to identiIy
groups oI buyers by using response diIIerences to Iorm the segments. A look at a segmentation
analysis Ior the packaging division oI Signode Corporation illustrates how this method is used.
32
The products consist oI steel strappings Ior various packaging applications. An analysis oI the
customer base identiIied the Iollowing segments: programmed buyers (limited service needs),
relationship buyers, transaction buyers, and bargain hunters (low price, high service). Statistical
(cluster) analysis Iormed the segments using 12 variables concerning price and service trade-oIIs
and buying power. The study included 161 oI Signodes national accounts. Measures oI the vari-
ables were obtained Irom sales records, sales managers, and sales representatives. The segments
vary in responsiveness based on relative price and relative service.
The widespread adoption oI CRM systems oIIers greater opportunity Ior timely and detailed
analysis oI response diIIerences between customers. The data warehouse, by integrating trans-
actional data around customer types, makes possible complex analyses to understand diIIerences
in the behavior oI diIIerent customers groups, observe customer liIe cycles, and predict behavior.
33
We discuss CRM in the Appendix to Chapter 7.
Response diIIerence approaches draw more extensively Irom buyer behavior inIormation
than the customer group identiIication methods discussed earlier. Note, Ior example, the inIor-
mation on Signodes customer responsiveness to price and service. We now look at additional
applications to more Iully explore the potential oI the customer response approaches.
- -- Cluster analysis (a statistical technique) groups people according to the
similarity oI their answers to questions such as brand preIerences or product attributes. This
method was useIul to Iorm segments Ior Signode Corporation. The objective oI cluster analysis
is to identiIy groupings in which the similarity within a group is high and the variation between
groups is as great as possible. Each cluster is a potential segment.
- Another promising segmentation method uses consumer research data to
construct maps oI buyers perceptions oI products and brands. The inIormation helps select market-
target strategies, and decide how to position a product Ior a market target.

- -
-

-
While the end result oI perceptual mapping is simple to understand, its execution is demand-
ing in terms oI research skills. Although there are variations in approach, the Iollowing steps are
illustrative:
1. Select the product-market area to be segmented.
2. Decide which brands compete in the product-market.
3. Collect buyers perceptions about attributes Ior the available brands (and an ideal brand)
obtained Irom a sample oI people.
4. Analyze the data to Iorm one, two, or more composite attribute dimensions, each independ-
ent oI the other.
5. Prepare a map (two-dimensional X and Y grid) oI attributes on which are positioned con-
sumer perceptions oI competing brands.
6. Plot consumers with similar ideal preIerences to see iI subgroups (potential segments) will Iorm.
7. Evaluate how well the solution corresponds to the data that are analyzed.
8. Interpret the results as to market-target and product-positioning strategies.
An example oI a perception map is shown in Exhibit 4.12. Each Group (IV) contains people
Irom a survey sample with similar preIerences concerning expensiveness and quality Ior the
product category. The Brands (AE) are positioned using the preIerence data obtained Irom the
survey participants. Assuming you are product manager Ior Brand C, what does the inIormation
indicate concerning possible targeting? Group V is a logical market target and III may represent
a secondary market target. To appeal most eIIectively to Group V, we will probably need to
change somewhat Group V consumers price perceptions oI Brand C. OIIering a second brand
less expensive than C to appeal to Group IV is another possible action. OI course, it is necessary
to study the research results in much greater depth than this brieI examination oI Exhibit 4.12.
Our intent is to illustrate the method oI segmenting and show how the results might be used.

-
-

GROUP
GROUP
GROUP
V
GROUP
V
GROUP
Expensive
nexpensive
Low
quality
High
quality
Brand E
Brand B
Brand A
Brand C
Brand D
GROUP
GROUP
GROUP
V
GROUP
V
GROUP
Expensive
nexpensive
Low
quality
High
quality
Brand E
Brand B
Brand A
Brand C
Brand D

- -
-

-
Perceptual mapping, like many oI the research methods used Ior segment identiIication, is
expensive and represents a technical challenge. When used and interpreted properly, these
methods are useIul tools Ior analyzing product-market structure to identiIy possible market
targets and positioning concepts. OI course, there are many issues to be considered in speciIic
applications such as choosing the attributes, identiIying relevant products and brands, selecting
the sample, and evaluating the strength oI results.
-
A combination oI Iactors may help a company utilize Iiner segmentation strategies. Technology
may be available to produce customized product oIIerings. Eurthermore, highly sophisticated
databases Ior accessing buyers can be used, and buyers escalating preIerences Ior unique
products encourage consideration oI increasingly smaller segments. In some situations, an
individual buyer may comprise a market segment. Thus, an important segmentation issue is
deciding how small segments should be.
We consider the logic oI Iiner segments Iollowed by a discussion oI the available Iiner
segmentation strategies.
-
Several Iactors working together point to the beneIits oI considering very small segmentsin some
cases, segments oI one. These include (1) the capabilities oI companies to oIIer cost-eIIective,
customized oIIerings; (2) the desires oI buyers Ior highly customized products; and (3) the organi-
zational advantages oI close customer relationships.
- - OIIering customized products may be Ieasible because oI extensive
inIormation Ilow and comprehensive databases, computerized manuIacturing systems, and inte-
grated value chains.
34
At the center oI these capabilities to provide buyers with customized oIIerings
is inIormation technology. Database knowledge, computer-aided product design and manuIacturing,
and distribution technology (e.g., just-in-time inventory) oIIer promising opportunities Ior serving
the needs and preIerences oI very small market segments. This technology combined with the
Internet has led to the emergence oI sliver companies or micromultinationalssmall, Ilexible
organizations selling highly specialized products across the world.
- - - The requirements oI an increasingly diverse customer base Ior
many products are apparent. Buyers seek uniqueness and companies such as Lutron Electronics
try to respond to unique preIerences. Global competitors seek to oIIer more attractive value in
their goods and services.
- - -- Companies recognize the beneIits oI close relationships
with their customers. By identiIying customer value opportunities and developing cost-eIIective
customized oIIerings, relationships can be proIitable and eIIective in creating competitive
barriers.
-
We examine three approaches Ior Iiner segmentation opportunities: microsegmentation, mass
customization, and variety seeking.
35
- This Iorm oI segmentation seeks to identiIy narrowly deIined segments
using one or more oI the previously discussed segmentation variables (Exhibit 4.8). It diIIers Irom
more aggregate segment Iormation in that microsegmentation results in a large number oI very
small segments. Each segment oI interest to the organization receives a marketing mix designed
to meet the value requirements oI the segment.
-- - Providing customized products at prices not much higher than
mass-produced items is Ieasible using mass customization concepts and methods. Achieving

- -
-

-
mass customization objectives is possible through computer-aided design and manuIacturing
soItware, Ilexible manuIacturing techniques, and Ilexible supply systems.
There are two Iorms oI mass customization. One employs standardized components but
conIiguring the components to achieve customized product oIIerings.
36
Eor example, using
standardized paint components, retail stores are able to create customized color shades by
mixing the components. The other mass customization approach employs a Ilexible process.
Through eIIective system design, variety can be created at very low costs. Eor example, Casios
customization approach enables the company to oIIer 5,000 diIIerent watches.
This product strategy is intended to oIIer buyers opportunities
to vary their choices in contrast to making unique choices.
37
The logic is that buyers who are
oIIered alternatives may increase their total purchases oI a brand. Mass customization methods
also enable companies to oIIer an extensive variety at relatively low prices, thus gaining the
advantages oI customized and variety oIIerings.
--- While the beneIits oI customization are apparent, there are
several issues that need to be examined when considering Iiner segmentation strategies:
38
1. How much variety should be oIIered to buyers? What attributes are important in buyers
choices and to what extent do they need to be varied? Boeing is considering this issue Ior its
customized aircraIt designs.
2. Will too much variety have negative eIIects on buyers? Is it possible that buyers will become
conIused and Irustrated when oIIered too many choices?
3. Is it possible to increase buyers desire Ior variety, creating a competitive advantage?
4. What processes should be used to learn about customer preIerences? This may entail indirect
methods (e.g., database analysis) or involving buyers in the process.
High variety strategies, properly conceived and executed, oIIer powerIul opportunities Ior
competitive advantage by providing superior value to customers. As highlighted by the above
issues, pursuing these Iiner segmentation strategies involves major decisions including which
strategy to pursue and how to implement the strategy. Important in deciding how Iine the
segmentation should be is estimating the value and cost trade-oIIs oI the relevant alternatives.

We have considered several approaches to market segmentation, ranging Irom Iorming segments
via experience and judgment to Iiner segmentation strategies. We now discuss deciding how to
segment the market, and strategic analysis oI the segments that have been identiIied.

The choice oI a segmentation method depends on such Iactors as the maturity oI market, the
competitive structure, and the organizations experience in the market. The more comprehensive
the segmentation process, the higher the costs oI segment identiIication will be, reaching the
highest level when Iield research studies are involved and Iiner segmentation strategies are
considered. It is important to maximize the available knowledge about the product-market. An
essential Iirst step in segmentation is analyzing the existing customer base to identiIy groups oI
buyers with diIIerent response behavior (e.g., Irequent purchase versus occasional purchase).
Developing a view oI how to segment the market by managers may be helpIul. In some instances
this inIormation will provide a suIIicient basis Ior segment Iormation. II not, experience and
existing inIormation are oIten helpIul in guiding the design oI customer research studies.
The Iive segmentation criteria discussed earlier help to evaluate potential segments. Deciding
iI the criteria are satisIied rests with management aIter examining response diIIerences among
the segments. The segmentation plan should satisIy the responsiveness criterion plus the other

- -
-

-
criteria (end users are identiIiable, they are accessible via marketing program, the segment|s| is
economically viable, and the segment is stable over time). The latter criterion may be less oI an
issue with mass customization since changes can be accommodated.
It is useIul to consider the trade-oII between the costs oI developing a better segmentation
scheme and the beneIits gained. Eor example, instead oI one variable being used to segment, a com-
bination oI two or three variables might be used. The costs oI a more insightIul segmentation scheme
include the analysis time and the complexity oI strategy development. The potential beneIits include
better determination oI response diIIerences, which enable the design oI more eIIective marketing
mix strategies. Importantly, segmentation should not be viewed as static, but as dynamicas Dell
learned more about the PC market, the segmentation approach evolved and developed.
The competitive advantage gained by Iinding (or developing) a new market segment can be
very important. Segment strategies are used by a wide range oI small companies with excellent per-
Iormance records. Consider, Ior example, segmenting the market Ior paper. One way to segment
is according to the use situation. The uses oI paper include newspapers, magazines, books,
announcements, letters, and other applications. Crane & Company, a Iirm competing in this
market, is the primary supplier oI paper Ior printing money.
39
This segment oI the high-quality
paper market consists oI a single customerthe U.S. Treasury. The companys commitment to
making quality products has sustained its competitive advantage in this segment since 1879. In the
early 1990s Crane introduced a new currency paper, designed to identiIy counterIeit bills by
placing a polyester thread in the paper. The other three-quarters oI Cranes sales includes Iine
writing papers and high-quality paper products.
-- -
Each market segment oI interest needs to be studied to determine its potential attractiveness
as a market target. The major areas oI analysis include customers, competitors, positioning
strategy, and Iinancial and market attractiveness.
- -- When Iorming segments, it is useIul to Iind out as much as possible
about the customers in each segment. Variables such as those used in dividing product-markets
into segments are also helpIul in describing the people in the same segments. The discussion oI
customer proIiles in Chapter 3 includes inIormation needed to proIile a product-market. Similar
inIormation is needed Ior the segment proIile, although the segment-level analysis is more
comprehensive than the product-market proIile.
The objective is to Iind descriptive characteristics that are highly correlated to the variables
used to Iorm the segments. Standardized inIormation services are available Ior some product-
markets including Ioods, health and beauty aids, and pharmaceuticals. Large markets involving
many competitors make it proIitable Ior research Iirms to collect and analyze data that are useIul
to the Iirms serving the market.
InIormation Resources Inc., a Chicago-based research supplier, has combined computerized
inIormation processing with customer research methods to generate inIormation Ior market
segmentation. Its Behavior Scan system electronically tracks total grocery store sales and indi-
vidual household purchase behavior through complete universal product code (UPC) scanner
coverage. People in the 2,500 household samples in each oI several metropolitan markets
covered by the service carry special identiIication cards and are individually tracked via scanner
in grocery stores and drugstores. IRI publishes 1he Marketing Fact Book, which has consumer
purchase data on all product categories. An example is shown in Exhibit 4.13. The database can
be used Ior Iollow-up, in-depth analyses to meet the needs oI speciIic companies.
An essential part oI customer analysis is determining how well the buyers in the segment are
satisIied. We know that customer satisIaction is measured by comparing customer expectations
about the product and supporting services with the performance oI the product and supporting
services.
40
Some researchers indicate the prior experience may be a better basis oI comparison
than expectations.
41

- -
-

-
Customer satisIaction depends on the perceived perIormance oI a product and supporting
services and the standards that customers use to evaluate that perIormance.
42
The customers
standards complicate the relationship between organizational product speciIications (e.g., product
attribute tolerances) and satisIaction. Standards may involve something other than prepurchase
expectations such as the perceived perIormance oI competing products. Importantly, the
standards are likely to vary across market segments.
-- Market segment analysis considers the set oI key competitors
currently active in the market in which the segment is located plus any potential segment entrants.
In complex market structures, mapping the competitive arena requires detailed analysis. The com-
peting Iirms are described and evaluated to highlight their strengths and weaknesses. InIormation
useIul in the competitor analysis includes business scope and objectives; market position; market
target(s) and customer base; positioning strategy; Iinancial, technical, and operating strengths;
management experience and capabilities; and special competitive advantages (e.g., patents). It is
also important to anticipate the Iuture strategies oI key competitors.
Value-chain analysis can be used to examine competitive advantage at the segment level. A
complete assessment oI the nature and intensity oI competition in the segment is important in

--

--
Source: Erom 1he
Marketing Fact Book
(Chicago: InIormation
Resources, 1986), 10.
Reprinted with permission.
-
-- - - -- -
--
- - -
-- - -
- - - --
- - - - -
- - - -
- -- - -
- -
- -
Age of female head
vory Liquid share
Percent of households buying with segment
Loyalty to vory among buyers
<30 3039 4049 50+
18.6%
21.3%
25.4%
28.7%
21.6% 24.9%
31.2%
37.4%
48.5%
47.8%
49.7% 48.2%

- -
-

-
determining whether to enter (or exit Irom) the segment and how to compete in the segment.
Examining the Iive Iorces suggested by Porter (Chapter 3) is useIul to determine segment
attractiveness.
- -- We consider positioning strategy in Chapter 6. Segment analysis
involves some preliminary choices about positioning strategy. One objective oI segment analysis
is to obtain guidelines Ior developing a positioning strategy. Elexibility exists in selecting how to
position the Iirm (or brand) with its customers and against its competition in a segment. Positioning
analysis shows how to combine product, distribution, pricing, and promotion strategies to Iavor-
ably position the brand with buyers in the segment. InIormation Irom positioning maps like Exhibit
4.12 is useIul in guiding positioning strategy. The positioning strategy should meet the needs and
requirements oI the targeted buyers at a cost that yields a proIitable margin Ior the organization.
- -- The Iinancial and market attractiveness oI each
segment needs to be evaluated. Included are speciIic estimates oI revenue, cost, and segment
proIit contribution over the planning horizon. Market attractiveness can be measured by market
growth rate projections and attractiveness assessments made by management.
Einancial analysis obtains sales, cost, and proIit contribution estimates Ior each segment oI
interest. Since accurate Iorecasting is diIIicult iI the projections are too Iar into the Iuture, detailed
projections typically extend two to Iive years ahead. Both the segments competitive position eval-
uation and the Iinancial Iorecasts are used in comparing segments. In all instances the risks and
returns associated with serving a particular segment need to be considered. Elows oI revenues and
costs can be weighted to take into account risks and the time value oI revenues and expenditures.
It should be recognized that as inIormation availability grows, Ior example, through the data
warehouses associated with CRM systems, the evaluation oI segment attractiveness also has the
potential Ior identiIying unattractive market segments and even individual customers, which
may be candidates Ior deletion.
One important aspect oI evaluating segment
attractiveness is how well the segments match company capabilities and the ability to implement
marketing strategies around those segments.
43
There are many organizational barriers to the
eIIective use oI segmentation strategies. New segment targets that do not Iit into conventional
inIormation reporting, planning processes, and budget systems in the company may be ignored
or not adequately resourced. Innovative models oI customer segments and market opportunities
may be rejected by managers or the culture oI the organization.
There are dangers that managers may preIer to retain traditional views oI the market and struc-
ture inIormation in that way, or that segmentation strategy will be driven by existing organizational
structures and competitive norms.
44
It is important to be realistic in balancing the attractiveness oI
segments against the ability oI the organization to implement appropriate marketing strategies to
take advantage oI the opportunities identiIied. Building eIIective marketing strategy around market
segmentation mandates an emphasis on actionability as well as technique and analysis.
45
Many oI the issues we consider in later chapters impact on the operational capabilities oI a
company to implement segmentation strategies: Ior example, strength in cross-Iunctional
relationships may be a prerequisite to deliver value to new segments; the ability to work with
partners may be needed to develop new products and services to build a strong position in a key
market segment. The existence oI these capabilities, or the ability to develop them, should be
considered in making segmentation decisions.
-- - An illustrative market segment analysis is shown in
Exhibit 4.14. A two-year period is used Ior estimating sales, costs, contribution margin, and
market share. Depending on the Iorecasting diIIiculty, estimates Ior a longer time period can be
used. When appropriate, estimates can be expressed as present values oI Iuture revenues and
costs. Business strength in Exhibit 4.13 reIers to the present position oI the Iirm relative to the
competition in the segment. Alternatively, it can be expressed as the present position and an

- -
-

-
estimated Iuture position, based upon plans Ior increasing business strength. Attractiveness is
typically evaluated Ior some Iuture time period. In the illustration a Iive-year projection is used.
The example shows how segment opportunities are ranked according to their overall
attractiveness. The analysis can be expanded to include additional inIormation such as proIiles oI
key competitors. The rankings are admittedly subjective since decision makers will vary in their
weighing oI estimated Iinancial position, business strength, and segment attractiveness. Place
yourselI in the role oI a manager evaluating the segments. Using the inIormation in Exhibit 4.14,
rank segments X, Y, and Z as to their overall importance as market targets. Unless management
is ready to allocate a major portion oI resources to segment Z to build business strength, it is a
candidate Ior the last-place position. Yet Z has some attractive characteristics. The segment has
the most Iavorable market attractiveness oI the three, and its estimated total sales are nearly equal
to Ys Ior the next two years. The big problem with Z is its business strength. The key question
is whether Zs market share can be increased. II not, X looks like a good prospect Ior top rating,
Iollowed by Y, and by Z. OI course, management may decide to go aIter all three segments.

--
--
- -
-
--

-
- --
-
--- -
--
*Eor a two-year period.
Percent oI total sales in the segment.
Based on a Iive-year projection.
Market segmentation is oIten a requirement Ior competing in

many product-markets because buyers diIIer in their
preIerences Ior products and services. Einding out what these
preIerences are and grouping buyers with similar needs is an
essential part oI business and marketing strategy development.
Market segmentation is an opportunity Ior a small Iirm to Iocus
on buyers where its competitive advantages are most Iavorable.
Large Iirms seeking to establish or protect a dominant market
position can oIten do so by targeting multiple segments.
Segmentation oI a product-market requires that response
diIIerences exist between segments, and that the segments are
identiIiable and stable over time. Also, the beneIits oI seg-
mentation should exceed the costs. Segmenting a market
involves identiIying the basis oI segmentation, Iorming seg-
ments, describing each segment, and analyzing and evaluating
the segment(s) oI interest. The variables useIul as bases Ior
Iorming and describing segments include the characteristics oI
people and organizations, use situation, buyers needs and
preIerences, and purchase behavior.
Segments can be Iormed by identiIying customer groups
using the characteristics oI people or organizations. The groups
are analyzed to determine iI the response proIiles are diIIerent
across the candidate segments. Alternatively, customer response
inIormation can be used to Iorm customer groupings and then
the descriptive characteristics oI the groups analyzed to Iind out
iI segments can be identiIied. Several examples oI segment
Iormation are discussed to illustrate the methods that are
available Ior this purpose.
Einer segmenting strategies present attractive options Ior
moving toward small segments and responding to buyers
unique value requirements. Technology, buyer diversity, and
relationship opportunities are the drivers oI Iiner segmentation
strategies. These strategies include microsegmentation, mass
customization, and variety seeking. While potentially attrac-
tive, Iiner segmentation strategies are more complex than other
Iorms oI segmentation and require comprehensive beneIit and
cost evaluations.
Segment analysis and evaluation consider the strengths and
limitations oI each segment as a potential market target Ior the
organization. Segment analysis includes customer descriptions
and satisIaction analysis, evaluating existing and potential
competitors and competitive advantage, marketing program

- -
-

-
positioning analysis, and Iinancial and market attractiveness.
Segment analysis is important in evaluating customer satisIac-
tion, Iinding new-product opportunities, selecting market
targets, and designing positioning strategies. Nonetheless, it is
also important to understand the organizational barriers to
implementing segmentation strategy which may exist in a
company, and to evaluate the Iit oI segmentation with com-
pany capabilities. EIIectively implemented, a good segmenta-
tion strategy creates an important competitive edge Ior an
organization.
-
A. Review the material in the Strategy Eeature, Segmentation
and Positioning Challenges Ior Banana Republic.
Examine the product ranges at Gaps three branded store
chains (The Gap, Banana Republic, and Old Navy) by
visiting the Gap Inc. Web page (www.gapinc.com) and the
pages Ior each type oI store. Consider whether the
company has succeeded in positioning its three brands in
diIIerent segments and the challenges in maintaining this
separation.
B. Review the BMW MINI case in the Global Eeature, The
BMW MINI. Do you believe that BMW has built a robust
niche or segment strategy, or is the car a Iashion item with
limited lasting appeal to car buyers, like other retro
attempts?
-- ---
1. Competing in the uniIied European market raises some
interesting market segment questions. Discuss the seg-
mentation issues regarding this multiple-country market.
2. Why are there marketing strategy advantages in using
demographic characteristics to break out product-markets
into segments?
3. The real test oI a segment Iormation scheme occurs aIter it
has been tried and the results evaluated. Are there ways to
evaluate alternative segmenting schemes without actually
trying them?
4. Suggest ways oI obtaining the inIormation needed to
conduct a market segment analysis.
5. Why may it become necessary Ior companies to change
their market segmentation identiIication over time?
6. Is considering segments oI one buyer a reality or a myth?
Discuss.
7. Is it necessary to use a unique positioning strategy Ior each
market segment targeted by an organization?
8. Under what circumstances may it not be possible to break
up a product-market into segments? What are the dangers
oI using an incorrect segment Iormation scheme?
9. What are some oI the advantages in using mass cus-
tomization technology to satisIy the needs oI buyers?
10. Does the use oI mass customization eliminate the need to
segment a market?
-
1. Adapted Irom case material compiled by Neil A. Morgan
and Garry Veale, originally published in Nigel E. Piercy,
Market-Led Strategic Change. 1ransforming the Process
of Going to Market (OxIord: Butterworth-Heinemann,
1997), 303311.
2. Anthony Bianco, The Vanishing Mass Market,
BusinessWeek, July 12, 2004, 6268.
3. Don Peppers and Martha Rogers, Enterprise One-to-One
(New York: Doubleday, 1997).
4. Don Shultz and Heidi Schultz, Individual Matters,
Marketing Business, March 2004, 1215.
5. Peter R. Dickson and James L. Ginter, Market Segment-
ation, Product DiIIerentiation, and Marketing Strategy,
-
A. Explore several oI the Iollowing Web sites:
www.adquest.com www.americanet.com
www.autosite.com www.mlm2000.com
www.sidewalk.com www.monster.com
www.realtor.com
How does the inIormation Irom these sites aIIect our
traditional concept oI market segmentation? How is the
segmentation process altered by such Internet providers?
B. Evaluate the Iollowing site Ior additional ideas and
material concerned with market segmentation and the types
oI support that can be provided Ior companies:
www.marketsegmentation.co.uk

- -
-

-
6. W. Chan Kim and Renee Mauborgne, Einding Rooms Ior
Manoeuvre, Financial 1imes, May 27, 1999.
7. James Samuelson, Elying High, Forbes, August 2, 1996,
8485.
8. Nikki Tait, Mixed Emotions as Olds Guard Bows Out,
Financial 1imes, December 20, 2000, 27.
9. Leonard L. Berry, Relationship Marketing oI Services
Growing Interest, Emerging Perspectives, Journal of the
Academy of Marketing Science, Eall 1995, 238240.
10. Henry Assael, Consumer Behavior and Marketing Action,
2nd ed. (Boston: PWS-Kent Publishing, 1984), 225.
11. Jerry Elint, The Magazine Eactory, Forbes, May 22,
1995, 160162.
12. Anthony Bianco, The Vanishing Mass Market.
13. Jay L. Laughlin and Charles R. Taylor, An Approach to
Industrial Market Segmentation, Industrial Marketing
Management 20 (1991), 127136.
14. Ronald HenkoII, Boeings Big Problem, Fortune,
January 12, 1998, 9699, 102103.
15. Daniel S. Levine, Justice Served, Sales & Marketing
Management, May 1995, 5361.
16. Michael Malone, Pennsylvania Guys Mass Customize,
Forbes ASAP, April 10, 1995, 8285.
17. Nicholas Bray, Credit Lyonnaise Targets Wealthy Clients,
1he Wall Street Journal, July 24, 1994.
18. A. H. Maslow, Theory oI Human Motivation, Psychology
Review, July 1943, 4345.
19. Assael, Consumer Behavior and Marketing Action, 650.
20. Bernard Berelson and Gary A. Steiner, Human Behavior.
An Inventory of Scientific Findings (New York: Harcourt
Brace Jovanovich, 1964), 88.
21. Christopher Eield, Loyalty Cards Are Unlikely to Carry
All the Answers, Financial 1imes, May 3, 2000, IV;
Marian Edwards, Your Wish Is on My Database,
Financial 1imes, Eebruary 28, 2000, 20.
22. Eric N. Berkowitz, Roger A. Kerin, Steven W. Hartley, and
William Rudelius, Marketing, 5th ed. (Chicago: Richard D.
Irwin, 1997), 155156.
23. Louise OBrien and Charles Jones, Do Rewards Really
Create Loyalty? Harvard Business Review, MayJune
1995, 78.
24. Anthony Bianco, The Vanishing Mass Market.
25. Miriam Jordan, In India, Luxury Is within Reach oI
Many, 1he Wall Street Journal, October 17, 1995, A15.
26. Malcolm McDonald, A Slice oI the Action, Marketing
Business, July/August 1998, 47.
27. Dickson and Ginter, Market Segmentation, 4.
28. George S. Day, Market Driven Strategy (New York: The
Eree Press), 1990, 101104.
29. Nancy Rotenier, Antistatus Backpacks, $450 a Copy,
Forbes, June 19, 1995, 118120.
30. Allanna Sullivan, Mobil Bets Drivers Pick Cappuccino
over Low Prices, 1he Wall Street Journal, January 30,
1995, B1 and B4.
31. Marketing News, July 20, 1998.
32. V. Kasturi Ranga, Rowland T. Moriarity, and Gordon S.
Swartz, Segmenting Customers in Mature Industrial
Markets, Journal of Marketing, October 1992, 7282.
33. Financial 1imes, Understanding Customer Relationship
Management, London. Financial 1imes, Spring 2000.
34. Ali Kara and Erdener Kaynak, Markets oI a Single
Customer: Exploiting Conceptual Developments in Market
Segmentation, European Journal of Marketing, no. 11/12,
1997, 873895.
35. Barbara E. Kahn, Dynamic Relationships with Customers:
High-Variety Strategies, Journal of the Academy of
Marketing Science, Winter 1998, 4553.
36. Kahn, Dynamic Relationships; Joseph B. Pine II, Mass
Customi:ation. 1he New Frontier in Business Competition
(Boston: Harvard Business School Press, 1993).
37. Kahn, Dynamic Relationships.
38. Kahn, Dynamic Relationships.
39. Linda Killian, Cranes Progress, Forbes, August 19, 1991,
44.
40. A. Parasuraman, Valarie A. Zeithaml, and Leonard L.
Berry, A Conceptual Model oI Service Quality and Its
Implications Ior Euture Research, Journal of Marketing,
Eall 1985, 4150.
41. Robert B. WoodruII, Ernest R. Cadotte, and Roger L.
Jenkins, Modeling Consumer SatisIaction Processes
Using Experienced-Based Norms, Journal of Marketing
Research, August 1983, 296304.
42. The Iollowing discussion oI customer satisIaction is based
on discussions with Robert B. WoodruII, The University
oI Tennessee, Knoxville.
43. Nigel E. Piercy and Neil A. Morgan, Strategic and
Operational Segmentation, Journal of Strategic Marketing
1, no. 2, 1993, 123140.
44. Noel Capon and James M. Hulbert, Marketing Management
in the 21st Century (Upper Saddle River, NJ: Prentice-Hall,
2001), 185186.
45. D. Young, The Politics behind Market Segmentation,
Marketing News, October 21, 1996, 17.

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Understanding markets and competition is critical to achieving market orientation. Every

discussion oI market orientation emphasizes the ability oI the Iirm to learn about customers,
competitors, and channel members in order to continually sense and act on events and trends
in present and prospective markets.
1
Market-driven companies display superior skills
in gathering, interpreting, and using inIormation to guide their business and marketing
strategies.
Increasingly, learning about markets is more about interpreting inIormation rather than
Iinding it. With resources like online Internet searches, in-company inIormation and intelligence
systems, marketing research agency reports and surveys, and burgeoning technical literature
in most Iields, executives may be in danger oI being overwhelmed by inIormation. Research
suggests that how accurate executives are about the competitive environment may be less
important Ior strategy and the organizational changes that Iollow strategy than the way they
interpret inIormation about their environments. This suggests that investments in enhancing and
shaping those interpretations may create a more durable competitive advantage than investments
in obtaining more inIormation.
2
The imperative in market-led strategy is the quest Ior superior
interpretation and market understanding.
Consider the case oI the personal computer market leader Dell Inc. Erom the outset, Dells
business model exploited the advantages oI selling direct to customers and building products
to order instead oI estimating demand and building to stock. The direct business model
was ideally placed to use the Internet to Iull advantage. However, underpinning the success oI
Dells direct business model are processes oI learning and responsiveness to customers,
utilizing the companys technology and the Internet, but also the human processes oI listening
to customers and learning Irom them. Dell and suppliers share inIormation and plans Ireely
external suppliers are treated as iI they were internal to Dells organization. Internet and
direct selling relationships with customers also provide Dell with unique insights into their
needs, preIerences, and changing requirements. Sales account managers work with customers to
develop plans to meet Iuture IT needs. Dell works with customers to save them money by
standardizing their global PC purchasing (providing the company with inIormation about its own
global PC purchasing patterns). Major customers have their own Dell Premier Pages on
the Internet, providing an interactive product catalog, but also access to Dell support tools and
technical resources. Dells market sensing and learning capabilities have created a new compe-
titive advantage, which is uniquely diIIicult Ior competitors to equal.
3

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Capabilities for Continuous Learning about Markets
A theme linking companies in many sectors is their capabilities in superior market sensing
and their abilities to develop competitive advantage Irom their learning processes. The Cayenne
sports utility vehicle Irom Porsche in Germany has been highly successIul with U.S. consumers,
liIting Porsches sales by 15 percent and proIits by 22 percent in 2004. The Cayenne product
concept was based on painstaking intelligence gathering to establish that the consumer would
pay a premium Ior the speed, Ior which Porsche is Iamous, in the shape oI a sports-utility
vehicle. Similarly, the British retailer Tesco is highly skilled in mining data Irom its loyalty
card scheme, supplemented by customer Ieedback Irom telephone and written surveys, to iden-
tiIy and exploit new market opportunities. Eor example, in 2003 Tesco detected early signs that
Iood consumers wanted more nutritional inIormation, allowing a swiIt marketing response with
a new labeling system providing shoppers with more detailed inIormation on the Iat, salt, and
sugar content oI hundreds oI products ahead oI the competition.
4
The challenge is increasingly one oI knowledge management to build companywide under-
standing oI the marketplace and responsiveness, rather than simply collecting inIormation.
In this chapter we examine how continuous learning about markets improves competitive
advantage. Eirst, we look at the relationship between market orientation and organizational learn-
ing. Next, we discuss several sources oI inIormation. Then we overview inIormation methods and
capabilities, including marketing research, standardized inIormation services, management inIor-
mation systems, database systems, and decision support systems. Einally, several important issues
are highlighted concerning the collection and use oI inIormation in the organization and the
growing importance oI knowledge management to eIIective market-driven strategy.

The ability to learn Irom customers underpins the management decision making at companies
like Autodeskwhich holds roughly 80 percent oI the world market Ior PC computer-aided
design (CAD) soItware. Autodesks successIul spin-oII Buzzsaw.com originated with discus-
sions with customers about how they used the companys soItware in designing buildings and
what they wanted in new soItware. The surprise was that customer priorities were not CAD
sophistication but managing complex collaborative construction projects. The challenge was to
create a better way Ior dozens oI participants in a construction project to share drawings elec-
tronically and manage projects Irom beginning to end. AIter extensive research into how the var-
ious participants in a construction project worked, the solution was a well-designed Internet
work space, with online tools Ior customers to manage their own work space. Within a year oI
the launch oI Buzzsaw.com there were around 150,000 users oI the Internet work space, com-
municating and sharing drawings across the world.
5
Companies like Dell, Tesco, Porsche, and Autodesk illustrate the close relationship between
a market-oriented culture and organizational learning. We review the characteristics oI market
orientation and look at the role oI organizational learning in creating superior customer value.
Next, the process oI learning about markets is described, Iollowed by a discussion oI how learn-
ing helps to create superior customer value. Einally, we examine and illustrate the available
methods oI obtaining inIormation.

Market orientation is both a culture and also a process committed to achieving superior customer
value (Chapter 1). The process consists oI inIormation acquisition, broad inIormation dissemi-
nation, and shared diagnosis and coordinated action.
6
Market orientation provides the Ioundation
Ior organizational learning, although some cautions need to be considered in achieving the
potential oI learning:
7
1. Market intelligence may be so Iocused that opportunities or threats outside the current
product-market are ignored.

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2. Prevailing views oI market orientation consider current customers and competitors, whereas
other learning sources including suppliers, noncompeting businesses, consultants, and
government may provide important inIormation.
The market orientation perspective needs to extend beyond traditional market boundaries to
include all oI the relevant sources oI knowledge and ideas. A key issue is deciding how broad
this orientation should be. The section on learning about markets oIIers several guidelines
concerning this issue.
-- Our understanding oI the learning
organization continues to unIold as the processes used by successIul organizations are studied
and interpreted. These organizations share several common characteristics:
Learning organizations are guided by a shared vision that Iocuses the energies oI organizational
members on creating superior value Ior customers. These organizations continuously acquire,
process, and disseminate throughout the organization knowledge about markets, products,
technologies, and business processes. They do not hesitate to question long held assumptions and
belieIs regarding their business. Their knowledge is based on experience, experimentation, and
inIormation Irom customers, suppliers, competitors, and other sources. Through complex
communication, coordination, and conIlict resolution processes, these organizations reach a shared
interpretation oI the inIormation, which enables them to act swiItly and decisively to exploit
opportunities and deIuse problems. Learning organizations are exceptional in their ability to
anticipate and act on opportunities in turbulent and Iragmenting markets.
8
Additional research promises to Iurther expand our knowledge about these complex organiza-
tional processes.
The advantage gained Irom learning is that
the organization is able to quickly and eIIectively respond to opportunities and threats, and to
satisIy customers needs with new products and improved services.
9
Learning reduces the time
necessary to accomplish projects such as new product development. Eor example, Manco is a
distributor oI duct tape, mailer envelopes, shelI liners, and related products. AIter listening to a
customer, Manco developed its nonadhesive shelI liner, which is similar to rubber mesh and can
be easily cut and Iitted in and out oI shelves. In 1997 the product had sales oI $30 million,
accounting Ior nearly one-IiIth oI Mancos annual sales.
10
Superior learning capabilities and
speed oI learning create a new competitive advantage, which may be extremely diIIicult Ior
competitors to imitate or equal.
-
Learning about markets requires developing processes throughout the organization Ior obtain-
ing, interpreting, and acting on inIormation Irom sensing activities. The learning processes oI
market-oriented companies include a sequence oI activities beginning with open-minded
inquiry.
11
In some cases, learning Irom the market may be a critical element oI rebuilding perIormance
by aligning company capabilities better with market characteristics. Consider the recovery
program under way at The Bombay Company which is described in the Strategy Eeature.
Specialty retailer Bombay saw a steady decline in its perIormance through the late 1990s. A
change oI management team and enhanced market Iocus has driven a recovery in the early
2000s. The basis oI this recovery has been extensive customer research and systematic manage-
ment response to the lessons learned.
One danger to be avoided is not exploring new views about markets
and competition, because they are not taken seriously. Searching Ior inIormation is oI little value
iI management already has a Iixed view on which new inIormation will have no inIluence
whatever it indicates.

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As discussed in Chapter 1, the members oI market-oriented organizations recognize the
importance oI market sensing and coordinated interpretation oI market intelligence to guide
strategies. Nonetheless, not all companies see the value in continuous learning about markets.
Managers who are not part oI market-driven cultures may be unwilling to invest in inIormation
to improve their decision-making results. The same companies oIten encounter problems
because oI Iaulty or incomplete market sensing.
A Iramework oI the type shown in Exhibit 5.1 can be used as a participative, cross-Iunctional
structure Ior market sensing. This challenges managers to identiIy the most signiIicant events
impacting their business and its markets over a three- to Iive-year horizon, and to position
the events in the matrix according to estimated probability and the eIIect oI the event on the
business. Importantly, by including external views, such as suppliers, technology experts, dis-
tributors, and customers, it is possible to build a view oI the world that breaks Iree oI traditional
company belieIs, challenges management assumptions, and identiIies the highest priorities Ior
inIormation collection and use in making strategic decisions.
12
Developing processes Ior continuous learning allows Iirms to capture more inIormation about
customers, suppliers, and competitors. This capability provides the potential Ior growth based on
inIormed decisions and a more complete mapping and analysis oI the competitive environment.
Also, Iirms can respond much more quickly to competitors actions and take advantage oI situ-
ations in the marketplace. Open-minded inquiry also helps to anticipate value migration threats,
which are Irequently initiated by competitors Irom outside the traditional market or industry.
13
Eor example, monitoring potential competitors such as electronic imaging companies by
conventional Iilm producers is essential in designing strategies Ior coping with the competitive
threats Irom electronic technology.
- This step encourages the widespread distribution
oI inIormation in the organization. The objective is to leverage the value oI the inIormation

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Utopia
Field of
Dreams
Things to
Watch
Danger
Future
Risks
1
3
4
5
6
7
2
High Medium Low
Effect of the
Event on the
Company*
* 1 = Disaster, 2 = Very bad, 3 = Bad, 4 = Neutral, 5 = Good, 6 = Very good, 7 = deal.
Probability of the Event Occurring
by cutting across business Iunctions to share inIormation on customers, value-chain channels,
suppliers, and competitors. Traditional inIormation processing in organizations allocates rele-
vant inIormation to each business Iunction, and inIormation possession becomes a source oI
internal power. Synergistic distribution works to remove Iunctional hurdles and practices. Cross-
Iunctional teams are useIul to encourage transIer oI inIormation across Iunctions.
The explosion in inIormation connectivity (access) resulting Irom electronic communication
Iacilitates widespread inIormation distribution.
14
Unbundling inIormation Irom its physical
carrier such as salespeople will provide access as well as speed in organizations. This will help
cross-Iunctional teams and alter hierarchical structures and proprietary inIormation systems.
Expanded inIormation connectivity promises to encourage cooperation among Iunctions, reduce
the power oI inIormation possession, and enhance organizational learning.
- The mental model oI the market guides managers
interpretation oI inIormation. The intent is to reach a shared vision about the market and about
the impact that new inIormation has on this vision. The market-oriented culture encourages
market sensing. But the process requires more than gathering and studying inIormation. This
interpretation is Iacilitated by the mental models oI managers, which contain decision rules Ior
deciding how to act on the inIormation in light oI anticipated outcomes.
15
The model reIlects
the executives vision about the Iorces inIluencing the market and likely Iuture directions oI
change. Learning occurs as members oI the organization evaluate the results oI their decisions
based on their vision at the time the decisions were made. The market sensing Iramework in
Exhibit 5.1 may support addressing these issues.
Deciding to take the high risk oI cutting-edge ventures requires managers to reach a shared
vision about uncertain Iuture market opportunities. Eor example, the British supermarket company
Tesco operates an outstanding and successIul Internet grocery channel alongside its store network.
The planning Ior this venture started in the mid-1990s, long beIore the much-publicized dot-com
revolution was under way, leading to a national rollout in 2000, at a time when other Internet

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ventures were crashing in ruins. The Iive-year gestation period involved close study oI what con-
sumers wanted Irom Internet grocery shopping and a developing understanding that shoppers
wanted the Internet channel to provide a complement store-based shopping, not a substitute. The
management team has sustained its vision that an Internet channel would become a proIitable part
oI the core business over a seven-year period beIore reaching operating proIitability.
-- This part in the learning process emphasizes the importance oI keep-
ing and gaining access to prior learning. The objective is not to lose valuable inIormation that
can continue to be used. Doing this involves integrating the inIormation into the organizational
memory, and not losing inIormation when people leave the organization. Hewlett-Packards
(H-P) vision about computer printer technology was that inkjet technology would replace dot
matrix printers, providing an excellent growth opportunity. H-P beat Japanese companies to the
market even though Canon had the technology. Hewlett-Packards inkjet product design team
continued to learn how to improve the product and develop strategies based on monitoring
competitors actions. Eor example, prices were lowered when the team sensed that Japanese
competitors were about to enter the market.
Urban OutIitters Inc. is a successIul specialty retailer that is guided by managements
shared and constantly renewed vision about the market based on an eIIective learning process.
The company targets style-conscious young adults. Sales in 2000 ran at $210 million, but this
has grown at an average annual rate oI 21 percent, reaching $548 million in 2004. The
retailers products include Iashion apparel, accessories, household items, and giIts. Urban
OutIitters unique value proposition is the shopping environment it provides to the 1830
targeted age group. To stay ahead oI its unpredictable buyers with whimsical tastes, manage-
ment employs over 75 Iashion spies who sense what is happening in Iashion in neighborhoods
in New York, CaliIornia, London, and Paris.
16
Salaries and expenses oI this market sensing
team total several million dollars annually. Market Ieedback guides new-product decisions
and signals when buyer interest is slowing down. Stores are located near colleges and places
where youths gather. Catalogs and the Web site reIlect this identity. Managements close
understanding oI the Iashion market has led to new retail concepts in its 50 Anthropologie
stores, designed to appeal to its buyers when they move to an older age group in the liIe cycle.
The target is women aged 30 to 45, Iocused on Iashion, career, and home. The Eree People
operation is the companys more general branded wholesaler oI casual clothes, sold through
department and specialty stores.
--
Deciding what inIormation is needed is the starting point in planning Ior and acquiring inIor-
mation. Because oI the costs oI acquiring, processing, and analyzing inIormation, the potential
beneIits oI needed inIormation need to be compared to costs. Normally, inIormation Ialls into
two categories: (1) inIormation regularly supplied Irom internal and external sources, and
(2) inIormation obtained as needed Ior a particular problem or situation. Examples oI the Iormer
are sales costs analyses, inIormation Irom 800 number calls, market share measurements, and
customer satisIaction surveys. InIormation Irom the latter category includes new-product
concept tests, brand preIerence studies, and studies oI advertising eIIectiveness.
Several types oI marketing inIormation are available. A description oI each type oI inIorma-
tion Iollows:
- - These studies consist oI customized inIormation collected
and analyzed Ior a particular research problem. A study oI customers reactions to a new-product
concept is an example. The inIormation may be obtained through Iield surveys, online responses,
and/or published sources.
- This inIormation is available Irom outside vendors
on a subscription or single-purchase basis. The services collect and analyze inIormation that is
sold to several customers such as prescription sales Ior drugs marketed to pharmaceutical Iirms.

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-- Computerized systems supply inIormation
Ior a variety oI purposes such as order processing, invoicing, customer analysis, and product
perIormance. The inIormation in these systems may include both internal and external data.
- -- This special Iorm oI MIS includes inIormation Irom internal and
external sources that is computerized and used Ior customer and product analyses, mailing lists,
identiIying sales prospects, and other marketing applications.
- -- These computerized systems provide decision-making assis-
tance to managers and staII. Their capabilities are more advanced than a MIS. American
Airlines revenue (pricing and yield) management system Ior aircraIt seat utilization includes
eIIective decision support techniques to assist analysts in obtaining maximum revenue Ior each
Ilight.
- - -- Designed to manage the
relationship with a customer more eIIectively, by integrating all needed inIormation sources and
systems to provide seamlessness at the point oI contact with the customer, CRM systems also
provide rich inIormation sources relating to customers actual purchase behavior. Erequently
associated are data warehouses, which are capable oI being mined Ior customer inIormation,
CRM systems are providing a Iormidable new type oI marketing inIormation. (See the Appendix
to Chapter 7.)
-- Companies are using competitor intelligence systems
to help monitor existing and potential competitors. Intelligence activities include searching
databases, conducting customer surveys, interviewing suppliers and other channel members,
Iorming strategic alliances with competitors, hiring competitors employees, and evaluating
competitors products.
The Iirms complete inIormation needs should be considered beIore deciding what types oI
inIormation to use. Most Iirms beneIit Irom a routine and complete evaluation oI their inIorma-
tion situation. Cooperation among departments can save the Iirm countless employee-hours and
dollars. Ear too oIten a department launches an expensive inIormation-gathering project only to
discover later that another department already had the type oI inIormation sought. Synergistic
inIormation distribution encourages sharing.
In the remainder oI the chapter, we examine the various methods oI acquiring and processing
inIormation Ior use in marketing decision making. The objective is to show how the various
inIormation capabilities assist decision makers in strategic and operating decisions. A good
marketing inIormation management strategy takes into account the interrelationship oI these
capabilities.
-
The starting point in obtaining marketing research inIormation is deIining the problem to be
studied, indicating speciIic objectives, and determining what inIormation is needed to help solve
the problem. Problem deIinition examples Ior a new candy product and the quality oI Iast-Iood
services are shown in Parts A and B oI Exhibit 5.2.
Marketing research inIormation is obtained Irom internal records, trade contacts, published
inIormation, surveys, and many other sources. An example oI a research study is shown in
Exhibit 5.3. It is a proposed test oI the eIIectiveness oI an advertising commercial. Marketing
research studies range in cost Irom less than $10,000 to over $100,000.
Marketing research is the systematic gathering, recording, processing, and analyzing oI
marketing data, whichwhen interpretedwill help the marketing executive to uncover oppor-
tunities and to reduce risks in decision making.
17
Strategies Ior obtaining marketing research
inIormation include collecting existing inIormation, using standardized research services, and
conducting special research studies.

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The internal inIormation system oI the Iirm aIIects the extent and ease oI the collection oI exist-
ing inIormation. The nature and scope oI the inIormation and the inIormation system network
will vary greatly Irom Iirm to Iirm and among industries. Many Iirms have extensive internal
inIormation systems, or at least the capability to implement such systems. Recall the new
customer inIormation resources being created by CRM systems.

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Nell H. Eirtle, Marketing
Irwin, 1994), 34.
Copyright The
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There is considerable value and potential in using the inIormation in the organizations
current system. This is essential Ior the strategic mission oI the Iirm, as well as Ior eIIicient
utilization oI assets. InIormation is a resource that needs to be consciously managed.
18
Management should structure the inIormation system to capture this resource and control its use.
InIormation is not a by-product oI activities oI the Iirm. It is a scarce, valuable resource that aIIects
the Iuture success or Iailure oI the Iirm. Management may not have control over the actions oI com-
petitors or consumers, but an eIIective inIormation system provides a way to anticipate and react.
The product mix and the nature oI business operations inIluence what type oI internal
marketing inIormation system is appropriate in a particular Iirm. Nonetheless, electronic inIor-
mation systems are necessary in all kinds oI companies. The system needs to be designed to meet
the inIormation needs oI the organization. ManuIacturers have diIIerent inIormation require-
ments Irom retailers or wholesalers. The size and complexity oI the Iirm also inIluence the
composition oI the inIormation system.
The costs and beneIits oI the inIormation must be evaluated Ior both short-term and long-term
planning. Incremental eIIorts and expenditures in the early stages oI creating an internal inIor-
mation system may avoid Iuture costly modiIications. Achieving long-term perIormance may

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Irwin, 1994), 611.
Copyright The

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require temporary losses to Iinance a system. It is critical to consider a long-term perspective in
evaluating inIormation system decisions.
Harrahs Entertainment is an example oI a company developing market-led strategy on the
basis oI existing inIormation. Harrahs operates 26 casinos in 13 states and in 2002 had more
than $4 billion in revenue. In a sector known Ior Iickle customers, Harrahs has built a strategy
based on customer loyalty. Harrahs has used the data in its customer loyalty programthe Total
Gold cardto uncover consumer preIerences based on tracking the millions oI individual trans-
actions conducted. Harrahs Iound that 26 percent oI its customers generated 82 percent oI their
revenues. These were not the high-rollers targeted by competitors, they were Iormer teachers,
doctors, bankers, and machinistsmiddle-aged and senior adults with discretionary time and
income. They typically do not stay in casino hotels, but visit a casino on the way home Irom
work or on a weekend night out. They respond diIIerently to marketing and promotions because
they enjoy the anticipation and excitement oI gambling itselI. Harrahs strategy is one oI pro-
viding visibly higher levels oI service to the customers with greatest value to the company. The
transactional data can even be used to see which particular customers are playing which slot
machines and to identiIy what it was about the particular machine that appealed to them.
Harrahs successIul strategy is driven by leveraging an existing inIormation source to build com-
petitive diIIerentiation.
19
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A wide variety oI marketing inIormation is available Ior purchase in special publications and on
a subscription basis. In some instances, the inIormation may be Iree, Ior example, in online
statistical databases. Sources include government agencies, universities, private research Iirms,
industry and trade organizations, and consultants. A key advantage to standardized inIormation
is that the costs oI collection and analysis are shared by many users. The major limitation is
that the inIormation may not correspond well with the users individual needs. These services
oIIer substantial cost advantages, and many are quite inexpensive (Ior example, data distributed
Irom the U.S. Census oI Population and most governmental statistical services in developed
countries). Many services allow online access to data, enabling subscribers to automatically
input external inIormation into their own inIormation systems.
Many standardized inIormation services are available to meet a wide range oI decision-
making needs. Some examples Iollow:
20
Nielsen Media Research (www.nielsenmedia.com) collects inIormation on television audience
measurement, with measurement meters in 5,100 homes assessing the viewing habits oI
14,000 individuals. Decisions to continue or drop shows oIten depend on these ratings.
The Petroleum InIormation Corporation unit (now part oI IHS Energy) supplies inIormation
on drilling and production Ior Iirms interested in oil and gas exploration activities around
the world (www.ihsenergy.com).
VNU in 2004 launched Homescan Online, a new service to measure how Internet use aIIects
oIIline purchase behavior among 14,000 Homescan panel households (www.vnu.com).
InIormation Resources Inc.s InIoScan retail tracking service and ConsumerNetwork panel
services provide weekly sales, price, and store condition inIormation Ior a sample oI Iood,
drug, and mass merchandise stores (www.infores.com).
ACNielsen Corp. (www.acnielsen.com) oIIers product movement data Ior Iood, drug, and
other retail stores in more than 80 countries. Its ScanTrack service captures data through
checkout scanners or in-store audits and provides weekly data on packaged goods in the
United States.
IMS International (imshealth.com) provides inIormation such as pharmaceutical audits oI
sales to the pharmaceutical and health care industries worldwide. Audits are available in
over 100 countries.

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Using the large data banks collected and organized by these services, many diIIerent analy-
ses can be made, depending on a companys inIormation needs. The cost oI the inIormation Ior
use by one company would be prohibitive. By sharing the database, a wide range oI company
inIormation needs can be met.
InIormation Resources Inc. (IRI) uses electronic retail store scanning systems to record
purchases by people participating on consumer panels. Scanning systems in stores automatically
record consumers purchases, eliminating the need Ior diaries and providing accurate data. The
InIoScan panel data are obtained Irom a sample oI 60,000 households. IRI installs a complete
electronic monitoring system in each city where it has a consumer panel. IRI can also monitor
the television programs watched by participants and insert test commercials into programming.
Advertisements can be targeted to households with speciIic demographic characteristics since
these data are recorded Ior all participants. Subsequent purchases measure the eIIect oI the com-
mercial. The use oI coupons can be monitored to test products and the strength oI competitors.
With this network, IRI can respond to various queries Irom clients such as Campbell Soup
Company, P&G, Johnson & Johnson, and General Eoods Corporation. IRI monitors consumer
reactions and preIerences without alerting them to which products are being tested. Eirms can
introduce advertising campaigns and determine optimal marketing strategies.
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Research studies are initiated in response to problems or special inIormation needs. Examples
include market segmentation, new-product concept tests, product use tests, brand-name research,
and advertising recall tests. Studies may range in scope Irom exploratory research based prima-
rily on analysis oI published inIormation to Iield surveys involving personal, phone, or mail
interviews with respondents who represent target populations. Considerable recent attention has
been given to qualitative research using Iocus groups, rather than broader more representative
surveys.
Recent developments include online market research services, oIIering less expensive and
more rapidly available market research surveys. Eor example, launched in 1999, InsightExpress
provides clients with a survey template to build an online questionnaire, allowing them to
sample Irom a panel oI 700,000 respondents, pay by credit card, and download results within a
Iew days. A research project costing perhaps $25,000 using traditional services is estimated to
cost only $1,000 online.
21
Reservations exist regarding the quality oI the data produced by online
services, but they provide a cheap route to sensing the market quickly.
Research studies Iollow a step-by-step process beginning with deIining the problem to be
investigated and the objectives oI the research. An example oI a project proposal Ior a study oI
customers usage oI low-salt/unsalted crackers is shown in Exhibit 5.4. The proposal indicated the
objectives, research method, sampling plan, method oI analysis, and cost. The project illustrates
the steps involved in the research process (problem deIinition, inIormation required, research
method, sampling plan, questionnaire design, data collection, analysis, and research report).
In deciding whether to employ marketing research and when interpreting the results, several
considerations are important.
Care must be exercised in Iormulating the research problem. It is
essential to spell out exactly what inIormation is needed to solve the problem. II this cannot be
done, exploratory research should be conducted to help deIine the research problem and deter-
mine the objectives oI the project. Caution should be exercised to avoid deIining a symptom
rather than the underlying problemdo Ialling sales reIlect declining market size, new compe-
titive activity, or ineIIective promotion?
It is useIul to prepare a written statement oI the research problem, speciIic objectives, the
inIormation that is needed, inIormation sources, and when the inIormation is needed. Many com-
panies contract with research Iirms to do the research. It is important that the supplier be as
Iamiliar as possible with the problem to be studied. Management needs to clearly deIine the
intended project and may choose to involve the research supplier in deIining the problem.

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Source: William R. Dillon
Neil H. Eirtle. Marketing
Ridge, IL: Richard
D. Irwin, 1994). 49.
Copyright The
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- - - Most studies are unable to do every-
thing that the user wishes to accomplish and also stay within the available budget. Priorities Ior
the inIormation that is needed should be indicated. Also, obtaining certain inIormation may not
be Ieasible. Eor example, measuring the impact oI advertising on proIits may not be possible due
to the inIluence oI many other Iactors on proIits.
Research suppliers should be able to indicate the limitations that may exist Ior a particular
project. Discussions with a potential supplier are advisable beIore making a Iinal commitment
to the project. This will be useIul in Iinalizing inIormation need priorities.
- There are many challenges to obtaining sound research results.
The available evidence indicates that some studies are not well designed and implemented and
may contain misleading results. Eactors that aIIect the quality oI study results include the expe-
rience oI the research personnel, skills in careIully managing and controlling the data collection
process, the size oI the sample, the wording oI questions, and how the data are analyzed. This
classic example highlights the diIIiculties in achieving reliable results:
22
A Gallup poll sponsored by the disposable diaper industry asked: It is estimated that disposable
diapers account Ior less than 2 percent oI the trash in todays landIills. In contrast, beverage
containers, third-class mail and yard waste are estimated to account Ior about 21 percent oI trash
in landIills. Given this, in your opinion, would it be Iair to ban disposable diapers?
Not surprisingly, because oI the wording oI the question, 84 percent oI the respondents answered
no to the question.
- Typically, research studies are not conducted by
the user. When selecting a supplier, it is important to talk with two or three prior clients to
determine their satisIaction with the research Iirm. It is also important to identiIy consultants
who are experienced in conducting the particular type oI research needed by the user. Eamiliarity
with the industry may also be important.
Spending some time in evaluating a potential research supplier is very worthwhile.
Experience and qualiIications are important in selecting the supplier. Several useIul screening
questions are shown in Exhibit 5.5. These could be used to evaluate possible suppliers beIore
asking Ior a detailed research proposal Irom the supplier.
-- Customized research studies are expensive. The Iactors that aIIect study costs include
sample size, the length oI the questionnaire, and how the inIormation will be obtained. The
complexity oI the study objectives and the analysis methods also increases the proIessional
capabilities oI research personnel. Study costs may range Irom less than $10,000 (Exhibit 5.3)
to over $100,000 (Exhibit 5.4).
Standardized subscription services (e.g., IRIs InIoScan) are also expensive, but Ior compa-
nies with various product types the annual cost is reasonable compared to the beneIits and con-
siderably below the cost oI a company collecting and analyzing its own data in traditional ways.
- It is important to recognize that research problems to be addressed
may indicate the appropriateness oI qualitative research methods, rather than surveys and other
quantitative approaches. The use oI Iocus groups is a typical way oI collecting rich qualitative
data, as compared to the more representative inIormation Irom a survey or market test. Eor
example, companies like Nokia use customer Iocus groups Ior several purposes. Testing a new
messaging product Ior the U.S. market involved small groups giving individual Ieedback on
product Ieatures that were changed beIore the product launch. The global positioning statement
Ior the Nokia 3390 phoneYou Make It Youwas created Irom unIavorable Iocus group
reactions to company attempts to describe positioning.
23
- - Suppliers oI quantitative and qualitative research are
likely to be marketing research Iirms. In 2003, the top 50 U.S. marketing research Iirms had
revenues oI $11.6 billion.
24
Nearly halI these revenues were Irom outside the United States.
Exhibit 5.6 shows the top 10 companies in 2003. Interestingly, six oI the ten largest research

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organizations are owned by organizations based outside the United States. Agency research is
predominantly market measurement studies, media audience research, and customer satisIaction
measurement. Research into the impact oI the Internet on markets is growing rapidly.
With the increasing globalization oI brands and international competition, growing emphasis
is being placed on a global perspective on marketing research. Particular interest is being shown
in research in China and India, but also Latin America and parts oI AIrica, as well as eastern
Europe and Russia. Particular problems in global research are cross-cultural diIIerences that
impact on inIormation quality and characteristics. Eor example, an industry rule oI thumb is that

--

Source: Seymour Sudman
and Edward Blair,
Marketing Research. A
Problem-Solving Approach
(Burr Ridge, IL:
Irwin/McGraw-Hill, 1998),
67. Copyright The
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Source: Table Irom Honomichi Top 50 Special Section oI the Marketing News, June 15, 2004, p. H4. Reprinted with permission oI the American Marketing Association.
in the Americas the Iurther north you go, the more reserved consumers are in what they express.
The same consumer perception oI the quality oI a product might receive high scores in Latin
America, average marks in the United States, and less Iavorable reviews in Canada, because
oI cultural diIIerences. Eor companies in international markets, making allowances Ior such
cultural diIIerences in examining global marketing research is an important challenge.
25
--
It is important to consider the impact oI the Internet on both the way in which inIormation can
be collected and the type oI inIormation available. Many traditional guidelines to the availabil-
ity and use oI existing inIormation, standardized services, and special studies are challenged by
the major impact oI the Internet. The Web oIIers greatly enhanced access to online inIormation
resources as diverse as the World Bank statistics on overseas countries, and individual company
Web sites. The costs oI using these resources are limited to the time it takes to access them. In
addition, new and speedy ways oI conducting survey studies using electronic questionnaires and
panels are expanding rapidly. The Internet Eeature summarizes some oI the Iundamental impacts
oI the Internet on marketing inIormation collection.
--
There are many types oI inIormation systems within the organization. Manual systems are also
used and may provide crucial inIormation. Yet, Ior purposes oI this chapter, attention is Iocused
on computer-based inIormation systems. Strategic systems are those that change the goals,
products, services, or environmental relationships oI organizations.
26
These inIormation sys-
tems alter how a Iirm does business with competitors, suppliers, and customers. Since the scope
oI strategic planning is so broad, inIormation generated by the system is invaluable in strategic
marketing planning. The system may provide inIormation to assist decision makers with strate-
gic planning, or may actually prepare a plan and Iormulate decisions. We brieIly describe
management inIormation systems, database systems, and decision-support systems as possible
ways to enhance the quality oI inIormation available to marketing decision makers.

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Management inIormation systems (MIS) provide raw data to decision makers within a
Iirm. The system collects data on the transactions oI the Iirm and may include competitor
and environmental inIormation. The decision makers (and systems analysts) are responsible
Ior extracting the data relevant Ior a decision and in the appropriate Iormat to Iacilitate the
process. The system can provide inIormation Ior decisions at all levels oI the organization.
Lower and middle-level managers are likely to use the system most oIten Ior operating
decisions. The system may generate routine reports Ior Irequent operating decisions, such as
weekly sales by product, or may be queried Ior special analyses on an as-needed basis.
Nonroutine decisions may consist oI tracking the sales perIormance oI a sales district over
several months, determining the number oI customer returns Ior a particular good, or listing
all customers or suppliers within a given geographic area. The basic MIS collects data and
allows Ior retrieval and manipulation oI Iormat in an organized manner. Typically, the MIS
does not interact in the decision-making process. More advanced MIS capabilities provide
important decision analysis capabilities.
Consider this MIS application. A sophisticated marketing inIormation system enables a major
airline to Iocus on the needs oI speciIic market segments.
27
The system determines mileage
awards Ior Irequent Ilyers and provides a reservation support database, organized by market

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segments. The companys top 3 percent oI customers accounts Ior 50 percent oI sales. These key
accounts are highlighted on all service screens and reports. Reservations agents are alerted that
a person is an important customer. The Irequent Ilyers receive a variety oI special services
including boarding priority and Iirst-class upgrades.
- --
Database systems comprise an important inIormation resource in many companies. Eor exam-
ple, the Target Corporation uses an eIIective database system to respond to customer diversity
in its stores. Managements model oI the market takes into account diIIerences in product needs
and preIerences by store location, to tailor store oIIerings to customer diIIerences.
28
Similarly,
in its European retail operation, supermarket Tesco uses its loyalty club data to indicate demo-
graphic, income, and housing characteristics oI consumers in the catchment area oI a store
to design appropriate product assortmentsstores near large universities may concentrate on
high-value ready-meal replacements Irom pizzas to take-away, precooked curries, while stores
in Iamily residential areas emphasize extensive Iood choices, cooking ingredients, and products
Ior babies and children.
Databases are a Iorm oI MIS. Some database systems oIIer capabilities similar to decision-
support systems. Computerized databases are indispensable Ior companies pursuing direct
marketing strategies. Discussion oI database marketing as a Iorm oI promotional strategy is
included in Chapter 13.
The components oI database systems include relational databases, personal computers, electronic
publishing media, and voice systems.
29
The intent oI database marketing is eIIectively using a com-
puterized customer database to Iacilitate a signiIicant and proIitable communication with customers.
One oI the challenges in the use oI databases is identiIying what patterns are present in the
huge accumulations oI inIormation. Data mining soItware technology is being developed to
assist in diagnosing patterns in databases.
30
Computer power enables analysis oI as many as
10,000 customer attributes to help identiIy key patterns such as how to keep the best customers.
Eor example, MCI Communications Corp. through data mining soItware has developed a highly
secret set oI 22 statistical proIiles to monitor on a regular basis. While companies are only
beginning to consider data mining technology, it promises to become an increasingly important
database capability.
Recall earlier comments regarding the growing role oI Customer Relationship Management
(CRM) technology in building new databasesor data warehousesIrom the companys
own customer contacts. These new data sources are likely to be the Iocus oI many data mining
exercises and create new insights into customer behavior. Eor example, Wal-Marts discovery oI
a correlation between Eriday evening purchases oI disposable diapers and beer is associated with
the identiIication oI a new product category comprising leisure and Iamily products Ior Iamilies
with small children.
- --
A decision-support system (DSS) assists in the decision-making process using the inIormation
captured by the MIS. A marketing decision-support system (MDSS) integrates data that are not
easily Iound, assimilated, Iormatted, or readily manipulated with soItware and hardware into a
decision-making process that provides the marketing decision maker with assistance when
needed.
31
The MDSS allows the user Ilexibility in applications and in Iormat. A MDSS can be
used Ior various levels oI decision making ranging Irom determining reorder points Ior inven-
tory to launching a new product.
The components oI the MDSS consist oI the database, the display, the models, and the analy-
sis capabilities.
32
- Various kinds oI inIormation are included in the database such as standardized
marketing inIormation produced by Nielsen and other research suppliers, sales and cost

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data, and internal inIormation such as product sales, advertising data, and price inIormation.
The design and updating oI the database are vital to the eIIectiveness oI MDSS. The inIor-
mation should be relevant and organized to correspond to the units oI analysis used in the
system.
- This component oI the MDSS enables the user to communicate with the database.
Managers and staII proIessionals need to interact with the database:
They must be able to extract, manipulate, and display data easily and quickly. Required capabili-
ties range Irom simple ad hoc retrieval to more Iormal reports that track market status and product
perIormance. Also needed are exception reports that Ilag problem areas. Many presentations
should have graphics integrated with other materials.
33
- This component oI the MDSS provides mathematical and computational representa-
tions oI variables and their interrelationships. Eor example, a sales Iorce deployment model
would include an eIIort-to-sales response Iunction model and a deployment algorithm Ior use in
analyzing selling eIIort allocation alternatives. The decision-support models are useIul in analy-
sis, planning, and control.
-- This capability consists oI various analysis methods such as regression analysis,
Iactor analysis, time series, and preIerence mapping. SoItware capabilities may be included in
the system. Analysis may be perIormed on a data set to study relationships, identiIy trends,
prepare Iorecasts, and examine the impact oI alternative decision rules.
MDSSs may operate autonomously or instead may require interaction with the decision
maker during the process. There may be several stages beIore a recommendation is Iormed
where the decision maker responds to queries to reIine the scenario. Thus, an interactive MDSS
requires more assistance Irom the decision maker and has more room Ior variation than an
autonomous MDSS. The system is dependent on the quality and accuracy oI the inIormation and
assumptions that are used in designing the system. The process should be viewed as a tool to
assist in decision making, and is not a Iinal product in itselI.
Ideally, the experience and shared vision oI management are built into the model. But oIten
inIormation is missing, and the decision maker has the best grasp oI the entire situation. The
most complete decisions incorporate the recommendation oI the MDSS, but do not solely rely
upon them. However, a DSS oIten serves to create or support a consensus, and evidence exists
that a DSS does yield Iavorable decision-making perIormance when it is properly designed and
applied to appropriate decision situations. Evaluations oI DSS eIIectiveness show some positive
results.
34
Using controlled laboratory tests oI senior undergraduate students enrolled in a
business policy course, researchers Iound that groups using the DSS made signiIicantly better
decisions than their non-DSS counterparts. Nevertheless, Iurther evaluation is needed to better
deIine the conditions and applications where success is likely to occur.
The concept oI the MDSS as a tool is most apparent when considering strategic decisions
rather than operating decisions. Clear, concise answers may not always be possible, yet the
system is a very valuable tool in the process. Consider the Iollowing:
A DSS developed by William Luther analyzes key success Iactors in the marketplace and makes
comparisons with competitors. This system is called a Strategic Planning Model, and is most
useIul Ior smaller companies. Managers input their deIinition oI key success Iactors by means oI a
standardized questionnaire Iormat. Comparisons are made between the Iirm and competitors
Ior these Iactors. The Iactors can be weighted Ior importance, and multiple situations can be
considered. The model makes projections and recommendations oI strategies.
35
In using this system it is important that managers identiIy key success Iactors; otherwise the
model will lose a great deal oI credibility. When properly applied it oIIers a useIul Iramework Ior
decision makers, recognizing that it is not a complete replica oI the decision-making situation.

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Importantly, the emphasis on market sensing in market-driven companies does not rely on hard
data alone. Many companies are now investing in in-company intelligence units to coordinate
and disseminate soIt or qualitative data and improve shared corporate knowledge.
36
Intelligence may come Irom published materials in trade and scientiIic journals, salesperson
visit reports, programs oI customer visits by executives, social contacts, Ieedback Irom trade
exhibitions and personal contacts, or even rumor in the marketplace.
Eor example, when Southwestern Bell Telephone Co. heard rumors about new competi-
tors entering the market with special packages Ior home renters, they were able to counter
this rapidly by appointing apartment complex managers as Southwestern Bell sales agents.
Similarly, market Ieedback suggesting that new micro phone companies appealed particu-
larly to younger telephone renters led Southwestern to move resources into product oIIers
and promotions based on colleges.
37
This shows a market sensing capability based on market
intelligence.
Conversely, there is widespread evidence that while it may take a substantial time Ior
inIormation about a companys shortcomings to reach senior executives, they are well known
to customers and employees much earlier.
38
Eor example, the perIormance oI British
retailer Marks & Spencer collapsed during the late 1990s, its share value Ialling Irom
650p to 150p between 1997 and 2000. Customer surveys in 1997 and 1998 showed rapidly
declining customer satisIaction and increasing deIection. Retiring CEO Sir Richard
Greenbury said in 2000 that he simply did not know that there were customer problems
and that the decline in sales was a surprise.
39
Market inIormation that is ignored by
management, interpreted incorrectly, or poorly communicated to them cannot impact eIIec-
tively on decision making.

There is increasing recognition that knowledge about customers should be managed as a
strategic asset, because competitive advantage can be created not merely by possessing current
market inIormation but by knowing how to use it. Market knowledge is inextricably linked to
organizational learning and market orientation in the market-driven company.
40
Peter Drucker argues, Ior example, that oIten 90 percent oI the inIormation that companies
collect is internalmarket research and management reports that only tell executives about
their own companywhile the real challenge is to build knowledge about new markets they do
not yet serve and new technologies they do not yet possess.
41
Knowledge that builds competi-
tive advantage involves major emphasis on rigorous customer perspectives and competitor
comparisons.
42

To meet this challenge, some companies have established positions with titles such as chieI
knowledge oIIicer. While the titles and the job responsibilities vary, all appear linked to improv-
ing an organizations knowledge management and learning processes. This may be a staII
position with only a Iew people involved, or, instead, responsibility Ior databases, a technical
inIrastructure, and related knowledge Iunctions.
43
The position may report to chieI executive
oIIicer, inIormation oIIicer, or other high-level executive. Companies that have these positions
include Ernst & Young, IBM, and the World Bank.
While there appear to be diIIerences between the role and Iunctions oI knowledge and learning
oIIicers, both positions do not occur in the same company.
44
Knowledge management is concerned
with knowledge (inIormation) collection and linking inIormation within the organization. While
the Iuture oI the position is not clear, as it develops there is likely to be a relationship between
knowledge management and the discussion in this chapter oI continuous learning about markets.

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Eor example, Xerox claims a saving oI $200 million Irom a single project that uncovered
and shared expertise across the group. Internal benchmarking Iound its Austrian subsidiary
was unusually successIul at persuading customers to renew contracts. Sharing the Austrian
approach with other groups brought 70 percent up to the Austrian standard in three months.
45
The Innovation Eeature illustrates the potential power oI innovative uses oI Internet-based
technology at Buckman Labs to enhance this Iorm oI knowledge sharing to solve customer prob-
lems in market-driven companies.
-
Several methods are being employed by companies to improve the availability and use oI cus-
tomer knowledge in impacting strategic decisions.
46
A discussion Iollows:
- - Eor example,
DaimlerChryslers Jeep division runs customer events called Jeep Jamborees, attracting
enthusiasts Ior the vehicle. Jeep employees connect with customers through inIormal conversations
and semiIormal round tables. Engineers and ethnographic researchers Iocus on the Jeep owners
relationship with the vehicle, driving changes to existing models and plans Ior new models.
- - - IBM, Ior exam-
ple, uses collaborative Internet workspace called the CustomerRoomwith major accounts, where
individuals throughout its divisions and Iunctions can exchange knowledge with each other and
with the customer.
- - Customer
Relationship Management systems capture customer behavior and response inIormation which
oIIers rich potential Ior better insights into issues like customer deIection and competitors
strengths, as well as emerging customer needs and perceptions.
- Management responsibility
includes investing resources, time, and attention in maintaining customer dialogues and commu-
nities as a commitment to enhanced organizational understanding oI the customer. Eor example,

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the vice president oI marketing at Eords LincolnMercury division actively participates in
customer-related chat rooms on the Internet, and encourages other employees to Iollow his lead.
Other approaches include planned programs oI customer visits by cross-Iunctional teams oI
executives as a systematic way oI acquiring customer inIormation, but also building superior
understanding oI and responsiveness to customer perspectives.
47
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Lastly, important privacy and ethical issues concerning the role oI inIormation in the organiza-
tion need to be assessed by managers and proIessionals. Questions regarding ethical and socially
responsible behavior are escalating in importance Ior individual executives and organizations.
These questions may particularly impact approaches to collecting customer inIormation, and the
uses made oI that inIormation.
- -
The dramatic increase in use oI databases has generated concerns about the invasion oI privacy
oI individuals. Companies have responded to the issue by asking customers to indicate their
preIerences concerning mailing lists and other uses oI the inIormation. Nonetheless, concerns
about this issue will undoubtedly continue as the sophistication oI communications technology
and soItware continues to develop.
Consider, Ior example, the use oI patient inIormation in the drug industry. Database marketing
by pharmaceutical companies is guided by inIormation obtained Irom toll-Iree number calls,
subscriptions to magazines, and pharmacy questionnaires.
48
This inIormation can be used to guide
database marketing programs, targeting people with speciIic health concerns such as depression,
arthritis, and other problems. Some patients are objecting about the use oI their prescription data to
guide direct mail and other promotional eIIorts. Yet Iurther objections relate to the possible sharing
oI medical inIormation databases oI this kind with other parties, such as insurance companies who
may want to determine premiums on the basis oI health data Ior existing patients and their children.
-
Related to the issue oI invasion oI privacy is the issue oI how companies and research suppliers
should respond to ethical issues. Eor example, should a prospective client share a suppliers
detailed project proposal with a competing supplier? A central issue concerns which organiza-
tion pays Ior the cost oI preparing the proposal. II the proposal is prepared at the expense oI
the supplier, then the proposal is the property oI the supplier.
49
Sharing the proposal with its
competition would be an issue oI questionable ethics.
Other issues relate to the ways in which inIormation is collected and Irom whom it is
collected. There are major proIessional restrictions, Ior example, on collecting marketing inIor-
mation Irom children. In terms oI the dilemmas that may emerge in how inIormation is collected,
consider the use oI medical brain scanning technology to capture clues as to consumer product
preIerences and reactions to marketing messages described in the Ethics Eeature. Executives
Iace diIIicult issues in deciding iI neuromarketing is an acceptable use oI medical technology
or whether it breaches the individuals right to privacy.
InIormation sharing with research suppliers, other external contractors, strategic alliance partners,
and acquisition/merger prospects oIten involves highly conIidential inIormation. There are many
possible situations that present ethical questions and concerns. Companies normally sign conIiden-
tiality agreements. Nonetheless, revealing trade secrets is a risk that relies primarily on the ethical
behavior oI the participants. Moreover, these situations oIIer excellent opportunities Ior learning.

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InIormation perIorms a vital strategic role in an organization.

InIormation capability creates a sustainable competitive
advantage by improving the speed oI decision making, reduc-
ing the costs oI repetitive operations, and improving decision-
making results. Market sensing is vital to the eIIectiveness
oI the market-oriented company. Managers models oI their
markets guide the interpretation oI inIormation and resulting
strategies designed to keep the Iirm ahead oI its competition.
Learning about markets necessitates open-minded inquiry,
widespread distribution oI inIormation within the organiza-
tion, mutually inIormed interpretation, and developing a mem-
ory to provide access to prior learning.
Marketing inIormation capabilities include marketing
research, marketing inIormation systems, database systems,
decision-support systems, and expert systems. Research inIor-
mation supports marketing analysis and decision making. This
inIormation may be obtained Irom internal sources, standard-
ized inIormation services, and special research studies. The
inIormation may be used to solve existing problems, evaluate
potential actions such as new-product introductions, and as
inputs to computerized data banks.
Computerized inIormation systems include management
inIormation systems, database systems, CRM technology, and
decision-support systems. These systems include capabilities Ior
inIormation processing, analysis oI routine decision making, and
decision recommendations Ior complex decision situations. The
vast array oI inIormation processing and telecommunications
technology that is available oIIers many opportunities to enhance
the competitive advantage oI companies.
The development oI useIul inIormation systems is a key
success requirement Ior competing in the rapidly changing and
shrinking global business environment. Marketing decision-
making results are improved by the use oI eIIective inIorma-
tion systems. Importantly, gaining inIormation advantage
requires more than technology. The systems demand creative
(and cost-eIIective) design that Iocuses on decision-making
inIormation needs.
In addition, we recognize the growing importance oI
knowledge management in strategic marketing as a vital
source oI competitive advantage, the role oI the chieI
knowledge oIIicer, and several approaches to enhancing the
development oI customer knowledge.
Einally we consider some important issues in collecting
and using inIormation. These include invasion oI customer
privacy, and inIormation and ethics.

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A. Revisit the list oI major marketing research agencies in
Exhibit 5.6. Visit several oI the Web sites listed. Examine
the major types oI inIormation provided both as standard-
ized services and special study capabilities. List these and
identiIy the ways in which such resources can impact on
marketing decisions.
B. Select a well-known company or brand and use a search
engine to Iind Web pages that include its name. Review the
content oI Web pages Irom diIIerent sources. Discuss the
impact oI Internet-based inIormation on traditional ideas
about conIidentiality and privacy.
-- ---
1. Discuss how an organizations marketing inIormation
skills and resources contribute to its distinctive capabilities.
2. How would you explain to a group oI top-level executives
the relationship between market orientation and conti-
nuous learning about markets?
3. Outline an approach to developing an eIIective market
sensing capability Ior a regional Iull-service bank.
4. Compare and contrast the use oI standardized inIorma-
tion services as an alternative to special research studies
Ior tracking the perIormance oI a new packaged Iood
product.
5. Discuss the probable impact oI cable television on
marketing research methods during the next decade as this
medium penetrates an increasing number oI U.S. house-
holds and closer relationships are developed with telecom-
munications companies.
6. Comment on the useIulness and limitations oI test-market
data as a source oI marketing inIormation.
7. Suppose the management oI a retail Iloor covering (carpet,
tile, wood) chain is considering a research study to
measure household awareness oI the retail chain, reactions
to various aspects oI wallpaper purchase and use, and
identiIication oI competing Iirms. How could management
estimate the beneIits oI such a study in order to determine
iI the study should be conducted?
8. Are there similarities between marketing strategic intelli-
gence and the operations oI the U.S. Central Intelligence
Agency? Do companies ever employ business spies?
9. Discuss how manuIacturers oI U.S. and Swiss watches
could have used market sensing to help avoid the problems
that several Iirms in the industry encountered as Seiko and
other Japanese companies entered the watch market.
10. Examine the strategic implications Ior small independent
retailers and regional chains concerning the expanding
strategic use oI inIormation technology by large retailers
like Wal-Mart.
11. Data mining Irom databases is receiving increased atten-
tion in many companies. Discuss the underlying logic oI
data mining.
12. What are the relevant issues that need to be considered
when obtaining the services oI an outside supplier Ior a
marketing research project?
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A. Revisit the Internet Eeature The Web and Marketing
InIormation. What are the major advantages oI the Web
in developing marketing inIormation resources, but what
are the potential disadvantages? How do these two lists bal-
ance against each other?
B. Examine the marketing inIormation example described in
the Ethics Eeature Neuromarketing. Should limits be
placed on the ability oI commercial organizations to cap-
ture and exploit inIormation about individuals Ior reasons
oI privacy? Why should such issues concern marketing
executives?
-
1. George S. Day, The Capabilities oI Market-Driven
Organizations, Journal of Marketing, October 1994, 43.
2. Kathleen M. SutcliIIe and Klaus Weber, The High Cost
oI Accurate Knowledge, Harvard Business Review, May
2003, 7482.
3. Adapted Irom Nigel E. Piercy, Market-Led Strategic
Change. A Guide to 1ransforming the Process of Going
to Market (OxIord: Butterworth-Heinemann, 2002), 202204.
4. David Eairlamb, Gail Edmondson, Laura Cohn, Kerry
Capell, and Stanley Reed, The Best European
PerIormers, BusinessWeek, June 28, 2004, 4853.
5. Patricia B. Seybould, Get inside the Lives oI Your
Customers, Harvard Business Review, May 2001, 8189.
6. Stanley E. Slater and John C. Narver, Market Orientation,
Customer Value, and Superior PerIormance, Business
Hori:ons, March/April 1994, 2227.
7. Stanley E. Slater and John C. Narver, Market Orientation
and the Learning Organization, Journal of Marketing,
July 1995, 6374 at 71. Reprinted with permission oI the
American Marketing Association.
8. Ibid., 71.
9. Ibid.
10. Roger D. Blackwell, From Mind to Market (New York:
HarperBusiness, 1997), 9.
11. The Iollowing discussion is based on Day, The Capabilities
oI Market-Driven Organizations. See also Stanley E. Slater

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and John C. Narver, Market-Oriented Isnt Enough: Build a
Learning Organization, Report No. 94-103 (Cambridge,
MA: Marketing Science Institute, 1994).
12. Nigel E. Piercy and Nikala Lane, Marketing
Implementation: Building and Sustaining a Real Market
Understanding, Journal of Marketing Practice. Applied
Marketing Science 2, no. 3, 1996, 1528.
14. Philip B. Evans and Thomas S. Wuster, Strategy and the
New Economics oI InIormation, Harvard Business
Review, SeptemberOctober 1997, 7082. See also Philip
Evans and Thomas S. Wurster, Blown to Bits. How the
New Economics of Information 1ransforms Strategy
(Boston, MA.: Harvard Business School Press, 2000).
15. Day, The Capabilities oI Market-Driven Organizations, 43.
16. Robert La Eranco, Its All about Visuals, Forbes, May
22, 1995, 108, 110, and 112.
17. William R. Dillon, Thomas J. Madden, and Neil H. Eirtle,
Marketing Research in a Marketing Environment, 3rd ed.
(Burr Ridge, IL: Richard D. Irwin, 1994), 737.
18. Kenneth C. Laudon and Jane Price Laudon, Management
Information Systems (New York: Macmillan, 1988), 235.
19. Gary Loveman, Diamonds in the Data Mine, Harvard
Business Review, May 2003, 109113.
20. A description oI the top 50 companies in the marketing
research industry can be Iound in the Honomichl 50 Special
Section oI the Marketing News, June 15, 2004. Reprinted with
permission oI the American Marketing Association.
21. Valerie Marchant, Eirst E-Marketing, Now E-Research,
1ime.com, January 24, 2000.
22. Cynthia Crossen, Margin oI Error, 1he Wall Street
Journal, November 11, 1991, A1. Wall Street Journal.
Central Edition (staII produced copy only) by Cynthia
Crossen. Copyright 1991 by Dow Jones & Co Inc.
Reproduced with permission oI Dow Jones & Co Inc. in
the Iormat Textbook via Copyright Clearance Center.
23. Deborah L. Vence, Turned on a Dime, Marketing News,
March 15, 2004.
24. Jack Honomichl, Gradual Gains, Marketing News, June
15, 2004, H1H53.
25. Catherine Arnold, Global Perspective, Marketing News,
May 15, 2004, 43.
26. Laudon and Laudon, Management Information Systems, 62.
27. Michael Miron, John Cecil, Kevin Bradicich, and
Gene Hall, The Myths and Realities oI Competitive
Advantage, DA1AMA1ION, October 1, 1988, 76.
28. Gregory A. Patterson, DiIIerent Strokes: Target
Micromarkets Its Way to Success; No Two Stores Are
Alike, 1he Wall Street Journal, May 31, 1995, A1 and A9.
29. Bob Shaw and Merlin Stone, Competitive Superiority
through Database Marketing, Long Range Planning,
October 1988, 2440.
30. Coaxing the Meaning out oI Raw Data, BusinessWeek,
Eebruary 3, 1997, 134, 136138.
31. John D. C. Little and Michael Cassettari, Decision Support
Systems for Marketing Managers, New York: AMA,
1984, 7.
32. Ibid., 1215.
33. Ibid., 14.
34. A discussion oI DSS eIIectiveness is provided in Ramesh
Sharda, Steve H. Barr, and James C. McDonnell,
Decision Support System EIIectiveness: A Review and
an Empirical Test, Management Science 34, no. 2
(Eebruary 1988), 139159.
35. Reprinted Irom Business Hori:ons, May-June 1987,
Robert J. Mockler, Computer InIormation Systems and
Strategic Corporate Planning, Copyright 1987, with per-
mission Irom Elsevier.
36. Thomas A. Stewart, Getting Real about Brainpower,
Fortune, November 27, 1995.
37. Pat Long, Turning Intelligence into Smart Marketing,
Marketing News, March 27, 1995.
38. Michael Skapinker, How to Bow Out without Egg on
Your Eace, Financial 1imes, March 8, 2000, 21.
39. Kate Rankine, Marks Ignored Shoppers Eall in Eaith,
Daily 1elegraph, October 30, 2000, 21.
40. Rohit Deshpande, Erom Market Research Use to Market
Knowledge Management, in Rohit Deshpande (ed.),
Using Market Knowledge, Thousand Oaks, CA.: Sage,
2001, 18.
41. Peter Drucker, Peter Drucker on the Profession of
Management (Boston, MA.: Harvard Business School
Press, 1998).
42. George S. Day, Learning about Markets, in Rohit
Deshpande (ed.), Using Market Knowledge (Thousand
Oaks, CA: Sage, 2001), 930.
43. Thomas A. Stewart, Is This Job Really Necessary?
Fortune, January 12, 1998, 154155.
44. Ibid.
45. Vanessa Houlder, Xerox Makes Copies, Financial
1imes, July 14, 1997, 10.
46. Eric Lesser, David Mundel and Charles Wiecha,
Managing Customer Knowledge, Journal of Business
Strategy, November/December 2000, 3537.
47. Edward E. McQuarrie and Shelby H. McIntyre,
Implementing the Marketing Concept through a Program
oI Customer Visits, in Rohit Deshpande (ed.), Using
Market Knowledge, Thousand Oaks, CA: Sage, 2001,
163190.
48. William M. Bulkeley, Prescriptions, Toll-Eree Numbers
Yield a Gold Mine Ior Marketers, 1he Wall Street
Journal, April 17, 1998, B1 and B3.
49. Dillon, Madden, and Eirtle, Marketing Research in a
Marketing Environment, 48. Elizabeth MacDonald and
Joanne S. Lublin, In the Debris oI a Eailed Merger: Trade
Secrets, 1he Wall Street Journal, March 10, 1998, B1 and
B10.

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Deciding which buyers to target and how to position the Iirms products Ior each market target
are the core components oI market-driven strategy, guiding the entire organization in its eIIorts
to provide superior customer value. EIIective targeting and positioning strategies are essential in
gaining and sustaining superior organizational perIormance. Eaulty decisions negatively aIIect
perIormance.
Through eIIective targeting and positioning Costco Wholesale has gained a strong position
against Wal-Marts Sams Club in the U.S. warehouse club market. Costco targets more aIIluent and
sophisticated urban dwellers whereas Sams concentrates on the mass middle-market located in
smaller cities.
1
Costcos value oIIering enables buyers to trade up Ior branded luxury items and trade
down Ior private label products such as paper towels, detergent, and vitamins. Markups are set at 14
percent, resulting in very attractive prices. Costcos sales Ior 2005 should exceed $52 billion.
Costcos annual sales have been greater than Sams sales with Iewer warehouses but nearly double
the average sales per Costco outlet. Costco has a strong ethics-driven corporate culture. Sams has
been reducing prices to gain market share, and has also adjusted its merchandise mix to oIIer more
upscale items. Industry experts indicate that the growth oI the warehouse club market segments
(households and businesses) is likely to slow down in the Iuture.
In the analysis oI the successIul marketing strategies oI companies like Costco, one Ieature
stands out. Each has a market target and positioning strategy that is a positive contributor to
gaining a strong market and Iinancial position Ior the Iirm. Examples oI eIIective targeting and
positioning strategies are Iound in all kinds and sizes oI businesses, including companies mar-
keting industrial and consumer goods and services.
We begin the chapter by examining market targeting strategy and discussing how targets are
selected. Next, we consider strategic positioning and look at what is involved in developing a
positioning strategy Ior each market target. We conclude with a discussion oI how positioning
eIIectiveness is evaluated.

The market targeting decision identiIies the people or organizations in a product-market toward
which an organization directs its positioning strategy. Selecting good market targets is one oI
managements most demanding challenges. Eor example, should the organization attempt to serve
all buyers who are willing and able to buy a particular good or service, or instead selectively Iocus
on one or more subgroups? Study oI the product-market, its buyers, the organizations capabilities

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Market 1argeting and Strategic Positioning
and resources, and the competition is necessary in order to make this
decision. The chapters in Part II provide important inIormation Ior the tar-
geting decision.
Consider, Ior example, the development oI Intels marketing strategy
oI progressively adding new product-markets to the existing core
business. (See Intel advertisement.) Intels product strategy is described
in the Strategy Eeature.
Targeting and positioning strategies consist oI: (1) identiIying
and analyzing the segments in a product-market, (2) deciding which
segment(s) to target, and (3) designing and implementing a positioning
strategy Ior each target.
Many companies use some Iorm oI market segmentation, since buyers
have become increasingly diIIerentiated as to their value requirements.
Microsegmentation (Iiner segmentation) is becoming popular, aided by
eIIective segmentation and targeting methods such as database marketing
and mass customization. Moreover, the Internet oIIers an opportunity Ior
direct access to individual customers. In the Iollowing discussion we
assume that the product-market is segmented on some basis. Emerging
markets may require rather broad macrosegmentation, resulting in a Iew
segments, whereas more mature markets can be divided into several
micro segments. A new market may need to advance to the growth stage beIore meaningIul
segmentation is Ieasible.
-
The targeting decision determines which customer group(s) the organization will serve.
Management may select one or a Iew segments or go aIter more complete coverage oI the
product-market by targeting most oI the segments. A speciIic marketing eIIort (positioning
strategy) is directed toward each target that management decides to serve. Eor example, PIizers
targeting strategy Ior the 2003 launch oI its new drug Relpax is as Iollows:
PIizer Ior the Iirst time launched a new productRelpaxwithout any TV advertising at all. Relpax
is a prescription medicine Ior migraine headache relieI. PIizer identiIied - -

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Designing Market-Driven Strategies

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Segments clearly defined
Extensive
targeting
Selective
targeting
Target
selected
niche(s)
Target
multiple
segments
Product
specialization
Product
variety
Segments not clearly defined
Ior Relpax and adjusted its media mix accordingly. They are listening to
the radio in the car, |going| on the Internet late at night, or reading a magazine in a quiet moment,
says Dorothy L. Weitzer, a PIizer marketing vice-president. They are not watching TV.
2
PIizers market target strategy is guided by market segmentation based on buyers characteris-
tics (active mothers).
Market targeting approaches Iall into two major categories: segment targeting and targeting
through product diIIerentiation. As shown by Exhibit 6.1, segment targeting ranges Irom a single
segment to targeting all or most oI the segments in the market. American Airlines uses extensive
targeting in air travel services, as does General Motors with its diIIerent brands and styles oI
automobiles. An example oI selective targeting is Autodesks targeting oI architects with its line
oI computer-aided design soItware.
When segments are diIIicult to identiIy, even though diversity in preIerences may exist,
companies may appeal to buyers through product specialization or product variety. While
diIIerences may exist in needs and wants, buyers preIerences are diIIused, making it diIIicult to
deIine segments.
3
Specialization involves oIIering buyers a product diIIerentiated Irom competitors
products and designed to appeal to customer needs and wants not satisIied by competitors. The
Vanguard Group oIIers a wide variety oI mutual Iunds to investors, which are not targeted to
particular investor segments. Vanguards variety-based positioning is intended to appeal to a wide
array oI customers, but in most cases meeting a subset oI their investment needs.
4
- --
Market segment analysis discussed in Chapter 4 helps to evaluate and rank the overall
attractiveness oI the segments under consideration by management as market targets. These
evaluations include customer inIormation, competitor positioning, and the Iinancial and market
attractiveness oI the segments. An important Iactor in targeting is determining the value
requirements oI the buyers in each segment. Market segment analysis is used to evaluate both
existing and potential market targets.
Management needs to decide iI it will target a single segment, selectively target a Iew
segments, or target all or most oI the segments in the product-market. Several Iactors inIluence
the choice oI the targeting strategy:
Stage oI product-market maturity
Extent oI diversity in buyer preIerences
Industry structure
Organizational capabilities and resources
Opportunities Ior gaining competitive advantage

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Since these inIluences may vary according to stage oI product-market maturity, we use
maturity as the basis Ior considering diIIerent targeting situations. The objective is to look at
how each Iactor aIIects the market target strategy.
-
The industry environment is inIluenced by the extent oI concentration oI its Iirms, the stage oI
its maturity, and its exposure to international competition. Eive generic environments portray the
range oI industry structures:
5
Industries newly Iormed or reIormed are categorized as emerging, created by
Iactors such as a new technology, the changing needs oI buyers, and the identiIication oI
unmet needs by suppliers. The satellite radio service industry is illustrative.
Typically, a large number oI relatively small Iirms make up the Iragmented
industry. No company has a strong position regarding market share or inIluence in this
industry structure. Industrial chemical distribution and home security services are examples
oI Iragmented industries.
- These industries are shiIting Irom rapid growth to maturity, as indicated by the
maturing product liIe cycles oI the products in the industry. Growing rapidly until reaching
high levels oI household penetration, microwave ovens are now in the maturity stage.
A declining industry is actually Iading away instead oI experiencing a temporary
decline or cyclical changes. Camera and Iilm products are moving into the declining stage
as digital photography gains momentum.
Eirms in this category compete on a global basis. Examples include automobiles,
consumer electronics, and telecommunications. This classiIication may include transitional
or declining industry market situations.
The Iive industry categories are neither exhaustive nor mutually exclusive. Moreover, chang-
ing environmental and industry conditions may alter an industry classiIication. Also, rapid
growth may occur in some countries while industry growth is mature or declining in other
countries or regions.
The stages oI the liIe cycles oI the products in the industry oIIer useIul insights about the
industry environment. The market environments discussed above are closely related to the
product liIe cycle (PLC) stages. Looking at competition during the stages oI the product liIe
cycle and at diIIerent product-market levels (generic, product type, and variant) provides
insights into diIIerent types and intensities oI competition. We know that products, like people,
move through liIe cycles, and products liIe cycles are increasingly shorter due to the rapid pace
oI technological change in the 21st century.
The liIe cycle oI a typical product is shown in Exhibit 6.2. Sales begin at the time oI intro-
duction and increase over the pattern shown. ProIits initially lag sales, since expenses oIten
exceed sales during the initial stage oI the product liIe cycle as a result oI heavy introductory
expenses. Industry sales and proIits decline aIter the product reaches the maturity stage. OIten
proIits Iall oII beIore sales.
Since an industry may contain more than one product-market and diIIerent industries may
compete in a given market, it is useIul to consider the market environment as the basis oI
discussion. Emerging, growth, mature, declining, and global market environments are discussed
to illustrate diIIerent targeting situations.
-
The most pervasive Ieature oI emerging markets is uncertainty about customer acceptance and
the eventual size oI the market, which process and product technology will be dominant, whether
cost declines will be realized, and the identity, structure, and actions oI competitors.
6
Internet

-
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telecommunications is an example oI an emerging market. Market deIinition and analysis are
rather general in the early stages oI product-market development. Buyers needs and wants are
not highly diIIerentiated because they do not have experience with the product. Determining the
Iuture scope and direction oI growth oI product-market development may be diIIicult, as will
Iorecasting the size oI market growth.
There are two types oI emerging markets: (1) the development oI a totally new product-market,
and (2) a new product entry into an existing market. In the Iirst situation, the emerging market is
Iormed by people/organizations whose needs and wants have not been satisIied by available products.
A cure Ior the AIDS virus is an example. In the second situation, the market entry is a new product
that provides an alternative value proposition to buyers in an existing market. The entry oI digital pho-
tography into the traditional camera and Iilm market is an example oI entry into an existing market.
- The similarity oI buyers preIerences in a new product-market oIten limits
segmentation eIIorts. It may be possible to identiIy a Iew broad segments. Eor example, heavy,
medium, and low product usage can be used to segment a new product-market where usage
varies across buyers. II segmentation is not Ieasible, an alternative is to deIine and describe an
average or typical user, directing marketing eIIorts toward these potential users.
- Study oI the characteristics oI market pioneers indicates that new
enterprises are more likely to enter a new product-market than are the large, well-established
companies. The exception is a breakthrough innovation in a large company coupled with strong
entry barriers. The pioneers that develop a new product-market are typically small new
organizations set up speciIically to exploit Iirst-mover advantages in the new resource space.
7
These entrepreneurs oIten have limited access to resources and must pursue product-market
opportunities that require low levels oI investment.
Industry development is inIluenced by various Iactors, including the rate oI acceptance oI the
product by buyers, entry barriers, perIormance oI Iirms serving the market, and Iuture expecta-
tions. The pioneers proprietary technology may delay entry by others until the potential entrants
can gain access to the technology. Major change in market composition and competition during
the initial years is a common Ieature oI emerging industries.
- -- A Iirm entering an existing product-market with a new pro-
duct is more likely to achieve a competitive edge by oIIering buyers unique beneIits rather than
lower prices Ior equivalent beneIits, though cost may be the basis oI superior value when the
new product is a lower-cost alternate technology to an existing product. Eor example, Iax
transmission oI letters and brieI reports is both Iaster and less expensive than overnight delivery
services. Similarly, the development oI e-mail capabilities gave e-mail transmission an advan-
tage over Iax transmissions.

ntroduction
Time
Profits
Sales
Growth Maturity Decline
+
0
_

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Entry oI disruptive technologies into existing product-markets may present competitive
threats to incumbents.
8
The threat is that the value proposition oI the new technology (e.g.,
digital photography) may eventually attract buyers away Irom incumbent Iirms. Disruptive
technology is discussed in Chapter 8.
Despite the uncertainties in an emerging industry, there is evidence
which indicates that more successIul or longer-living Iirms engage in less change than Iirms
which Iail.
9
Instead these experienced Iirms select and Iollow a consistent strategy on a
continuing basis. II this behavior is characteristic oI a broad range oI successIul new ventures,
then choosing the entry strategy is very important.
Satellite radio service is an interesting example oI an emerging market. This market situation
displays many oI the characteristics we have been discussing. The Innovation Eeature describes
the opportunities, challenges, and risks conIronting XM Satellite Radio in early 2004.

Segments are likely to be Iound in the growth stage oI the market. IdentiIying customer groups
with similar value requirements improves targeting, and experience with the product, process,
and materials technologies leads to greater eIIiciency and increased standardization.
10
During the
growth stage the market environment moves Irom highly uncertain to moderately uncertain.
Eurther change in the market is likely, but at this stage there is a level oI awareness about the
Iorces that inIluence the size and composition oI the product-market.
Patterns oI use can be identiIied and the characteristics oI buyers and their use patterns can be
determined. Segmentation by type oI industry may be Ieasible in industrial markets. Demographic
characteristics such as age, income, and Iamily size may identiIy broad macrosegments Ior
consumer products such as Iood and drugs. Analysis oI the characteristics and preIerences oI
existing buyers yields useIul guidelines Ior estimating market potential.

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- We oIten assume that high-growth markets are very attractive, and that
early entry oIIers important competitive advantages. Nevertheless, there are some warnings Ior
industry participants:
Eirst, a visible growth market can attract too many competitorsthe market and its distribution
channel cannot support them. The intensity oI competition is accentuated when growth Iails to match
expectations or eventually slows. Second, the early entrant is unable to cope when key success
Iactors or technologies change, in part because it lacks the Iinancial skills or organizational skills.
11
Eor example, the Iiber-optic cable network market in the United States attracted Iar too many
competitors (some 1,500). Most oI the networks were not being used in the early 2000s due to
signiIicant overbuilding.
Generalizations about industry structure in growth markets are diIIicult. There is some
evidence that large, established Iirms are more likely to enter growth markets rather than
entering emerging markets. This is because the companies may not be able to move as quickly
as small specialist Iirms in exploiting the opportunities in the emerging product-market.
12
The
established companies have skills and resource advantages Ior achieving market leadership.
These powerIul Iirms can overcome the timing advantage oI the market pioneers. Later entrants
also have the advantage oI evaluating the attractiveness oI the product-market during its initial
development.
- -- Survival analysis oI Iirms in the minicomputer industry high-
lights two perIormance characteristics in the rapid growth stage oI the product-market: (1) survival
rates are much higher Ior aggressive Iirms competing on a broad market scope compared to con-
servative Iirms competing on the same basis, and (2) survival rates are high (about three-quarters)
Ior both aggressive and conservative specialists.
13
This research suggests that survival requires
aggressive action by Iirms that seek large market positions in the total market. These Iirms must
possess the capabilities and resources necessary to achieve market position. Other competitors are
likely to be more successIul by selectively targeting one or a Iew market segments.
There are at least three possible targeting strategies in growth market
situations: (1) extensive market coverage by Iirms with established businesses in related markets,
(2) selective targeting by Iirms with diversiIied product portIolios, and (3) very Iocused targeting
strategies by small organizations serving one or a Iew market segments.
14
A selective targeting strategy is Ieasible when buyers needs are diIIerentiated or when
products are diIIerentiated. The segments that are not served by large competitors provide an
opportunity Ior the small Iirm to gain competitive advantage. The market leader(s) may not Iind
small segments attractive enough to seek a position in the segment. II the buyers in the market
have similar needs, a small organization may gain advantage through product specialization.
This strategy would concentrate on a speciIic product or component.
The objective oI the targeting strategy is to match the organizations distinctive capabilities
to value opportunities in the product-market. The number oI speciIic targets to pursue depends
on managements objectives and the available segments in the market.
- -
Not all Iirms that enter the emerging and growth stages oI the market survive in the maturity
stage. The needs and characteristics oI buyers also change over time. Market entry at the
maturity stage is less likely than in previous liIe cycle stages.
- Segmentation is oIten essential at the maturity stage oI the liIe cycle. At this
stage, the product-market is clearly deIined, indicating buyers preIerences and the competitive
structure. The Iactors that drive market growth are oIten apparent. The market is not likely to
expand or decline rapidly. Nonetheless, eventual decline may occur unless actions are taken to
extend the product liIe cycle through product innovation and new applications oI existing products.

-
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IdentiIication and evaluation oI market segments are necessary to select targets that oIIer each
Iirm a competitive advantage. Since the mature market has a history, experience should be
available concerning how buyers respond to the marketing eIIorts oI the Iirms competing in the
product-market. Knowledge oI the competitive and environmental inIluences on the segments in
the market helps to obtain accurate Iorecasts, and select positioning strategies.
The maturity oI the product-market may reduce its attractiveness to the companies serving the
market, so the market-driven organization may beneIit Irom (1) scanning the external environ-
ment Ior new opportunities that are consistent with the organizations skills and resources (core
competencies); (2) identiIying potential disruptive technology threats/opportunities to the
current technologies in meeting customer needs, and selecting strategies Ior responding to the
opportunities; and/or (3) identiIying opportunities within speciIic segments Ior new and
improved products.
Buyers in mature markets are experienced and increasingly demanding. They are Iamiliar
with competing brands and display preIerences Ior particular brands. The key marketing issue is
developing and sustaining brand preIerence, since buyers are aware oI the product type and its
Ieatures. Many top brands like Coca-Cola, Gillette, and Wrigleys have held their leading posi-
tions Ior more than halI a century. This highlights the importance oI obtaining and protecting a
lead position at an early stage in the development oI a market.
- The characteristics oI mature industries include intense competition Ior
market share, emphasis on cost and service, slowdown in new-product Ilows, international
competition, pressures on proIits, and increases in the power oI channel oI distribution
organizations that link suppliers and producers with end users.
15
Deciding how to compete suc-
cessIully in a mature product-market is inIluenced by the composition oI competitive space and
the extent oI diIIerentiation in buyers value requirements.
The typical mature industry structure consists oI a Iew companies that dominate the industry
and several other Iirms that pursue market selectivity strategies. The larger Iirms may include a
market leader and two or three competitors with relatively large market positions compared to
the remaining competitors. Entry into the mature product-market is oIten diIIicult because oI
major barriers and intense competition Ior sales and proIits. Those that enter normally Iollow
market or product selectivity strategies. Acquisition may be the best way oI market entry rather
than trying to develop products and marketing capabilities. Mature industries are increasingly
experiencing pressures Ior global consolidation. Examples include automobiles, banking, Ioods,
household appliances, prescription drugs, telecommunications, and consumer electronics.
- -- Depending on the Iirms position in the mature market,
managements objective may be cost reduction, selective targeting, or product diIIerentiation.
Poor perIormance may lead to restructuring the corporation to try to improve Iinancial
perIormance. II improvement is not Ieasible, the decision may be to exit Irom the business.
Audi AG implemented a major turnaround strategy in the mid-1990s designed to appeal to
more automobile buyers with an exciting image. The midrange Audi A4 introduced in 1995
attracted new buyers and was part oI a major new product strategy to increase sales and proIits.
Leveraging Audis capabilities and resources, the A4s initial entry was very successIul.
Supported by a major advertising campaign, the new model attracted younger buyers. Appealing
to this target was a major objective oI the new marketing strategy. Audis A6 and A8 models
were targeted to additional market segments.
Both targeting and positioning strategies may change in moving Irom the growth
to maturity stages oI the product-market. Targeting may be altered to reIlect changes in priorities
among market targets. Positioning within a targeted market may be adjusted to improve
customer satisIaction and operating perIormance. Nonetheless, consistency in positioning
over time is important. During the maturity stage management is likely to place heavy emphasis
on eIIiciency.

-
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Targeting segments is appropriate Ior all Iirms competing in a mature product-market. The
strategic issue is deciding which segments to serve. Market maturity may create new opportuni-
ties and threats in a companys market target(s). The Strategy Eeature describes Levi Strauss
challenges in the mature jeans market.
Eirms pursuing extensive targeting strategies may decide to exit Irom certain segments. The tar-
gets that are retained in the portIolio can be prioritized to help guide product research and develop-
ment, channel management, pricing strategy, advertising expenditures, and selling eIIort allocations.
-
Understanding global markets is important regardless oI where an organization decides to
compete, since domestic markets oIten attract international competitors. The increasingly
smaller world linked by instant communications, global supply networks, and international
Iinance markets mandates evaluating global opportunities and threats. In selecting strategies Ior
global markets, there are two primary options Ior consideration: (1) the advantages oI global
reach and standardization; and (2) the advantages oI local adaptation.
16
This strategy considers the extent to which
standardization oI products and other strategy elements can be used to compete on a global basis.
The world is the market arena and buyers are targeted without regard to national boundaries and
regional preIerences. Global standardized products are not commodities. They are diIIerentiated,
but standardized across national boundaries. The objective is to identiIy market segments that
span global markets and to serve these opportunities with global positioning strategies. Eor
example, Gap, McDonalds and Rolex employ standardization strategies.
In some international markets, domestic customers are targeted and positioning
strategies are designed to consider the value requirements oI domestic buyers. A wide variety oI
social, political, cultural, economic, and language diIIerences among countries aIIects buyers needs
and preIerences. These variations need to be accounted Ior in targeting and positioning strategies.
Eor example, Iood and beverage preIerences vary across national and regional boundaries. Instant
coIIee is popular in Britain but not in Erance. Responding to national diIIerences, Nestle employs
domestic and regional strategies Ior several oI its Iood products.
- Industry structure and competition are changing throughout the world
as companies seek to improve their competitive advantage in the rapidly shrinking global
marketplace. Corporate actions include restructuring, acquisitions, mergers, and strategic alliances.

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Eor example, General Mills has a strategic alliance with Nestle to market General Mills products
in Europe, oIIering a major opportunity Ior General Mills to increase sales oI cereal products.
Nestle has the experience and distribution network needed to tap the global cereal market.
Strategies Ior competing in international markets range Irom targeting a single
country, regional (multinational) targeting, or targeting on a global basis. The strategic issue is
deciding whether to compete internationally, and, iI so, how to compete. Also, the choice oI a
domestic Iocus requires an understanding oI relevant global inIluences on the domestic strategy.
Cateora and Graham discuss three strategies Ior competing in international markets:
17
1. Selling domestic products in Ioreign markets with little or no adaption oI the domestic
marketing program.
2. Multidomestic market strategy utilizing distinct marketing programs Ior each country.
3. Global strategy targeting an entire set oI country markets using a standardized marketing program.
The domestic market extension strategy targets markets where there is a good match with the
domestic market. The multidomestic strategy is decentralized, with strategy operating relatively
independently. The global strategy seeks to pursue a similar strategy in all international markets.
Airbus and Boeing use this strategy Ior commercial aircraIt.
One market entry option is establishing a strategic alliance with one or more companies that
provide market access and other global distinctive capabilities (see Chapter 7). The Global
Eeature demonstrates how local Iilmmaking in IndiaBollywoodhas become more success-
Iul internationally.
18
U.S. distributors and studios are responding with collaborative eIIorts.
-
Positioning strategy is discussed in the rest oI the chapter. Eirst, we provide an overview oI
what is involved in strategic positioning and consider the selection oI the positioning concept.
Next, we examine the composition oI the positioning strategy and how the positioning components

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---

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are combined into an integrated strategy. Einally, we look at how positioning eIIectiveness is
evaluated.
Positioning may Iocus on an entire company, a mix oI products, a speciIic line oI products,
or a particular brand, although positioning is oIten centered on the brand. Importantly,
positioning is closely linked to business strategy. The major initiatives necessary in strategic
positioning are described in Exhibit 6.3. The buyers in the market target are the Iocus oI the posi-
tioning strategy. The positioning concept indicates managements desired positioning oI the
product (brand) in the eyes and minds oI the targeted buyers. It is a statement oI what the product
(brand) means guided by the value requirements oI the buyers in the market target.
19
Positioning
is intended to deliver the value proposition appropriate Ior each market target pursued by the
organization. Eor example, Gatorade is targeted to active people experiencing hot and thirsty use
situations. The drink is positioned as the best thirst quencher and replenisher, backed by
scientiIic tests. Selecting the desired positioning requires an understanding oI buyers value
requirements and their perceptions oI competing brands.
The positioning strategy is the combination oI marketing program (mix) strategies used to
portray the desired positioning oI management to targeted buyers. This strategy includes the
product, supporting services, distribution channels, price, and promotion actions taken by the
organization. Positioning effectiveness considers how well managements positioning objectives
are being achieved in the market target.
As shown in Exhibit 6.4 the positioning objective is to have each targeted customer perceive
the brand distinctly Irom other competing brands and Iavorably compared to the other brands.
OI course, the actual positioning oI the brand is determined by the buyers perceptions oI the
Iirms positioning strategy (and perceptions oI competitors strategies). The intent is to gain a
relevant, distinct, and enduring position that is considered important by the buyers that are
targeted. Management must design and implement the positioning strategy to achieve this result.
A companys positioning strategy (marketing program) works to persuade buyers to Iavorably
position the brand.
Achieving a distinct and valued position with targeted buyers is a pivotal initiative in
Hyundais plan to gain market position in the U.S. automobile market. The Korean carmaker is
using new models, attractive prices, and a generous warranty to attract buyers oI U.S. automo-
biles as described in Exhibit 6.5. A key component oI the plan was the new 2001 XG 300, which
oIIers Iull-size luxury at prices substantially below Japanese brands. Hyundais market position
has shown major growth since 1998. Hyundais competitive threat is likely to impact U.S. car
brands rather than European or Japanese companies.

-
-
Positioning Concept
Positioning
Effectiveness
Positioning
Strategy
The extent to which
managements positioning
objectives are achieved for the
market target
Managements desired
positioning of the product
(brand) by buyers in the
market target
The combination of marketing
actions used to communicate
the positioning concept to
targeted buyers
Market
Target

-
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The positioning concept indicates the perception or association that management wants buyers
to have concerning the companys brand. Aaker and Shansby comment on the importance oI this
decision:
The position can be central to customers perception and choice decisions. Eurther, since all
elements oI the marketing program can potentially aIIect the position, it is usually necessary to use
a positioning strategy as a Iocus Ior the development oI the marketing program. A clear positioning
strategy can insure that the elements oI the marketing program are consistent and supportive.
20
Choosing the positioning concept is an important Iirst step in designing the positioning
strategy. The positioning concept oI the product (brand) is the general meaning that is under-
stood by customers in terms oI its relevance to their needs and preIerences.
21
The positioning
strategy is the combination oI marketing mix actions that are intended to implement the product
(brand) concept to achieve a speciIic position with targeted buyers.
- -
22
The positioning concept should be linked to buyers value preIerences
(value proposition). The concept may be functional, symbolic, or experiential. The functional
concept applies to products that solve consumption-related problems Ior externally generated con-
sumption needs. Examples oI brands using this basis oI positioning include Crest toothpaste (cavity
prevention), Clorox liquid cleaner (eIIective cleaning), and a checking account with ABC Bank
(convenient services). Symbolic positioning relates to the buyers internally generated need Ior
selI-enhancement, role position, group membership, or ego-identiIication. Examples oI symbolic
positioning are Rolex watches and Louis Vuitton luxury goods. Einally, the experiential concept is
used to position products that provide sensory pleasure, variety, and/or cognitive stimulation.
BMWs automobile brands are positioned using an experiential concept that emphasizes the driving
experience.

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Source: And Now, A

Luxury Hyundai,
BusinessWeek, Eebruary
26, 2001, 33.
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Three aspects oI positioning concept selection are important.
23
Eirst, the positioning concept
applies to a speciIic brand rather than all oI the competing brands in a product classiIication such
as toothpaste. Second, the concept is used to guide positioning decisions over the liIe oI the brand,
recognizing that the brands speciIic position may change over time. However, consistency is
important. Third, iI two or more positioning concepts, Ior example, Iunctional and experiential,
are used to guide positioning strategy, the multiple concepts are likely to conIuse buyers and
perhaps weaken the eIIectiveness oI positioning actions. OI course, the speciIic concept selected
may not Iall clearly into one oI the three classiIications.
- - In deciding how to position, it is useIul to study the positioning
oI competing brands using attributes that are important to existing and potential buyers oI the
competing brands. The objective is to try to determine the preIerred (ideal) position oI the buyers
in each market segment oI interest and to compare this preIerred position with the actual
positions oI competing brands. Marketing research may be necessary in identiIying customers
ideal positioning. Management then seeks a distinct position that corresponds with the buyers
preIerred position Ior the target oI interest.
Determining the existing positioning oI a brand by targeted buyers and deciding whether the
position satisIies managements objectives are considered later in the chapter. We discuss devel-
oping the positioning strategy, and examine resource allocation guidelines Ior integrating the
positioning components.
-
The positioning strategy places the marketing program (mix) components into a coordinated set
oI actions designed to achieve the positioning objective(s). Developing the positioning strategy
includes determining the activities and results Ior which each marketing program component
(product, distribution, price, promotion) will be responsible, choosing the amount to spend on
each program component, and deciding how much to spend on the entire program.
Selecting the positioning strategy may be guided by a combination oI management judgment
and experience, analysis oI prior activities and results, experimentation (e.g., test marketing),
and Iield research. We look at several considerations regarding targeting and supporting activi-
ties, Iollowed by deciding how to develop the positioning strategy.
-
The positioning strategy is usually centered on a single brand (Total toothpaste) or a line oI related
products (kitchen appliances) Ior a speciIic market target. Whether the strategy is brand-speciIic or
greater in scope depends on such Iactors as the size oI the product-market, characteristics oI the good
or service, the number oI products involved, and product interrelationships in the consumers use
situation. Eor example, the marketing programs oI Johnson & Johnson, P&G, and Sara Lee Iocus
on positioning each oI their various brands, whereas Iirms such as General Electric Company,
Caterpillar, IBM, and Nike use the corporate name to position the product-line or product-portIolio.
When serving several market targets, an umbrella strategy covering multiple targets may be used Ior
some oI the marketing program components. Eor example, advertising may be designed to appeal
to more than a single target, or the same product (coach airline seats) may be targeted to diIIerent
buyers through diIIerent distribution channels, pricing, and promotion activities.
--
A look at Pier 1 Imports positioning strategy illustrates how the specialty retailer combines
marketing mix components into a coordinated strategy.
24
The company competes in the United
States, Canada, England, and Mexico. Pier 1s 2004 sales should exceed $2 billion, double 1996
sales. ProIits have grown at an even Iaster rate. Pier 1s positioning strategy includes unique
merchandise, national and local advertising, strategically located stores, attractive store

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environments, outstanding customer service, and modern retail systems. Most oI the retailers
goods are imported Irom China and India.
Pier 1s array oI merchandise includes decorative home Iurnishings, Iurni-
ture, housewares, and bed and bath products. The merchandise is unique and ever-changing,
imported Irom 1,500 suppliers. Managements objective is to create a casual, sensory store envi-
ronment. The merchandise oIIers customers an opportunity to satisIy their desire Ior diversity.
The retailer manages the value chain Irom supplier to end user,
integrating its global supply network with its retail stores. Pier 1 has over 1,000 stores in 48 states.
It uses Ireestanding and strip retail sites that can be quickly and conveniently accessed by
customers. Store layouts and exteriors are attractively designed. InIormation systems are installed
throughout company operations to provide real-time inIormation to manage the business.
Regional distribution centers supply merchandise to the retail store networks.
Pier 1s global supply network and purchasing know-how result in
merchandise costs that enable the company to oIIer quality merchandise at attractive prices.
InIormation systems target slow-moving merchandise Ior possible pricing actions. The pricing
strategy emphasizes the value and uniqueness oI the merchandise.
The retailer uses an eIIective combination oI advertising, sales promo-
tion, personal selling, and public relations to communicate with customers. Its aggressive national
television advertising strategy positions Pier 1 as The Place to Discover. Television advertising
and store enhancements have helped to generate impressive sales growth. Attractive color cata-
logs encourage people to visit the stores. Experienced store managers and sales associates convey
the corporate culture oI a customer-driven company. The customer service policy states, The
customer is always right.
Pier 1 Imports distinctive capability is a combination oI value and
uniqueness oI merchandise that is competitively priced and deployed in a strong retail network.
The specialty retailer has been very eIIective in building brand image and customer loyalty. The
slowdown in household relocation during the 1990s encouraged spending on accent pieces and
decorative home Iurnishings. These pressures Iorced many small retailers to close, strengthening
Pier 1s market position. Managements continual investment in market research studies keeps the
retailers strategy Iocused on customers needs and wants.
An overview oI the various decisions that are made in developing a positioning strategy is
shown in Exhibit 6.6. Several oI these actions are described in the Pier 1 illustration. We exam-
ine each positioning strategy component in detail in Chapters 913. The present objective is to
show how the components Iit into the positioning strategy. The positioning concept is the core
Iocus Ior designing the integrated strategy. The positioning strategy indicates how (and why) the
product mix, line, or brand is to be positioned Ior each market target. This strategy includes:
The product strategy, including how the product(s) will be positioned against the competition
in the product-market.
The value-chain (distribution) strategy to be used.
The pricing strategy, including the role and positioning oI price relative to competition.
The advertising and sales promotion strategy and the objectives these promotion components
are expected to achieve.
The sales Iorce strategy, direct marketing strategy, and Internet strategy, indicating how they
are used in the positioning strategy.
- - Eirst, it is necessary to set the major strategy
guidelines Ior each marketing program component. Eor example, will more than one channel oI
distribution be utilized? Second, management strategies Ior each oI the program components are

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implemented. Eor example, Pier 1s retail management strategy involves inIorming store
managers about new merchandise, providing logistical support to the stores, and making neces-
sary changes in the strategy over time.
-- -- Responsibilities Ior the positioning strategy components
(product, distribution, price, and promotion) are oIten assigned to various Iunctional units within
a company or business unit. This separation oI responsibilities (and budgets) highlights the
importance oI coordinating the positioning strategy. Responsibility should be assigned Ior
coordinating and managing all aspects oI the positioning strategy. Some companies use strategy
teams Ior this purpose. Product and brand managers may be given responsibility Ior coordinating
the positioning strategy across Iunctional units.
- --
Estimating how the market target will respond to a proposed marketing program, and, aIter imple-
mentation, determining how the target is responding to the program that has been implemented
are essential in selecting and managing positioning strategies. Positioning evaluation should
include customer analysis, competitor analysis, and internal analysis.
25
Importantly, these analy-
ses need to be conducted on a continuing basis to determine how well the positioning strategy is
perIorming. Positioning helps customers know the real diIIerences among competing products
so that they can choose the one that is oI most value to them.
26
Positioning shows how a com-
pany or brand is diIIerentiated Irom its competitors. Buyers position companies or brands using

-
Product
positioning
strategy
Product
objectives
Branding
strategy
Type of
channel
How active
will price be
Product/service
strategy
Distribution
strategy
Price strategy
Marketing
program
positioning
strategy
Sales force
strategy
Pricing
objectives
Price management
strategy
Role and objectives of
sales force
Size and deployment
strategy
Sales force manage-
ment strategy
Distribution
intensity
Channel
configuration
Creative
strategy
Product
management
strategy
Channel of
distribution
objectives
Price position
relative to
competition
Advertising and
sales promotion
strategy
Channel
management
strategy
Advertising/sales
promotion role
and objectives
Media and
programming
strategy
Advertising
management
strategy

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speciIic attributes or dimensions about products or corporate values. Managements objective is
to gain (or sustain) a distinct position that corresponds to target customers value preIerences Ior
the brand or company being positioned.
Several methods are available Ior analyzing positioning alternatives and determining
positioning eIIectiveness. These include customer and competitor research, market testing oI
proposed strategies, and the use oI analytical models (Exhibit 6.7).
- -
Research studies provide customer and competitor inIormation which may be useIul in designing
positioning strategy and evaluating strategy results. Several oI the research methods discussed in
Part II help to determine the position oI a brand. Eor example, preIerence maps are useIul in
determining a marketing program strategy by mapping customer preIerences Ior various competing
brands.
Methods are available Ior considering the eIIects on sales oI several marketing program
components. Eor example, using multivariate testing (MVT), a screening experiment can be
conducted to identiIy important causal Iactors aIIecting market response.
27
The advantage oI MVT
is testing the eIIects oI several Iactors at the same time. Eor example, a medical equipment producer
identiIied seven Iactors as possible inIluences on the sales oI a new product Ior use by surgeons in
the operating room. The Iactors include: (1) special product training Ior salespeople; (2) monetary
incentives Ior salespeople; (3) vacation incentives Ior salespeople; (4) distributing product
inIormation to physicians; (5) mailing product inIormation to operating room supervisors; (6) a
letter Irom the president oI the Iirm describing the product; and (7) oIIering a customized surgical
product (in contrast to a standardized product). The eIIect oI each Iactor can be measured using Iield
tests to vary the amount oI the Iactor exposed to targeted buyers. Eor example, the high level oI Iac-
tor 1 consisted oI training whereas the low-level treatment was no training. A Iractional Iactorial
experimental design was used to evaluate the eIIects oI the seven Iactors. DiIIerent Iactor combina-
tions were tested. One Iactor combination included no training, a monetary incentive, no vacation
incentive, no mailing to physicians, mailing to operating room supervisors, letter Irom the president,
and the standard product. A sample oI 64 salespeople was randomly selected, and groups oI eight
were randomly assigned to each oI the eight treatment combinations. The eight treatment combina-
tions were designed to enable testing the eIIects oI each Iactor plus the inIluence oI various
combinations oI Iactors.
One useIul Iinding oI the screening experiment was that several oI the Iactors had no impact
on sales. Eor example, the customized product did not sell as well as the standard product. This
inIormation saved the Iirm an estimated $1 million in expenses by eliminating the need to oIIer
customized product designs. BeIore conducting the experiment, management had planned to
customize the product Ior surgeons use. The other results oI the screening experiment were

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Methods for
Assessing
Positioning
Effectiveness
Analytical
Positioning
Models
Test
Marketing
Customer and
Competitor
Research

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useIul in designing the positioning strategy Ior the product. Interestingly, the vacation incentive
had the largest eIIect on sales oI all oI the Iactors, surpassing even the money incentive.
-
Test marketing generates inIormation about the commercial Ieasibility oI a promising new
product or about new positioning strategies Ior new products. The research method can also be
used to test possible changes in the marketing program components (e.g., diIIerent amounts oI
advertising expenditures). The decision to test market is inIluenced by the Iollowing Iactors:
1. How much risk and investment are associated with the venture? When both are low, launch-
ing the product without a test market may be appropriate.
2. How much oI a diIIerence is there between the manuIacturing investment required Ior the test
versus the national launch? A large diIIerence would Iavor a test market.
3. What are the likelihood and speed oI the competitive response to the product oIIering?
4. How do the marketing costs and risks vary with the scale oI the launch?
28
While usually costing less than a national introduction, test marketing is nevertheless expensive.
Market tests oI packaged consumer products oIten cost $2 million or more depending on the scope
oI the tests and locations involved.
29
The competitive risks oI revealing ones plans must also be
weighed against the value oI test market inIormation. The major beneIits oI testing are risk reduc-
tion through better demand Iorecasts and the opportunity to Iine-tune a marketing program strategy.
Test marketing provides market (sales) Iorecasts and inIormation on the eIIectiveness oI
alternative marketing program strategies. Eorecasts and other inIormation are highly dependent
on how well results Irom one or a Iew test markets provide accurate projections oI how
the national market or regional market will respond to the marketing program being tested.
Model-based analysis helps overcome problems associated with idiosyncrasies oI test cities.
30
A detailed behavioral model oI the consumer is used to analyze test market inIormation and
develop Iorecasts that can be made Ior the eIIect oI modiIied marketing strategies. We continue
the discussion oI test marketing oI new products in Chapter 8.
Virtual shopping is a potentially powerIul computer-simulated environment Ior testing buyers
reactions to new products and developing positioning strategies.
31
A virtual retail store can be cre-
ated as a marketing laboratory Ior testing new-product concepts beIore commercial introduction.
In addition to evaluating new-product concepts, the virtual shopping laboratory can test alternative
retail display Iormats and other marketing program components such as product styles and sizes.
- -
Obtaining inIormation about customers and prospects, analyzing it, and then developing strate-
gies based on the inIormation coupled with management judgment is the crux oI positioning
analysis. Some promising results have been achieved by incorporating research data into Iormal
models Ior decision analysis. These models are developed using historical sales and marketing
program data. A wide range oI soItware is available Ior marketing model applications (e.g.,
advertising media allocation models).
32
Comprehensive discussion oI marketing model applica-
tions is available Irom various sources.
33
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How do we know iI we have a good positioning strategy? Does the strategy yield the results that are
expected concerning sales, market share, proIit contribution, growth rates, customer satisIaction, and
other competitive advantage outcomes? Gauging the eIIectiveness oI a marketing program strategy
using speciIic criteria such as market share and proIitability is more straightIorward than evaluating
competitive advantage. Yet developing a positioning strategy that cannot be easily copied is an
essential consideration. Eor example, a competitor would need considerable resourcesnot to

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mention a long time periodto duplicate the powerIul Revenue Management decision support
system developed by American Airlines. In contrast, an airline can respond immediately with a price
cut to meet the price oIIered by a competitor.
Companies do not alter their positioning strategies on a Irequent basis, although adjustments
are made at diIIerent stages oI product-market maturity and in response to environmental,
market, and competitive Iorces. Eor example, Pier 1 began national television advertising in
1995, and the expenditures generated very Iavorable sales response. Even though Irequent
changes are not made, a successIul positioning strategy should be evaluated on a regular basis
to identiIy shiIting buyer preIerences and changes in competitors strategies.
The importance oI clear, strong positioning is undermined by Iaulty positioning, which can
subvert a companys marketing strategy. Positioning errors include:
Underpositioningwhen customers have only vague ideas about the company and its
products and do not perceive anything distinctive about them.
Overpositioningwhen customers have too narrow an understanding oI the company,
product, or brand. Eor example, Mont Blanc sells pens Ior several thousand dollars, but it is
important to the company that the consumer is aware that Mont Blanc pens are available in
much cheaper models.
Confused positioningwhen Irequent changes and contradictory messages conIuse
customers regarding the positioning oI the brand.
Doubtful positioningwhen the claims made Ior the product or brand are not regarded as
credible by the customer.
34
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Positioning strategies become particularly challenging when management decides to target
several segments. The objective is to develop an eIIective positioning strategy Ior each segment.
The use oI a diIIerent brand Ior each targeted segment is one way oI Iocusing a positioning
strategy. The Gap employs this strategy with its Gap, Banana Republic, and Old Navy brands.
It is a challenge Ior a company with a clear positioning and segment choice in place to target
additional segments which may undermine the strength oI positioning in the existing segment.
This may be particularly important to maintaining growth in mature markets. The Strategy
Eeature describing the positioning and targeting dilemma Ior Harley-Davidson is illustrative.

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A. Procter & Gamble (P&G) competes in the United States
and many other countries. Consider how P&G may utilize
maps in analyzing and selecting market targets (see
tiger.census.gov and www.nationalgeographic.com).
B. Go to www.fnf.com and click on Background and then on
East Eacts. Describe the diIIerent business segments and
units oI Johnson & Johnson.
C. Go to www.mcdonalds.com and analyze McDonalds revi-
talization plan and discuss possible marketing strategies
Ior McDonalds.
D. Based on inIormation available at www.cisco.com describe
Cisco Systems positioning strategy.
-
A. Review the Global Eeature Bollywood, and consider what
market targeting and strategic positioning choices are Iaced
by a Bollywood studio targeting the U.S. marketplace.
B. Examine the issues described in the Strategy Eeature
Harley-Davidson, and identiIy the problem Harley Iaces
concerning positioning in its core market segment while
trying to gain business Irom new segments with diIIerent
needs. How can the company resolve this dilemma?
Choosing the right market target strategy can aIIect the

perIormance oI the enterprise. The targeting decision is critical
to guiding the positioning oI a brand or company in the
marketplace. Sometimes a single target cannot be selected
because the business competes in several market segments.
Moreover, locating the Iirms best match between its distinc-
tive capabilities and a market segments value requirements
may Iirst require a detailed analysis oI several segments.
Targeting decisions establish key guidelines Ior business and
marketing strategies.
The market targeting options include a single segment,
selective segments, or extensive segments. Choosing among
these options involves consideration oI the stage oI product-
market maturity, buyer diversity, industry structure, and the
organizations distinctive capabilities. When segments cannot
be clearly deIined, product specialization or product variety
strategies may be used.
Market targeting decisions need to take into account the
product-market liIe cycle stage. Risk and uncertainty are high in
the emerging market stage because oI the lack oI experience in
the new market. Targeting in the growth stage beneIits Irom
prior experience, although competition is likely to be more
intense than in the emerging market stage. Targeting approaches
may be narrow or broad in scope based on the Iirms resources
and competitive advantage. Targeting in mature markets oIten
involves multiple targeting (or product variety) strategies by a
Iew major competitors and single/selective (or product special-
ization) strategies by Iirms with small market shares. Global tar-
geting ranges Irom local adaptation to global reach.
The positioning concept describes how management wants
buyers to position the brand. The concept used to position the
brand may be based on the Iunctions provided by the product,
the experience it oIIers, or the symbol it conveys. Importantly,
buyers position brands whereas companies seek to inIluence
how buyers position brands. Success depends on how well the
organizations distinctive capabilities correspond to the value
requirements oI each targeted segment.
Developing the positioning strategy requires integrating the
product, value-chain, price, and promotion strategies to Iocus
them on the market target. The result is an integrated strategy
designed to achieve managements positioning objectives
while gaining the largest possible competitive advantage.
Shaping this bundle oI strategies is a major challenge to
marketing decision makers. Since the strategies span diIIerent
Iunctional areas and responsibilities, close cross-Iunctional
coordination is essential.
Building on an understanding oI the market target and the
objectives to be accomplished by the marketing program, the
positioning strategy matches the Iirms capabilities to buyers
value preIerences. These programming decisions include select-
ing the amount oI expenditure, deciding how to allocate these
resources to the marketing program components, and making
the most eIIective use oI resources within each mix component.
The Iactors that aIIect marketing program strategy include the
market target, competition, resource constraints, managements
priorities, and the product liIe cycle. The positioning strategy
describes the desired positioning relative to the competition.
Central to the positioning decision is examining the rela-
tionship between the marketing eIIort and the market response.
Positioning analysis is useIul in estimating the market response
as well as in evaluating competition and buyer preIerences.
The analysis methods include customer/competitor research,
market testing, and positioning models. Analysis inIormation,
combined with management judgment and experience, are the
basis Ior selecting a positioning strategy.

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1. Discuss why it may be necessary Ior an organization to
alter its targeting strategy over time.
2. What Iactors are important in selecting a market target?
3. Discuss the considerations that should be evaluated in
targeting a macromarket segment whose buyers needs
vary versus targeting three microsegments within the
macrosegment.
4. How might a medium-sized bank determine the major
market targets served by the bank?
5. Select a product and discuss how the size and composition
oI the marketing program might require adjustment as the
product moves through its liIe cycle.
6. Suggest an approach that can be used by a regional Iamily
restaurant chain to determine the Iirms strengths over its
competitors.
7. Describe a positioning concept Ior three diIIerent brands/
products that corresponds to Iunctional, experiential, and
symbolic positioning.
8. Discuss some oI the more important reasons why test
market results may not be a good gauge oI how well a new
product will perIorm when it is launched in the national
market.
9. Evaluating marketing perIormance by using return-on-
investment (ROI) measures is not appropriate because
marketing is only one oI several inIluences upon ROI.
Develop an argument against this statement.
10. Two Iactors complicate the problem oI making Iuture
projections as to the Iinancial perIormance oI marketing
programs. Eirst, the Ilow oI revenues and costs is likely to
be uneven over the planning horizon. Second, sales may
not develop as Iorecasted. How should we handle these
Iactors in Iinancial projections?
11. Discuss the relationship between the positioning concept
and positioning strategy.
12. Select a product type product-market (e.g., ice cream).
Discuss the use oI Iunctional, symbolic, and experiential
positioning concepts in this product category.
13. Discuss the conditions that might enable a new competitor
to enter a mature product-market.
14. Competing in the mature market Ior air travel promises to
be a demanding challenge in the 21st century. Discuss the
marketing strategy issues Iacing Delta Airlines during the
next decade.
15. Assume you are assisting Motorola in determining inIor-
mation needs Ior monitoring its cell phone targeting and
positioning strategies. What are your recommendations?
-
1. Based in part on John Helyar, The Only Company
Wal-Mart Eears, Fortune, November 2, 2003, 158166:
Ratings and Reports, 1he Jalue Line Investment Survey,
November 12, 2004, 1677.
2. Anthony Bianco, The Vanishing Mass Market,
3. Ravi S. Achrol, Evolution oI the Marketing Organization:
New Eorms Ior Turbulent Environments, Journal of
Marketing, October 1991, 8283.
4. Michael E. Porter, What Is Strategy? Harvard Business
Review, NovemberDecember 1996, 66.
5. Michael E. Porter, Competitive Strategy (New York: Eree
Press, 1980), Chapter 9.
6. Mary Lambkin and George S. Day, Evolutionary Processes
in Competitive Markets: Beyond the Product LiIe Cycle,
Journal of Marketing, July 1989, 4.
7. Ibid., 13.
8. Clayton M. Christensen and Michael E. Raynor, 1he
Innovators Solution (Boston: Harvard Business School
Press, 2003), Chapter 1.
9. Elaine Romanelli, New Venture Strategies in the Mini-
computer Industry, California Management Review, Eall
1987, 161.
10. Lambkin and Day, Evolutionary Processes in Competitive
Markets, 14.
11. Romanelli, New Venture Strategies in the Minicomputer
Industry, 161.
Markets, 11.
13. Romanelli, New Venture Strategies in the Minicomputer
Industry, 170172.
Markets, 12.
15. Porter, Competitive Strategy, 238240.
16. George S. Day, Market-Driven Strategy (New York: The
Eree Press, 1990), 266270.
17. Philip R. Cateora and John L. Graham, International
Marketing, 12th ed. (New York: McGraw-Hill/Irwin, 2005),
2223.
18. Manjeet Kripalani and Ron Grover, Bollywood,
BusinessWeek, December 2, 2002, 4246.
19. C. Whan Park, Bernard J. Jaworski, and Deborah J. Macinnis,
Strategic Brand Concept-Image Management, Journal of
20. Reprinted Irom Business Hori:ons, May-June 1982, David
A. Aaker and J. Gary Shansby, Positioning Your
Product, Copyright 1982, with permission Irom Elsevier.
21. C. W. Park and Gerald Zaltman, Marketing Management
(Chicago: The Dryden Press, 1987), 248.

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-
22. This discussion is based on Park, Jaworski, and Macinnis,
Strategic Brand Concept-Image Management, 136137,
and David A. Aaker, Building Strong Brands (New York:
The Eree Press, 1996), 95101.
23. Ibid.
24. This illustration is drawn Irom discussions with Pier 1
executives, Annual Reports, and published inIormation.
25. Aaker, Building Strong Brands, Chapter 6.
26. Edward D. Mingo, The Eine Art oI Positioning, 1he
Journal of Business Strategy, March/April 1988, 34.
27. Rita Koselka, The New Mantra: MVT, Forbes, March
11, 1996, 114116; David W. Cravens, Charles H.
Holland, Charles W. Lamb Jr., and William C. MoncrieI
III, Marketings Role in Product and Service Quality,
Industrial Marketing Management, November 1988, 301.
28. N. D. Cadbury, When, Where, and How to Test Market,
Harvard Business Review, MayJune 1975, 9798.
29. Glen L. Urban and John R. Hauser, Design and Marketing
of New Products, 2nd ed. (Englewood CliIIs, NJ: Prentice-
Hall, 1993), 495.
30. Ibid.; See Chapter 17 Ior a discussion oI alternative meth-
ods Ior analyzing test markets.
31. Raymond R. Burke, Virtual Shopping: Breakthrough
in Marketing Research, Harvard Business Review,
MarchApril 1996, 120131.
32. Gary L. Lilien and Arvind Rangaswamy, Marketing Engi-
neering. Computer Assisted Marketing Analysis and
Planning (Reading, MA: Addison-Wesley, 1998).
33. See, Ior example, Gary L. Lillien, Phillip Kotler, and
K. Sridhar Moorthy, Marketing Models (Englewood
CliIIs, NJ: Prentice-Hall, 1992).
34. Graham J. Hooley, John A. Saunders, and Nigel E. Piercy,
Marketing Strategy and Competitive Positioning, 3rd ed.
(London: Prentice-Hall Europe, 2003), 269.

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Strategic relationships among suppliers, producers, distribution channel organizations, and
customers (end users oI goods and services) occur Ior several reasons. The objective may be to
gain access to markets, enhance value oIIerings, reduce the risks generated by rapid environ-
mental change, share complementary skills to acquire new knowledge, or obtain resources
beyond those available to a single enterprise. These relationships are not recent innovations, but
they are escalating in importance because oI the environmental complexity and risks oI a global
economy, and the skill and resource limitations oI a single organization.
1
Strategic alliances,
joint ventures, and supplier-producer collaborations are examples oI cooperative relationships
between independent Iirms.
An interesting example oI an evolving relationship strategy is the Business Development
Initiative launched by RadioShack in 2004. As part oI its mission to demystiIy new technology
Ior the consumerYouve Got Questions. Weve Got Answers.RadioShack relies on
strategic alliances to bring technology to its 7,000 stores and the one million consumers who
visit one oI them every day. Through the late 1990s RadioShack pioneered cobranding alliances
with leading brands in the electronics and computer industry to pursue stores within a store
Ior example, The Sprint Store at RadioShack brought wireless phone and other telephone serv-
ices to RadioShack stores, while The RadioShack Cool Things gave Radioshack a bridge Irom
consumer electronics into the home entertainment industry.
The alliance approach continues to underpin RadioShacks strategy. In 2003 RadioShack
announced a strategic alliance with GlobeSecNine in Washington, DC, to identiIy declassiIied
military and security technology that could provide consumer products (such as smart cameras
and tracking systems). A major move in 2004 also saw a RadioShack alliance with Motorola to
leverage joint development, sourcing, and licensing power (e.g., in Bluetooth wireless technol-
ogy accessories and broadband networking products). The same year saw another alliance Ior
RadioShack with EchoStar Communications Corp. and SIRIUS satellite radio to position
EchoStars DISH network and SIRIUS as the only satellite entertainment brands oIIered in
RadioShack.
2
Marketing relationships are important avenues to building strong bonds with customers.
The RadioShack illustration indicates how essential it is to consider all oI the participating
organizations involved in linking buyers with sellers in the relationship strategy. The objec-
tive is to oIIer end user customers superior value through collaboration oI the organizations
involved in the process. However, it is also important to recognize that collaborative relation-
ship strategies may radically transIorm traditional buyer-seller and competitor structures in
unexpected ways.
Increasingly, business and marketing strategies involve more than a single organization.
In this chapter we examine the nature and scope oI the strategic relationships among various

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Strategic
Relationship
Customers
Suppliers
Distribution
Channels
Joint
Ventures
Alliances Internal
Partnering
partners. We consider the Iull range oI strategic relationships shown in Exhibit 7.1. Eirst, we
consider the rationale Ior interorganizational relationships and discuss the logic underlying col-
laborative relationships. Next, we look at diIIerent kinds oI relationships among organizations,
Iollowed by a discussion oI several considerations that are important in developing eIIective
interorganizational relationships. We emphasize the risks and strategic vulnerabilities that new
types oI business relationship strategies may create. Einally, we discuss several issues that are
important concerning global relationships.
--
In the past, companies Irequently established relationships to achieve tactical objectives such as
selling in smaller overseas markets.
3
Today strategic relationships among organizations consider
the elements oI overall competitive strengthtechnology, costs, and marketing. Unlike tactical
relationships, the eIIectiveness oI these strategic agreements among companies can aIIect their
long-term perIormance and even survival.
Several Iactors create a need to establish cooperative strategic relationships with other
organizations. These inIluences include the opportunities to enhance value oIIerings to cus-
tomers; the diversity, turbulence, and riskiness oI the global business environment; the escalat-
ing complexity oI technology; the existence oI large resource requirements; the need to gain
access to global markets; and the availability oI an impressive array oI inIormation technology
Ior coordinating intercompany operations. As shown in Exhibit 7.2, the various drivers oI rela-
tionships Iall into three broad categories: (1) value-enhancing opportunities by combining the
competencies oI two or more organizations, (2) environmental turbulence and diversity, and
(3) skill and resource gaps.
-
The opportunity present in many markets today is that organizations can couple their competen-
cies to oIIer superior customer value. Even when partnering is not required, a relationship strat-
egy may result in a much more attractive value oIIering.
RadioShacks Store-within-a-Store concepts give customers the combined advantages oI
strong producer/service supplier and retail brands. Customers work with experienced electron-
ics retailers and also gain access to strong product brands. Similar logic underpins the deal
between Amazon and The Bombay Company. Amazon will sell Iurniture by Bombay Company
and Bombay Kids onlineAmazon leverages its database expertise to promote Bombay through

--

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The Rationale
Skill and
resource gaps
Environmental
turbulence
and diversity
Value-enhancing
opportunities
Strategic Relationships
targeted e-mails and other Iorms oI personalized marketing, using technology not otherwise
available to Bombay.
4
Modularity in product and process design oIIers a promising basis Ior leveraging interorga-
nizational capabilities to create superior customer value. It consists oI building a complex prod-
uct or process Irom smaller subsystems that can be designed independently yet Iunction together
as a whole.
5
A key Ieature oI modularity is the Ilexibility gained by designers, producers, and
product users. Companies are able to partner with others in design and production oI modules or
subsystems. The computer industry has perIormed a leadership role in advancing the use oI mod-
ularity. Chip designers, computer manuIacturers, component specialists, and soItware Iirms are
able to make unique contributions to product design, manuIacture, and use by working within
the Iramework oI an integrated architecture, which indicates how the modules Iit together and
the Iunctions each will perIorm.
6
A similar logic underpins the strategy developed at TiVo Inc., the pioneering producer oI dig-
ital video recorders that allow TV viewers to pause live television, zip through commercials, and
automatically record their Iavorite programs. Eaced with lower price competition Irom cable TV
companies oIIering similar services, and new competitors entering the market, TiVo is striking
alliances to have its soItware incorporated into Iast-selling consumer electronics like DVD play-
ers and laptop computers, aiming to build business Irom the premium services it can then oIIer
consumers. The challenge is to make TiVo Inside successIul across several sectors.
7
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Since the changing and turbulent global business environment is examined in several chapters,
the present discussion is brieI. Diversity reIers to diIIerences between the elements in the envi-
ronment, including people, organizations, and social Iorces aIIecting resources.
8
Interlinked
global markets create important challenges Ior companies.
Coping with diversity involves both the internal organization and its relationships with other
organizations. Environmental diversity reduces the capacity oI an organization to respond
quickly to customer needs and new product development.
9
Organizations meet this challenge by
(1) altering their internal organization structures, and (2) establishing strategic relationships with
other organizations.
Environmental diversity makes it diIIicult to link buyers and the goods and services that
meet buyers needs and wants in the marketplace. Because oI this, companies are teaming up to
meet the requirements oI Iragmented markets and complex technologies. These strategies may
involve supplier and producer collaboration, strategic alliances between competitors, joint ven-
tures between industry members, and network organizations that coordinate partnerships and
alliances with many other organizations.
10
Examples oI these organization Iorms are discussed
later in the chapter.
Exhibit 7.3 illustrates growth trends in strategic relationships. Major organizations through-
out the world display escalating dependence on alliances to build business, and this trend appears
set to continue.

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The skill and resource requirements oI technologies in many industries oIten surpass the capabil-
ities oI a single organization. Even those companies that can develop the capabilities may do
so Iaster via partnering. Thus, the sharing oI complementary technologies and risks are important
drivers Ior strategic partnerships. In addition to technology, Iinancial constraints, access to
markets, and availability oI inIormation systems encourage establishing relationships among
independent organizations. Eor example, airIrame manuIacturer Boeing, seeking to provide air-
line passengers with live television and Internet access, joined Iorces with units oI Loral Space
and Communications Ltd., Italys Einmeccanica SpA, and Japans Mitsubishi group to create
an inIlight-communications venture, which also includes CNN and CNBC to provide news
content.
11
An interesting and unusual illustration is provided by the Anglo-German alliance between
Warren Kade, a small British clothing company, and Siemens, the German engineering and elec-
tronics conglomerate. The alliance helps position Siemens mobile phones as Iashion accessories
associated with designer clothing on the Paris catwalk, but with the potentials Ior new design
concepts to be incorporated in the phones, and advanced electronics to be designed into Iashion
clothing. The alliance unusually brings Iashion and technology closer together.
12
- Technology constraints impact industry giants as
well as smaller Iirms. Small companies with specialized competitive strengths are able to
achieve impressive bargaining power with larger Iirms because oI their high levels oI compe-
tence in specialized technology areas, and their ability to substantially compress development
time. The partnerships between large and small pharmaceutical companies are illustrative. The
small Iirm gains Iinancial support, while the large Iirm gets access to specialized technology.

--
Sources: Loren Gary,
A Growing Reliance on
Alliance, Harvard
Management Update, April
2004, 34. Matthew
SchiIrin, Partner or
Perish, Forbes, May 21,
2001, 2628. Maria
Gonzalez, Strategic
Alliances, Ivey Business
Journal, September/
October 2001, 4751.
J. R. Harbison and
P. Pekar, Smart Alliances.
A Practical Guide to
Repeatable Success (San
Erancisco: Jossey-Bass,
1998).
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Similarly, in 2001 IBM Iormed 59 strategic soItware alliances to bring the hot, the cool, the
Iast, where IBM needs it.
13
Access to technology and other skills, specialization advantages, and the opportunity
to enhance product value are important motivations Ior establishing relationships among
organizations. These relationships may be vertical between suppliers and producers or horizon-
tal across industry members.
The global aerospace and deIense industry provides a compelling illustration oI the risks
driven by technology complexity and the importance oI managing alliances eIIectively. The
Strategy Eeature describes the problematic relationships between U.S. and European producers,
and the danger that Iailure to collaborate eIIectively and share risks may increase risk by turn-
ing potential partners into powerIul competitors.
-- The Iinancial needs Ior competing in global markets are oIten
greater than the capacity oI a single organization. As a result, many companies must seek part-
ners in order to obtain the resources essential Ior competing in many industries, or to spread the
risks oI Iinancial loss with another Iirm.
The development oI large commercial aircraIt described in the Strategy Eeature illustrates the
limitations oI one company trying to compete in this global market. Boeing and Airbus Industrie,
the industry leaders, are conIronting the challenge oI developing strategies Ior competing
eIIectively in the 21st century. The two companies display intensive rivalry and are Iiercely
competitive Ior market share in the depressed airliner market. However, the two companies

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are launching new aircraIt in diIIerent markets instead oI going head-to-head Ior the same
customers.
The Airbus vision is that airport congestion will be relieved by reducing the number oI air-
craIt Ilying Irom them, and has invested $10.7 billion in the development oI the A380 super-
jumbo carrying 555 passengers. Airbus can spread its risk over its consortium members (Iour
companies Irom England, Erance, Germany, and Spain Iorm Airbus). Boeing will invest $6
billion in developing its new 200300-seat 7E7 Dreamliner, because it believes that major airport
congestion will be countered by more point-to-point Ilying between smaller cities. Importantly,
both companies have risk-sharing partners. Collaborators are investing $3.1 billion in new tech-
nologies Ior the double-decker A380, including 18 Japanese technology partners. Airbus claims
the A380 is the Iirst oI its models with more than 50 percent U.S. content (excluding engines).
Boeings 7E7 will be the least American oI any Boeing model with Ioreign companies supply-
ing up to 70 percent oI some versions. Thirty-Iive percent oI the 7E7the wings and Iorward
Iuselage sectionwill come Irom Mitsubishi, Kawasaki, and Euji in Japan in a $2.26 billion deal
to develop these parts Irom carbon Iiber reinIorced plastic supplied by Toray Corp. in Japan.
This is the Iirst time in its history that Boeing has outsourced the design and development oI its
critical wing and center Iuselage.
14
-- - Organizational relationships are also important in gaining access to
markets. Products have traditionally been distributed through marketing intermediaries such as
wholesalers and retailers in order to access end user markets. These vertical channels oI distri-
bution are important in linking supply and demand. Horizontal relationships have oIten been
established between competing Iirms to access global markets and domestic market segments
not served by the cooperating Iirms. These cooperative marketing agreements expand the tradi-
tional channel oI distribution coverage and gain the advantage oI market knowledge in interna-
tional markets.
International strategic alliances are used by many companies competing throughout the
world. Commercial air travel is one oI the more active industries involving overseas partners and
competing through strategic alliances. The Global Eeature demonstrates how essential these
strategic relationships have become to competing in this industry. In eIIect competition is
between alliances rather than between individual organizations.
InIormation technology makes establishing organizational rela-
tionships Ieasible in terms oI time, cost, and eIIectiveness. Advances in inIormation technology
provide an important resource Ior improving the eIIectiveness oI both internal and interorgani-
zational communications:
Advances in inIormation technology and telecommunications have removed many oI the commu-
nications barriers that prevented companies Irom drawing on overseas technical resources. Indeed,
the ability to transmit documents and even complex design drawings instantaneously Irom one part
oI the globe to another by electronic mail means that it is oIten more eIIicient to collaborate
globally in product development.
15
InIormation systems enable organizations to eIIectively communicate even though the col-
laborating Iirms are widely dispersed geographically. In particular, the Internet provides a pow-
erIul means, Ior example, to reduce product development times by sharing designs Ior
components and subassemblies with suppliers, customers, and collaborators throughout the
world.
16
Electronic mail, Iile-sharing, and Web-based conIerencing and collaboration tools do
much to support working across traditional corporate boundaries.
An interesting example oI a new business model based on the Internet that reshapes relation-
ships between buyers and sellers is described in the Internet Eeature. Swedish-based ABB Group
is a leader in power and automation technologies. ABB uses the Internet to provide an integra-
tion platIormIT Industrialthat allows industrial customers to manage installations better and
to have real-time access to their own customers and suppliers.

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Collaborative relations include shared activities such as product and process design, cooperative
marketing programs, applications assistance, long-term supply contracts, and just-in-time inven-
tory programs.
17
The amount oI collaboration may vary substantially across industries and indi-
vidual companies. Moreover, in a given competitive situation a Iirm may pursue diIIerent
degrees oI collaboration across its customer base. Eor example, some supplier-customer rela-
tionships are transactional, but the same supplier may seek collaborative relationships with other
customers.
There are several Iactors that need to be evaluated when considering possible collaborative
relationships with other organizations. We examine each Iactor, indicating important issues con-
cerning how the Iactor may impact a strategic relationship.
- Partnering is the result oI two organizations working together
toward a common objective such as sharing technologies, market access, or compressing new
product development time. Eor example, a supplier may beneIit Irom a customers leading-edge
application oI the suppliers product.
18
When Wal-Mart wanted to expand in Mexico in anticipation oI NAETA, it established a joint
venture with Mexicos CiIra, providing Wal-Mart with a Iirm base and greatly reducing its
learning time in a new market. CiIra/Wal-Mart is now Mexicos leading retailer under the name
Wal-Mart de Mexico. Interestingly, Wal-Mart has taken that experience and applied it to Brazil
and other parts oI Latin America.
19
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-

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--- - -
Research by Accenture on alliance issues and trends in 2003 Iinds that Ior nearly halI the
companies involved in strategic alliances, learning was seen as the critical goal. Achieving learn-
ing goals through alliances is highly associated with successIul alliances.
20
The key issue is that there should be a strong underlying logic Ior collaboration. The align-
ment between alliance strategy and business strategy is crucial to success in partnering.
21
- - This Iactor considers the costs as well as the beneIits
oI partnering with customers, suppliers, and competitors. Strategic relationships are demanding
in terms oI both time and resources. The relationship may require substantial investments by the
partners, and oIten cannot be transIerred to other business relationships.
22
Because oI this, the
beneIits need to be candidly assessed and compared to the costs. This requires careIul planning
oI the relationship to spell out activities, participants, and costs.
-- - - Normally, relationships are Iormed because the
partners believe that combining their eIIorts is essential, and that pursuing the project alone is
not Ieasible. However, experience indicates that strategic relationships are more likely to suc-
ceed when dependence is important and equivalent between the collaborating organizations.
- Promising partners may be unwilling to collaborate or
already involved with other organizations. Eor example, many oI the desirable global airline
alliance partners have established relationships (see the Global Eeature on Airline Strategic
Alliances), and partnering with weaker companies is increasingly undesirable in this sector.
-- The corporate cultures oI the partners should be adapt-
able to the partnership.
23
This issue is particularly important Ior partners Irom countries with
substantial national cultural diIIerences. The partners approach to business activities and prior-
ities should be compatible.
Eor example, the global alliance between British Telecom (BT) and AT&T aimed to combine
resources around Concerta product to provide multinational corporations with a single,
global telecoms source based on virtual private networks, with target sales oI $10 billion. BT
had a history oI Iailed partnerships in its globalization initiatives. AT&T lacked experience in
collaborative situations, and its earlier global allianceUnisourcehad broken down over
AT&Ts reluctance to cooperate with Ioreign partners or commit to common investment with

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Goods
suppliers
Services
suppliers
Focal
Firm
Competitors
Nonprofit
organizations
Business
units
ntermediate
customers
Ultimate
customers
Government
Buyer partnerships
Lateral
partnerships
Employees
Functional
departments
nternal
partnerships
Supplier partnerships
them. AIter a relationship oI persistent squabbling between BT and AT&T, the Concert alliance
collapsed aIter only two years. Costs to BT oI unwinding Irom the alliance are estimated at $2.1
billion, with charges oI $5.5 billion to AT&T Irom Concerts demise.
24
We will discuss shortly the related question oI partnering capabilities. It is becoming clear
that the ability to operate eIIective relationship strategies between organizations relies on skills
and capabilities which vary considerably between organizations.
- --
The types oI relationships that may be Iormed by a Iirm are shown in Exhibit 7.4. Included are
supplier and buyer (vertical), lateral (horizontal), and internal relationships. A useIul way to
examine organizational relationships is to consider whether the tie between Iirms is vertical or
horizontal. The Iocal Iirm may participate in both vertical and horizontal relationships. We Iirst
look at vertical relationships among organizations, and, then, strategic alliances and joint ven-
tures, Iollowed by internal relationships. Evolving global, relationships among organizations are
examined in a subsequent section.
- --
Moving products through various stages in the value-added process oIten involves linking sup-
pliers, manuIacturers, distributors, and consumer and business end users oI goods and services
into vertical channels. Eunctional specialization and eIIiciency create the need Ior diIIerent types
oI organizations. Eor example, wholesalers stock products in inventory and deploy them when
needed to retailers, thus reducing the delays oI ordering direct Irom manuIacturers.
Over recent years the use oI supplier/manuIacturer collaborative relationships has expanded
in many industries. While problems such as industrial secrets, labor objections, and loss oI con-
trol occurred, the beneIits oI leveraging oI distinctive capabilities oI partners are substantial in
developing new products and manuIacturing processes. These relationships are extensively used
in the automotive and computer industries.
A related development is the outsourcing oI activities such as transportation, repair and main-
tenance services, inIormation systems, and human resources. It has been suggested that out-
sourcing parts oI the value-chain process to partners is a Iorm oI leveraged growthit allows a
company to expand sales without capital investment in all stages oI the value chain.
25

-
--
Source: Eigure Irom
Robert M. Morgan and
Shelby D. Hunt, The
CommitmentTrust Theory
oI Relationship Marketing
Journal of Marketing, July
1994, 21. Reprinted with
permission oI the
American Marketing
Association.

- --
-
The suppliers and buyers oI a vast array oI raw materials, parts and components, equipment,
and services (e.g., consulting, maintenance) are linked together in vertical channels oI distribu-
tion. The relationships between the supplier and customer range Irom transactional to collabo-
rative. A provocative example is provided in the Innovation Eeature. Eor the Iirst time in its
history, luxury automobile manuIacturer BMW is outsourcing production oI its vehicles. The
new manuIacturing model oIIers major beneIits, but also carries substantial risks.
- --
Vertical relationships also occur between producers and marketing intermediaries (e.g., whole-
salers and retailers). These value-chain relationships provide the producer access to consumer
and organizational end users. Interorganizational relationships vary Irom highly collaborative to
transactional ties. A strong collaborative relationship exists in a vertical marketing system
(VMS).
26
These systems are managed by one oI the channel members such as a retailer, distrib-
utor, or producer. The VMS may be owned by a channel Iirm, linked together contractually (e.g.,
a Iranchise system), or the relationship held together by the power and inIluence oI the Iirm
administering the channel relationships.
Eor example, the American Eamily LiIe Assurance Company (AELAC) is increasingly
well known in the United States Irom its advertising Ieaturing the AELAC duck, (see photo on
the Iollowing page). In Iact, three-quarters oI AELACs $12 billion revenues come Irom Japan,
where it is the largest Ioreign liIe insurance company. AELAC operates in Japan in the niche
category oI supplemental insurance (cancer, medical, and other liIe insurance products that
supplement the national health-care system). While traditional Japanese liIe insurers employ sales
employees who call on customers at their home to sell policies and collect premiums, AELAC
established a broad-based distribution network oI corporate partners. The corporate partners
are aIIiliated with companies and reach those companies employees, suppliers, and customers.
By 2004, some 95 percent oI companies listed on the Tokyo Stock Exchange oIIer AELAC
products to their employees, and AELAC has insurance products in 25 percent oI Japanese

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households. Marketing through collaboration with employers enables AELAC to
reach large numbers oI consumers economically to minimize the costs oI premium
collection (they are collected through payroll deductions), and avoid paying high
commissions.
There is considerable evidence that the organizations in distribution channels
are becoming involved to a greater extent in collaborative relationships
compared to traditional power and dependence ties. Examples include the
Radio Shack store-within-a-store relationships with other compa-
nies, and AELACs ties with Japanese companies. We discuss
value-chain relationships in Chapter 10.
- - --
The driving Iorce underlying strategic relation-
ships is that a company may enhance its ability
to satisIy customers and cope with a rapidly
changing business environment through part-
nering. Several examples are shown in Exhibit
7.5. Some believe that the Iuture oI competi-
tion lies in co-creation initiatives with customers
only by letting individual corporate customers and
consumers shape products and service can real Iit with
customer needs be achieved.
27
Eor example, Sumerset Houseboats Inc. in Kentucky custom-builds boats, engaging each
individual customer in a dialogue through design and construction. Through the Internet, it also
connects to a community oI Sumerset houseboat owners so they can compare notes, which
boosts customer satisIaction but also provides Sumerset with unique design insights Ior Iuture
products.
28
Although building collaborative relationships may not always be the best course oI action,
this avenue Ior gaining a competitive edge is increasing in popularity. We examine developing
a customer Iocus and assessing customer value.
- - Relationship marketing starts with the customerunderstanding needs
and wants and how to satisIy requirements and preIerences:
Customers think about products and companies in relation to other products and companies. What
really matters is how existing and potential customers think about a company in relation to its
competitors. Customers set up a hierarchy oI values, wants, and needs based on empirical data,
opinions, word-oI-mouth reIerences, and previous experiences with products and services. They
use that inIormation to make purchasing decisions.
29
The importance oI understanding customers needs and wants encourages developing long-
term collaborative relationships. Driving the necessity oI staying in close contact with buyers is
the reality that customers oIten have several suppliers oI the products they wish to purchase.
Customer diversity complicates the competitive challenge. Consistent with being market-
oriented, developing a customer-oriented organization includes:
Instilling customer-oriented values and belieIs supported by top management.
Integrating market and customer Iocus into the strategic planning process.
Developing strong marketing managers and programs.
Creating market-based measures oI perIormance.
Developing customer commitment throughout the organization.
30

- --
-
The development oI Customer Relationship Management (CRM) systems provides an
extension oI relationship marketing to customers. CRM provides structure Ior managing the
point oI customer contact by integrating inIormation technology and data around the cus-
tomer. CRM is an important development and is discussed in more detail in the Appendix to
this chapter.
Similarly, in the management oI relationships with large corporate customers, many organi-
zations have moved to the adoption oI Key Account Management structures and Global Account
Management approaches as ways oI building teams dedicated to managing the relationship with
the most valuable customers.
31
---- - An important issue is selecting the customers with which
to develop relationships since some may not want to partner and others may not oIIer
enough potential to justiIy partnering with them. A look at Marriotts partnering strategy is
illustrative.
Building customer relationships is the core sales strategy oI Marriott International Inc.s Business
Travel Sales Organization. The travel manager is the target Ior the selling activities oI the 2,500-
person sales organization. The key Ieatures oI the major account sales strategy are: (1) choose cus-
tomers wisely (Marriott Iollows a comprehensive customer evaluation process); (2) build customer
research into the value proposition (understanding what drives customer value and satisIaction);
(3) lead with learning by Iollowing a step-by-step sales process; (4) invest in the customers goal-
setting process, rather than Marriotts; and (5) develop a relationship strategy with a sense oI
purpose, trust, open access, shared leadership, and continuous learning. Marriotts management
recognizes that customers who regularly purchase the companys services are valuable assets who
demand continuous attention by high-perIormance teams. Rapidly changing markets and customer
diversity add to the importance oI developing strong ties with valuable customers to stay in touch
with their changing requirements.
32
Relationship strategies need to recognize diIIerences in the value oI customers to the
seller as well as the speciIic requirements oI customers.
33
Marriotts emphasis on careIully
selecting business customers with whom to partner illustrates the importance oI prioritizing
sales strategies by segmenting accounts Ior corporate inIluence and proIit. Relationship
building is appropriate when large diIIerences exist in the value oI customers. Valuable
customers may want close collaboration Irom their suppliers concerning product design,
inventory planning, and order processing, and they may proactively pursue collaboration.
The objective is to develop buyer and seller relationships so that both partners beneIit Irom
the relationship.
Erequent Ilyer programs have been very successIul in building long-term relationships with
customers. The Advantage program pioneered by American Airlines attracted other airlines as
well as hotel chains, credit card companies, and rental car companies. In many diIIerent business
situations, a small percent oI customers account Ior a very large percentage oI purchases. The
80/20 rule is illustrative, which states that 20 percent oI customers are the source oI 80 percent
oI sales.

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-
A strategic alliance between two organizations is an agreement to cooperate to achieve
one or more common strategic objectives. The relationship is horizontal in scope, between
companies at the same level in the value chain. While the term alliance is sometimes
used to designate supplier-producer partnerships, it is used here to identiIy collaborative
relationships between companies that are competitors or in related industries. The alliance
relationship is intended to be long-term and strategically important to both parties. Several
reasons Ior Iorming strategic alliances are shown in Exhibit 7.6. The Iollowing discussion
assumes an alliance between two parties, recognizing that there may be more than two
alliance partners.
Each organizations contribution to the alliance is intended to complement the partners con-
tribution. The alliance requires each participant to yield some oI its independence: Alliances
mean sharing control.
34
The rationale Ior the relationship may be to gain access to markets, uti-
lize existing distribution channels, share technology development costs, or obtain speciIic skills
or resources.
The alliance is not a merger between two independent organizations, although the termina-
tion oI an alliance may eventually lead to an acquisition oI one partner by the other partner. It is
diIIerent Irom a joint venture launched by two Iirms or a Iormal contractual relationship between
organizations. Moreover, the alliance involves more than purchasing stock in another company.
Instead, it is a commitment to actively participate on a common project or program that is strate-
gic in scope.
Weaknesses in alliances may come Irom several causes. Eor example, in 2000 as part oI its
drive to build the worlds number one car and truck company, DaimlerChrysler Iormed a part-
nership with Korean automaker Hyundaitaking a 10.5 percent ownership stake in Hyundai and
promising to build small cars and 100,000 trucks a year in a 50-50 joint venture. The relation-
ship was dogged by acrimonious disputes, cultural clashes, and power struggles, with an increas-
ingly selI-conIident Hyundai determined to be treated as an equal partner. By 2004, the plan to
develop small cars had gone nowhere, and the $700 million truck project was stalled. The time-
line oI the partnership is illustrative:
September 2000Daimler takes an initial 10 percent stake in Hyundai Ior $381 million, aim-
ing to set up a 50-50 joint venture to build 100,000 trucks a year.
November 2001Daimler and Hyundai break ground Ior a $260 million truck engine plant
due to start up in 2004.
October 2003Hyundai halts the project, angry over Daimlers new alliance with Beijing
Automotive to produce Mercedes-Benz autos in the Iast-growing Chinese marketHyundai
already had an exclusive pact with Beijing to make autos in China.
April 2004Insiders say the alliance is near collapse.
35
Poorly structured partnerships may be extremely damaging to all concerned. Eirst, we discuss
the success record oI alliances. Next, diIIerent uses oI alliances are described. Einally, several
alliance success requirements are examined.
-- - The competitive realities oI surviving and prospering in the complex
and rapidly changing business environment encourage companies to Iorm strategic alliances in
many diIIerent industries. Some strategic partnerships have endured Ior substantial periodsa
Euji-Xerox partnership entered its 42nd year in 2004, and Samsung and Corning have been
working together since the 1970s.
36
Nonetheless, the record oI success oI alliances is not Iavorable, and success rates oI less than
50 percent have oIten been Iound by researchers.
37
While the alliance is a promising strategy Ior
enhancing the competitive advantage oI the partners, several Iailures have occurred due to the
complexity oI managing these relationships.

- --
-
The ConIerence Board Inc. surveyed the chieI executive oIIicers (CEOs) oI 350 companies
in the United States, Europe, Canada, and Mexico concerning their experiences with strategic
alliances. The CEOs considered about halI oI their recent alliances to be successIul. Several
reasons are cited Ior those that were not successIul, which are summarized in Exhibit 7.7. The
alliance Iailures are divided into logic and process Iailures.
- - An alliance typically involves a marketing, research and development,
operations (manuIacturing), and/or Iinancial relationship between the partners (Exhibit 7.6).
Capabilities may be exchanged or shared. In addition to Iunctions perIormed by the partners,
other aspects oI alliances may include market coverage and eIIectively matching the speciIic
characteristics oI the partners.
The alliance helps each partner to obtain business and technical skills and experience that
are not available internally. One partner contributes unique capabilities to the other organization
in return Ior needed skills and experience. The intent oI the alliance is that both parties beneIit
Irom sharing complementary Iunctional responsibilities rather than independently perIorming
them.

-
-

-
Source: Erom P. Rajan
Varadarajan and Margaret
H. Cunningham, Strategic
Alliances: A Synthesis oI
Conceptual Eoundations,
Journal of the Academy of
Marketing Science, Eall
1995, 285. Copyright
1995 by the Academy oI
Marketing Science.
Reprinted by permission oI
Sage Publications, Inc.
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Never developed
new product
7.6%
Environment
changed drastically
27.5%
nsufficient information
about partner
18.4%
Wrong partner
18.4%
Overestimated
market
16.3%
Too far removed
from core companies
11.7%
Merged too
many activities
7.1%
Merged too
few activities
9.3%
Leadership
unclear
18.1%
Poor integration
21.2%
Poor
leadership
22.6%
Cultures
too different
21.7%
Logic Failures Process Failures
Note: Data show combined responses from all surveyed regions except Mexico
-- - The success oI the alliance may depend heavily on eIIec-
tively matching the capabilities oI the participating organizations and on achieving the Iull com-
mitment oI each partner to the alliance. The beneIits and the trade-oIIs in the alliance must be
Iavorable Ior each oI the partners. The contribution oI one partner should Iill a gap in the other
partners capabilities.
One important concern in the alliance relationship is that the partner may gain access to
conIidential technology and other proprietary inIormation. While this issue is important, the
essential consideration is assessing the relationships risks and rewards and the integrity oI the
alliance partner. A strong bond oI trust between the partners exists in most successIul relation-
ships. The purpose oI the alliance is Ior each partner to contribute something distinctive rather
than to transIer core skills to the other partner.
38
It is important Ior the managers in each organi-
zation to evaluate the advisability and risks concerning the transIer oI skills and technologies to
the partner.
- Relatedly, it is important to recognize that alliance relationships
may be Iragile and diIIicult to sustain eIIectively, particularly iI there is a lack oI trust or mutu-
ality oI interest between partners.
39
Moreover, careIul analysis is required oI the impact oI a
Iailed alliance on a companys remaining ability to compete and survive. Eor example, in 2001,
when Motorola withdrew Irom a joint project with Psion to develop a product to rival the Palm
Pilot, Psions shares Iell 20 percent on the day, and the company was leIt without suIIicient
resources to complete the project alone.
40
The higher the level oI dependence on a partner organization, the greater the strategic
vulnerability created iI the alliance Iails. Some estimates suggest that as many as 70 percent oI
alliances Iail. It is important that every alliance agreement should include an exit strategy.
Recognizing that alliances are impermanent may maximize their useIul liIe.
41
-
Joint ventures are agreements between two or more Iirms to establish a separate entity. These rela-
tionships may be used in several ways: to develop a new market opportunity; to access an inter-
national market; to share costs and Iinancial risks; to gain a share oI local manuIacturing proIits;
or to acquire knowledge or technology Ior the core business.
42
Eor example, Coca-Cola has a
long-standing 50-50 joint venture with NestleBeverage Partners Worldwide (Iormerly Coca-
Cola and Nestle ReIreshments)to take its tea and coIIee brands into global markets alongside
Nestle products. In some cases, joint ventures can grow valuable assetsin 2001 Xerox was able
to sell halI its stake in Euji Xerox Co. to Euji Ior $1.3 billion, to counter liquidity problems.
43
While joint ventures are similar to strategic alliances, a venture results in the creation oI a new
organization. Environmental turbulence and risk set the rationale Ior the venture more so than a
major skill/resource gap, although both pressures may be present.

-
Source: Chart Irom
Margaret Hart and Stephen
J. Garone, Making
International Strategic
Alliances Work, R-1086
(New York:
The ConIerence Board,
1994), 19. Reprinted with
permission Irom The
ConIerence Board.

- --
-
Honeywell Inc. has several joint ventures worldwide. The manuIacturer and marketer oI con-
trol systems and components Ior homes and businesses has been operating outside the United
States Ior nearly 60 years. The companys chieI executive oIIicer, Michael R. Bonsignore,
describes one venture:
Sinopec-Honeywell involves one oI Honeywells customers, the Chinese National Petroleum
CompanySinopec. In January 1993, Honeywell entered into a joint equity company with
Sinopec Ior a number oI reasons: geographic expansion, market share, and risk diversiIication.
Orders Irom Sinopec doubled in the Iirst year and Honeywell has since attained the central govern-
ments acceptance. However, says Bonsignore, we do have a number oI concerns that we monitor
constantly, such as MEN, the potential Ior Sinopec to become a competitor, and ongoing decen-
tralization oI the decision authority in the Chinese government.
44

Internal partnerships may occur between business units, Iunctional departments, and individual
employees (Exhibit 7.4). The intent is to encourage and Iacilitate cross-Iunctional cooperation
rather than specialization. Key internal processes such as new-product development beneIit Irom
cross-Iunctional cooperation in areas such as research and development, marketing, purchasing,
Iinance, and operations working together to identiIy, evaluate, develop, and commercialize new-
product concepts.
Eor example, P&G uses a corporate collaboration networkMy Ideato allow employees
throughout the company to send ideas to an innovation panel. Projects selected can tap into
P&Gs entire global resource base. P&Gs Corporate New Ventures Group was established in
1997, and by the end oI 1998, 58 new products had been launchedcompared to no new prod-
ucts launched in some years. The Swiffer cleaning product reached market in 10 months, halI the
normal P&G time.
45
The success oI internal relationship strategies requires developing strong internal collabora-
tion that cuts across Iunctional boundaries. As noted in earlier chapters, many companies are
using teams oI people Irom various Iunctions to manage processes such as new-product devel-
opment, customer relationships, order processing, and delivery oI products.
As we discussed in Chapter 1, a market-oriented organization is committed to delivering
superior customer value through market sensing, interIunctional cooperation, and shared deci-
sion making. Several guidelines Ior developing eIIective internal relationships Iollow:
46
1. Demonstrate management support.
2. Start with a pilot team.
3. Keep the teams smalland together.
4. Link the teams to the strategy.
5. Seek complementary skills Ior the teamand look Ior potential.
6. Educate and train.
7. Address the issue oI team leadership.
8. Motivate and reward team perIormance, not just individual perIormance.
The relationship strategy requires attention to the internal structure. The starting point is build-
ing a collaborative customer-driven internal culture.
The importance oI eIIective internal partnering to support market-driven strategy is under-
lined by the remarkable perIormance oI warehouse club Costco compared to archrival Sams
Club, owned by Wal-Mart. Costco combines higher compensation and more generous employ-
ment terms Ior its employees with higher productivity than Sams Club can achieve. The Cross-
Eunctional Eeature describes Costcos clever marketing strategy supported by strong employee
relationships driving competitive advantage.

- --
-
-- -
We know that Iorming and managing eIIective collaborative partnerships between independent
organizations is complex, so we need to look Iurther into the process oI developing eIIective
relationships. The objective oI the relationship is Iirst considered, Iollowed by a discussion oI
several relationship management guidelines.
-
We look at possible strategic objectives oI relationships.
47
In some situations collaborative
action may be an option rather than a requirement.
- - This objective is
a continuing challenge Ior many companies because oI the increasing complexity oI technology
and the short time span between identiIying and commercializing new technologies.
--
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---
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-- -- --
--
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--

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There are several ways to locate and exploit external sources oI research and development:
Collaboration with university departments and other research institutions.
Precompetitive collaborative R&D to spread research resources more widely.
Corporate venturingmaking systematic investments in emerging companies to gain a win-
dow on the technologies and market applications oI the Iuture.
Joint ventures and other Iorms oI strategic partnership that enable a company to acquire new
competencies by borrowing Irom a company with a leadership position.
48
Japanese companies aggressively pursue all oI these strategies, whereas U.S. companies rely
more heavily on internal R&D. However, the Iuture trend is toward expanded use oI external
research and development collaboration by United States and other companies throughout the
world. Eor example, collaboration is extensive among component manuIacturers, personal com-
puter producers, and soItware Iirms.
The role oI the Internet in encouraging and Iacilitating technology sharing is becoming sig-
niIicant. Italian company Olivetti has pioneered multinational collaboration between companies
and research institutions in its multimedia product development project.
49
- - Alliances and other col-
laborative relationships may be promising alternatives Ior a single company interested in
developing a market or entering a global market. This strategy requires Iinding potential
partners that have strong marketing capabilities, and/or market position. Collaboration may be
used to enter a new product market or to geographically expand a position in a market already
served.
Increasingly, major corporations are pursuing collaborative strategies in research and devel-
opment and in gaining market access. General Electric has a corporate objective oI globaliza-
tion, which requires participation in each major market in the world:
This requires several diIIerent Iorms oI participation: trading technology Ior market access; trading
market access Ior technology; and trading market access Ior market access. This share to gain
becomes a way oI liIe.
50
GEs globalization objective has led to Iorming over 100 collaborative relationships.
51
- Competing in mature markets oIten involves either market
domination or market selectivity strategies. Competition in these markets is characterized by a
small core oI major Iirms and several smaller competitors that concentrate their eIIorts in mar-
ket segments. Eirms with small market position need to adopt strategies that enable them to com-
pete in market segments where they have unique strengths and/or the segments are not oI interest
to large competitors. Cooperative relationships may be appropriate Ior these Iirms. The possible
avenues Ior relationships include purchasing components to be processed and marketed to one
or a Iew market segments, subcontracting to industry leaders, and providing distribution services
to industry leaders.
The high entry barriers in producing semiconductors encourage the Iormation oI strategic
alliances.
52
Partnerships are essential in developing niche markets in this industry. Alliances
exist between small U.S. Iirms that have specialized design expertise and Japanese, Korean,
Taiwanese, and European companies with large-scale electronics manuIacturing capabilities.
The alliances make possible market entry Ior the design specialists. The cost oI moving a com-
plex new chip design to commercialization is in excess oI $1 billion.
- - - Competing in international markets
oIten requires companies to restructure and/or reduce product costs. Restructuring may result in
Iorming cooperative relationships with other organizations. Cost reduction requirements may
encourage the Iirm to locate low-cost sources oI supply. Many producers in Europe, Japan, and

- --
-
the United States establish relationships with companies in newly industrialized countries such
as Korea, Taiwan, and Singapore. These collaborative relationships enable companies to reduce
plant investment and product costs.
- -
While collaborative relationships are increasingly necessary, the available concepts and methods
Ior managing these partnerships are limited. Contemporary business management skills and
experience apply primarily to a single organization rather than oIIering guidelines Ior managing
interorganizational relationships. However, the experience that companies have gained in
managing distribution-channel relationships provides a useIul, although incomplete, set oI
guidelines. To expand the existing base oI management knowledge, Collins and Doorley con-
ducted a major global study oI strategic partnerships.
53
Companies in North America, Europe,
Japan, and Korea participated in the study. The research identiIied the eight key guidelines Ior
strategic-partnership management shown in Exhibit 7.8. A brieI discussion oI each guideline
Iollows.
Comprehensive planning is critical when combining the skills and resources oI
two independent organizations to achieve one or more strategic objectives. The objectives must
be speciIied, alternative strategies Ior achieving the objectives evaluated, and decisions made
concerning how the relationship will be structured and managed. To determine the Ieasibility
and attractiveness oI the proposed relationship, the initiating partner may want to evaluate sev-
eral potential partners beIore selecting one.
- - SuccessIul partnerships involve trust and respect between the part-
ners and a willingness to share with each other on various selI-interest issues. ConIrontational
relationships are not likely to be successIul. Prior inIormal experience may be useIul in showing
whether participants can cooperate on a more Iormalized strategic project.
Trust is enhanced by meaningIul communication between the partners.
54
The process oI
building trust leads to better communication. Thus, building and sustaining partnership relation-
ships require both communication and the accumulation oI trust between the organizations.
Trust, in turn, leads to better cooperation among the partners.
- Realizing that conIlicts will occur is an important aspect oI the relationship. The
partners must respond when conIlicts occur and work proactively to resolve the issues:
Even Iirms in successIul partnerships would readily acknowledge that disagreements are
inevitable. Rather than allowing these conIlicts to run their course capriciously, however, adroit
partner Iirms develop mediating mechanisms to diIIuse and settle their diIIerences rapidly.
55
Mechanisms Ior conIlict resolution include training the personnel who are involved in rela-
tionships, establishing a council or interorganizational committee, and appointing a mutually
acceptable ombudsman to resolve problems.
- Eailure to create an eIIective leadership structure can be Iatal; it
makes coordination diIIicult and expensive, slows down development, and can seriously erode
the decision-making process.
56
Strategic leadership oI the partnership can be achieved by

-
-

--
-
-

-

- --
-
(1) developing an independent leadership structure, or (2) assigning the responsibility to one oI
the partners. The Iormer may involve recruiting a project director Irom outside. The latter option
is probably the more Ieasible oI the two in many instances.
Recognizing the interdependence oI the partners is essential in building success-
Iul relationships. Each organization has diIIerent objectives and priorities. Management must
be predominantly by persuasion and inIluence, with a willingness to adapt as circumstances
change.
57
Relationships change over time. The partnership must be Ilexible in order to adjust to
changing conditions and partnership requirements.
- Strategic relationships among companies Irom diIIerent nations are
inIluenced by cultural diIIerences. Both partners must accept these realities. II partners Iail to
respond to the cultural variations, the relationship may be adversely aIIected. These diIIerences
may be related to stage oI industrial development, political system, religion, economic issues,
and corporate culture.
- When the partnership involves both developing technology and
transIerring the technology into commercial applications, special attention must be given to
implementation. Important issues include organizational problems, identiIying a commercial
sponsor, appointing a team to achieve the transIer, and building transIer mechanisms into the plan.
Planners, marketers, and production people are important participants in the transIer process.
- - Einally, the opportunity Ior an organization to
expand its skills and experience should be exploited. Japanese companies are particularly eIIec-
tive in taking advantage oI this opportunity. One objective oI the partnership should be to learn
the skills oI the cooperating Iirm, as well as completing a speciIic project or program.
58
Surprisingly, U.S. companies oIten Iail to capitalize on this opportunity in their interorganiza-
tional relationships. Japanese companies view cooperative ventures as another Iorm oI competi-
tion where they can transIer acquired skills to other parts oI the business.
- -
In addition to establishing a sound process Ior designing and managing alliances, it is important
to consider what is necessary to build an organizational competence in strategic relationships.
The capability to manage eIIectively through partnerships does not exist in all organizations.
Recall the collapse oI the BT and AT&T strategic alliance Ior global telecommunications
described earlier. Partnering eIIectively with other organizations is a key core competence,
which may need to be developed. Eli Lilly is recognized as a company that generates value Irom
its alliances, and this company addresses the skills gap by running partnership training classes
Ior its managers and Ior its partners. Other successIul alliance strategies are operated by com-
panies like Hewlett-Packard and Oracle by establishing a dedicated strategic alliance Iunction in
the company.
59

Many conventional approaches to control and evaluation are inappropriate and ineIIective in
managing interorganizational collaborations. Alliance perIormance evaluation is a critical suc-
cess Iactor, which requires the development and implementation oI a Iormal evaluation process
that reIlects the unique diIIerences between alliances and more traditional organizational Iorms.
A balanced scorecard approach allows evaluation criteria to be speciIied in Iinancial, customer
Iocus, internal business process, and learning and growth dimensions. The goal is to have
measurement metrics with both short- and long-term importance, and to incorporate not only
quantitative measures (e.g., sales, growth, costs) but also important qualitative measures that
speak to the strength and sustainability oI the alliance (e.g., trust, communications Ilows,
conIlicts, culture gaps). Importantly, particularly in the early stages oI an alliance relationship,
qualitative metrics may be the most important predictors oI success.

- --
-
The challenge oI developing appropriate ways to assess alliance perIormance and strength is
considerable. It is useIul to consider measures and metrics against the Iollowing principles:
Metrics should be comparable across alliances.
Metrics should be deIined and discussed with alliance partners.
There should be clarity about the implications oI alliance perIormance.
A process Ior auditing alliance perIormance should be implemented.
Alliance perIormance should be linked to individual perIormance review.
A Iorum should be created Ior reviewing and acting on alliance perIormance data.
61
-- -
Several kinds oI organizations compete in global markets. One Iorm is the multinational corpo-
ration that may operate in several countries, using a separate organization in each country. The
present discussion considers organizational Iorms that involve relationships with other organi-
zations.
Examples oI joint ventures and strategic alliances competing in international markets are dis-
cussed throughout the chapter. The use oI cooperative agreements by companies in the United
States, Japan, and the European Union expanded during the 1990s and 2000s. Global relation-
ships oIIer signiIicant advantages in gaining market access and leveraging the capabilities oI
individual Iirms.
The need to develop more Ilexible organizational Iorms Ior competing in rapidly changing
global markets is illustrated by two types oI organizations: (1) the network corporation, and
(2) the Japanese Iorm oI trading company.
62
We also discuss the strategic role oI government
in global relationships among organizations.
This kind oI organization consists oI a core corporation that
coordinates activities and Iunctions between sources oI supply and end users oI the product. The
network, or hollow corporation, has a relatively small work Iorce, relying instead on independ-
ent organizations Ior manuIacturing and distribution, oIten located at several places throughout
the world. The organizations are linked by a sophisticated inIormation system. The core com-
pany may be vertically integrated at the retail level or, instead, may utilize an independent dis-
tribution system.
One organization oI the network manages the various partnerships and alliances. This net-
work organization coordinates R&D, Iinance, global strategy, manuIacturing, inIormation sys-
tems, marketing, and the management oI relationships.
63
The primary organizing concept is a
small network control center that uses independent specialists to perIorm various Iunctions.
Thus, the priority is placed on buying rather than producing and on partnership rather than
ownership. The network organization must deIine the skills and resources that it will use to
develop new knowledge and skills. Eor example, a core competency oI the network organization
may be designing, managing, and controlling partnerships with customers, suppliers, distribu-
tors, and other specialists.
- The use oI trading companies dates Iar back into history in Asia.
Since they share certain oI the characteristics oI network organizations, a look at this organi-
zation Iorm provides additional insights into interorganizational relationships. Japanese com-
panies have been very successIul in developing and coordinating extensive global operations
and inIormation management.
64
These sogo shosha concentrated primarily on commodity
products, worked most directly with suppliers, and maintained a strong national (rather than
global) perspective.

- --
-
The skills and experience developed by Japanese companies through the sogo shosha provide
these companies an important competitive advantage in developing other Iorms oI Ilexible
organizations, like the network company discussed above. Japans needs Ior natural resources
were important inIluences on the development oI trading companies. Today, these giant organ-
izations are active in helping emerging countries develop their markets such as China and
Vietnam.

While the role oI the government in the United States is largely one oI Iacilitating and regulat-
ing Iree enterprise, governments in several other countries play a proactive role with business
organizations. Eor example, the Japanese government encouraged the development oI the sogo
shosha. In considering the role oI government, we look at three types oI relationships between
government and private industry: (1) the single-nation partnership; (2) the multiple-nation part-
nership; and (3) the government corporation.
- A countrys government may Iorm a partnership with one or a
group oI companies to develop an industry or achieve some other national objective. Japan has
successIully used this method oI creating a national competitive advantage in a targeted indus-
try in several instances.
65
Eor example, the Japanese Ministry oI International Trade and Industry
(MITI) perIorms a coordinating role in industry development. MITI resources and personnel
establish alliances among companies, provide planning and technical assistance, and sponsor
research. Government policy helped Japan build its competitive advantage by encouraging
demand in new industries, Iostering intraindustry competition, and identiIying and encouraging
the development oI emerging technologies.
-- Regional cooperation among nations may encourage com-
panies to Iorm consortium relationships in selected industries. Recall the Strategy Eeature
describing the Airbus Industrie consortium. Airbus Industrie members have received massive
loans Irom the governments oI the participating companies.
66
Boeing and McDonnell Douglas
dominated the industry until government subsidies and multinational sharing oI skills and
resources enabled Airbus to gain second place in the worldwide market Ior large commercial air-
craIt in the early 1990s. Government subsidies Ior Airbus continue in the 21st century.
International partnerships may create signiIicant market change and shiIts in international
trading patterns. Consider the relationship between Korea and China. In the 1990s Koreas Iocus
was on the U.S. market and its Ioreign relations were centered on Washington, DC. Increasingly
in the 21st century, Korea looks at China as the regional leader in diplomacy and statecraIt. In
2003, South Korean businesses invested more in China$4.4 billionthan U.S. companies
who put $4.2 billion into China. Some 25,000 Korean companies manuIacture in China.
Companies like Samsung and LG are using China as a major manuIacturing base to produce
goods more cheaply and increase global market share Ior their electronics products and appli-
ances. While some Iear the eIIects oI the export oI Korean jobs and technology to China, the
relationship between the two countries has major global implications Ior the Iuture.
67
- Nations may operate government-owned corporations, though
in recent years a trend toward privatization oI these corporations occurred in the United
Kingdom, Australia, Mexico, and other countries. Nevertheless, government-supported corpora-
tions continue to compete in various global industries, including air transportation, chemicals,
computers, and consumer electronics. Not surprisingly, competitors oIten are critical oI govern-
ment organizations because oI their unIair advantage resulting Irom government Iinancial sup-
port. Interestingly, in the European airline industry, the privatized carriers show substantially
stronger proIit perIormance compared to state-owned carriers.
68
- Antitrust laws in the United States prohibit certain kinds oI coop-
eration among direct competitors in an industry. The intense global competition and loss oI

- --
-
competitiveness in many industries seem to be changing the traditional view oI lone-wolI com-
petition among companies. While the antitrust laws continue to be in place, there may be more
Ilexibility by government agencies in interpreting whether collaboration among Iirms in an
industry is an antitrust issue. Eor example, the granting oI antitrust immunity is essential in cer-
tain aspects oI the airline alliances described in the Global Eeature.
The competitive realities oI surviving and prospering in the

complex and rapidly changing business environment encour-
age teaming up with other companies, so cooperative strategic
relationships among independent companies are escalating in
importance. The major drivers oI interorganizational relation-
ships are value opportunities, environmental turbulence and
diversity, and skill and resource gaps. The increasing com-
plexity oI technology, Iinancial constraints, the need to access
markets, and the availability oI inIormation technology all
contribute to skill and resource gaps.
In examining the potential Ior collaborative relationships
several criteria need to be evaluated. Important criteria include
determining the underlying logic oI the proposed relationship,
deciding whether partnering is the best way to achieve the
strategic objective, assessing how essential is the relationship,
determining iI good candidates are available, and considering
whether collaborative relationships are compatible with the
corporate culture.
Relationships between organizations range Irom transac-
tional exchange to collaborative partnerships. These relation-
ships may be vertical in the value-added chain or horizontal
within or across industries. Vertical relationships involve col-
laboration between suppliers and producers and distribution
channel linkages among Iirms. Horizontal partnerships may
include competitors and other industry members. The horizon-
tal or lateral relationships include strategic alliances and joint
ventures.
Collaborative relationships are complex, and, not surpris-
ingly, generate conIlicts. Many horizontal relationships have
not been particularly successIul, even though the number oI
these partnerships is escalating throughout the world. Trust
and commitment between the partners are critical to building a
successIul relationship. Planning helps to improve the chances
oI success. The capability to manage eIIectively through part-
nerships requires distinct skills and new approaches, not avail-
able in all organizations.
Several objectives may be achieved through strategic
relationships, including gaining access to new technologies,
developing new markets, building market position, imple-
menting market segmentation strategies, and pursuing restruc-
turing and cost-reduction strategies. The requirements Ior
successIully managing interorganizational relationships
include planning, balancing trust and selI-interest, recognizing
conIlicts, deIining leadership structure, achieving Ilexibility,
adjusting to cultural diIIerences, Iacilitating technology trans-
Iers, and learning Irom partners strengths. The development
oI appropriate control and evaluation approaches Ior these new
business Iorms has become a priority.
Global relationships among organizations may include con-
ventional organizational Iorms, alliances, joint ventures, net-
work corporations, and trading companies. Governments in
several countries play a proactive role in organizational rela-
tionships through coordination, Iinancial support, and govern-
ment corporations.
-
A. Visit the Web site www.alliancestrategy.com and review
the presentations and material available at the site.
Summarize what Iactors should be considered in making
alliances between organizations eIIective.
B. Go to the investor inIormation and company history inIor-
mation on www.ama:on.com. IdentiIy the evolving net-
work oI strategic relationships with customers, suppliers,
and collaborators both on the Web and with conventional
organizations. Which oI these relationships are the most
important to Amazon?
-
A. Review the airline alliance lists, statistics, and news in the
Global Eeature in this chapter. Examine the changes
happening and predicted in airline alliances by searching
airline alliances on the Internet. What conclusions can
be drawn about the strategic vulnerabilities oI alliances?
B. Examine the material presented in the Cross-Eunctional
Eeature. How can it be possible Ior Costco to perIorm well
against competitors when it carries a burden oI higher
labor costs? Are there issues in this case, which may be
worth considering in other situations where a company
Iaces strong low-cost, low-price competition?

- --
-
-- ---
1. Discuss the major Iactors that encourage the Iormation oI
strategic partnerships between companies.
2. Compare and contrast vertical and horizontal strategic
relationships between independent companies.
3. Discuss the similarities and diIIerences between strategic
alliances and joint ventures.
4. A German electronics company and a Japanese electronics
company are discussing the Iormation oI a strategic
alliance to market the other Iirms products in their respec-
tive countries. What are the important issues in making
this relationship successIul Ior both partners?
5. Establishing successIul interorganizational relationships
is diIIicult, according to authorities. Will the success
record improve in the Iuture as more companies pursue
this strategy?
6. Are vertical relationships more likely to be successIul than
horizontal relationships? Discuss.
7. Suppose you are seeking a Japanese strategic alliance
partner to market your Erench pharmaceutical products in
Asia. What characteristics are important in selecting a
good partner?
8. Discuss how alliances may enable Ioreign companies to
reduce the negative reaction that is anticipated iI they tried
to purchase companies in other countries.
9. Discuss how government may participate in helping
domestic companies develop their competitive advantages
in an industry such as aerospace products.
10. IdentiIy and discuss important issues in deciding whether
to create internal cross-Iunctional relationships.
-
1. David W. Cravens, Shannon H. Shipp, and Karen S.
Cravens, Analysis oI Cooperative Interorganizational
Relationships, Strategic Alliance Eormation, and Strategic
Alliance EIIectiveness, Journal of Strategic Marketing,
March 1993, 5570.
2. InIormation collated Irom company Web site:
www.radioshack.com, July 2004.
3. Timothy M. Collins and Thomas L. Doorley, 1eaming Up
for the 90s (Homewood, IL: Business One Irwin, 1991), 5.
4. Arundhati Parmar, Redecoration: Bombay Style,
Marketing News, March 15, 2004, 910.
5. Carliss Y. Baldwin and Kim B. Clark, Managing in an
Age oI Modularity, Harvard Business Review,
SeptemberOctober 1997, 8493 at 84.
6. Ibid.
7. CliII Edwards, Will Souping Up TiVo Save It?
BusinessWeek, May 17, 2004, 8283.
8. Ravi S. Achrol, Evolution oI the Marketing Organization:
New Eorms Ior the Turbulent Environments, Journal of
9. Ibid.
10. Erederick E. Webster Jr., The Changing Role oI
Marketing in the Organization, Journal of Marketing,
October 1992, 117.
11. Andy Pasztor and JeII Cole, Boeing Plans TV, Web
Alliance Ior InIlight Access, Wall Street Journal, April
28, 2000, 5.
12. Gill South, Upwardly Mobile, 1he Business, September
2, 2000, 2629.
13. Matthew SchiIrin, Partner or Perish, Eorbes, May 21,
2001, 2628.
14. Aerospace & Aviation, BusinessWeek, July 26, 2004,
4648.
15. Collins and Doorley, 1eaming Up for the 90s, 8.
16. Andrew Baxter, Internet Heralds New Era oI
Collaboration, Financial 1imes, November 1, 2000, V.
17. The Iollowing discussion is based on James C. Anderson
and James A. Narus, Partnering as a Eocused Market
Strategy, California Management Review, Spring 1991,
9697.
18. Ibid., 100103.
19. Matthew SchiIrin, Partner or Perish, Forbes, May 21,
2001, 2628.
20. Nick Palmer, Alliances: Learning to Change,
www.accenture.com, January 2003.
21. Salvatore Parise and John C. Henderson, Knowledge
Resource Exchange in Strategic Alliances, IBM Systems
Journal 40, no. 4, 2001, 908924.
22. Lars Hallen, Jan Johanson, and Nazeem Seyed-Mohamed,
InterIirm Adaptation in Business Relationships, Journal
of Marketing, April 1991, 30.
23. Anderson and Narus, Partnering as a Eocused Market
Strategy.
24. Concertinad, Financial 1imes, October 17, 2001, 28.
25. John Hagel, Leveraged Growth: Expanding Sales without
SacriIicing ProIits, Harvard Business Review, October
2002, 6977.
26. Bert C. McCammon Jr., Perspectives Ior Distribution
Programming, in Jertical Marketing Systems, ed. Louis
P. Bucklin (Glenview, IL: Scott, Eoresman, 1970), 43.
27. C. K. Prahalad and Venkat Ramaswamy, 1he Future of
Competition. Co-Creating Unique Jalue with Customers
(Cambridge, MA: Harvard Business School Press, 2004).
28. Ibid.
29. Regis McKenna, Relationship Marketing (Reading, MA:
Addison-Wesley Publishing Company, 1991), 43.
30. Erederick E. Webster Jr., The Rediscovery oI the Marketing
Concept, Business Hori:ons, MayJune 1988, 37.

- --
-
31. Noel Capon, Key Account Management and Planning
(New York: Eree Press, 2001).
32. David W. Cravens, The Changing Role oI the SalesIorce in
the Corporation, Marketing Management, Eall 1995, 50.
33. Ibid.
34. Kenichi Ohmae, 1he Borderless World (New York:
Harper Business, 1990), 114.
35. Gail Edmondson and Moon Ihlwan, Driving in DiIIerent
Directions, BusinessWeek, May 3, 2004, 24.
36. Loren Gary, A Growing Reliance on Alliance, Harvard
Management Update, April 2004, 34.
37. Salvatore Parise and John C. Henderson, Knowledge
Resource Exchange in Strategic Alliances, IBM Systems
Journal 40 (4), 2001, 908924.
38. Gary Hamel, Yves L. Doz, and C. K. Prahalad,
Collaborate with Your Competitorand Win, Harvard
Business Review, JanuaryEebruary 1989, 135136.
39. Douglas M. Lambert, Margaret A. Emmelhainz, and
John T. Gardner, So You Think You Want a Partner?
Marketing Management, Summer 1996, 2541.
40. Caroline Daniel, Psion Ealls 19 AIter Motorola Pulls
Out oI Project, Financial 1imes, January 30, 2001, 38.
41. Maria Gonzalez, Strategic Alliances, Ivey Business
Journal, September/October 2001, 4751.
43. Matthew SchiIrin, Partner or Perish, Forbes, May 21,
2001, 2628.
44. Margaret Hart and Stephen J. Garone, Making International
Strategic Alliances Work, R-1086 (New York: The
ConIerence Board Inc.,1994), 19.
45. BusinessWeek E.Bi:, December 18, 1999.
46. Leonard L. Berry, On Great Service (New York: Eree
Press, 1995), 139142.
47. The Iollowing discussion is based on Collins and Doorley,
1eaming Up for the 90s, Chapter 3.
48. Ibid., 30.
49. P. Zagnoli and C. Cardini, Patterns oI International R&R
Cooperation Ior New Product Development: The Olivetti
Multimedia Product, R&D Management, 24, no. 1, 1994,
315.
50. General Electric Company, Operating Obfectives to Meet
the Challenges of the 90s (EairIield, CT: General Electric
Company), March 14, 1988.
51. George S. Day, Market Driven Strategy (New York: The
Eree Press, 1990), 275276.
52. William B. Scott, Global Alliances Spur Development oI
Niche Market Semiconductors, Aviation Week and Space
1echnology, September 9, 1991, 7071.
53. The Iollowing discussion is drawn Irom Collins and
Doorley, 1eaming Up for the 90s, Chapter 5.
54. James C. Anderson and James A. Narus, A Model oI
Distributor Eirm and ManuIacturer Eirm Working
Partnerships, Journal of Marketing, January 1990, 45.
55. Ibid., 56.
57. Ibid., 110.
58. Bernard Wysocki, Jr., Global Reach, 1he Wall Street
Journal, March 26, 1990, A1 and A5.
59. JeIIrey H. Dyer, Prashant Kale, and Harbir Singh, How to
Make Strategic Alliances Work, Sloan Management
Review, Summer 2001, 3743.
60. This discussion is based on: Karen Cravens, Nigel Piercy,
and David Cravens, Assessing the PerIormance oI
Strategic Alliances, European Management Journal 18,
no. 5, 2000, 529541.
61. Jonathan Hughes, Implementing Alliance Metrics. Six
Basic Principles, Vantage Partners White Paper,
www.vantagepartners.com/publications, 2002.
62. Achrol, Evolution oI the Marketing Organization, 8485;
and Webster, The Changing Role oI Marketing, 89.
63. Webster, The Changing Role oI Marketing, 89.
64. Achrol, Evolution oI the Marketing Organization, 84.
65. Michael E. Porter, 1he Competitive Advantage of Nations
(New York: The Eree Press, 1990), 414416.
66. David W. Cravens, H. Kirk Downey, and Paul Lauritano,
Global Competition in the Commercial AircraIt Industry:
Positioning Ior Advantage by the Triad Nations,
Columbia Journal of World Business, Winter 1992, 4658.
67. Moon Ihlwan and Dexter Roberts, Koreas China Play,
BusinessWeek, March 29, 2004, 4852.
68. Brian Coleman, Among European Airlines, the Privatized
Soar to the Top, 1he Wall Street Journal, July 19, 1995, B4.

- -
-
-
Customer Relationship Management (CRM) systems have
attracted wide attention in companies because oI several
beneIits they oIIer. There are a number oI major beneIits
attainable in improving the service received by customers
but most particularly in building and leveraging powerIul
and insightIul databases oI customer inIormation.
However, Iully realizing those beneIits has proved
diIIicult Ior many companies. CRM developments have
paralleled the growth in e-business and the two areas have
several connections, leading to the emergence oI e-CRM
to describe Internet-based initiatives. It is important that
CRM strategy should be developed by marketing execu-
tives with the other business Iunctions involved in CRM.
CRM oIIers sellers the opportunity to gather cus-
tomer inIormation rapidly, to identiIy the most valu-
able customers over a time period, and to increase
customer loyalty by providing customized products
and services. It may also Iacilitate cross-selling by
attracting loyal customers to additional products and
services, and make it easier to capture similar cus-
tomers in the Iuture.
This has been described as tying in an asset, when
the asset is the customer, and CRM supports a
customer-responsive strategy, which gains competitive
advantage when it:
Delivers superior customer value by personalizing the
interaction between the customer and the company.
Demonstrates the companys trustworthiness and
reliability to the customer.
Tightens connections with the customer.
Achieves the coordination oI complex organizational
capabilities around the customer.
1
CRM underpins a Iocus on customer loyalty and reten-
tion, with a goal oI winning a large share oI the total
liIetime value oI each proIitable customer.
-
-
The term CRM is somewhat open-ended because it
means very diIIerent things in diIIerent circumstances. This
reIlects the rapid evolution and development oI this
approach to managing customer relationships. We identiIy
several levels oI CRM below. The term is oIten used to
embrace anything Irom automated customer contact
systems to increase salesIorce productivity, to customer
service centers and automated call centers, to enterprisewide
systems to break down departmental barriers and integrate
inIormation about customers into a single access point.
To some, CRM reIers to little more than building
relationships with customers to match the product and
service oIIer better with customer needs. Others see CRM
as concerned with developing a uniIied and cohesive view
oI the customer, however the customer chooses to com-
municate with the organization (in person, by mail,
Internet, or telephone), and emphasizing enhanced
customer service and the use oI call centers to provide
consistency in how the company interacts with customers.
To yet others, CRM Iocuses on the creation and use oI a
customer database to support decision makers.
Importantly, Peppers and Rogers turn our attention
Irom the technology and hardware oI CRM to its strategic
importance when they deIine CRM as making manage-
rial decisions with the end goal oI increasing the value
oI the customer base through better relationships with
customers, usually on an individual basis.
2
The empha-
sis on strategy built around proIitable customers as the
primary concern oI CRM is emphasized also by Bain &
Co. In their view CRM aligns business processes with
customer strategies to build customer loyalty and increase
proIits over time.
3
Another useIul viewpoint suggests
that CRM consists oI three main elements:
IdentiIying, satisIying, retaining, and maximizing the
value oI a Iirms best customers.
Wrapping the Iirm around the customer to ensure that
each contact with the customer is appropriate and
based upon extensive knowledge oI both the cus-
tomers needs and proIitability.
Creating a Iull picture oI the customer.
4
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--

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- -
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-

- -
-
-
-
One way oI categorizing CRM initiatives is to distin-
guish between operational, analytical, and strategic
CRM levels, as shown in Exhibit 7A.1. All levels oI
CRM have important but diIIerent implications Ior
strategic marketing.

A key element oI CRM is to improve and make consis-
tent the customers service experience. The goal oI
CRM is to use every available source oI inIormation to
build a detailed picture oI each individual customer. It
aims to capture inIormation Irom every contact the
customer has with any part oI the organization, and
to ensure it is available whenever the customer next
interacts with the company.
One aim is to avoid ineIIiciencies Ior the customer
receiving mailshots Irom a bank oIIering a mortgage
to an existing mortgage customer; waiting on the tele-
phone to the utility company while Iiles are retrieved;
providing name and address details every time a book
is purchased by mail order or on an Internet site. The
integration oI customer inIormation through the CRM
system should allow more accurate mailshots; a call
center operative or help desk engineer with instant
access to up-to-date and complete customer inIorma-
tion; and Web sites that recognize a returning customer
and remember dispatch and payment requirements.
The beneIits to the customer Irom CRM initiatives
may also include: improved response times when they
request inIormation; products and services that are
better adapted to their requirements; immediate access
to order status and history inIormation; and more
responsive technical support.
Eor example, the Erance-based hotel group Accor
links CRM data to guest survey inIormation in its U.S.
SoIitel and Novatel hotels, to anticipate the preIerences
oI Irequent users. The VP Ior sales and marketing Ior
Accor North America notes It takes us back to the time
when there were small inns and the owner knew every
customer and treated them as an individual. It should
help streamline check-in and accommodate preIerences
Ior guests who, Ior example, request the same room
every time. The group will be able to market with a
microscope instead oI a telescope.
5

In addition to enhancing customer service eIIiciency
and impacting on the quality oI customer relationships,
the integration and pooling oI individual customer
inIormation by CRM systems also creates a powerIul
resource Ior analysis. Knowledge about which products
and services a speciIic customer buys, through which
channels, and at what times, oIIers unprecedented
opportunities Ior more precise direct marketing oIIers
and Ior Iocusing on the best prospects in a market, in
terms oI their proIitability and growth potential Ior
the seller. Eor example, bookseller Borders uses its
customer database to send e-mails tailored to the cus-
tomers reading interests to alert them to upcoming
releases.
The database created through CRM technology
should contain inIormation about the Iollowing:
1ransactionsthis should include a complete pur-
chase history Ior each customer with accompanying
details (date, price paid, products purchased).
Customer Contactswith multiple channels oI dis-
tribution and communication the database should
record all customer contacts with the company
and its distributors, including sales calls, service
requests, complaints, inquiries, and loyalty program
participation.
Descriptive InformationIor each individual cus-
tomer, relevant descriptive data that provide the basis
Ior market segmentation and targeted marketing
communications.

-
Source: Adapted Irom Charlotte Mason, Perspectives on Teaching Analytically
Oriented CRM, presentation at AMA CRM Eaculty Consortium, 2004.
- - - -
-
Strategic CRM
OperationaI CRM
AnaIyticaI CRM
nfrastructure for
customer knowledge
Targeted marketing
communications and
offers
Customer service
Customer data capture
Customer database
Customer relationships
Customer value
Competitive differentiation
Market segmentation
Strategic positioning

- -
-
-
Response to Marketing Stimuliwhether the cus-
tomer responded to speciIic advertising, a price oIIer,
a direct marketing initiative, or a sales call, or any
other direct contact.
6
Increasingly sophisticated soItware is available to
undertake data mining and to model data Irom the CRM
database.
Eor example, while traditional approaches to market
segmentation have identiIied groups oI customers by
their purchase behavior or descriptive data, CRM oIIers
the opportunity to examine individual customers or nar-
rowly deIined groups, and to calculate what each oIIers
the company in proIits. The concept oI customer lifetime
value (CLV) is illustrative. CLV calculates past proIit
produced by the customer Ior the Iirmthe sum oI all
the margins oI all the products purchased over time, less
the cost oI reaching that customer. To this is added Iore-
casts oI margins on Iuture purchases (under diIIerent
assumptions Ior diIIerent customers), discounted back to
their present value (because proIit we expect in Iive years
time is worth less to us than proIit we make this year).
The CLV calculation is a powerIul tool Ior Iocusing
marketing and promotional eIIorts where they will be
most productive. Other novel data analyses Iacilitated
by CRM include market basket analysisthat is, exam-
ining what products are purchased together by diIIerent
customers, and click analysis based on Web site visits
and purchases to better understand online customer
behavior.
7

Importantly, the creation oI CRM inIormation resources
and the adoption oI appropriate soItware tools
8
to make
sense oI the inIormation is building an important source
oI competitive advantage Ior many companies that goes
beyond the conIines oI call centers and targeted com-
munications.
The strategic use oI CRM resources reIlects the shiIt
in Iocus by marketing executives to the customer who
delivers long-term proIits, that is, an emphasis on cus-
tomer retention rather than acquisition. Well-known
metrics suggest that as little as a 5 percent increase
in customer retention can have an impact as high as
95 percent on the net present value delivered by the
customer.
9
Other studies by McKinsey Iind that repeat
customers generate over twice as much gross income as
new customers.
10
CRM makes it much easier Ior execu-
tives to Iocus strategy on customer proIitability and the
gains Irom reducing customer churn.
Interestingly, as CRM evolves and oIIers executives
deeper insights into their customer base, the new inIor-
mation may challenge strategic assumptions in impor-
tant ways. Eor example, the points made above suggest
a powerIul linkage between enhanced customer loyalty
and higher customer proIitability. However, companies
are discovering through CRM database analysis that
this is not always true. Some groups oI customers may
not justiIy the costs required to retain them, because the
real Iit between their needs and the companys products
is weak. Just because a group oI customers was proI-
itable in the past, it may be dangerous to assume this
will always be true. Eor example, many nonloyal cus-
tomers are initially proIitable, causing the company to
chase them Ior Iurther proIitsbut once these cus-
tomers have ceased buying, they become increasingly
unproIitable iI the company continues to invest in them.
CRM data provide executives with a unique basis to
address such issues as loyalty and proIitability on the
basis oI Iact instead oI assumption, and to Iocus on indi-
vidual customers, not groups containing many dissimilar
buyers.
11
We say more about the strategic beneIits oI
CRM below.
In short, while the Iront-end oI CRM systems is
about customer service and building stronger customer
relationships, the analytical level provides a back-end
or inIrastructure Ior decision support, which links to the
strategic level oI CRM.
-
Corporate expenditures on CRM technology are running

at very high levels across the world. Estimated expendi-
tures rose Irom $20 billion in 2000 to $46 billion in
2003, with signs oI continued growth. Nonetheless, the
evidence oI the perIormance oI CRM systems has been
disappointing Ior many companies. The Gartner Group
concluded in 2002 that 55 percent oI all CRM projects
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-
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do not produce results, and the Bain & Co. 2001 survey
oI management tools ranked CRM in the bottom three
Ior satisIactionindeed, one in Iive users in the Bain
survey reported their CRM initiatives had not only Iailed
to deliver proIitable growth, but had also damaged long-
term customer relationships.
12
One report suggests that the major components oI the
successIul implementation oI CRM are:
A Iront oIIice that integrates sales, marketing, and
service Iunctions across all media (call centers, peo-
ple, retail outlets, Internet).
A data warehouse that stores customer inIormation
and the appropriate analytical tools with which to
analyze that data and learn about customer behavior.
Business rules developed Irom the data analysis to
ensure the Iront oIIice beneIits Irom the Iirms learn-
ing about its customers.
Measures oI perIormance that enable customer rela-
tionships to continually improve.
Integration into the Iirms operational and support (or
back oIIice) systems, ensuring the Iront oIIices
promises are delivered.
13
Indeed, there have been several suggestions that high
Iailure rates associated with CRM are caused by
managers underestimating the real organizational
changes required Ior eIIective implementation that
unlocks the beneIits oI CRM. While the Iront-end oI
CRM systems is concerned with building databases inte-
grating customer data, providing better customer serv-
ice, and establishing systems like automated call centers
Ior enhanced responsiveness, achieving the Iull potential
oI CRM requires change in companywide processes,
organization structure, and corporate culture.
Bain & Co. research suggests that there are Iour sig-
niIicant pitIalls to avoid in CRM initiatives:
1. Implementing CRM beIore creating a customer strat-
egysuccess relies on making strategic customer
and positioning choices, and this outweighs the
importance oI the computer systems, soItware, call
centers, and other technologies.
2. Putting CRM in place beIore changing the organiza-
tion to matchCRM aIIects more than customer-
Iacing processes, it impacts on internal structures and
systems that may have to change.
3. Assuming that more CRM technology is necessarily
better, rather than matching the technology to the
customer strategy.
4. Investing in building relationships with disinterested
customers, instead oI those who value them.
14

Erom the perspective oI strategic marketing, there are
several reasons why CRM is important and why there
should be marketing involvement in decisions about
CRM.
It is important that the adoption and implementation oI

CRM should be seen as more than technology Iocused
on eIIiciency. There are signiIicant implications Ior
the strategic positioning oI a company and its cus-
tomer relationships, where the voice oI marketing
should be heard.
-
Operationally it is important not to assume that the driv-
ers oI value Ior all customers are the same, or that CRM
is the key to all important customer relationships. Eor
example, there are signs that many consumers are weary
with call centers and automated responses.
-
The availability oI CRM data provide the opportunity to
update the measures used by managers to assess the suc-
cess oI products and services in the marketplace.
Traditional Iinancial and market-based indicators like
sales, proIitability, and market share will continue to be
important. However, CRM allows the development oI
measures that are customer-centric and more insightIul
into marketing strategy eIIectiveness. CRM-based
measures oI perIormance (both online and oIIline) may
include: customer acquisition costs; conversion rates
(Irom lookers to buyers); retention/churn rates; same
customer sales rates; loyalty measures; and customer
share oI wallet.
15
--
It is important that when decisions are made about a
companys customer priorities, Ior example, on the basis
oI historical customer proIitability, that long-term issues
should be considered. Customers who are currently
unproIitable may be attractive long-term prospects Ior

- - - --

--

- -
-
-
suppliers who maintain loyalty through the hard times
until the customers become proIitable, and customers
who are currently proIitable may not be the best
prospects Ior the Iuture. The simple availability oI CRM
inIormation should not be allowed to override strategic
choices oI customers to be retained where a long-term
relationship may be highly attractive. This is why the
active participation oI marketing executives in CRM
initiatives remains a priority. Customer liIetime value
is an attractive measure to Iocus on long-term customer
attractiveness. Eor example, in many countries retail
banks aggressively recruit young people as customers
when they are undergraduate and graduate students (and
likely to be unproIitable to the bank) with the goal oI
retaining the customer with a better than average chance
oI becoming a high-net-worth individual (and oIIering
proIitable opportunities to the bank).

II some customers are unproIitable, then rather than
Iiring the customer, the competitive issue may be how
to change the route to market to make then proIitable to
the company. Eor example, when British Airways made
the decision to Iocus only on its proIitable business-class
passengers at the expense oI economy travelers, Virgin
Airways gained the economy-class passengers at BAs
cost. CRM data may provide one oI the most powerIul
tools Ior identiIying diIIerent customers on the basis oI
their behavior and other characteristics, to locate those
whose needs have good Iit with a companys capabili-
ties. As one-to-one marketing expert Don Peppers has
noted: Eor every credit card company that wants to
concentrate on higher income customers, theres another
credit card company that wants to concentrate on lower
income customers, and they do it by streamlining their
service and making it more cost-eIIicient.
16
It is impor-
tant that decisions about customer choices should reIlect
strategic priorities.

Investment in CRM to build competitive advantage may
be an illusion iI a company Iocuses only on automated
call centers and customer complaint systems. The level
oI expenditure on CRM suggests that most competitors
in most markets will have similar resources, and may
be quicker to get to the real competitive strengths in
aligning resources and capabilities around customers.
Competitive advantage is likely to require more than just
investment in CRM technology, particularly iI it is
poorly implemented. Similar CRM technology is avail-
able to most companies in most markets, and the issue
Ior competitive advantage enhancement is not having
the technology but how it is used.
-
One oI the most important aspects oI CRM Irom a
strategic marketing perspective is the creation oI a major
new source oI customer knowledge. Used appropriately
the databases and inIormation stores created through
CRM technology may be one oI the most valuable
resources in the company Ior uncovering new value-
creating opportunities Ior customers and Ior developing
market understanding and insights ahead oI the compe-
tition. As a Iurther resource Ior developing and
exploiting market sensing capabilities, CRM systems
have enormous potential, which some organizations
are now beginning to exploit to build competitive
advantage.
- -
The Web site oI the Database Marketing Institute, with a

number oI articles and speeches concerning recent develop-
ments in database marketing, available to be downloaded.
A site with extensive inIormation about developments in data

mining, and articles and papers on this topic Ior download.
The Web site oI the Peppers & Rogers Group Ieatures the
work and consultancy oI Don Peppers and Martha Rogers.
White Papers are available Ior download. A Iree subscription
to the inside 1to1 newsletter is also available.
The Web site oI the Teradata Division oI NCR. It contains an

interesting technical library on data warehousing and data
mining as well as customer case studies.
- -
-

-
-
-
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-
Innovation is essential to all organizations continuing growth and perIormance in the global
marketplace. Innovation takes many Iorms, including new goods and services, organizational
processes, and business designs. Importantly, even when the critical role oI innovation is recog-
nized by managers, deciding which innovation opportunities to pursue is a demanding challenge.
Organizations must develop a culture oI innovation and build eIIective processes to identiIy
innovation opportunities and transIorm ideas into new-product successes.
The economic pressures and market turbulence that impacted companies in a wide range oI
industries during the early years oI the 21st century shiIted many executives strategic priorities
away Irom the development oI cutting-edge new products.
1
The innovation processes oI com-
panies like Boeing, Kodak, Motorola, and 3M were not meeting the challenges oI aggressive
development oI cutting-edge new products. Instead, short-term, bottom-line perIormance was
the center oI attention. These short-term cost initiatives may sometimes be necessary, but it is
essential to sustain long-term innovation strategies. Innovation creates competitive advantage
and value Ior customers and the organization.
Breakthrough innovations provide vital avenues Ior company growth. Consider, Ior example,
light-emitting diodes (LEDs). LEDs promise to replace todays glass encased incandescent and
Iluorescent light bulbs: LED lights use Iar less electricity than an average bulb, and they shine Ior
a Iar longer time beIore burning out.
2
The market potential is exciting but there are many chal-
lenges in developing LEDs Ior broad-based lighting applications. Several companies are pursu-
ing initiatives to move LED technology into the $40 billion lighting market.
3
The players include
General Electric, Philips, and other electronic Iirms. Two major hurdles are cost oI the diode and
the quality oI the light. The breakthrough is at least a Iew years away and probably longer.
In this chapter we consider the planning oI new products, beginning with a discussion oI cus-
tomer needs analysis. Next, we discuss the steps in new-product planning, including generating
ideas, screening and evaluating the ideas, business analysis, product development and testing,
designing the market entry strategy, market testing, and new-product introduction. The chapter
concludes with a discussion oI variations in the generic new-product planning process.
- - --
New-product opportunities that oIIer superior value to customers range Irom totally new
products to improvements in existing products. Eirst, we consider the diIIerent types oI new
products. Next, the importance oI Iinding customer value opportunities is discussed. Einally,
important drivers oI successIul innovations are examined.

-
-
-
- -
New goods and services introductions can be classiIied according to (1) newness to the
market and (2) the extent oI customer value created, resulting in the Iollowing types oI new
products:
4
1ransformational Innovation. Products that are radically new and the value created is
substantial. Examples include CNN News Channel, Automatic Teller Machines (ATMs), and
digital cameras.
Substantial Innovation. Products that are signiIicantly new and create important value Ior
customers. Examples include Kimberly-Clark Huggies/Nappies and Diet Coke.
Incremental Innovations. New products that provide improved perIormance or greater
perceived value (or lower cost). An example is a new Coca-Cola Ilavor.
A companys new-product initiatives may include innovation in one or more oI the three
categories. The reality is that many new products are extensions oI existing product lines and
incremental improvements oI existing products rather than totally new products. These exten-
sions and improvements account Ior as much as 70 to 80 percent oI all innovations. The plan-
ning process we discuss in this chapter applies to any oI the three categories and is used in
planning new services as well as tangible products. The Innovation Eeature describes some
interesting innovation initiatives by Intel and MicrosoIt that extend outside their core business
Iocus but leverage their brand recognition and proprietary technologies. We discuss brand lever-
aging in Chapter 9.
New-product initiatives are guided by customer needs analysis. Even transIormational prod-
uct ideas should have some relationship to needs that are not being met by existing products.
However, as we discuss shortly, potential customers may not always be good sounding boards
Ior radically new innovations. Importantly, these innovations sometimes have a disruptive
impact on existing products.

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-
-
-
Planning for New Products
- -
Customer needs yield important inIormation Ior determining where value opportunities exist
in developing new products. Market segment identiIication and analysis help identiIy which seg-
ments oIIer new-product opportunities to the organization. Extensive study oI existing and
potential customers and the competition are vital in guiding eIIective new-product planning.
We know that customer value is the combination oI beneIits provided by a product minus all
oI the costs incurred by the buyer (Chapter 1). Customer satisIaction indicates how well the
product use experience compares to the value expected by the buyer. The closer the match
between expectations and the use experience, the better the resulting value.
- The objective oI customer value analysis is to identiIy needs Ior (1) new
products, (2) improvements in existing products, (3) improvements in the processes that produce
the products, and (4) improvements in supporting services. The intent is to Iind gaps (opportu-
nities) between buyers expectations and the extent to which they are being met (Exhibit 8.1).
Everyone in the organization needs to be involved in this process. This market-driven approach
to product planning helps to avoid a mismatch between technologies and customer needs.
A diIIerence between expectations and use experience may oIIer a new-product opportunity.
Eor example, an alert U.S. Surgical Corporation (USS) salesperson saw an opportunity to satisIy
a surgical need that was not being met with existing products. USSs products include staplers
Ior skin closure and other surgical applications. The close working relationship oI USS sales rep-
resentatives with surgeons in operating rooms gives USS a critical competitive advantage.
5
The
salesperson identiIied the new-product opportunity by observing surgeons early use oI selI-
developed instruments to perIorm experiments in laparoscopy. Using this procedure, the surgeon
inserts a tiny TV camera into the body with very thin surgical instruments. USS responded
quickly to this need by designing and introducing a laparoscopic stapler. The product is used in
gall bladder removal and other internal surgical applications.
Buyers satisIaction with existing products and brands is evaluated by considering various
product/service attributes that identiIy buyers preIerences and comparisons oI competing
brands. The comparisons may include preIerence mapping and other analyses that we discussed
in earlier chapters. The USS surgical product idea is an example oI lead customer analysis.
Lead customers are those that are the Iirst to anticipate new product trends. The objective oI the
various preIerence analysis techniques is to identiIy the important preIerences Ior the buyers in
speciIic market segments.
- - Each value opportunity should be con-
sidered in terms oI whether the organization has the capabilities to deliver superior customer
value. Organizations will normally have the capabilities needed Ior product line extensions and

-
New-Product
Opportunities
Customer Value
Expectations
Product Use
Experience

-
-
-
incremental improvements. Developing products Ior a new product category requires realistic
assessment oI the organizations capabilities concerning the new category. Partnering with a
company that has the needed capabilities is an option concerning the addition oI a new product
category. Eor example, Healthy Choice (ConAgra) Eoods Inc. partnered with Kellogg to oIIer a
new line oI breakIast cereals.
- - Customers may not be good guides to totally new
product ideas that may be called radical or breakthrough innovations since they create new Iam-
ilies oI products and businesses.
6
When such ideas are under consideration, potential customers
may not understand how the new product will replace an existing product. The problem is that
customers may not anticipate a preIerence Ior a revolutionary new product.
7
Eor example, initial
response Irom potential users oI optical Iibers, VCRs, Eederal Express, and CNN was not
encouraging. In these situations, management must Iorm a vision about the innovation and be
willing to make the commitment to develop the technology as Corning Inc. did with optical Iiber
technology. The risk, oI course, is that managements vision may be Iaulty.
A study oI successIul U.S. Iirms competing against Japanese companies in electronics-
related markets points to the critical role oI both radical innovations and incremental product
improvements:
These businesses built and renewed, and continue to build and renew, their competitive advantage
through radical and generational innovations. They sustained that advantage over time
through incremental product line improvements and extensionsbut it is on the basis oI the
riskier, Iailure-laden, expensive and time-consuming eIIorts to pioneer new businesses and new
generations oI technology that their competitive advantage was and still is established.
8
Incremental product improvements are guided by analyzing customer value opportunities
(Exhibit 8.1), whereas conventional approaches to Iinding new-product opportunities are not
very useIul in evaluating potential transIormational innovations:
The Iamiliar admonition to be customer-driven is oI little value when it is not at all clear who the
customer iswhen the market has never experienced the Ieatures created by the new technology.
Likewise, analytic methods Ior evaluating new product opportunities (e.g., discounted cash Ilow
and market diIIusion analyses) appear to be much more appropriate Ior incremental than Ior
discontinuous innovation.
9
Radical innovations have the potential oI disrupting existing (sustaining) technologies, and
creating negative impacts on the leading Iirms that pursue innovation strategies using existing
technologies.
10
Examples oI disruptive innovations include Amazon.com, JetBlue (airline),
salesIorce.com, and steel minimills. LED lighting is a potential disruptive threat to incandescent
and Iluorescent light bulbs. These disruptive technologies are oIten not considered to be threats
by Iirms pursuing sustaining technologies. IdentiIying threats and developing viable strategies
Ior disruptive technologies is a major management challenge. Clayton Christensen and Michael
E. Raynor in 1he Innovators Solution oIIer a compelling analysis oI these threats and provide
important guidelines Ior managing disruptive innovations.
11
The challenge Ior companies con-
Ironted with potential disruptive opportunities and threats is recognizing that product planning
processes diIIer Ior sustaining and disruptive innovations. Executives must manage both
processes. It may be necessary to position the disruptive technology in a separate organization
independent Irom the core organization.
To avoid missing out on new technologies, IBM has changed the way it identiIies and pur-
sues promising new ideas. Because new ideas Iall between organizational boundaries and may
conIlict with existing business units, the ideas are managed separately and diIIerently:
Hori:on One Businesses are traditional, mature businesses such as mainIrame computers.
Hori:on 1wo Businesses are the current growth businesses.

-
-
-
Hori:on 1hree Businesses are new, young businesses that are put in separate organizational units,
are insulated Irom traditional management methods and perIormance yardsticks, and receive per-
sonal sponsorship Irom senior managers to protect them Irom other interests in the company.
12
Unless these initiatives are taken, the sustaining technology is likely to dominate innovation
activities. A good market/technology match is important in being successIul with radical
technologies. Priority should be given to market niches that the traditional technology does
not serve well. Christensen and Raynor also propose that products Irom disruptive technologies
that are not currently valued by customers may match Iuture value requirements very well. The
eventual strong preIerence Ior digital photography displayed by buyers is illustrative.
The new-product planning process we discuss in this chapter is appropriate Ior planning
incremental product improvements, and it can also be used in radical innovation, as a separate
organizational initiative. We discuss variations to the generic new-product planning process at
the end oI the chapter.
-- -- -
Certain companies seem to consistently excel over others in developing successIul new products.
SuccessIul innovators oIten display similar characteristics. Importantly, the strategic initiatives
shown in Exhibit 8.2 have consistently been good predictors oI successIul innovation based on
research studies, management judgment and experience, and analysis oI speciIic companies
innovation experience. These initiatives reIer to the organization as an innovator rather than spe-
ciIic new-product projects, which may be impacted by situation speciIic Iactors.
Creating an innovative culture is essential to generating successIul new products. Research
Iindings constantly point to the importance oI an innovative organizational climate and culture.
13
This requires positioning innovation as a distinct organizational priority, and communicating the
importance oI innovation to all employees. Moreover, deciding the right innovation strategy
involves deIining the product, market, and technology scope oI the organization. Corporate pur-
pose and scope set important guidelines and boundaries Ior new-product planning. High-quality
new-product planning processes are essential to implement the organizations innovation strat-
egy. Importantly, achieving successIul new-product outcomes requires allocating adequate
resources to new-product initiatives. Einally, the extent to which the organization can leverage
its capabilities into promising new-product and market opportunities enhances innovation per-
Iormance (iI the leveraging eIIorts are successIul). Our earlier Innovation Eeature discussion oI
the Intel and MicrosoIt consumer products is an example oI leveraging.

--
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-
Strategic
nitiatives
Creating an
nnovative
Culture
Selecting the
Right nnovation
Strategy
Developing and
mplementing
Effective New-
Product Processes
Making Resource
Commitments
Leveraging
Capabilities

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A new product does not have to be a high-technology breakthrough to be successIul, but it must
deliver superior customer value. Post-it Notes have been a big winner Ior 3M Company.
14
We
know that the notepaper pads come in various sizes and each page has a thin strip oI adhesive
on the back which can be attached to reports, telephones, walls, and other places. The idea came
Irom a 3M researcher. He had used slips oI paper to mark songs in his hymnbook, but the paper
kept Ialling out. To eliminate the problem, the employee applied an adhesive that had been
developed in 3Ms research laboratory that Iailed to provide the adhesive strength needed in the
original use situation. The adhesive worked Iine Ior marking songs in the book. Interestingly,
oIIice-supply vendors initially saw no market Ior the sticky-back notepaper. The 3M Company
employed extensive sampling to show the value oI the product. Over the signature oI the CEOs
administrative assistant, samples were sent to executive assistants at all Fortune 500 companies.
AIter using the supply oI samples, the executive assistants wanted more. Today, Post-it-Notes
are indispensable in both oIIices and homes.
Creating an innovative culture is an important Ioundation Ior innovation (Exhibit 8.2). It is
also necessary to set some boundaries concerning the types oI new products to be considered Ior
possible development. We examine these issues Iollowed by a discussion oI the steps in the new-
product planning process.

Open communications throughout the organization and high levels oI employee involvement
and interest are characteristic oI innovative cultures. Recognizing the importance oI developing
a culture and innovation strategy, Intels CEO has pursued several actions intended to encour-
age innovation initiatives beyond the core chip business. Management also changed the
structure oI the organization to make it more Ilexible to allow new ideas to thrive (see earlier
Innovation Eeature). Evidence oI innovative cultures may be Iound in corporate mission
statements, advertising messages, presentations by top executives, and case studies in business
publications.
Creating (or strengthening) an innovation culture can be encouraged by several interrelated
management initiatives:
15
Plan and implement a two-day innovation workshop oI top executives to develop an innova-
tion plan. This would involve use oI cross-Iunctional teams, resource allocations, rewards,
and innovation perIormance metrics.
Develop an innovation declaration highlighting the companys objectives and senior
managements roles and responsibilities.
Conduct innovation training programs Ior employees and managers to encourage commit-
ment and involvement.
Communicate the priority oI innovation via articles, newsletters, and presentations to
employees, shareholders, and customers.
Schedule innovation speakers on a regular basis to expose employees to innovation
authorities.
The organizations innovation strategy spells out managements choice oI the organizations
most promising opportunities Ior new products. This strategy needs to be Iormulated by taking
into account the organizations distinctive capabilities, relevant technologies, and the market
opportunities that provide a good customer value match with the organizations capabilities.
A major benchmarking study oI 161 business units Irom a broad range oI industries in the United
States, Germany, Denmark, and Canada indicates that a careIully Iormulated and communicated
new-product innovation strategy is one oI three cornerstones oI superior new-product perIorm-
ance.
16
A successIul new-product strategy includes:

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1. Setting speciIic, written new-product objectives (sales, proIit contribution, market,
share, etc.).
2. Communicating across the organization the role oI new products in contributing to the goals
oI the business.
3. DeIining the areas oI strategic Iocus Ior the corporation in terms oI product scope, markets,
and technologies.
4. Including longer-term, transIormational projects in the portIolio along with incremental projects.
Implementing each oI these new-product strategy guidelines should assist management in
selecting the right innovation strategy.
In 2004 Philips, Europes consumer-electronics giant, launched new innovation strategy
guidelines:
17
All products should conIorm to the philosophy designed around youthe consumer.
Products should be easy to use but not through low technology.
Products should be advanced.
The strategy is intended to guide a transIormation process Ior Philips, which is clearly Iocused
on the customer (Exhibit 8.1). Interaction across business units is encouraged.
---
Creating the right culture and selecting the right innovation strategy are essential but not
suIIicient initiatives in successIul innovation (Exhibit 8.2). Innovation must be achieved through
the processes put in place by the organization. The previously discussed benchmarking study
Iound that having a high-quality new-product process in place is the most important cornerstone
oI new-product planning perIormance, ahead oI both selecting the right innovation strategy and
committing necessary resources to new-product development.
Developing successIul new products requires systematic planning to coordinate the many
decisions, activities, and Iunctions necessary to move the new-product idea to commercial suc-
cess. A generic planning process can be used in planning a wide range oI new products. There
may be necessary modiIications in the process in certain situations and these issues are discussed
in the last section oI the chapter. The major stages in the planning process are shown in Exhibit
8.3. We examine each process stage to see what is involved, how the stages depend on each
other, and why cross-Iunctional coordination oI new-product planning is very important.

--
Customer needs
analysis
dea generation
Screening and
evaluation
Marketing strategy
development
Business analysis
Product
development
Testing
Commercialization

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SuccessIul new-product planning requires: (1) generating a continuing stream oI new-product
ideas that will satisIy the organizations requirements Ior new products and (2) putting in place
processes and methods Ior evaluating new-product ideas as they move through each oI the
planning stages.
The Iollowing initiatives are important in eIIectively applying the planning process to
develop and introduce new products. Eirst, the process involves diIIerent business Iunctions, so
it is necessary to develop ways oI coordinating and integrating cross-Iunctional activities in the
planning process. Second, compressing the time span Ior product development creates an impor-
tant competitive advantage. Eor example, U.S. Surgicals quick response to laparoscopy equip-
ment development enabled the company to establish Iirst position in the market. Third, the
product planning activities consume resources and must be managed so that the results deliver
high levels oI customer satisIaction at acceptable costs. Einally, the planning process is used Ior
new-service development as well as physical products. Certain diIIerences in new-service plan-
ning are highlighted as we discuss the planning stages.
--
Since new product development involves diIIerent business Iunctions such as marketing, Iinance,
operations, human resources, and research and development (R&D), ways oI encouraging cross
Iunctional interaction and coordination are essential. Various organizational designs may be
employed to coordinate interIunctional interactions that are necessary in developing successIul
new products, including:
18
Coordination oI new-product activities by a high-level business manager.
InterIunctional coordination by a team oI new-product planning representatives.
Creation oI a cross-Iunctional project task Iorce responsible Ior new-product planning.
Designation oI a new-products manager to coordinate planning among departments.
Eormation oI a matrix organizational structure Ior integrating new-product planning with
business Iunctions.
Creation oI a design center which is similar in concept to a new-product team, except the
center is a permanent part oI the organization.
The design team and design center are more recent new-product coordination mechanisms. Though
cross-Iunctional teams are widely cited as promising new-product planning mechanisms, research
Iindings suggest that they may be most appropriate Ior planning truly new and innovative prod-
ucts.
19
The more traditional bureaucratic structures (e.g., new-products manager) may be better in
planning line extensions and product improvements. The danger oI the traditional structure is Iail-
ing to identiIy new-product opportunities outside the scope oI existing new-product planning.
The nature and scope oI new-product projects may inIluence how the responsibilities are
allocated. Several characteristics oI various new-product development eIIorts are described in
Exhibit 8.4. Consider, Ior example, the enormous team oI people involved in developing the
Boeing 777 commercial aircraIt. The organizational design Ior such a large-scale project is likely
to be more Iormal than a small-scale project like the Stanley screwdriver. Interestingly, the
complete design and production Ior the 777 aircraIt was accomplished by computer that linked
together the various people and Iunctions involved as well as partnering companies. We discuss
organizational designs Iurther in Chapter 14.

Guided by the new-product innovation strategy, Iinding promising new ideas is the starting
point in the new-product development process. Idea generation ranges Irom incremental
improvements oI existing products to breakthrough products. An example oI an incremental

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improvement is Pepsis vanilla Ilavor carbonated drink introduced in 2003. An example oI a
totally new product is a drug that will cure AIDS.
- -
New-product ideas come Irom many sources. Limiting the search Ior ideas to those generated by
internal research and development activities is Iar too narrow an approach Ior most Iirms.
Sources oI new-product ideas include R&D laboratories, employees, customers, competitors,
outside inventors, acquisition, and value-chain members. Both solicited and spontaneous ideas
may emerge Irom these sources. Some companies are developing open-market innovation
approaches using licensing, joint ventures, and strategic alliances. By opening their boundaries
to suppliers, customers, outside researchers, even competitors, businesses are increasing the
import and export oI new ideas to improve the speed, cost, and quality oI innovation. Eor exam-
ple, when Pitney-Bowes was challenged with protecting consumers and postal workers Irom
envelopes tainted with anthrax spores by terrorists, they had no in-house responsetheir expert-
ise is in secure metering systems to protect postal revenues. They collected ideas Irom Iields as
diverse as Iood handling to military security, beIore working with outside inventors to introduce
new products and services to secure mail against bioterrorismspecialized scanners and imag-
ing systems to identiIy suspicious letters and packages.
20
Eor many major companies, the slowdown in traditional R&D spending has mandated a broad
global search Ior new ideas Irom any source. Eor example, giant chemical companies like Dow
and BASE post research problems at a Web site run by Eli Lilly & Co.s InnoCentive Inc., to match
scientists anywhere in the world with research problems. InnoCentive has a community oI 30,000
scientists worldwide and pays up to $100,000 Ior solutions posted to the site. Others like Intel are
locating satellite research Iacilities close to leading research universities to tap into academic
expertise. In some cases the breakthrough ideas come Irom research-based collaboration. Eor
example, Xerox has broken with its tradition to look to outsiders to help develop optical-network
- - -- - -
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Source: Karl T. Ulrich and Stephen D. Eppinger, Product Design and Development, 2nd ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 2000), 6. Copyright The McGraw-Hill
Companies. Used with permission.
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technology. One result is the inclusion oI Xeroxs imaging technology expertise in a joint project
with Intel, to produce a new microprocessor tailored to document imaging.
21
In complex and rap-
idly changing markets, many companies are exploring new and Iaster ways to capture new ideas
Irom diverse sources as the basis Ior developing new products and services.
It is essential to establish a proactive idea-generation and evaluation process that meets the needs
oI the enterprise. Answering these questions is helpIul in developing the idea-generation program:
Should idea search activities be targeted or open-ended? Should the search Ior new-product
ideas be restricted to ideas that correspond to the Iirms new-product strategy?
How extensive and aggressive should new-product idea search activities be?
What speciIic sources are best Ior generating a regular Ilow oI new-product ideas?
How can new ideas be obtained Irom customers?
Where will responsibility Ior new-product idea search be placed? How will new-product idea
generation activities be directed and coordinated?
What are potential threats Irom alternative technologies that may satisIy customers better than
our products (e.g., digital rather than camera and Iilm photography)?
An important issue is deciding how Iar to expand beyond the organizations core new-
product strategy in generating new-product ideas. These initiatives may be risky as discussed in
the Strategy Eeature, which describes Benettons neglect oI its core apparel business resulting
Irom venturing into sports equipment.
Eor most companies, the idea search process should be targeted within a range oI product
and market involvement that is consistent with corporate mission and objectives and business-
unit strategy. While some Iar-out new-product idea may occasionally change the Iuture oI a
company, more oIten open-ended idea search dissipates resources and misdirects eIIorts.
However, management should be proactive in monitoring potential disruptive technologies and
opportunities beyond the core product Iocus.

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IdentiIying the best idea sources depends on many Iactors including the size and type oI Iirm,
technologies involved, new-product needs, resources, managements preIerences, and corporate
capabilities. Management should consider these issues and develop a proactive strategy Ior idea
generation that will satisIy the Iirms requirements. Creating an innovative culture should
encourage generating new-product ideas. The innovation strategy provides idea generation
guidelines.
Many new-product ideas originate Irom the users oI products and services. Lead user analy-
ses oIIer promising potential Ior the development oI new products.
22
The earlier U.S. Surgical
example is illustrative oI lead-user opportunities. These companies identiIy gaps between their
satisIaction with available products and users value expectations, and lead users pursue
initiatives to meet their needs. Implementing this approach to idea generation requires major
internal and external initiatives. The beneIits can be signiIicant as described in Exhibit 8.5. The
objective is to identiIy the companies that pioneer new applications and to study their require-
ments to guide new-product development in product markets that change rapidly. The intent is
to satisIy the lead users needs, thus accelerating new-product adoption by other companies.
Involving customers in the innovation process goes much Iurther than direct customer Ieed-
back Ior some companies in their search Ior new ideas that create customer value. These com-
panies have gone to the extent oI equipping customers with the tools to develop and design their
own productsranging Irom minor modiIications to major innovations. Eor example, Bush
Boake Allen (BBA) is a global supplier oI specialty Ilavors to companies like Nestle. BBA has
developed a toolkit that enables customers to develop their own Ilavors, which BBA then
manuIactures. In the materials business, GE provides customers with Web tools to design better
plastic products. The trend toward customers as innovators has transIormed some industries.
In the semiconductor business it has led to a custom-chip business that has grown to more than
$15 billion.
23
One view is that co-creating value with customers provides a model indicating the Iuture
oI competitive strategyonly by allowing customers to design products and services will com-
panies be able to provide the added value Ior which customers will pay.
24
Eor example, Dow
Chemical Co. has developed what it calls inventing to order, when it collects a wish list oI
products or technical characteristics Irom customers, which provide input to the R&D labora-
tory. This is similar to open market innovation we describe elsewhere, but aims to build in
guaranteed demand to underwrite R&D expenditure.
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There are several ways oI obtaining ideas Ior new products. Typically, a company considers
multiple options in generating product ideas. Various approaches to idea generation are shown
in Exhibit 8.6. A discussion oI idea-generation methods Iollows.
Tapping several inIormation sources may be helpIul in identiIying new-product
ideas. New-product idea publications are available Irom companies that wish to sell or license

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Source: Review oI
C. K. Prahalad and Venkat
Ramaswamy, 1he Future
of Competition (Boston:
Harvard Business School
Press, 2004), in
BusinessWeek, March 1,
2004, 22.
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ideas they do not wish to commercialize. New technology inIormation is available Irom
commercial and government computerized search services. News sources may also yield inIor-
mation about the new-product activities oI competitors. Many trade publications contain
new-product announcements. Companies need to identiIy the relevant search areas and assign
responsibility Ior idea search to an individual or team.
- Surveys oI product users help to identiIy needs that can be satisIied
by new products. The Iocus group is a useIul technique to identiIy and evaluate new-product
concepts, and the research method can be used Ior both consumer and industrial products. The
Iocus group consists oI 8 to 12 people invited to meet with an experienced moderator to discuss
a product-use situation. Idea generation may occur in the Iocus group discussion oI user require-
ments Ior a particular product-use situation. Group members are asked to suggest new-product
ideas. Later, Iocus group sessions may be used to evaluate product concepts intended to satisIy
the needs identiIied in the initial session. More than one Iocus group can be used at each stage
in the process. Eocus groups can be conducted using value-chain members and company
personnel as well as end user customers.
Another research technique that is used to generate new-product ideas is the advisory panel.
The panel members are selected to represent the Iirms target market. Eor example, such a
panel Ior a producer oI mechanics hand tools would include mechanics. Companies in vari-
ous industries, including telecommunications, Iast Ioods, and pharmaceuticals, use customer
advisory groups. These experienced users provide ideas and evaluations Ior new and existing
products.

-
Source: Chart Irom

C. Merle CrawIord and
C. Anthony DiBenedetto,
New Products
Management,
7th ed. (Burr Ridge,
IL: Irwin/McGraw-Hill,
2003), 96. Copyright
The McGraw-Hill
permission.
Determine category of interest and make thorough analysis
of that situationcompany, customers, resellers, etc.
Team members undertake problem analysis
Marketing and
technical staffs
pool experience
Stakeholder
contacts
Search of service
records, sales calls,
idea files, etc.
Scenario
analysis
Other methods:
Role playing
Observation
Focus Groups nterviews
One-on-one Many variations
Dyads and others
Pool of problems
Screen the pool to acceptable problem set
Undertake various problem-solving efforts
Technical Marketing
Brainstorming Disciplines panel
Group methods
Resolve to acceptable solution(s) and prepare concept statements

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Companies research and development laboratories
continue to generate many new-product ideas. The United States is the leading spender on indus-
trial research and development in the world and aIter the surge in R&D expenditure in the
late 1990s, with the exception oI countries like Japan and Korea, very Iew countries allocated a
higher percentage oI gross domestic product to R&D. However, U.S. expenditures Iell Irom
$198.8 billion between 2001 and 2002, with a small recovery in 2003. Major cut backs in R&D
expenditure by large corporations like Xerox and AT&T may even lead to a steady decline in
overall national spending.
25
These Iactors are driving innovative companies to explore new ways
oI matching R&D resources to value opportunitiesthrough open source innovation, strate-
gic alliances, joint ventures, and the global search Ior promising innovation prospects.
New-product ideas may originate Irom development eIIorts outside the Iirm. Sources include
inventors, government and private laboratories, and small high-technology Iirms. Strategic
alliances between companies may result in identiIying new-product ideas, as well as sharing
responsibility Ior other activities in new-product development.
- Incentives may be useIul to get new-product ideas
Irom employees, marketing middlemen, and customers. The amount oI the incentive should
be high enough to encourage submission. Management should also guard against employees
leaving the company and developing a promising idea elsewhere. Eor this reason many Iirms
require employees to sign secrecy agreements.
Einally, acquiring another Iirm oIIers a way to obtain new-product ideas. This strategy may
be more cost-eIIective than internal development and can substantially reduce the lead time
required Ior developing new products. P&Gs purchase oI the battery-powered Crest SpinBrush
Irom the inventor is an example.
Idea generation identiIies one or more new-product opportunities that are screened and eval-
uated. BeIore comprehensive evaluation, an idea Ior a new product must be transIormed into a
deIined concept, which states what the product will do (anticipated attributes) and the beneIits
that are superior to available products.
26
The product concept expresses the idea in operational
terms so that it can be evaluated as a potential candidate Ior development into a new product.
--- --
Management needs a screening and evaluation process that will eliminate unpromising ideas
as soon as possible while keeping the risks oI rejecting good ideas at acceptable levels. Moving
too many ideas through too many stages in the new-product planning process is expensive.
Expenditures build up Irom the idea stage to the commercialization stage, whereas the risks oI
developing a bad new product decline as inIormation accumulates about product perIormance
and market acceptance. The objective is to eliminate the least promising ideas beIore too much
time and money are invested in them. However, the tighter the screening procedure, the higher
the risk oI rejecting a good idea. On the basis oI the speciIic Iactors involved, it is necessary to
establish a level oI risk that is acceptable to management.
Evaluation occurs regularly as an idea moves through the new-product planning stages. While
the objective is to eliminate the poor risks as early as possible in the planning process, evalua-
tion is necessary at each stage in the planning process. We discuss several evaluation techniques
as the stages in new-product planning are examined. Typically, evaluation begins by screening
new-product ideas to identiIy those that are considered to be most promising. These ideas are
subjected to more comprehensive concept evaluation. Business analysis is the Iinal assessment
beIore deciding whether to develop the concept into a new product.
A new-product idea receives an initial screening to determine its strategic Iit in the company or busi-
ness unit. Two questions need to be answered: (1) Is the idea compatible with the organizations
mission and objectives? (2) Is the product initiative commercially Ieasible? The compatibility oI the

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idea considers Iactors such as internal capabilities (e.g., development, production, and marketing),
Iinancial needs, and competitive Iactors. Commercial Ieasibility considers market attractiveness,
technical Ieasibility, Iinancial attractiveness, and social and environmental concerns. The number oI
ideas generated by an organization is likely to inIluence the approach utilized in screening the ideas.
A large number oI ideas call Ior a Iormal screening process.
Screening eliminates ideas that are not compatible or Ieasible Ior the business. Management
must establish how narrow or wide the screening boundaries should be, Eor example, managers
Irom two similar Iirms may have very diIIerent missions and objectives as well as diIIerent
propensities toward risk. An idea could be strategically compatible in one Iirm and not in
another. Also, new-product strategies and priorities may change when top management changes
as previously discussed in the Strategic Eeature concerning Benetton.
AIter identiIying relevant screening criteria, some Iirms use scoring and importance weighting
techniques to evaluate the Iactors considered in the screening process. Summing the weighted
scores obtains a score Ior each idea being screened. Management can set ranges Ior passing and
rejecting. The eIIectiveness oI these methods is highly dependent on including relevant criteria
and gaining agreement on the relative importance oI the screening Iactors Irom the managers
involved.

The boundaries between idea screening, evaluation, and business analysis are oIten not clearly
drawn. These evaluation stages may be combined, particularly when only a Iew ideas are
involved. AIter completion oI initial screening, each idea that survives becomes a new-product
concept and receives a more comprehensive evaluation. Several oI the same Iactors used
in screening may be evaluated in greater depth, including buyers reactions to the proposed
concept. A team representing diIIerent business Iunctions is oIten responsible Ior concept
evaluation.
Extensive research on companies new-product plan-
ning activities highlights the critical role oI extensive market and technical assessments before
beginning the development oI a new-product concept.
27
These up-Iront evaluations should
result in a clearly deIined new-product concept indicating its market target(s), customer value
oIIering, and positioning strategy. Research concerning product Iailures strongly suggests that
many companies do not devote enough attention to up-Iront evaluation oI product concepts.
The Iailure oI the handheld CueCat scanner oIIers compelling evidence oI the value and
importance oI concept evaluation. CueCat reads a bar code and, when attached to a personal
computer, provides a direct access Web page Ior the product. The Iounder oI Digital
Convergence Corp. raised $185 million Irom investors to commercially launch CueCat.
28
Large
investors included Belo Corp. ($37.5 million), Radio Shack ($30 million), and Young &
Rubicam ($28 million). The business plan was to give away 50 million CueCats ($6.50 cost) and
obtain revenues Irom advertisers and licensing Iees. Eour million CueCats were distributed but
Iew were used. People did not want to carry the scanner around and could quickly access Web
sites by typing the address. CueCat did not Iill a consumer need. Importantly, this weakness
could have been identiIied at the concept stage beIore large expenditures were made to produce
and distribute the product.
-- Concept tests are useIul in evaluation and reIinement oI proposed new prod-
ucts. The purpose oI concept testing is to obtain a reaction to the new-product concept Irom a
sample oI potential buyers beIore the product is developed. More than one concept test may be
used during the evaluation process. The technique supplies important inIormation Ior reshaping,
redeIining, and coalescing new-product ideas.
29
Concept tests help to evaluate the relative appeal
oI ideas or alternative product positionings, supply inIormation Ior developing the product and
marketing strategy, and identiIy potential market segments. A proposal to conduct a concept test
Ior evaluating alternative investment products is described in Exhibit 8.7.

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William R. Dillon, Thomas
J. Madden, and Neil H.
Eirtle, Marketing Research
in a Marketing
Irwin, 1994), 562.
Copyright The McGraw-
Hill Companies. Used with
permission.
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The concept test is a useIul way to evaluate a product idea very early in the development process.
The costs oI these tests are reasonable, given the inIormation that can be obtained. Nonetheless,
there are some important cautions. The test is not a deIinitive gauge oI commercial success. Since
the actual product and a commercial setting are not present, the evaluation is somewhat artiIicial.
The concept test is probably most useIul in identiIying very Iavorable or unIavorable product
concepts. The research method also oIIers a basis Ior comparing two or more concepts. An

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important requirement oI concept testing is that the product (good or service) can be described
in words and visually, and the participant must have the experience and capability to evaluate
the concept. The respondent must be able to visualize the proposed product and its Ieatures based
on a verbal or written description and/or picture.
Computer technology oIIers very promising capabilities Ior visual testing oI new-product
concepts. Potential customers can be provided with multimedia virtual buying environment.
Virtual methodology was used to evaluate the potential oI new electric cars:
Respondents viewed multimedia presentations, read on-line articles about the new product, talked
with users oI the vehicle, visited a showroom, and were able to virtually get into the vehicle and
talk with salespeople.
30
Several concept evaluation issues are highlighted in Exhibit 8.8. Evaluation includes more
than concept tests. Eor example, the new-product team may perIorm competitor analyses,
market Iorecasts, and technical Ieasibility evaluations. The questions indicated in Exhibit 8.8 are
helpIul in deciding how to evaluate the new-product concept.
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BeIore making the decision to move the concept into the product development stage, an assess-
ment needs to be made oI the estimated revenues and costs Ior developing and commercializing
the new product. Business analysis estimates the commercial perIormance oI the new-product
concept. Obtaining an accurate Iinancial projection depends on the quality oI the revenue and
cost Iorecasts. Business analysis is normally accomplished at several stages in the new-product
planning process, beginning beIore the product concept moves into the development stage.
Einancial projections are reIined at later stages.
-- The newness oI the product, the size oI the market, and the competing
products all inIluence the accuracy oI revenue projections. In the case oI an established market
such as breakIast cereals, potato chips, or toothpaste, estimates oI total market size are usually
available Irom industry inIormation. Industry associations oIten publish industry Iorecasts and
government agencies such as the U.S. Commerce Department Iorecast sales Ior various indus-
tries. The more diIIicult task is estimating the market share that is Ieasible Ior a new-product
entry. A range oI Ieasible share positions can be Iorecast at the concept stage and used as a basis
Ior preliminary Iinancial projections. Established markets also may have success norms based
on prior experience. When available the success norm provides a basis Ior estimating the possi-
bility oI reaching a successIul level oI sales.
Nonetheless, major diIIiculties may exist in Iorecasting the demand Ior innovations. Consider,
Ior example, the dilemma Iacing telecom companies with third-generation (3G) mobile phone
services. The European carriers have spent some $250 billion buying 3G rights and new networks.
Notwithstanding eIIicient data connections at broadband speeds, cheaper voice calls, Internet
access, photo messaging, games, streaming video clips, and videoconIerencing on 3G phones,
consumers have shown limited interest in buying mobile multimedia. There is a possible risk that
levels oI business achieved may never pay back the cost oI the 3G licenses acquired in 2001 and
2002.
31
AIter a very slow start the 3Q Iorecasts in 2004 became cautiously optimistic, indicating
an evolution rather than a revolution.

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An initial marketing strategy should be developed as a
part oI the business analysis. Included are market target(s), positioning strategy, and marketing
program plans. While this plan is preliminary, it is an early guide to strategy development and
coordination among marketing, design, operations, and other business Iunctions. The choice oI
the marketing strategy is necessary in developing the revenue Iorecast. DiIIerent approaches to
marketing and diIIerent levels oI eIIort in the marketing strategy guide estimates oI the sales,
which may be achieved in diIIerent parts oI the market.
- - Several diIIerent costs occur in the planning and commercialization oI
new products. One way to categorize the costs is to estimate them Ior each stage in the new-
product planning process (Exhibit 8.3). The costs increase rapidly as the product concept moves
through the development process. Expenditures Ior each planning stage can be Iurther divided
into Iunctional categories (e.g., marketing, research and development, and manuIacturing).
- Analyses appropriate Ior new-product evaluation include break-even,
cash Ilow, return on investment, and proIit contribution (see Appendix to Chapter 2). Break-even
analysis is particularly useIul to show how many units oI the new-product must be sold beIore
it begins to make a proIit. Management can use the break-even level as a basis Ior assessing the
Ieasibility oI the project. The issue is whether management considers reaching and exceeding
break-even to be Ieasible.
The appropriate time horizon Ior projecting sales, costs, and proIits should be determined. Eor
example, the product may be required to recoup all costs within a certain time period. Business
analysis estimates should take into consideration the probable Ilow oI revenues and costs over
the time span used in the analysis. Typically, new products incur heavy costs beIore they start to
generate revenues.
-- Several other issues are considered in the business analysis oI a
new-product concept. Eirst, management oIten has guidelines Ior the Iinancial perIormance oI
new products. These can be used to accept, reject, or Iurther analyze the product concept.
Another issue is assessing the amount oI risk associated with the venture. This Iactor should be
included either in the Iinancial projections or as an additional consideration beyond the Iinancial
estimates. Einally, possible cannibalization oI sales by the new-product Irom the Iirms existing
products needs to be considered. Cannibalization is not necessarily a negative Iactor since man-
agements intent may be to cannibalize its brand and competitors brands with the new product.
--
AIter completing the business analysis stage, management must decide either to begin product
development or abort the project. During the development stage the concept is transIormed into
one or more prototypes. The prototype is the actual product, but may be custom-produced rather
than by an established manuIacturing process. Use testing oI the product may occur during the
development stage.
Our earlier discussion oI customer-guided new-product planning emphasizes the importance oI
transIorming customer preIerences into internal product design guidelines. Product design decisions
need to be guided by customer preIerences and analysis oI competitor advantages and weaknesses.
Product development should involve the entire new-product planning team. We examine the prod-
uct development process Iollowed by a discussion oI collaborative development.
--
The development oI the new-product includes product design, industrial design (ease-oI-use and
style), process (manuIacturing) design, packaging design, and decisions to make or outsource
various product components. Development typically consists oI various technical activities, but
also requires continuing interaction among R&D, marketing, operations, Iinance, and legal Iunc-
tions. The relative importance oI development activities diIIers according to the product

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involved. Eor example, product and process design are extensive Ior complex products like large
commercial aircraIt. In contrast, line extensions (e.g., new Ilavors and package sizes) oI Iood
products do not require extensive design activities.
- The R&D technical team needs guidelines in order to develop the
product. Product speciIications describe what the product will do rather than how it should be
designed. These guidelines indicate the product planners expectations regarding the beneIits
provided by the product based on customer analysis, including essential physical and operating
characteristics.
32
This inIormation helps the technical team in determining the best design strat-
egy Ior delivering the beneIits. The more complete the speciIications Ior the product, the better
the designers can incorporate the requirements into the design. The speciIications also provide a
basis Ior assessing design Ieasibility. In some situations beneIit/cost assessments may require
changing the speciIications.
- - Companies are placing increasing emphasis on the ease-oI-use and style
oI products. Design consultants assist companies on various design initiatives. The design
process oI IDEO, the industry leader, is described in the Cross Eunctional Eeature.
The technical team uses the product speciIications to guide the design oI one or
more physical products. Similar inIormation is needed to guide soItware design and design oI
new services. At this stage the product is called a prototype since it is not ready Ior commercial
production and marketing. Many oI the parts may be custom-built, and materials, packaging, and
other details may diIIer Irom the commercial version. Nevertheless, the prototype needs to be
capable oI delivering the beneIits spelled out in the speciIications. Scale models are used in some
kinds oI products such as commercial aircraIt. Models can be tested in wind tunnels to evaluate
their perIormance characteristics. Computer technology is also used in testing and evaluation oI
new products such as automobiles and aircraIt.
- -- When use testing oI the prototype is Ieasible, designers can obtain important
Ieedback Irom users concerning how well the product meets the needs that are spelled out in the
product speciIications. A standard approach to use testing is to distribute the product to a
sample oI users, asking them to try the product. Eollow-up occurs aIter the test participant has
had suIIicient time to evaluate the product. The design oI new industrial products may include
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the active involvement oI users in testing and evaluating the product at various stages in
the development process. The relatively small number oI users in industrial markets compared
to consumer markets makes use testing very Ieasible. Use tests are also popular Ior gaining
reactions to new consumer products such as Ioods, drinks, and health and beauty aids. Clinical
trials may also be conducted to support perIormance claims oI products such as Ioods oIIering
therapeutic beneIits.
An example oI a proposed use test Ior a new soup Ilavor is described in Exhibit 8.9.
Unlike a market test, the use test normally does not identiIy the brand name oI the product or the
company name. While the use test is less accurate in gauging market success compared to the
market test, the use test yields important inIormation such as preIerences, ratings, likes/dislikes,
advantages/limitations, unique Ieatures, usage and users, and comparisons with competing
products.
33
-- The process Ior producing the product in commercial quantities
must be developed. ManuIacturing the product at the desired quality level and cost is a critical
determinant oI proIitability. The new-product may be Ieasible to produce in the laboratory but
not in a manuIacturing plant, because oI costs, production rates, and other considerations. Initial
production delays can also jeopardize the success oI a new product.
The concepts oI mass customi:ation and modularity may have a major impact on product
and process design.
34
As we discussed in Chapter 4, mass customization enables customizing
product oIIerings at relatively low costs. Modularity involves developing and producing a
product using interrelated modules, thus Iacilitating mass customization. The system architec-
ture links the modules together, but each part can be designed and produced independently
within the organization or by suppliers. Modularity was pioneered by the computer industry, but
is applicable to many other products.

Collaborative research and development partnerships are used to increase the distinctive capa-
bilities oI a single company and reduce the time required to develop and market new products.
These relationships may be strategic alliances or supplier-producer collaborations (Chapter 7).
Collaborative development occurs in several industries including computer hardware and
soItware, commercial aircraIt, and automobiles.
Outsourcing oI the manuIacturing oI new products to other Iirms became very popular
over the last decade. Eor example, Sara Lee Corp., the $20 billion (2004) producer oI an array
oI consumer brands Irom Ioods to apparel, announced a strategy in the late 1990s oI shiIting
production oI its products to independent producers. Previously, Sara Lee had produced many
oI its brands in-house. Pursuing similar initiatives, Tommy HilIiger has about 3,100 employees
(and $1.7 billion in sales in 2004) because oI outsourcing and licensing its clothing and acces-
sories. Coke and Pepsi outsource the bottling and distribution oI their beverage brands.
Outsourcing reduces the investment required by the product designer but requires close coordi-
nation with the producer Iirm.
-
Guidelines Ior marketing strategy depend on whether the new-product being developed is an
incremental improvement or new to the company. The latter requires complete targeting and
positioning strategies (Chapter 6). An incremental product improvement may only need a
revised promotion strategy to convey to target buyers inIormation about the beneIits the
improved product oIIers. It is also important to consider how the new-product will impact the
sales oI existing products. Regardless oI the newness oI the product, reviewing the proposed
marketing strategy helps to avoid market introduction problems.

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Irwin, 1994), 583.
permission.

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Evaluation eIIorts (e.g., use tests) conducted during product development supply inIormation
that may be helpIul in designing the marketing strategy. Examples oI useIul planning guidelines
include user characteristics, product Ieatures, advantages over competing products, types oI
use situations, Ieasible price range, and potential buyer proIiles. The design oI the marketing
strategy should begin early in the new-product planning process since several activities need to
be completed and reducing the time to market introduction is an important competitive advan-
tage. Marketing strategy planning begins at the concept evaluation stage and continues during
product development. Activities such as packaging, name selection, environmental considera-
tions, product inIormation, colors, materials, and product saIety must also be decided between
engineering, operations, and marketing.
Selection oI the market target(s) Ior the new-product range Irom oIIer-
ing a new-product to an existing target, to identiIying an entirely new group oI potential users.
Examining the prior marketing research (concept tests and use tests) Ior the new-product may
yield useIul insights as to targeting opportunities. It may also be necessary to conduct additional
research beIore Iinalizing the market targeting strategy.
- Several positioning decisions are resolved during the marketing strategy
development stage. Product strategy regarding packaging, name selection, sizes, and other aspects
oI the product must be decided. The distribution strategy determines the channels oI distribution to
be used. It is also necessary to Iormulate a price strategy and to develop an advertising and sales pro-
motion strategy. Testing oI advertisements may occur at this stage. Decisions must be made as to
how to use the Internet. Einally, sales management must design a personal selling strategy includ-
ing deciding about sales Iorce training and allocation oI selling eIIort to the new product.
- -
Market testing can be considered aIter the product is Iully developed, providing the product is suit-
able Ior market testing. Market tests gauge buyer response to the new-product and evaluate one or
more positioning strategies. Test marketing is used Ior consumer products such as Ioods, bever-
ages, and health and beauty aids. Market tests can also be conducted Ior business-to-business goods
and services. In addition to conventional test marketing, less expensive alternatives are available
such as simulated test marketing and scanner-based test marketing.
An interesting description oI the diIIerent new-product evaluation methods is shown in
Exhibit 8.10.
35
The testing tools Ior each oI the stages are indicated. Note how market testing Iits
into the planning process. The exhibit also provides an overview oI the entire new-product plan-
ning process.
- One way oI implementing simulated testing is recruiting
potential buyers while they are shopping. The simulation technique:
Involves intercepting shoppers at a high-traIIic location, sometimes prescreening them Ior category
use, exposing the selected individuals to a commercial (or concept) Ior a proposed new-product,
giving them an opportunity to buy the new-product in a real liIe or laboratory setting, and inter-
viewing those who purchased the new-product at a later date to ascertain their reaction and repeat-
purchase intentions.
36
Simulated tests oIIer several advantages including speed (12 to 16 weeks), low cost (less than
$100,000 compared to more than $2 million Ior Iull-scale market tests), and the simulated tests
yield relatively accurate Iorecasts oI market response.
37
The tests also eliminate the risk present
in conventional testing that competitors will jam the test.
- - This method involves testing in an actual market envi-
ronment. The test product must be made available in each test city. InIormation Resources Inc.s
BehaviorScan system pioneered the use oI cable television and a computerized database to track
new products. The system uses inIormation and responses Irom recruited panel members in

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each test city. Each member has an identiIication card to show to participating store cashiers.
Purchases are electronically recorded and transmitted to a central data bank. Cable television
enables BehaviorScan to use controlled advertisement testing. Some viewers can be exposed to
ads while the ads are being withheld Irom other viewers.
- This method oI market testing introduces the product
under actual market conditions in one or more test cities.
38
It is used Ior Irequently purchased
consumer products. Test marketing employs a complete marketing program including advertis-
ing and personal selling. Product sampling is oIten an important Iactor in launching the new-
product in the test market. The product is marketed on a commercial basis in each city, and test
results are then projected to the national or regional target market. Because oI its high cost, con-
ventional test marketing represents the Iinal evaluation beIore Iull-scale market introduction.
Management may decide not to test-market in order to avoid competitor awareness, high testing
costs, and delayed introduction.
- - - Market testing can be used Ior industrial products. Selection
oI test sites may need to extend beyond one or two cities to include suIIicient market coverage.
Eor example, a region oI a country might be used Ior testing. The test Iirm has substantial con-
trol oI an industrial products test since it can use direct mail, the Internet, and personal selling.
The relatively small number oI customers also aids targeting oI marketing eIIorts. The product
should have the characteristics necessary Ior testing: It should be producible in test quantities,
relatively inexpensive, and not subject to extensive buying center inIluences throughout the
customers organization.
- - Test sites should exhibit the buyer and environmental characteristics
oI the intended market target. Since no site is perIect, the objective is to Iind a reasonable match
between the test and market target Ior the new-product. These criteria are oIten used to evaluate
potential test sites Ior consumer products.
1. Representation as to population size.
2. Typical per capita income.
3. Typical purchasing habits.
4. Stability oI year-round sales.

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Source: Chart Irom
C. Merle CrawIord and
C. Anthony Di Benedetto,
New Products
Management, 7th ed.
(Burr Ridge, IL:
Irwin/McGraw-Hill,
2003), 435. Copyright
The McGraw-Hill
permission.
Product use test
Product
concept
R&D
prototype
Production
prototype
Product
Product Marketing PIan
Product used
for national
launch
Final plan
for national
launch
Target
Positioning
Price
Promotion
Distribution
Service
Concept test
Market test
Marketing
components test:
Ad copy, pricing
and others
Plan

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5. Relative isolation Irom other cities.
6. Not easily jammed by competitors.
7. Typical oI planned distribution outlets.
8. Availability oI retailers that will cooperate.
9. Availability oI media that will cooperate.
10. Availability oI research and audit service companies.
39
Some oI the best metropolitan test markets in the United State are Detroit; St. Louis;
Charlotte-Gastonia-Rock Hill, North CarolinaSouth Carolina; Eort Worth-Arlington, Texas;
and Kansas City.
40
- The length oI the test aIIects the test results. Conventional market tests
are usually conducted over several months. The longer the test period, the more accurate the
results are in predicting Iuture market perIormance. Market tests oI more than a year are not
unusual.
- Probably the most troublesome external Iactor that may aIIect test
market results is competition that does not compete on a normal basis. Competitors may attempt
to drive test market results awry by increasing or decreasing their marketing eIIorts and making
other changes in their marketing actions. It is also important to monitor the test market environ-
ment to identiIy other unusual inIluences such as major shiIts in economic conditions.
-
New-product analytical models are useIul in analyzing test market data and predicting commer-
cial market success. They Iall into two categories: (1) Iirst-purchase models designed to predict
the cumulative number oI new-product tries over time, and (2) models designed to predict the
repeat purchase rate oI buyers who have tried the product.
41
The latter model combines a Iirst-
purchase model with a repeat-purchase model. The consumer adoption process Ior new products
provides guidelines Ior using the models.
Extensive research concerning the adoption oI innovations indicates that (1) new-product
adopters Iollow a sequence oI stages in their adoption process; (2) adopters characteristics
vary according to how soon they adopt the product aIter introduction; and (3) adoption Iind-
ings may be oI value in new-product planning. The adoption stages are awareness, interest,
evaluation, trial, and adoption.
42
By Iinding and targeting the early adopters, Iirms may be
able to accelerate a new-products adoption. Early adopters tend to be younger, oI generally
higher socioeconomic status, and more in contact with impersonal and cosmopolitan sources
oI inIormation than later adopters.
43
The early adopter also uses a variety oI inIormation
sources.
Introducing the new product into the market requires Iinalizing the marketing plan, coordinating
market entry activities with business Iunctions, implementing the marketing strategy, and
monitoring and control oI the product launch. P&Gs entry into Japans dish soap market in 1995
is an interesting new-product venture.
44
P&Gs Joy brand gained a leading 20 percent share
oI the $400 million dish soap market by 1997. The successIul strategy included oIIering new
technology, packaging that retailers liked, attractive margins Ior retailers, and heavy spending
on innovative commercials that got consumers attention. At the time oI market entry, Kao and
Lion (Japanese companies) together had nearly 40 percent oI the market. P&G developed a
highly concentrated Iormula Ior Joy to eliminate consumers concerns about Joys strengths
compared to other brands. Encouraged by commercials to try the new-product, Japanese home-
makers were pleased with Joys perIormance.

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Market introduction requires a complete marketing strategy that is spelled out in the marketing
plan. The plan should be coordinated with the people and business Iunctions responsible Ior
the introduction, including salespeople, sales and marketing managers, and managers in other
Iunctional areas such as operations, distribution, Iinance, and human resources. Responsibility
Ior the new-product launch is normally assigned to the marketing manager or product manager.
Alternatively, companies may assign responsibility to product planning and market introduction
teams.
The timing and geographical scope oI the launch are important decisions. The options range
Irom a national market introduction to an area-by-area rollout. In some instances the scope oI
the introduction may extend to international markets. The national introduction is a major
endeavor, requiring a comprehensive implementation eIIort. A rollout reduces the scope oI
the introduction and enables management to adjust marketing strategy based on experience
gained in the early stages oI the launch. OI course, the rollout approach, like market testing,
gives competition more time to react.

Real-time tracking oI new-product perIormance at the market entry stage is extremely important.
Standardized inIormation services are available Ior monitoring sales oI products such as Ioods,
health and beauty aids, and prescription drugs. InIormation Ior these services is collected
through store audits, consumer diary panels, and scanner services. Special tracking studies may
be necessary Ior products that are not included in standardized inIormation services.
The Internet is rapidly becoming an essential new-product inIormation gathering and moni-
toring capability. These activities include private online communities and research panels that
provide companies with Shoppers Ieedback. The Internet Eeature describes how Coca-Cola,
KraIt Eoods, Hallmark Cards, and StonyIield Earm use the Web to generate new-product ideas
Irom consumers and spot problems with new products.
It is important to include product perIormance metrics with perIormance targets in the
new-product plan to evaluate how well the product is perIorming. OIten included are proIit con-
tribution, sales, market share, and return on investment objectivesincluding the time horizon
Ior reaching objectives. It is also important to establish benchmarks Ior objectives that indicate
minimum acceptable perIormance. Eor example, market share threshold levels are sometimes
used to gauge new-product perIormance. Repeat purchase data are essential Ior tracking
Irequently purchased products. Regular measures oI customer satisIaction are also relevant
measures oI market perIormance.
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The new-product planning process (Exhibit 8.3) is based on the logic oI being market driven and
Iocused on customer needs. While a market-oriented Iocus is always important, some variations
in the generic process we have been discussing may occur due to the new-product strategy oI a
particular company. The variants Irom the generic process Iall into Iour categories: technology
push, platIorm, process intensive, and customized products.
45
The major impact oI the variants
is on the types oI ideas that are considered by the Iirm. Several characteristics oI variations Irom
the generic process are described in Exhibit 8.11. We examine each variant, highlighting situa-
tions where it may be applicable and the diIIerences Irom the generic process. The chapter is
concluded with a discussion oI proactive cannibalization.

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Technology-driven new-product planning starts with a new technology and the planning team
looks Ior a market need that can be satisIied by the technology. The technology is the primary
driver oI the new-product planning process. Nonetheless, the various stages oI generic process
are applicable. The technology provides the Iocus Ior generating new-product ideas, which
are based on the technology. The development oI ink-jet technology by Hewlett-Packard (H-P)
Iollowed the technology push process. The printing capability was developed Iirst, and then a
product team pursued applications oI the technology.
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The platIorm product is the result oI an organization developing a capability that can be used to
generate other products. The planning process starts with an available platIorm. The platIorm is
an existing design that can be adapted to other product extensions. The objective is to leverage
the platIorm to develop other products. PlatIorm strategies are used Ior automobile designs,
computers, appliances, and many other products.

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Planning Ior process-intensive products centers on the production process that an organization has
in place. The objective is to generate products that utilize the organizations process capabilities.
New-product ideas are those that can be produced by the existing process. Examples oI process-
intensive products include Ioods, beverages, chemicals, and semiconductors. Pepsis develop-
ment oI the Sierra Mist carbonated beverage is an example oI a process-intensive product.
- -
Customized products are incremental variations oI existing products, and may be developed
to meet speciIic needs oI customers. The organization pursues a very structured and detailed
development process. The intent is to customize the product to meet the customers speciIic
speciIications. Eor example, large commercial aircraIt orders are oIten customized to meet the
speciIic preIerences oI airline carriers.

Proactive cannibalization consists oI the pursuit oI a deliberate, ongoing strategy oI developing
and introducing new products that attract the buyers oI a companys existing products.
The strategic logic oI this concept is oIIering buyers a better solution to a need currently being
satisIied. Executive resistance to cannibalization is driven by the belieI that it is unproductive
Ior a company to compete with its own products and services, rather than targeting those oI

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Source: Karl T. Ulrich and Stephen D. Eppinger, Product Design and Development, 2nd ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 2000), 21. Copyright The McGraw-Hill
Companies. Used with permission.
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competitors. Nonetheless, the reality is that changes in market requirements and customer value
opportunities will result in threats Ior existing products and technologies.
There are various examples oI the negative consequences oI avoiding cannibalization initia-
tives in the communications, Iinancial services, retailing, and other sectors. Encyclopaedia
Britannicas Iailure to recognize the threat oI CD-ROM technology is illustrative. Proactive
cannibalization may be essential to many Iirms to sustain a competitive advantage and achieve
Iinancial perIormance and growth objectives. In support oI the logic oI proactive cannibaliza-
tion, research sponsored by the Marketing Science Institute indicates that managers oI success-
Iul Iirms proactively resist the instinct to retain the value oI past investments in product
development.
46
They pursue proactive cannibalization initiatives.
New-product planning is a vital activity in every company, and it

applies to services as well as physical products. Companies that
are successIul in new-product planning Iollow a step-by-step
process oI new-product planning combined with eIIective organ-
ization designs Ior managing new products. Experience and
learning help these Iirms to improve product planning over time.
The corporate cultures oI companies, like MicrosoIt, encourage
innovation.
Top management oIten deIines the product, market, and
technology scope oI new-product ideas to be considered by
an organization. The steps in new-product planning include
customer needs analysis, idea generation and screening, con-
cept evaluation, business analysis, product development and
testing, marketing strategy development, market testing, and
commercialization (Exhibit 8.3).
Idea generation starts the process oI planning Ior a new-
product. There are various internal and external sources oI
new-product ideas. Ideas are generated by inIormation search,
marketing research, research and development, incentives, and
acquisition. Screening, evaluation, and business analysis help
determine iI the new-product concept is suIIiciently attractive
to justiIy proceeding with development.
Design oI the product and use testing transIorm the product
Irom a concept into a prototype. Product development creates
one or more prototypes. Product testing obtains user reaction
to the new-product. ManuIacturing development determines
how to produce the product in commercial quantities at costs
that will enable the Iirm to price the product at a level attrac-
tive to buyers. Marketing strategy development begins early
in the product planning process. A complete marketing strat-
egy is needed Ior a totally new-product. Product line additions,
modiIications, and other changes require a less extensive
development oI marketing strategy.
Completion oI the product design and marketing strategy
moves the process to the market testing stage. At this point
management may decide to obtain some Iorm oI market reac-
tion to the new product beIore Iull-scale market entry. Testing
options include simulated test marketing, scanner-based
test marketing, and conventional test marketing. Industrial
products are not market-tested as much as consumer products,
although Irequently purchased nondurables can be tested.
Instead, use tests oI product prototypes are more typical Ior
industrial products. Commercialization completes the planning
process, moving the product into the marketplace to pursue
sales and proIit perIormance objectives.
The market-driven, customer-Iocused generic planning
process provides the basic guide to developing new products.
Nonetheless, some variations are necessary in applying the
process when technology plays a lead role, existing product
platIorms inIluence new-product development, manuIacturing
processes constrain product scope, or incremental variations
are used to customize products. Einally, proactive cannibaliza-
tion initiatives should be considered in the innovation strate-
gies oI all companies.
A. Visit the Web site oI the Gap (www.gap.com). Discuss
how the Web can be used in new-product planning Ior a
bricks-and-mortar retailer such as the Gap.
B. Virgin Group Ltd. is an interesting corporate conglomer-
ate headed by British tycoon Richard C.N. Branson. Visit
Virgin.com and develop a critical analysis oI Virgins
new-product strategy oI launching a portIolio oI online
businesses.
C. Dell Inc. is expanding its product portIolio. Go to
www.dell.com and describe the product categories in
which Dell competes.
D. Visit the H&M Web site and compare H&Ms product
oIIerings with those oIIered by Gap (www.gap.com).
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A. The Benetton Strategy Eeature describes the potential risks
oI expanding too Iar beyond the core business. How
should new-product planners avoid this problem without
disregarding all potential opportunities beyond the core
business?
B. The Cross-Eunctional Eeature describes how the design
consultant IDEO assists companies in new-product
design. Discuss the advantages and limitations oI
having this activity perIormed by a consultant rather
than internally.
C. Review the content oI the Innovation Eeature MicrosoIt
and Intel Moving In on PC Makers TurI. Consider
the risks Ior established companies in developing new
products that put them in direct competition with their own
customers. Is it appropriate Ior MicrosoIt and Intel to go
in this direction?
1. Explain the relationship between customer satisIaction and
customer value.
2. In many consumer products companies, marketing execu-
tives seem to play the lead role in new-product planning,
whereas research and development executives occupy
this position in Iirms with very complex products such as
electronics. Why do these diIIerences exist? Do you agree
that such diIIerences should occur?
3. Discuss the Ieatures and limitations oI Iocus group inter-
views Ior use in new-product planning.
4. IdentiIy and discuss the important issues in deciding how
to organize Ior new-product planning.
5. Discuss the issues and trade-oIIs oI using tight evaluation
versus loose evaluation procedures as a product concept
moves through the planning process to the commercializa-
tion stage.
6. What Iactors may aIIect the length oI the new-product
planning process?
7. Compare and contrast the use oI scanner tests and conven-
tional market tests.
8. Is the use oI a single-city test market appropriate? Discuss.
9. Examine the new-product planning process (Exhibit 8.3),
assuming a platIorm strategy is being used by the organi-
zation. How does the platIorm strategy alter the planning
process?
10. Discuss the potential role oI the Internet in the new-
product planning process. Which stages oI the process
may beneIit most Irom Internet initiatives?
1. Thomas D. Kuczmarski, Erica B. Seamon, Kathryn W.
Spilotro, and Zachary T. Johnston, The Breakthrough
Mindset. Marketing Management, March/April 2003,
3843.
2. David Talbot, LEDS versus Lightbulb, 1echnology
Review, May 2003, 32.
3. Daniel Lyons, Bright Ideas, Forbes, October 14, 2002,
154158.
4. Suzanne Treville, Improving the Innovation Process,
OR/MS 1oday, December 1994, 29.
5. Getting Hot Ideas Irom Customers, Fortune, May 18,
1992, 8687.
6. Gary S. Lynn, Joseph G. Morone, and Albert S. Paulson,
Marketing and Discontinuous Innovation: The Probe and
Learn Process, California Management Review, Spring
1996, 837.
7. Ibid.
8. Joseph Morone, Winning in High-1ech Markets (Boston:
Harvard Business School Press, 1993), 217.
9. Lynn et al., Marketing and Discontinuous
Innovation . . . , 11.
10. Clayton M. Christensen, 1he Innovators Dilemma
(Boston: Harvard Business School Press, 1997).
11. Clayton M. Christensen and Michael E. Raynor, 1he
Innovators Solution (Boston: Harvard Business School
Press, 2003).
12. Richard Walters, Never Eorget to Nurture the Next Big
Idea, Financial 1imes, May 15, 2001, 21.
13. Robert Cooper, Benchmarking new-product
PerIormance: Results oI the Best Practices Study,
European Management Journal, Eebruary 1998, 17;
Producer Power, 1he Economist, March 4, 1995, 70;
Kuczmarski et al. The Breakthrough Mindset.
14. Lawrence Ingrassia, By Improving Scratch Paper, 3M
Gets New-Product Winner, 1he Wall Street Journal,
March 31, 1983, 27.
15. Kuczmarski et al. The Breakthrough Mindset, 43.
16. Cooper, Benchmarking New Product PerIormance.
17. SimpliIying Philips, 1he Economist, June 12, 2004, 66.
18. Eric M. Olsen, Orville C. Walker Jr., and Robert W. Ruekert,
Organizing Ior EIIective New-Product Development: The
Moderating Role oI Product Innovativeness. Journal of
Marketing, January 1995, 4862.
19. Ibid.
20. Darrell Rigby and Chris Zook, Open-Market Innovation,
Harvard Business Review, October 2002, 8089.
-
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-
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21. Jay Greene, John Carey, Michael Arndt, and Otis Port,
Reinventing Corporate R&D, BusinessWeek, September
22, 2003, 7273.
22. Glen L. Urban and Eric von Hippel, Lead User Analyses
Ior the Development oI New Industrial Products,
Management Science, May 1988, 569582.
23. SteIan Thomke and Eric von Hippel, Customers as
Innovators, Harvard Business Review, April 2002,
7481.
24. Prahalad and Ramaswamy, 1he Future of Competition.
25. Jay Greene, John Carey, Michael Arndt, and Otis Port,
Reinventing Corporate R&D, BusinessWeek, September
22, 2003, 7273.
26. C. Merle CrawIord and C. Anthony Di Benedetto, New
Products Management, 7th ed. (Burr Ridge, IL:
Irwin/McGraw-Hill, 2003), Chapter 4.
27. Cooper, Benchmarking New Product PerIormance.
28. Elliot Spagat, A Web Gadget Eizzles Despite a
Salesmans Dazzle, 1he Wall Street Journal, June 27,
2001, B1, B4.
29. William R. Dillon, Thomas J. Madden, and Neil H. Eirtle,
Marketing Research in a Marketing Environment, 3rd ed.
(Burr Ridge, IL: Richard D. Irwin Inc., 1994).
30. Glen L. Urban, Digital Marketing Strategy (Upper Saddle
River, NJ: Pearson Prentice Hall, 2004), 96.
31. Almar Latour, Disconnected, 1he Wall Street Journal,
June 5, 2001, A1, A8. Vision, Meet Reality, 1he
Economist, September 4, 2004, 6365.
32. CrawIord and Di Benedetto, New Products Management,
Chapter 12.
33. Dillon, Madden, and Eirtle, Marketing Research,
582584.
34. See, Ior example, James H. Gilmore and B. Joseph Pine II,
The Eour Eaces oI Mass Customization, Harvard
Business Review, JanuaryEebruary 1997, 91101; and
Kathleen M. Eisenhardt and Shona L. Brown, Time
Pacing: Competing in Markets That Wont Stand Still,
Harvard Business Review, MarchApril 1998, 67.
35. CrawIord and DiBenedetto, New Products Management,
411.
36. Dillon, Madden, and Eirtle, Marketing Research, 639.
37. Ibid.
38. Ibid.
39. Ibid.
40. Judith Waldrop, All-American Markets. American
Demographics, January 1992.
41. Gary L. Lillien, Phillip Kotler, and Sridhar Moorthy,
Marketing Models (Upper Saddle River, NJ: Prentice Hall,
1992).
42. Everett M. Rogers, Diffusion of Innovations (New York:
Eree Press, 1962).
43. Ibid.
44. Norhiko Shirouzu, P&Gs Joy Makes an Unlikely Splash
in Japan, 1he Wall Street Journal, December 19, 1997,
B1 and B8.
45. The Iollowing discussion is based on Karl T. Ulrich and
Steven D. Eppinger, Product Design and Development,
2nd ed. (Burr Ridge, IL: Irwin/McGraw-Hill Inc., 2000),
2023.
46. Rajesh K. Chandy and Gerald J. Tellis, Organizing Ior
Radical Product Innovation, Innovation, MSI Report
No. 98102. (Cambridge, MA: Marketing Science
Institute, 1998).

Existing products as well as new products play an essential role in generating the sales
and proIits required to maintain the vitality oI the business. Moreover, initiatives concerning
new and existing products are closely interrelated. Managements challenge is to achieve the
highest overall perIormance Irom the portIolio oI products oIIered by the Iirm. This involves
new-product initiatives, targeting and positioning existing products, tracking perIormance oI the
portIolio, and improving or eliminating poor-perIorming products. Companies may have one or
more brands in the portIolio. Strategic brand management is an ongoing challenge, involving
executives Irom all business Iunctions
Bayerische Motoren Werkes BMW brand consists oI an impressive portIolio oI automobile
lines and models (see accompanying BMW advertisement). Building strong brands is a high-
priority management initiative at BMW:

-
The Munich company is rolling out a new or updated model nearly every three months
through 2005 in a ramp-up more ambitious than anything the company has tried beIore. The
|new-| product initiative is critical to our success, say BMW ChieI Executive Helmut Panke. We
wont give up, and we dont rest on our laurels, says the 56-year old Panke. We wont accept
the position oI No. 2.
1
The expanding BMW Iamily is described in the Global Eeature. Managements Iast-track
brand initiatives present an array oI strategic brand management challenges. The new model
rollout is designed to move BMW to a new level oI global brand position and proIitability.
2
In
the short run the resource demands oI the new models are expected to reduce proIit margins.
Nonetheless, BMW has impressive distinctive capabilities including strong brand equity, strong
technical skills, Ilexible production Iacilities, and a very talented and committed workIorce.

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Strategic Brand Management

-
Market-Driven Program Development
Moreover, as shown in Exhibit 9.1, BMWs perIormance continues to achieve new highs. The
major risk is doing too much, too Iast.
Strategic Brand Management requires several interrelated initiatives designed to build strong
brands. Eirst, we examine the challenges oI brand building, and discuss the importance and
scope oI strategic brand analysis. Next, we look at brand identity strategies, and what is involved
in managing the brand over time including brand leveraging initiatives. We Iollow this with a
discussion oI managing the brand system (portIolio).
- -
It is important to distinguish between the terms product and brand. In practice they are oIten used
interchangeably, although there are diIIerences in meaning. A product is anything that is potentially
valued by a target market Ior the beneIits or satisIactions it provides, including objects, services,
organizations, places, people, and ideas.
3
This view oI the product covers a wide range oI
situations, including tangible goods and intangible services. Thus, political candidates are products,
as are travel services, medical services, reIrigerators, gas turbines, and computers.
A brand is a company-speciIic identiIication oI a companys products. The American
Marketing Association deIines a brand as Iollows:
A is a name, term, sign, symbol, or design, or a combination oI them, intended to identiIy the
goods or services oI one seller or group oI sellers, and to diIIerentiate them Irom those oI competitors.
While the products oI some companies are not identiIied as brands, most have some Iorm oI
brand designation. Throughout the chapter when discussing a companys product, product line,
or product mix (portIolio) we assume that the products have a brand identity.
We know that services diIIer Irom physical products in several ways. A service is intangible.
4
It cannot be placed in inventory; the service is consumed at the time it is produced. There is oIten
variability in the consistency oI services rendered. Services are oIten linked to the people who
produce the service. Establishing a brand position Ior a service requires association with the
tangible components such as people that produce the service or are somehow related to the
service. The use oI well-known personalities in the advertisements oI the American Express

Source: BMW, BusinessWeek, June 9, 2003, 60.
BMW*
Lex-
Mercede-
Cdillc
Acr
Volvo
nfiniti
Adi
Jgr
Por-che
Lxry model
to -le-
Jnry throgh
April

Por-che
Operting Mrgin*
15.8%
11.0%
8.5%
6.1%
5.8%
5.4%
2.5%
2.3%
1.5%
Ni--n
Toyot**
Volk-wgen Grop
Mercede- & mrt Cr-
Volvo Grop
PA Grop
Renlt Grop
Chry-ler Cr- & Trck-
7.4% BMW GROUP
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Card is an example. Internet-based brands are particularly illustrative oI the problems Iaced in
establishing eIIective brands Ior intangibles like services.
Eirst, we look at the strategic role oI brands. A discussion Iollows oI brand management
challenges. Next, we consider who is responsible Ior brand management. Einally, we examine
the initiatives involved in strategic brand management.
-
Strategic brand management is a key issue in many organizations and is not the domain only oI
packaged consumer goods companies. Eor example, in 2004 Sun Microsystems Inc. CEO, Scott
McNealy, was struggling to turn the company around by creating a distinctive brand identity
against Dell Inc., IBM, and other competitors. Suns strategy is described below:
While most rivals make plain-vanilla computers and slug it out on price, Suns plan is to change
the rules oI the game. At the high end oI the server market, Sun is developing throughput
computing chips that can handle dozens oI tasks at the same time. At the low end, Sun servers
built around Advanced Micro Devices, Inc.s inexpensive chips will handle not only processing
tasks but also the basic networking that rivals boxes cant. And its pricing approach is something
no server company has dared try beIore: Its planning to give away low-end servers to customers
that agree to buy its soItware Ior several years. We have a maverick strategy, says McNealy.
I think theres a huge opportunity right now.
5
Sun is attempting to pursue two very diIIerent brand strategies: developing low cost servers and
inventing state-oI-the-art technologies. These involve positioning the Sun brand as a premium
brand and also oIIering bare-bones servers.
6
A strategic brand perspective requires managers to be clear about what role brands play Ior
the company in creating customer value and shareholder value. This understanding should be the
basis Ior directing and sustaining brand investments into the most productive areas. One
approach distinguishes between the Iunctions oI brands Ior buyers and sellers.
7
Eor buyers, brands can:
Reduce customer search costs, by identiIying products quickly and accurately.
Reduce the buyers perceived risk, by providing an assurance oI quality and consistency
(which may then be transIerred to new products).
Reduce the social and psychological risks associated with owning and using the wrong product,
by providing psychological rewards Ior purchasing brands that symbolize status and prestige.
Eor sellers, brands can play a Iunction oI Iacilitation, by making easier some oI the tasks the
seller has to perIorm. Brands can Iacilitate:
Repeat purchases that enhance the companys Iinancial perIormance, because the brand
enables the customer to identiIy and re-identiIy the product compared to alternatives.
The introduction oI new products, because the customer is Iamiliar with the brand Irom
previous buying experience.
Promotional eIIectiveness, by providing a point oI Iocus.
Premium pricing, by creating a basic level oI diIIerentiation compared to competitors.
Market segmentation, by communicating a coherent message to the target audience, telling
them Ior whom the brand is intended and Ior whom it is not.
Brand loyalty, oI particular importance in product categories where loyal buying is an important
Ieature oI buying behavior.
The potential contribution oI brand strength to building customer value and competitive
advantage has encouraged managers to Iocus attention on global estimates oI the value oI brands
and the concept oI brand equity.

-
The Iinancial value oI brands receives major attention Irom investors, particularly in changes
in the estimated value oI a companys brand.
8
Exhibit 9.2 shows the top-ranked 25 brands Irom
the 2004 Interbrand valuations oI global brands with a value greater than $1 billion. Interbrand
calculates brand value as the net present value oI the earnings the brand is expected to generate
in the Iuture. The Interbrand model bases brand earnings on Iorecasts oI brand revenues allowing
Ior risk and the role oI the brand in stimulating customer demand. The Interbrand measure
oI brand strength includes: leadership (ability to inIluence the market); stability (survival
ability based on customer loyalty); market (security Irom change oI technology and Iashion);
geography (ability to cross geographic borders); support (consistency and eIIectiveness oI brand
support); and, protection (legal title).
Strong brands are major contributors to the distinctive capabilities oI companies like General
Electric, Johnson & Johnson, Nestle, and Procter and Gamble. Sustaining and building brand
strengths is a continuing challenge Ior managers. The earlier Global Eeature describes several oI
BMWs brand-building initiatives. Customers preIerences change over time and competitors
are continually seeking to improve their market positions.
-
Several internal and external Iorces create hurdles Ior product and brand managers in their
eIIorts to build strong brands:
9
Intense Price and Other Competitive Pressures. Deciding how to respond to these pressures
shiIts managers attention away Irom brand management responsibilities. Eor example, in
2003 Dell Inc. pursued aggressive tactics in lowering its personal computer prices. Hewlett-
Packard and others were Iorced to alter their PC prices or Iace market share losses.
Fragmentation of Markets and Media. Many markets have become highly diIIerentiated in
terms oI customer needs. Similarly, the media (advertising and sales promotion) available
to access market segments have become very Iragmented and specialized. The Internet has
compounded market targeting and access complexity.
Complex Brand Strategies and Relationships. Multiple additions to core brands such as Pepsi
have created complex brand management situations, compounded by the value-chain
relationships essential in delivering superior value to end user customers. These complexities
may encourage managers to alter strategies rather than building the existing strategies.
Benettons ill-Iated entry into the sports equipment market is illustrative.
Bias against Innovation. Brand complacency may result in a Iailure to innovate. Innovation
may be avoided to prevent cannibalism oI existing products. Polaroids management waited
too long to Iully respond to the disruptive threat oI digital photography.
Pressure to Invest Elsewhere. A strong brand may generate complacency and cause management
to shiIt resources to new initiatives. Motorolas allocation oI resources to the Irridium Global
Phone initiative is an example oI neglecting the core brand, enabling Nokia to gain the lead
position in cellular phones.
Short-1erm Pressures. Managers encounter many short-term pressures that shiIt their attention
and resources away Irom important brand-building programs. Top managements need to
achieve quarterly Iinancial targets may cause these pressures.
The key to reducing these negative impacts on brand-building strategies is developing brand
strategy guidelines, tracking initiatives on a regular basis, and critically assessing potential challenges
that shiIt management attention away Irom core strategies.
--
Responsibility Ior brand strategy extends to several organizational levels. Three management
levels oIten are Iound in companies that have strategic business units, diIIerent product lines,
and speciIic brands within lines.

-

Source: The 100 Top Brands, BusinessWeek, August 2, 2004, 6869.

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Product or brand managers responsibilities consist oI
planning, managing, and coordinating the strategy Ior a speciIic product or brand. Managers
activities include market analysis, targeting, positioning strategy, perIormance analysis and
strategy adjustment, identiIication oI new-product needs, and management and coordination oI
product/brand marketing activities. Marketing plans Ior speciIic brands are oIten prepared at this
level. Product or brand managers typically do not have authority over all brand management
activities. Nevertheless, they have responsibility Ior the perIormance oI their brands. These
managers are sponsors or advocates oI speciIic products, negotiating and collaborating on behalI
oI their product/brand strategies with the salesIorce, research and development, operations,
marketing research, and advertising and sales promotion managers.

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A business with several product categories and/or
brands may assign responsibility Ior coordinating the initiatives oI its product or brand managers to
a product director, group manager, or marketing manager. This person coordinates and monitors the
activities and approves the recommendations oI a group oI product or brand managers. The group
responsibilities are to manage the brand systems (portIolio). Additionally, the product group manager
coordinates product management activities and decisions with the business-unit management.
This responsibility is normally assigned to the chieI
executive at the SBU or corporate level oI an organization or to a team oI top executives.
Illustrative decisions include product acquisitions, research and development priorities, new-
product decisions, and resource allocation. Evaluation oI brand/product portIolio perIormance
may also be centered at this level. In a corporation with two or more SBUs, top management
may coordinate and establish product management guidelines Ior the SBU management. We
look Iurther into the organization oI marketing activities in Chapter 14.
By the mid-1990s many companies were reevaluating the traditional approaches to managing
products. The changes were particularly apparent in Iast-moving goods as described below:
10
Unilevers British soap unit and Elida Gibbs personal products division eliminated their
marketing director positions.
Marketing and sales groups were combined and Iocused on consumer research and product
development.
Customer development teams were Iormed to work with retailers across all oI the companies
brands.
Similar changes are being made by other companies to integrate sales, marketing, and other business
Iunctions into cross-Iunctional teams. A study by the Boston Consulting Group indicated that
90 percent oI the responding companies have restructured their marketing departments. It is apparent
that traditional product and brand-based organizations will increasingly evolve into customer and
market-based approaches to implement more eIIectively the mandate Ior customer Iocus.
11
Competitive pressures and the changing needs and wants oI buyers help to explain why many
companies devote a lot oI attention to managing their products and brands. These strategies are
oIten a key component in top managements plans Ior improving the perIormance oI a business.
Actions may include modiIying products, introducing new products, and eliminating products.
- Marketing executives have three major respon-
sibilities in the organizations product/brand strategy. Eirst, market sensing is essential at all stages
oI new-product planning, providing inIormation Ior matching new-product ideas with customer
needs and wants. The knowledge, experience, and marketing research methods oI marketing
proIessionals are utilized in product strategy development. Customer and competitor inIormation
is needed in Iinding and describing unmet needs, in evaluating products as they are developed and
introduced, and in monitoring the perIormance oI speciIic brands and the brand portIolio.
Marketings second responsibility in product/brand strategy concerns product speciIications.
Increasingly, top management is looking to marketing proIessionals Ior identiIying the charac-
teristics and perIormance Ieatures oI products. InIormation about customers needs and wants is
translated into speciIications Ior the product. Matching customer value requirements with the
organizations distinctive capabilities is essential in designing and implementing successIul
strategic brand management.
The third responsibility oI marketing in brand strategy is guiding target market and program-
positioning strategies. These decisions are oIten critical to the success oI both new and existing
products. Since the choice oI product speciIications and positioning are very much interrelated,
strategic positioning should be considered at an early stage in the product planning process.
Positioning decisions may include a single product or brand, a line oI products, or a mix oI product
lines within a business unit.

-
Strategic brand management decisions are relevant to all businesses, including suppliers,
producers, wholesalers, distributors, and retailers. While many oI these decisions involve the
evaluation, selection, and dropping oI products by producers, intermediaries may also develop new
goods and services. Moreover, suppliers are Iaced with important brand management decisions.

Strategic brand management consists oI several interrelated initiatives as shown in Exhibit 9.3.
12
We brieIly describe each activity, examining them in greater depth in the Iollowing sections oI
the chapter.
The intent oI brand identity is to determine a unique set oI brand associations
that the brand strategist aspires to create or maintain.
13
The identity may be associated with the
product, the organization, a person, or a symbol.
This initiative determines what part oI the identity is to be
communicated to the target audience and how this will be achieved. The brand position
statement describes the identity inIormation to be used to position the brand in the eyes and
minds oI targeted buyers.
The brand must be managed Irom its initial launch
throughout its liIe cycle. While the brand strategy may be altered over time, the intent is to be con-
sistent, build the strength oI the brand, and avoid damaging the brand. Targets management has
been very successIul in managing the retailers brand, whereas Kmarts Iaulty brand management
eventually led to bankruptcy.
This initiative consists oI coordinating the organizations
portIolio or system oI brands with the objective oI achieving optimal system perIormance. The
Iocus is on the portIolio and its brand interrelations rather than an individual brand.
Leveraging involves extending the core identity to a new addition
to the product line, or to a new product category. Nikes leveraging the core Iootwear brand to
apparel and sports equipment is illustrative.
Each oI the strategic brand management initiatives shown in Exhibit 9.3 may
have a positive or negative impact on the value oI the brand. Brand equity recognizes the
importance oI brand value and identiIies the key dimensions oI equity. The objective is to build
brand equity over time. Exhibit 9.2 illustrates one approach to brand valuation.
-- This initiative provides essential inIormation Ior decision making
Ior each oI the brand management activities shown in Exhibit 9.3. Analysis includes market/
customer, competitor, and brand inIormation.

Brnd dentity
dentity mplementtion
Brnd trtegy
over Time
Mnging the Brnd
Portfolio
Leverging the
Brnd
Brnd
Eqity
trtegic
Brnd
Anly-i-

-
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A company may have a single product, a product line, or a portIolio oI product lines. In our
discussion oI managing existing products, we assume that product/brand strategy decisions are
being made Ior a strategic business unit (SBU). The product composition oI the SBU consists oI
one or more product lines and the speciIic product(s) that make up each line. The SBU may have
a single product or single line or various lines and speciIic products within each line.
Strategic brand analysis includes market and customer, competitor, and brand analysis. Since
Chapter 3 considers the two Iormer activities, the present discussion centers on brand analysis.
Various aspects oI the brand may be examined including perIormance, portIolio interrelationships,
leveraging strengths and weaknesses, and brand values.
Evaluating the perIormance oI the brand portIolio helps guide decisions on new products,
modiIied products, and eliminating products. Consider, Ior example, Apples decision to drop the
Newton handheld computer.
14
Apple invested an estimated $500 million in the brand extension Irom
the beginning oI the development in 1987. The core concept was a computer that could convert the
users handwriting into electronic Iormat. Introduced in 1993 at around $1,000, Newton was too
expensive Ior many users and there were problems with the handwriting recognition Ieature.
Competition eventually emerged Irom the successIul Palm Pilot introduced in 1996. Over one
million units were sold in a two-year period. The designers created a handheld unit that could do a
Iew things well. Apples Message Pad was never proIitable, although some industry observers
suggest that Apple could have been the market leader by continuing product improvement. The
Personal Digital Assistant units were a disruptive technology that required time to develop a position
in the mainstream market (see Chapter 8).

Evaluating existing products in the brand system (portIolio) requires tracking the perIormance oI
each product as shown in Exhibit 9.4. Management needs to establish the perIormance objectives
and benchmarks Ior gauging product perIormance. Objectives may include both Iinancial and
nonIinancial Iactors. Because oI the demand and cost interrelationships among products, it is
necessary to sort out the sales and costs attributable to each product to show how well it is doing.
The concepts and methods oI activity-based cost analysis are useIul Ior this purpose.
15
The next step in tracking perIormance is selecting one or more methods to evaluate product
perIormance. Several useIul methods are shown in Exhibit 9.5. The results oI the analyses
should identiIy problem products and those perIorming at or above managements expectations.
The inIormation Irom the analyses also helps management consider whether to eliminate the
problem product.

Performnce
Ojective-
elect Method(-)
for Evltion
dentify
Prolem
Prodct-
Decide How
to Re-olve
the Prolem

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An interesting application oI perIormance analysis Ior a service is the revenue management
system used by American Airlines to evaluate route perIormance. Each route (e.g., Los Angeles
Dallas/Eort Worth) is a unit in the route system or network. Based on perIormance, Iorecasts oI
demand, competition, and other strategic and tactical considerations, the airline makes decisions to
expand, reduce, or terminate service throughout the route network. Each analyst is responsible Ior a
group oI routes. Working with management guidelines, the analyst determines how many seats on
each Ilight are to be allocated to AA advantage miles and those assigned to various Iare classiIica-
tions. American Airlines pioneered this system and is recognized throughout the industry Ior its
distinctive revenue management capabilities. Assisting analysts are complex computer models
developed using experience data and management science techniques.
We look at product liIe cycle analysis, product grid analysis, and positioning analysis to illustrate
methods Ior diagnosing product perIormance and identiIying alternatives Ior resolving problems.
Standardized inIormation services, research studies, and Iinancial analysis are discussed in previous
chapters.
--
In Chapter 6 we describe the major stages oI the product liIe cycle (PLC): introduction, growth,
maturity, and decline. Relevant issues in PLC analysis include:
Determining the length and rate oI change oI the product liIe cycle.
IdentiIying the current PLC stage and selecting the product strategy that corresponds to that
stage.
Anticipating threats and Iinding opportunities Ior altering and extending the PLC.
Product liIe cycles are becoming shorter Ior many products due to new
technology, rapidly changing preIerences oI buyers, and intense competition. Cycles also vary
Ior diIIerent products. A clothing style may last only one season, whereas a new commercial
aircraIt may be produced Ior many years aIter introduction. Determining the rate oI change oI
the PLC is important because oI the need to adjust the marketing strategy to correspond to the
changing conditions.
New technologies may shorten and even terminate product liIe cycles. Eailures may occur in
the introductory stage. Recall our discussion oI the CueCat scanner in the previous chapter.
Moreover, DVD-audio and direct download Irom the Internet may make the CD obsolete.
16

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Anlyzing
Prodct
Portfolio
Performnce
Prodct
life cycle
nly-i-
Prodct
grid nly-i-
Brnd
po-itioning
mp-
tndrdized
informtion
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Re-erch
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Finncil
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- The PLC stage oI the product has important implications
regarding all aspects oI targeting and positioning (see Chapter 6). DiIIerent strategy phases are
encountered in moving through the PLC. This calls Ior changing the Iocus oI marketing strategy
over the PLC. In the Iirst stage the objective is to establish the brand in the market through brand
development activities such as advertising. In the growth stage the brand is reinIorced through
marketing eIIorts. During the maturity stage, product repositioning eIIorts may occur by adjusting
size, color, and packaging to appeal to diIIerent market segments. Einally, during the decline stage
the Ieatures oI the product may be modiIied.
Analysis oI the growth rate, sales trends, time since introduction, intensity oI competition,
pricing practices, and competitor entry/exit inIormation is useIul in PLC position analysis.
IdentiIying when the product has moved Irom growth to maturity is more diIIicult than determining
other stage positions. Analysis oI industry structure and competition helps in estimating when the
product has reached maturity.
--
Product grid analysis considers whether each product is measuring up to managements minimum
perIormance criteria, and assesses the strengths and weaknesses oI the product relative to other
products in the portIolio. The comparative analysis oI products can be perIormed by incorporating
market attractiveness and competitive strength assessments using two-way (horizontal and vertical)
grids. These grids highlight diIIerences among products. AIter the relative market attractiveness and
competitive strength oI the products in the portIolio are identiIied, more comprehensive analysis oI
speciIic perIormance Iactors may also be useIul, including proIit contribution; barriers to entry; sales
Iluctuations; extent oI capacity utilization; responsiveness oI sales to prices, promotional activities,
and service levels; technology (maturity, volatility, and complexity); alternative production and
process opportunities; and environmental considerations.
17
- --
Perceptual maps are useIul in comparing brands.
18
Recall our discussion oI these methods in
earlier chapters. PreIerence mapping analysis oIIers useIul guidelines Ior strategic targeting
and product positioning. The analyses can relate buyer preIerences to diIIerent brands and
indicate possible brand repositioning options. New product opportunities may also be identiIied
in the analysis oI preIerence maps. Positioning studies over time can measure the impact oI
repositioning strategies.
Virtual shopping technology is another promising method Ior studying brand positioning. This
research technique enabled Goodyear to assess its brand equity and pricing strategy Ior automo-
bile tires and examine potential competitor actions. The Innovation Eeature describes the research
technique.
-- -
The Iinancial analysis techniques in the Appendix to Chapter 2 are used to evaluate product
Iinancial perIormance. Other product analysis methods include research studies that show the
relative importance oI product attributes to buyers and rate brands against these attributes. This
inIormation indicates brand strengths and weaknesses. Many oI the standardized inIormation
services provided by marketing research Iirms, such as InIormation Resources Inc. and A.C.
Nielsen Company, are useIul in monitoring the market perIormance oI competing brands oI
Iood and drug products. Industry trade publications also publish market share and other brand
perIormance data.

A major consideration when introducing new products that meet similar needs to a Iirms existing
brands is estimating how much sales volume the new product will attract Irom one or more existing
brands. Eor example, Gillettes Sensor razor presented a possible cannibalization threat to the

-
companys Atra and Trac II sales.
20
Gillettes plan was to target disposable users, recognizing that
some cannibalization oI Atra and Trac II would occur. Also, the Sensor blades were priced about
25 percent higher than Atra. Since both Atra and Trac II were in the mature stages oI their liIe
cycles, the new brand was needed to strengthen Gillettes product portIolio perIormance. The
Sensor perIormed even better than the sales and proIit Iorecasts made by Gillettes management.
Decision makers with successIul products may be reluctant to innovate because oI the
cannibalization threat. Nonetheless, as discussed in chapter 8, proactive cannibalization can yield pos-
itive beneIits, and the willingness to risk cannibalization may be signiIicant to innovation success.
21
Intels continuous improvement oI computer processors is illustrative oI proactive cannibalization
with positive eIIects.

Brand equity measurement is an important part oI strategic brand management. It is Irequently
a diIIicult concept Ior managers to accept, but eIIective strategic brand management requires that
we understand brand equity and evaluate its impact when making brand management decisions:
Brand equity is a set oI brand assets and liabilities linked to a brand, its name, and symbol, that
add to or subtract Irom the value provided by a product or service to a Iirm and/or to that Iirms
customers.
22
The assets and liabilities that impact brand equity include brand loyalty, name awareness,
perceived quality, brand associations (e.g., Nikes association with athletes), and proprietary
brand assets (e.g., patents).
- Aaker proposes several measures to capture all relevant aspects
oI brand equity:
23
Loyalty (price premium, satisIaction/loyalty).
Perceived quality/leadership measures (perceived quality, leadership/popularity).
Associations/diIIerentiation (perceived value, brand personality, organizational associations).
Awareness (brand awareness).
Market behavior (market share, price and distribution indices).
These components provide the basis Ior developing operational measures oI brand equity.

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Several methods Ior brand valuation have been proposed. Interbrands approach was discussed
earlier (Exhibit 9.2). One promising method is momentum accounting, which considers how the
earning power oI the brand changes over its liIe cycle because oI the revenues and costs associated
with the brand:
Momentum accounting uses Iunctions similar to depreciation curves in conventional accounting to
monitor the sources oI change in brand value over time. Momentum accounting tries to capture
managers intuition about the reasons Ior momentum change in terms oI impulsesthe marketing,
competitive, and environmental events that aIIect a brands value.
24
Young & Rubicam (Y&R) has developed another brand evaluation tool, Brand Asset
Valuator (BAV).
25
The technique uses the brands vitality (relevance and diIIerentiation) and
brand stature (esteem and Iamiliarity) to gauge the health oI the brand. Since 1993 BAV has
conducted studies with 300,000 consumers and 19,000 brands in 40 countries. Brands with
high diIIerentiation include Disney, Jaguar, and Victorias Secret. AT&T and Kodak Iall into
the high relevance category. Brands with high esteem include Band-Aid and Rubbermaid,
while Coca-Cola and Kelloggs Iall into the high Iamiliarity category.
- It is important to consider absolute brand values and investments, and
the change in brand value over time that provides regular evaluation oI brand health. Several major
companies have adopted brand health report cards including indicators to assess the direction oI
change in brand equity and key issues to be addressed. Brand health reports can be compiled Ior
individual brands or the entire brand portIolio.
26
The brand report card can assess the brand against
the characteristics oI the strongest brands by scoring against key criteria oI brand strength:
The brand excels at delivering the beneIits customers truly desire.
The brand stays relevant.
The pricing strategy is based on consumers perceptions oI value.
The brand is properly positioned.
The brand is consistent.
The brand portIolio and hierarchy make sense.
The brand makes use oI and coordinates a Iull repertoire oI marketing activities to build brand
equity.
The brands managers understand what the brand means to consumers.
The brand is given proper support and that support is sustained over the long run.
The company monitors sources oI brand equity.
27
Others suggest that brand health assessment measures should include market position (e.g., market
share and repeat purchase behavior), perception (e.g., awareness, diIIerentiation), marketing
support (e.g., share oI advertising spending in the sector compared to market share), and
proIitability.
28
Brand health reports need to be produced on a regular and systematic basis to alert
managers to necessary changes in strategy and new market opportunities.
-
Determining the brand identity strategy Ior an organizations products is a very important
strategic initiative (Exhibit 9.3). Brand identiIication should span a long time horizon, providing
a Ioundation Ior building brand equity:
Brand identity is a unique set oI brand associations that the brand strategist aspires to create or
maintain. These associations represent what the brand stands Ior and imply a promise to customers
Irom the organization members.
29

-
We Iirst discuss determining the brand identity and consider the role oI brand position. Next,
alternative levels oI brand identity are described. Einally, we examine the process oI brand
identity implementation.

In addition to the brand as a product or the brand as an organization, David Aaker extends brand
identiIication to the brand as a person and the brand as a symbol.
30
The brand as a person, or
brand personality, perspective recognizes that strong brands may have an identity beyond the
product or the company, which has positive impacts on the customer relationship and perception
oI value. The brand as a symbol underlines the role in brand building oI visual imagery,
metaphors, and brand heritage. Eor example, consider Nikes swoosh visual symbolism, the
Energizer bunny metaphor Ior long battery liIe, and Starbucks Seattle coIIee house tradition.
Relatedly, Don Schultz reIers to this as getting to the heart oI the brand to understand the
promise that the brand makes to the customer and its value proposition.
31
A clear and eIIective
brand identiIication strategy is a Ioundation Ior building brand strength.
While all Iour brand identity perspectives may not be employed by an organization, it is impor-
tant to consider identity options beyond a product Iocus. Moreover, it is essential to recognize that
brand identity articulates how management would like the brand to be perceived, whereas brand
image indicates how buyers currently perceive the brand.
-
The value proposition conveys the beneIit(s) oIIered by the brand. These beneIits may be
Iunctional, emotional, or selI-expressive.
32
The intent is to consider the beneIits that distinguish
a brand Irom its competition. The value proposition expresses the underlying logic oI the
relationship between the brand and the customer.
-
One oI several brand identity options may be appropriate Ior a company. We look at the Ieatures oI
each. The major identiIication alternatives are shown in Exhibit 9.6. Branding applies to services
as well as goods. We examine the Ieatures oI each identity option.
The strategy oI assigning a brand name to a speciIic product
is used by various producers oI Irequently purchased items, such as P&Gs Crest toothpaste,
Pampers diapers, and Ivory soap. The brand name on the product gives it a unique identiIication
in the marketplace. Building a new brand name through advertising initially can cost over
$50 million, plus the expense oI maintaining the brand identity in the marketplace.
This strategy places a brand name on a line oI related products. Palm
Inc.s popular line oI personal digital assistants is an example oI product line branding. It provides
Iocus and oIIers cost advantages by promoting the entire line rather than each product. This
strategy is eIIective when a Iirm has one or more lines, each oI which contains an interrelated
oIIering oI product items. One advantage oI product line branding is that additional items (line
extensions) can be introduced utilizing the established brand name.
This strategy builds brand identity using the corporate name to
identiIy the entire product oIIering. Examples include IBM in computers, BMW in automobiles,
and Victorias Secret in intimate apparel. Corporate branding has the advantage oI using one
advertising and sales promotion program to support all oI the Iirms products. It also Iacilitates
the introduction and promotion oI new products. The shortcomings oI corporate branding
include a lack oI Iocus on speciIic products and possible adverse eIIects on the product portIolio
iI the company encounters negative publicity Ior one oI its products.
A company may use a combination oI the branding strategies
shown in Exhibit 9.6. Sears, Ior example, employs both product line and corporate branding
(e.g., the Kenmore appliance and CraItsman tool lines). Combination branding beneIits Irom the
buyers association oI the corporate name with the product or line brand name. However,

-
corporate advertising may not be cost-eIIective Ior inexpensive, Irequently purchased consumer
brands. Eor example, companies like P&G and Chesebrough-Ponds (Vaseline, Q-tips) do not
actively promote the corporate identity.
In another Iorm oI corporate branding, retailers with established brand
names, such as Costco, Krogers, Target, and Wal-Mart, contract with producers to manuIacture
and place the retailers brand name on products sold by the retailer. Called private branding, the
major advantage to the producer is eliminating the costs oI marketing to end users, although a
private-label arrangement may make the manuIacturer dependent on the Iirm using the private
brand. Nevertheless, the arrangement can yield beneIits to both the producer and the value-chain
member. The retailer uses its private brand to build store loyalty, since the private brand is asso-
ciated with the retailers stores.

Identity implementation involves deciding the components oI the brand identity and value
proposition to be included in the brand position statement. These questions should be answered
in Iormulating the identity implementation strategy:
33
1. Select a brand position that will be Iavorably recognized by customers and will diIIerentiate
the brand Irom its competitors.
2. Determine the primary and secondary target audiences.
3. Select the primary communication objectives.
4. Determine the points oI advantage.
Determination oI the brand position is the core oI the implementation strategy. This decision
involves selecting the part oI the core identity to be communicated to the targets, including
points oI leverage and key beneIits.
34
--
Analyzing perIormance shows how well existing brand strategies are perIorming, helps manage-
ment to identiIy new-product needs, and points to where existing strategies should be altered.
Brands that have been successIul over a long time period oIIer useIul insights about product
strategies. Established brands like Budweiser, Hershey, IBM, and Intel continue to build strong
market positions. The perIormance records oI powerIul brands are the result oI (1) marketing
skills, (2) product quality, and (3) strong brand preIerence developed through years oI successIul
advertising.
35
The brand equity that has been built Ior a companys many Iamous brands is a

-
pecific
Prodct
Brnding
Prodct Line
Brnding
Privte
Brnding
Comintion
Brnding
Corporte
Brnding
BA OF
DENTFCATON

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valuable asset. A common characteristic oI many enduring brands is that the targeting and
positioning strategy initially selected has generally been Iollowed during the liIe oI each brand.
Consistency in the marketing strategy over time is very important.
36
The evidence suggests that selecting and implementing good brand strategies pays oII.
Research Iindings indicate that the leading brands in various product categories are as much as
50 percent more proIitable than their nearest competitors.
37
-
Product improvement strategies include decisions Ior each product, product line, and the product
portIolio, as shown in Exhibit 9.7. Product line actions may consist oI adding a new product,
reducing costs, improving the existing product, altering the marketing strategy, or dropping
the product. Product portIolio strategy may involve adding a product line, deleting a line, or
changing the priority oI a line (e.g., increasing the marketing budget Ior one line and cutting the
budget Ior another line).
Once the need to change the strategy oI an existing product is identiIied, there are several
options Ior responding to the situation (Exhibit 9.7). We discuss each strategy to indicate the
issues and scope oI the action.
- Management may decide to add a new product to the line to
improve perIormance oI a product or product line. Coca-Cola added new Ilavors to Coke in early
2003. Alternatively, a strong perIorming brand may provide an opportunity to leverage its strengths
by adding a new related line or product category. Eor example, in 1998, the lingerie retailer
Victorias Secret launched a new line oI cosmetics to be sold in its stores, and subsequently through
its successIul Web page direct marketing channel.
38
By the end oI 2000, the growing line oI prestige
beauty products contributed 16 percent oI Victorias Secret sales, and the $150 million sales oI the
Dream Angels line made it the leading prestige Iragrance in the United States. This success led
Victorias Secret into a joint venture with Shisheido Ior a 2002 launch oI new cosmetics lines. We
discuss line and brand extension options later in the chapter.
- We know that low costs give a company a major advantage over the
competition. As an illustration, Nabiscos Ritz Cracker was introduced in 1934 and is the

-
Prodct
improvement
Prodct
line
-trtegy
Co-t
redction
Add new
prodct(-)
Eliminte -pecific
prodct(-)
Alter mrketing
-trtegy
Chnge prodct line
prioritie-
Prodct
portfolio
-trtegy
Delete prodct
line(-)
Add new prodct
line(-)

-
best-selling cracker in the world.
39
In 2000, Nabiscos Ritz had U.S. sales oI $475 million, and
a market share almost twice that oI its nearest competitor.
40
In addition to a Ilavor that has wide
appeal, Ritzs low price compared to other types oI crackers gives it a major competitive
advantage. Ritzs high-volume production helps to keep costs low. A products cost may be
reduced by changes in its design, manuIacturing improvements, reduction oI the cost oI supplies,
and improvements in marketing productivity.
Products are oIten improved by changing their Ieatures, quality, and
styling. Automobile Ieatures and styles are modiIied on a continuing basis. Many companies
allocate substantial resources to the regular improvement oI their products. Compared to a decade
ago, todays products, such as disposable diapers, cameras, computers, and consumer electronics
show vast improvements in perIormance and Ieatures. Eor example, the Skoda automobile brand
was associated with low mechanical standards and reliability, until acquired by Volkswagen
whose engineering and production expertise has transIormed the Skoda product into one oI the
leading European brands.
One way to diIIerentiate a brand against competition is with unique features. Another option
is to let the buyer customize the Ieatures desired in a product. Recall, Ior example, the discussion
oI mass customization in earlier chapters. Optional Ieatures oIIer the buyer more Ilexibility in
selecting a brand. The capability to produce products with varied Ieatures that appeal to market
diversity is an important competitive advantage.
Style may oIIer an important competitive edge Ior certain product categories. Moreover, style
may serve as a proxy Ior quality in some product categories. The impact oI intangibles like style
should not be underestimated. Trackers oI trends have been surprised by the inIluence oI Japanese
design and culture in the early 2000s. Japanese designs are impacting on Iields as diverse as toys
(e.g., small dolls); cell phones (e.g., the Sony Ericsson camera phone); cars (e.g., Toyotas
gas-electric Prius); and Iashion (e.g., Louis Vuittons Murakami bags). Japanese-style comics
called manga, as thick as paperbacks, selling Ior $10 in Target and Borders, are at the center oI
pop culture, along with anime, the distinctive Japanese-style cartoons. Interestingly, Nike has
experimented with releasing new sport shoes in Tokyo, and counting in days the time it takes Ior
the shoes to appear on the Ieet oI trendsetters in New York and London.
41
Changes in market targeting and positioning may be
necessary as a product moves through its liIe cycle. However, the changes should be consistent
with the core strategies. Problems or opportunities may point to adjusting the marketing strategy
during a PLC stage. Tylenols marketing strategy over its liIe cycle has been altered while
maintaining a consistent positioning on its strong association with doctors and hospitals.
Dropping a problem product may be necessary when cost reduction,
product improvement, or marketing strategy initiatives are not Ieasible Ior improving the per-
Iormance oI the product. In deciding to drop a product, management may consider a variety oI
perIormance criteria in addition to the products sales and proIit contribution. Elimination may
occur at any PLC stage, although it is more likely to occur in either the introduction or decline
stages. Risks are involved in eliminating products that have loyal buyers; the elimination strategy
should be careIully planned and implemented.
- - Environmental issues concerning product labeling,
packaging, use, and disposal need to be considered in the product strategies oI companies whose
products have potential environmental impact. Protection oI the environment involves a complex
set oI trade-oIIs among social, economic, political, and technology Iactors. Companies like
McDonalds, P&G, Rubbermaid, and many others incorporate environmental considerations into
their product strategies. Moreover, these environmental issues are global in scope.
Environmental issues and concerns may be very complex, and require consumers to change their
use and disposal behavior. Even technical authorities do not always agree on the extent to which
environmental problems exist, or how to solve the problems. Nevertheless, many companies,

-
governments, and special-interest groups are proactively working toward reducing environmental
contamination.
In some cases, stringent legislative controls have been developed. The European Unions end-
oI-liIe vehicles directive comes into Iorce in 2007 and mandates car manuIacturers to
cover the costs oI recycling old vehicles, as well as ensuring that recyclable components make
up 85 percent oI the weight oI new vehicles.
ManuIacturers are already setting aside large Iunds to meet compliance costs. Some expect simi-
lar legislation to be developed in other countries and across other sectors such as white goods.
42
-
Adding a new line oI products to the product portIolio is a major product strategy change
(Exhibit 9.7). The motivation Ior changing the product mix may be to:
Increase the growth rate oI the business.
OIIer a more complete range oI products to wholesalers and retailers.
Gain marketing strength and economies in distribution, advertising, and personal selling.
Leverage an existing brand position.
Avoid dependence on one product line or category.
The product portIolio may be expanded through internal development or by purchase oI an
entire company or a line oI products. Purchase may be a Iavorable option compared to the costs
oI internal development. Acquisition is also a Iaster means oI expanding the product mix.
Strategic alliances among competitors are also used Ior expanding product lines.
-
The discussion so Iar centers on actions that may be taken Ior speciIic products in the portIolio.
Managers in a company or business unit are also concerned with managing the portIolio Ior
optimal perIormance. Companies may also decide to delete a product line Irom the portIolio. Eor
example, Levi Strauss put its Dockers brand oI apparel up Ior sale in 2004. Apparently,
management decided to concentrate on managing the Levi brand. A cohesive, clearly deIined
brand portIolio is essential to achieving brand strength. The importance oI a strategic brand
management perspective is described:
Brand portIolio strategy becomes especially critical as brand contexts are complicated by multiple
segments, multiple products, varied competitor types, complex distribution channels, multiple
brand extensions, and the wider use oI endorsed brands and sub-brands.
43
Nestle, the worlds largest Iood company, has over 8,000 brands.
44
Starting in 2001 management
was pursuing initiatives to streamline operations to reduce cost, strengthening key product groups
via acquisitions, outsourcing activities such as tomato canning and pasta production, and develop-
ing new products. By 2003, $1.5 billion in cost reductions had been achieved. Some critics observe
that signiIicantly expanded marketing expenditures may oIIset the cost reductions.
There are many powerIul Iorces mandating critical strategic management Iocus on brands.
These Iorces include overcapacity and intense price competition in many sectors; the proliIeration
oI similar competing products; and, powerIul retailers with their own category management and
private branding interests.
45
Strategies Ior building brand strength and sustaining that strength Ior the brand portIolio require
attention to the implementation oI brand identiIication in brand-building strategies, revitalizing
brands in the later stages oI their liIe cycles, and recognizing the strategic vulnerabilities oI core
brands, since brands may be vulnerable to competitive attack or changing market conditions.
- The essence oI strategies Ior brand strength is that management
should actively build, maintain, and manage the Iour assets that underlie brand equityawareness,

-
perceived quality, brand loyalty, and brand association.
46
Critical to this process is developing the
brand identiIication strategy and implementing that identity throughout the company and
the marketplace. Colgate Palmolives successIul initiatives in global brand building are described
in the Global Eeature.
In addition to creating brand identiIication, attention is Irequently also needed in coordinating
the brand identity across the organization, the diIIerent media it uses, and the diIIerent markets
and segments it serves.
47
Eor example, IBMs corporate brand identiIies a great number oI
products and company divisions in diverse end user markets. The challenge is to implement the
brand identiIication consistently across these diIIerent situations. The risk oI Iailing to do so is
customer conIusion and reduced brand equity.
Mature brands that are important in the companys overall strategy may
require rejuvenation. Eor example, P&Gs Oil oI Olay has a 53-year-old brand history and retains a
strong position in the skin care market by adding products that link to the brand heritage.
48
Similarly,
when P&G acquired the mature Old Spice mens Iragrance brand, it was underperIorming in its
target market oI older consumers. P&G successIully repositioned the brand to attract younger
consumers and rebuilt market share. Apple Computers transIormed the companys position with
the launch oI the iMac and its 1997 Think DiIIerent campaign directed at the loyal core oI
Macintosh users.
49
- A strategic perspective on brands also requires that
decision makers be aware oI the vulnerability oI brands. When Skoda cars were Iirst launched in
the United Kingdom, with a heritage oI low-quality vehicles assembled in part by convict labor
in a then-Communist country, consumer tests revealed that perceived value was actually lower
when the brand was known, than when the brand identiIication was removed Irom the cars.
In the early 1990s, Encyclopaedia Britannica rebuIIed an approach Irom MicrosoIt to produce
a digital version oI their encyclopaedia. In less than two years MicrosoIts Encarta dominated
the market. When Encyclopaedia Britannica approached MicrosoIt to reopen negotiations,
MicrosoIts management indicated that research Iindings showed that Britannica had negative
brand equity and would have to pay MicrosoIt to have its name on a joint product.
50

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Established brand names may be useIul to introduce other products by linking the new product
to an existing brand name. The primary advantage is immediate name recognition Ior the new
product. Methods oI capitalizing on an existing brand name include line extension, stretching the
brand vertically, brand extension, cobranding, and licensing.
- This leveraging strategy consists oI oIIering additional items in the same
product class or category as the core brand. Extensions may include new Ilavors, Iorms, colors,
and package sizes. Cherry Coke is an example. The primary danger is overextending the line and
weakening the brand equity. Most new products are line extensions.

This Iorm oI line extension may include moving up or

down in price/quality Irom the core brand. It may involve subbrands that vary in price and Ieatures.
The same name may be used (e.g., BMW 300, 500, 700), or the brand name linked less directly
(Courtyard by Marriott). The advantages oI this strategy include expanded market opportunities,
shared costs, and leveraging distinctive capabilities. The primary limitations are damage to the core
brand when moving lower (e.g., lower price/quality versions oI a premium brand) or diIIiculty in
moving the brand to a higher price/quality level.
- This Iorm oI leveraging beneIits Irom buyers Iamiliarity with an existing
brand name in a product class to launch a new product line in another product class.
52
The new line
may or may not be closely related to the brand Irom which it is being extended. Examples oI related
extensions include Ivory shampoo and conditioner, Nike apparel, and Swiss Army watches. Critics
oI brand extensions indicate that these initiatives oIten do not succeed and may damage the core
brand. There are several potential risks associated with brand extensions: (1) diluting existing
brand associations, (2) creating undesirable attribute associations, (3) Iailure oI the new brand to
deliver on its promise, (4) an unexpected incident (e.g., product recall), and (5) cannibalization oI
the brand Iranchise.
53
One oI the more successIul brand extensions oI the 1990s was the various
lines oI Healthy Choice Ioods.
Regardless oI the possible dangers oI brand extension, it continues to be popular. Two
considerations are important. There should be a logical tie between the core brand and the
extension. It may be a diIIerent product type while having some relationship to the core brand.
Eor example, in the United Kingdom, the successIul Iashion retailer Erench Connection is
extending its branding Irom clothes to eyeglasses, cosmetics, underwear, and watches, as well
as homewares such as towels and bed linen. The extension also needs to be careIully evaluated
as to any negative impact on the brand equity oI the core brand.
An interesting example oI how the Virgin Group in the United Kingdom is extending the
brand into new industries is described in Exhibit 9.8. Sir Richard Branson, CEO oI Virgin
Group, plans to launch Virgin USA, a discount airline, in 2005.
This strategy consists oI two well-known brands working together in promoting
their products. The brand names are used in various promotional eIIorts. Examples include
airlines cobranding with credit card companies. Delta Airlines cobranding alliance with
American Express via the Sky Miles credit card is illustrative. The advantage is leveraging the
customer bases oI the two brands. Joint products may be involved or instead a composite product
such as the Healthy Choice-Kellogg line oI cereals may be cobranded.
Cobranding may involve business-to-business partners. Dell Inc. has an agreement with EMC
to cobrand its Clarion line oI data storage systems.
54
More commonly cobranding is used to link
consumer brands. Disney, Ior example, is cobranding breakIast cereals, toaster pastries, and
waIIles with Kellogg, as well as Disney Xtreme! Coolers with Minute Maid.
55
Cobranding occurs when brands Irom diIIerent organizations (or distinctly diIIerent businesses
within the same organization) combine to create an oIIering in which brands Irom each play a
driver role.
56
Promotional budgets can be shared and new-product introductions Iacilitated. The

-
important challenge is selecting the right brand combination and coordinating the implementation
between two independent companies. An eIIective cobranding arrangement is a strong competitive
strategy.
- Another popular method oI using the core brand name is licensing. The sale oI a
Iirms brand name to another company Ior use on a noncompeting product is a major business
activity. Total U.S. retail sales oI licensed products were estimated at more than $100 billion in
2000.
57
The Iirm granting the license obtains additional revenue with only limited costs. It also
gains Iree publicity Ior the core brand name.
Eor example, Land Rover has taken its name into a range oI product categories including
outdoor clothing, and adventure kit Ior children, wristwatches, and an all-terrain pushchair
Ior inIants designed Ior oII-road use like Land Rover vehicles. The company sees the advantages
as additional revenue Ior the brand, but also reinIorcing the rugged liIestyle identiIication oI the
brand. Similarly, PepsiCo Inc. employs licensing as a strategic tool to enhance and build the
identiIication oI the brand and generate additional revenue streamthe use oI the Pepsi logo on
young mens and womens apparel is intended to reIlect the liIestyles oI drinkers oI Pepsi and
Mountain Dew.
58
The main limitation is that the licensee may create an unIavorable image Ior the brand.
Licensing may be used Ior corporate, product line, or speciIic brands. Anheuser-Busch
Companies Inc. (Budweiser beer) is one oI the largest corporate licensors.
Decision makers may be under great pressure to leverage their brands over
a larger number oI products to justiIy investments in brand building and to increase proIitability.
There may be signiIicant risks in stretching brands too Iar. The brand extension may not succeed
iI it is not compatible with the established brand identiIication, and may even dilute or damage
the brand equity Ior established products.
59
Regular brand health checks and a strategic brand
system perspective are important to identiIying and managing these risks.

-

Stephen J. Garone,
Managing Reputation with
Image and Brands (New
York: The ConIerence
Board, 1998), 11.
Reprinted with permission
Irom The ConIerence
Board.

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Companies operating in international markets Iace various strategic branding challenges. Eor
example, European multinational Unilever is reducing its brand portIolio Irom 1,600 to 400, to
Iocus on its strong global brands like Lipton, while acquiring more global brands Ior its portIolio:
SlimEast, Ben & Jerrys Homemade, and BestIoods (Knorr, Hellmans). The companys global
brand strategy is intended to position it Iavorably with international retailers.
60
Increasingly cosmopolitan consumers in many countries with similar tastes drawn Irom
exposure to similar media, as well as the economies oI scale oI global brand identiIication and
communications, encourage the development oI global brands. However, global brand identity
may also create barriers to building strong identiIication with local markets, and Ior some
companies the mantra has become think global, act local.
Aaker and Joachimsthaler argue that global brand strategy is oIten misguided, and the priority
should not be building global brands (although they may result); instead the priority should be
working Ior global brand leadershipstrong brands in all markets supported by eIIective,
strategic global brand management.
61
Nonetheless, this may involve diIIerent approaches to those
successIul in the domestic market. Eor example, P&G has traditionally emphasized individual
product brands instead oI its corporate identity. However, in some overseas markets like Japan,
Russia, and India, the company uses the corporate umbrella identiIication oI P&G to create value.
Japanese consumers want to know about the company behind the brands they buy.
62
Multinational operations increasingly Iace the challenge oI managing brand portIolios
containing global, regional, and local brands. Eor example, Nestle manages a Iour-level brand
portIolio: 10 worldwide corporate brands (e.g., Nestle, Carnation, Buitoni); 45 worldwide
strategic brands (e.g., KitKat, Polo, CoIIee-Mate), which are the responsibility oI general
management at the strategic business-unit level; 140 regional strategic brands (e.g., StouIIers,
Contadina, Eindus), which are the responsibility oI strategic business units and regional
management; and 7,500 local brands (e.g., Texicana, Brigadeiro, Rocky), which are the respon-
sibility oI local markets.
63
While some observers believe Nestles brand strategy may be overly
complex, its perIormance is impressive.
-
Some controversy surrounds the issue oI branding on the Internet. That controversy relates mainly
to the sustainability oI brands that exist only on the Internet, but extends to how the Web can impact
the brand equity oI conventional brands. It is all but impossible Ior the decision maker to ignore
the linkage between the brand and the Internet. The Internet Eeature describes the struggle oI
Lastminute.com to establish its brand and value proposition as an Internet company.
Interestingly, successIul online brands may be those adopting brand strategies that rely on
traditional, oIIline Iorms oI communications. Eor example, the career Web site Monster.com
makes successIul use oI sponsoring the halItime report at the Super Bowl backed by advertising
spots in the pregame and during the game. Monsters target is men and women aged 18 to 49,
and the Super Bowl event gives excellent coverage, which coincides with the time oI the year
when many people are thinking oI changing their jobs.
64
The Internet can play a pivotal role in enhancing brand relationships and corporate reputation,
by oIIering customers a new degree oI interactivity with the brand, and speed and adaptability in
the relationship-building process.
65
Eor established brands seeking to reinIorce brand identiIication
strategy and enhance brand equity through the Web, the Web site should:
Create a positive experience, by being easy to use, delivering value, and being interactive,
personalized and timely.
ReIlect and support the brand.
Look Ior synergy with other communications programs.

-
Provide a home Ior the loyalist and extend the relationship with those customers.
DiIIerentiate, with strong subbranded content.
66
While much remains to be learned about the requirements Ior eIIective brand building on the
Internet, these initiatives should be included in strategic brand management responsibilities.

Companies that have several diIIerent brands and product categories should manage them as a
system rather than pursuing independent brand strategies:
The brand portIolio strategy speciIies the structure oI the brand portIolio and the scope, roles, and
interrelationships oI the portIolio brands. The goals are to create synergy, leverage, clarity within
the portIolio and relevant, diIIerentiated, and energized brands.
67
The importance oI a brand portIolio perspective is illustrated by the DaimlerBenz response to
a new-product test Iailure. In the late 1990s DaimlerBenzs management targeted the small car
market with the new A-Class Baby Benz, alongside the prestigious Mercedez-Benz C- and
E-Class lines. In 1997, wholly unexpectedly, in a test drive a Swedish journalist rolled the
A-Class Benz when simulating a swerve around an imaginary elk (the Elk Test). The company
responded with expensive changes to the vehiclenew tires, electronic stabilizing as standard
but aIter 3,000 cancelled orders they were Iorced to take the car oII the market Ior three months
to undertake chassis modiIications. Rumors spread that the company had stretched itselI too Iar

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too quickly to get into the mass car market, Iuelled by the subsequent delay oI the launch oI the
Smart car because oI similar saIety concerns. Nonetheless, the company survived the crisis and
its measured and careIul approach has protected the brands Irom long-term damage. The A-Class
Benz is now a highly successIul product line.
68
A brand portIolio perspective encourages the use oI brands to support the entire portIolio as
well as its support oI each brand:
A key to managing brands in an environment oI complexity is to consider them as not only
individual perIormers, but members oI a system oI brands that must work to support one another.
A brand system can serve as a launching platIorm Ior new products or brands and as a Ioundation
Ior all brands in the system.
69
A key concept that guides the management oI the brand portIolio is that speciIic brands play diI-
Ierent roles in the system. Eor example, one brand may play a lead or driver role whereas other
brands in the system may play supportive roles.
An important issue in managing brand portIolios is deciding how many brands should comprise
the system. Eour questions are relevant in deciding whether to introduce a new brand name:
1. Is the brand suIIiciently diIIerent to merit a new name?
2. Will a new name really add value?
3. Will the existing brand be placed at risk iI it is used on a new product?
4. Will the business support a new brand name?
70
Strategic brand management provides the Ioundation Ior

selecting strategies Ior each oI the remaining components oI
the positioning strategy. It Iorms the leading edge oI eIIorts
to inIluence buyers positioning oI the companys brands.
Product strategy needs to be matched to the right distribution,
pricing, and promotion strategies. Product decisions shape
both corporate and marketing strategies, and are made within
the guidelines oI the corporate mission and objectives. The
major product decisions Ior a strategic business unit include
selecting the mix oI products to be oIIered, deciding how to
position an SBUs product oIIering, developing and imple-
menting strategies Ior the products in the portIolio, selecting
the branding strategy Ior each product, and managing the
brand system.
Most successIul corporations assign an individual or organi-
zational unit responsibility Ior strategic brand management.
Product managers Ior planning and coordinating product activi-
ties are used by many companies, although new customer- and
market-based structures are emerging.
Evaluating a companys existing products and brands helps
to establish priorities and guidelines Ior managing the product
portIolio. The methods include the portIolio screening, analy-
sis oI the product liIe cycle, product grid analysis, positioning
analysis, and Iinancial analysis. Product cannibalization is an
important issue in this analysis. It is necessary to decide Ior
each product iI (1) a new product should be developed to
replace or complement the product; (2) the product should be
improved (and, iI so, how); or (3) the product should be elim-
inated. Product strategy alternatives Ior the existing products
include cost reduction, product alteration, marketing strategy
changes, and product elimination. Product mix modiIication
may also occur.
Gap Inc. announced an interesting new brand initiative in
late 2004.
71
The plan is to launch a new womens clothing
brand, targeting women over 35. The initial rollout will consist
oI 10 stores to be opened in 2005. The new chain will have its
own personality, diIIerentiating it Irom the Gap, Old Navy,
and Banana Republic brands.
The role oI branding in positioning products is pivotal Ior
many companies. Brand equity is a valuable asset that requires
continuous attention to build and protect the brands value.
The equity oI a brand includes both its assets and liabilities,
including brand loyalty, name awareness, perceived quality,
brand associations, and proprietary brand assets. Increasingly,
companies are measuring brand equity to help guide product
portIolio strategies, and adopting regular brand health checks.
Mature brands may require speciIic revitalization approaches.
Managers must be aware also oI existing and emerging
strategic brand vulnerabilities.
Brand identity may Iocus on the product, the organization,
a person, or a symbol. Brand identiIication strategy involves
deciding among private branding, corporate branding, product-
line branding, speciIic product branding, and combination
branding. Brand identiIication in the marketplace oIIers a Iirm

-
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A. Examine the Eortune Brands Web site (www.fortune
brands.com). Analyze and evaluate the strategic initiatives
used by Eortune Brands in their strategic brand management.
B. Visit the Web site oI Lastminute.com (www.lastminute.com).
Map the business model used by this Web brand. Review the
strengths and weaknesses oI the model, and consider how
the brand has been established and how it may be extended.
C. Go to (www.e4m.bi:), operated by the United Kingdoms
Marketing Council. Register at the site and choose the
Business-to-Consumer area, and the Brand Consistency
option under Strategy Area. Review several oI the short
cases describing how major companies are striving Ior
consistency in their brand identiIication while using
multiple channels including the Internet. What conclu-
sions can you draw regarding the requirements Ior brand
consistency across multiple channels?
D. Visit the Yahoo Inc. Web site. Describe Yahoos brand
portIolio.
an opportunity to gain a strategic advantage through brand
equity and brand leveraging.
Opportunities Ior leveraging brands include line extensions in
the existing product class, extending the line vertically, extending
the brand to diIIerent product classes, cobranding with other
brands, and licensing the brand name. Line extensions are widely
used alongside the other Iorms oI leveraging. Eor companies with
international operations, additional concerns relate to global
branding issues. Increasingly, attention is also required to the role
oI the Internet in implementing brand identiIication.
Einally, management is concerned with the system or
network oI brands in the portIolio. Each brand should
contribute to the portIolio as well as beneIiting Irom it. The
objective should be to coordinate strategies across the system
rather than managing each brand on an independent basis.
-
A. Review the BMW Global Eeature. What are the important
issues conIronting BMWs management in managing the
companys brand portIolio? How can a brand portIolio
perspective assist in meeting these challenges?
B. Examine the case described in the Global Eeature
Colgates Global Brand Strategy. What are the major
problems a company Iaces in taking branded consumer
goods into overseas marketscan brand identity and
image survive in globalization?
-- ---
1. Eli Lilly & Company manuIactures a broad line oI
pharmaceuticals with strong brand positions in the
marketplace. Lilly is also a manuIacturer oI generic drug
products. Is this combination branding strategy a logical
one? II so, why?
2. Discuss the advantages and limitations oI Iollowing a
branding strategy oI using brand names Ior speciIic
products.
3. What is the role oI strategic brand analysis in building
strong brands?
4. To what extent are the SBU strategy and the product
strategy interrelated?
5. Suppose that a top administrator oI a university wants to
establish a product-management Iunction covering both
new and existing services. Develop a plan Ior establishing
a product planning program.
6. Many products like Jell-O reach maturity. Discuss several
ways to give mature products new vigor. How can man-
agement determine whether it is worthwhile to attempt to
salvage products that are perIorming poorly?
7. How does improving product quality lower the cost oI
producing a product?
8. Why do some products experience long successIul lives
while others have very short liIe cycles?
9. How can a company combine the strengths oI global
brands with the need to adapt to local market requirements
in a multinational operation?
10. Discuss the underlying logic oI managing brand systems.
11. What are the strengths and limitations in moving the
Marriott brand vertically upward and downward in terms
oI price and quality?

-
-
1. BMW, BusinessWeek, June 9, 2003, 57.
2. Ibid., 5760.
3. David W. Cravens, Gerald E. Hills, and Robert B. WoodruII,
Marketing Management (Homewood IL: Richard D. Irwin,
1987), 375.
4. Leonard Berry, Services Marketing Is DiIIerent,
Business, MayJune 1980, 2430.
5. Jim Kerstetter and Peter Burrows, A CEOs Last Stand,
6. Ibid.
7. The discussion in this section is based on Pierre Berthon,
James M. Hulbert, and Leyland E. Pitt, Brands, Brand
Managers, and the Management of Brands. Where to
Next? Boston, MA: Marketing Science Institute, Report
No. 97-122, 1997.
8. The 100 Top Brands, BusinessWeek, August 2, 2004, 68.
9. David A. Aaker, Building Strong Brands (New York: The
Eree Press, 1996), 2635.
10. Death oI the Brand Manager, 1he Economist, April 9,
1994, 6768.
11. Pierre Berthon, James M. Hulbert, and Leyland E. Pitt,
Brands, Brand Managers, and the Management of
Brands. Where to Next? Boston, MA: Marketing Science
Institute, Report No. 97-122, 1997.
12. David A. Aaker, Building Strong Brands (New York: The
Eree Press, 1996), 2635.
13. Ibid., 68.
14. Jim Carlton, Apple Drops Newton, An Idea Ahead oI Its
Time, 1he Wall Street Journal, March 2, 1998, B1 and B8.
15. Robert Cooper and Robert S. Kaplan, Measure Costs
Right: Make the Right Decisions, Harvard Business
Review, SeptemberOctober 1998, 96103.
16. Michael J. Etzel, Bruce J. Walker, and William J. Stanton,
Marketing, 13th ed. (McGraw-Hill/lrwin, 2004), 247.
17. George S. Day, Diagnosing the Product PortIolio,
18. The development oI these maps is discussed in William R.
Dillon, Thomas J. Madden, and Neil H. Eirtle, Marketing
Research in a Marketing Environment, 3rd ed. (Burr
Ridge, IL: Richard D. Irwin, Inc. 1994), Appendix to
Chapter 17.
19. This section is based on David W. Cravens, Nigel
E. Piercy, and George S. Low, The Innovation Challenges
oI Proactive Cannibalization and Discontinuous
Technology, European Business Review 14, no. 4, 2002.
20. Lawrence Ingrassia, Eace-OII: A Recovering Gillette
Hopes Ior Vindication in a High-Tech Razor, 1he Wall
Street Journal, September 29, 1989, A1, A4.
21. Rajesh K. Chandry and Gerald J. Tellis, Organizing Ior
Radical Product Innovation: The Overlooked Role oI the
Willingness to Cannibalize, Journal of Marketing Research,
November 1998, 474487. Rajesh K. Chandry and Gerald
J. Tellis, Organi:ing for Radical Product Innovation (Boston,
MA): Marketing Science Institute, Report 98-102, 1998.
22. David A. Aaker, Managing Brand Equity (New York: The
Eree Press, 1991), 15.
23. Ibid., 102120.
24. Peter H. Earquhar, Julie Y. Han, and Yuji Liri, Brands on
the Balance Sheet, Marketing Management, Winter 1992,
19.
25. Kevin Lane Keller, Strategic Brand Management, 2nd ed.
Upper Saddle River: N.J. Pearson Education, Inc., 2003,
509517.
26. Kevin Lane Keller, The Brand Report Card, Harvard
Business Review, January/Eebruary 2000, 147157.
27. Ibid., 148149.
28. Noel Capon and James M. Hulbert, Marketing
Management in the 21st Century, Upper Saddle River, NJ:
Prentice-Hall, 2001.
29. Aaker, Building Strong Brands, 68.
30. This discussion is based on Aaker, Building Strong
Brands, Chapter 3.
31. Don E. Schultz, Getting to the Heart oI the Brand,
Marketing Management, September/October 2000, 89.
33. Ibid., 183.
34. Ibid., Chapter 6.
35. Ronald Alsop, Enduring Brands Hold Their Allure by
Sticking Close to Their Roots, 1he Wall Street Journal,
Centennial Edition.
36. Ibid.
37. Ibid.
38. Yumiko Ono, Victorias Secret to Launch Makeup with
Sexy Names, 1he Wall Street Journal, September 14,
1998, B8.
39. II Its Not Broken, Dont Eix It, Forbes, May 7, 1984,
132.
40. Kelly Beamon, The Great Bake OII, Supermarket
Business, August 15, 2000, 41.
41. Christopher Palmeri and Nanette Byrnes, Is Japanese
Style Taking Over the World? BusinessWeek, July 26,
2004, 9698.
42. Jonathan Guthrie, Industry LeIt to Bear the Burden,
Financial 1imes, March 19, 2001.
43. David A. Aaker, Brand Portfolio Strategy (New York:
The Eree Press, 2004), 13.
44. Nestle Is Starting to Slim Down at Last, BusinessWeek,
October 27, 2003, 5657.
45. David A. Aaker and Erich Joachimesthaler, Brand
Leadership (New York, The Eree Press, 2000).

-
47. Ibid., 340.
48. Dana James, Rejuvenating Mature Brands Can Be a
Stimulating Exercise, Marketing News, August 16, 1999,
1617.
49. James Heckman, Dont Let the Eat Lady Sing: Smart
Strategies Revive Dead Brands, Marketing News,
January 4, 1999, 1.
50. L. Downes and C. Mui, Unleashing the Killer App. Digital
Strategies for Market Dominance (Boston, MA: Harvard
51. Aaker, Brand Portfolio Strategy, Chapter 7.
52. Ibid.
53. Ibid., 210213.
54. Joseph E. Kovar, EMC-Dell Blockbuster, Crn, October
29, 2001, 3.
55. Stephanie Thompson, The Mouse in the Eood Aisle,
Advertising Age, September 10, 2001, 73.
56. Aaker, Brand Portfolio Strategy, 20.
57. Robert Gray, Brands ProIit Irom Loaning Out Kudos,
Marketing, October 4, 2000, 29.
58. Gary Khermouch, Whoa, Cool Shirt. Yeah, Its a
Pepsi, BusinessWeek, September 10, 2001, 84.
59. D. R. John, B. Loken, and C. Joiner, The Negative Impact
oI Extensions: Can Elagship Products Be Diluted?
Journal of Marketing 62, January 1998, 1932.
60. Richard Tomkins, ManuIacturers Strike Back, Financial
1imes, June 16, 2000, 14.
61. Aaker and Joachimsthaler, Brand Leadership, 309.
62. Alison Smith, Moving Out oI the Shadows, Financial
1imes, June 5, 1998, 22.
63. A Dedicated Enemy oI Eashion, 1he Economist, August
31, 2002, 4748; A. J. Parsons, Nestle: The Visions oI
Local Managers, 1he McKinsey Quarterly, No. 2, 1996,
529.
64. Michael Krauss, Monster.com Exec Shares Vision Ior
Brand, Marketing News, May 1, 2004, 6.
65. Larry Chiagouris and Brant Wansley, Branding on the
Internet, Marketing Management, Summer 2000, 3438.
66. Aaker and Joachimsthaler, Brand Leadership, 2000, 242.
67. Aaker, Brand Portfolio Strategy, 13.
68. David WoodruII, A-Class Damage Control at Daimler-
Benz, BusinessWeek, November 24, 1997, 62. RuIus Olins
and Matthew Lynn, A-Class Disaster, Sunday 1imes,
November 16, 1997, 54.
70. Ibid., 264266.
71. Amy Merrick, Gaps Greatest Generation, 1he Wall
Street Journal, September 15, 2004, B1, B3.

A group oI vertically aligned organizations that add value to a good or service in moving Irom
basic supplies to Iinished products Ior consumer and organizational end users is a value chain.
Strategic choices in value-chain options are an important part oI market-led strategy.
We use the term value chain in preIerence to others that describe distribution activities Irom
other perspectives (such as that oI manuIacturing or operations Iunctions), to underline the central
purpose oI superior customer value. Terms such as physical distribution management, logistics,
distribution, and supply chain management are all used to identiIy certain aspects oI the value chain
and its management, as well as new organizational units Iound in many companies. The term value
chain Iocuses attention on the processes, activities, organizations, and structures that combine to
create value Ior customers as products move Irom their point oI origin to the end user.
The value chain (network) is the conIiguration oI distribution channels linking value-chain
members with end users. We examine the decisions Iaced by a company in developing a channel
oI distribution strategy. Channels oI distribution are a central issue in managing the value chain.
An eIIective and eIIicient distribution channel provides the member organizations with an
important strategic edge over competing channels. Distribution strategy concerns how a Iirm
reaches its market targets. We also emphasize the need Ior marketing decision makers to
incorporate into their thinking the impact oI innovations in supply chain strategy. The important
goal is maintaining the ability oI the market-driven company to realign its value chain when this
is necessary to meet the changing needs oI its customers and markets.
The strategic importance oI value-chain decisions is illustrated by the recovery program in
process at Benetton. On the basis oI its distinctive casual wear and provocative advertising
Benetton became one oI the worlds best-known brands in the 1980s. However, in the 1990s the
company was leIt behind by new competitors which used digital technology to get new styles
Irom the Iashion house to stores in less than a month, and at bargain prices. Zara Irom Spain
Iocused on the latest styles Ior working women, and Swedens Hennes & Mauritz (H&M) aimed
at very up-to-date clothes Ior teenagers. By comparison, Benettons brand was seen as bland and
poorly positioned.
Zara and H&M own their retail outlets and operate state-oI-the-art uniIied supply chain systems
to track global sales and respond to changes. Benetton was renowned Ior its outsourcing oI
production and also distribution93 percent oI sales came Irom Iranchise operations. By 2000,
Benettons retail locations were being suIIocated by the aggressive international competition oI its

-
Jalue-Chain Strategy
competitorstypically with larger, more attractive stores, which could respond at lightning speed
to customer preIerences.
In addition to rebuilding brand values to position better against Zara and H&M, Benettons
recovery strategy depends on several value-chain initiatives: installing up-to-date yield management
technology to link all its several thousand retail outlets and improve its time-to-market with new
Iashions; enlarging existing outlets to carry the whole product range; where this is not possible,
Iocusing smaller stores on a single market segment or product (e.g., only womens clothes or only
knitwear); and, opening large outlets on the main shopping streets oI major cities. The aim is to
develop a network oI larger stores directly owned and managed by Benetton. By 2003, there were
166 Benetton megastores. It is likely that Benettons Iuture perIormance will depend in large part
on the success oI its value-chain initiatives.
1
We Iirst look at the role oI distribution channels in marketing strategy and discuss several
channel strategy issues. Next, we examine the process oI selecting the type oI channel, deter-
mining the intensity oI distribution, and choosing the channel conIiguration oI organizations. A
discussion oI managing the distribution channel Iollows. We then look at distributing through
international channels. Einally, we consider several important supply chain management issues.
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A good distribution network creates a strong competitive advantage Ior an organization. The
Benetton example above underlines how central distribution decisions can be to diIIerentiating
a company and building competitive strength.
In Chapter 7 we discussed partnering between international airlines to gain market access.
However, the airlines example also underlines the impact oI the Internet on distribution
channels. Eor example, Ior a growing number oI airlines, an e-mailed reservation number has
replaced the multipart ticket that the traveler had to collect Irom a travel agent or receive through
the mail. SigniIicantly, European no-Irills airlines like easyJet and Ryanair are working to
achieve 100 percent direct Internet booking and ticketing, replacing the traditional Iunctions oI
the travel agent. Channels are a major element oI how airlines compete.
The huge impact oI the Internet, creating new channels through which value can be delivered is
illustrated in the Internet Eeature. This describes the impact oI computer kiosks and communication
technology to remote villages and areas in Indiaone oI the largest but also one oI the poorest
countries in the world.
We describe the distribution Iunctions in the channel and then look at the distribution oI
services. We also examine several Iactors aIIecting the choice oI whether to use distribution
intermediaries or go direct to end users.
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The channel of distribution is a network oI value-chain organizations perIorming Iunctions that
connect goods and services with end users. The distribution channel consists oI interdependent
and interrelated institutions and agencies, Iunctioning as a system or network, cooperating in their
eIIorts to produce and distribute a product to end users. Thus, hospitals, ambulance services,
physicians, test laboratories, insurance companies, and drugstores make up a channel oI distribu-
tion Ior health care services.
2
Managed health care organizations are increasingly coordinating the
activities oI these channel members. Examples oI channels oI distribution Ior consumer and
industrial products are shown in Exhibit 10.1. In addition to the intermediaries that are shown,
many Iacilitating organizations perIorm services such as Iinancial institutions, transportation
Iirms, advertising agencies, and insurance Iirms.
Several value-added activities are necessary in moving products Irom producers to end users.
Buying and selling activities by marketing intermediaries reduce the number oI transactions
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Ior producers and end users. Assembly oI products into inventory helps to meet buyers time-oI-
purchase and variety preIerences. 1ransportation eliminates the locational gap between buyers
and sellers, thus accomplishing the physical distribution Iunction. Financing Iacilitates the
exchange Iunction. Processing and storage oI goods involve breaking large quantities into indi-
vidual orders, maintaining inventory, and assembling orders Ior shipment. Advertising and sales
promotion communicate product availability, location, and Ieatures. Pricing sets the basis oI
exchange between buyer and seller. Reduction of risk is accomplished through mechanisms such
as insurance, return policies, and Iutures trading. Personal selling provides sales, inIormation, and
supporting services. Communications between buyers and sellers include personal selling con-
tacts, written orders and conIirmations, and other inIormation Ilows. Einally, servicing and
repairs are essential Ior many types oI products. Increasingly, the Internet provides an enabling
and inIormation-sharing technology, changing the way in which these value-adding Iunctions are
carried out.
Developing the channel strategy includes determining the Iunctions that are needed and
which organizations will be responsible Ior each Iunction. Middlemen oIIer important cost and
time advantages in the distribution oI a wide range oI products. Steel service centers illustrate
Iunctional specialization.
3
The centers buy steel coil or bar in bulk Irom steel producers. They

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cut and shape the steel at lower costs than the producers, and value-added resellers can react
more quickly than steel mills to customer needs. This responsiveness helps reduce the buyers
inventory.
When Iirst selecting a channel oI distribution Ior a new product, the pricing strategy and
desired positioning oI the product may inIluence the choice oI the channel. Eor example, a
decision to use a premium price and a symbolic positioning concept calls Ior retail stores that
buyers will associate with this image. While the consumer can view and conIigure alternative
models on the companys Web page, it is not possible to buy a new Rolex watch on the Internet.
The Strategy Eeature describes the impressive turnaround strategy Ior Samsung, built on
vertical integration (Samsung operates its own Iactories rather than Iavoring outsourcing), and a
careIul choice oI markets and distribution partners. Much oI the competitive diIIerentiation built
by Samsung is based on speed to market and rapid innovation.
Once the channel-oI-distribution design is complete and responsibilities Ior perIorming the
various marketing Iunctions are assigned, these decisions establish guidelines Ior pricing,
advertising, and personal selling strategies. Eor example, the manuIacturers prices must take
into account the requirements and Iunctions oI middlemen as well as pricing practices in the
channel. Likewise, promotional eIIorts must be matched to the various channel participants
requirements and capabilities. Consumer-products manuIacturers oIten direct advertising to
consumers to help pull products through distribution channels. Alternatively, promotion may be
concentrated on middlemen to help push the product through the channel. Intermediaries may
also need help in planning their marketing eIIorts and other supporting activities.
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Services such as air travel, banking, entertainment, health care, and insurance oIten involve
distribution channels. The service provider renders the service to the end users rather than its
being produced like a good and moved through marketing intermediaries to the end user.
Because oI this the distribution networks Ior services diIIer somewhat Irom those used Ior

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Source: Gilbert A.
Churchill, Jr., and J. Paul
Peter, Marketing, 2nd ed.
(New York: Irwin/McGraw-
Hill, 1998), 369, 371.
permission.
Con-mer Prodct-
Direct Chnnel
ndirect Chnnel-
Prodcer Con-mer-
Prodcer Con-mer-
Prodcer Con-mer-
Prodcer Con-mer-
Whole-ler-
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Orgniztionl Prodct-
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Prodcer Orgniztionl
yer-
Prodcer Orgniztionl
yer-
Prodcer Orgniztionl
yer-
Prodcer Orgniztionl
yer-
Agent-
Agent- Di-tritor-
Di-tritor-
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goods. While channels Ior services may not require as many levels (e.g., producer, distributor,
retailer), the network may actually be more complex.
A look at the distribution channels Ior commercial air travel services highlights several oI the
characteristics oI channels Ior services. While the airline produces the services, it works with
several distribution partners. Tickets may be obtained Irom independent travel agencies, Irom
airline ticket oIIices, by telephone, direct Irom the airlines Internet site, Irom an Internet travel
agent, and through special group arrangements. Airlines have cooperative arrangements with
hotel chains, car rental companies, and tour groups. Airline sales Iorces may call on large
corporate customers and other partners. Credit card companies oIIer charge services and may
participate with the airlines Irequent Ilier programs. Strategic alliances with other airlines may
extend a carriers geographical coverage.
The objectives oI channels Ior services are similar to those Ior goods, although the Iunctions
perIormed in channels diIIer somewhat Irom those Ior goods. Services are normally rendered
when needed rather than placed into inventory. Similarly, services may not be transported
although the service provider may go to the users location to render the service. Processing and
storage are normally not involved with services. Servicing and repair Iunctions may not apply
to many services. The other Iunctions previously discussed apply to both goods and services (e.g.,
buying and selling, Iinancing, advertising and sales promotion, pricing, reduction oI risk (e.g., lost
baggage insurance), and communications.
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We consider channel oI distribution strategy Irom a manuIacturers point oI view, although many
oI the strategic issues apply to Iirms at any level in the value chainsupplier, wholesale, or retail.
ManuIacturers are unique because they may have the option oI going directly to end users through
a company sales Iorce or serving end users through marketing intermediaries. ManuIacturers have
three distribution alternatives: (1) direct distribution, (2) use oI intermediaries, or (3) situations in
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which both (1) and (2) are Ieasible. The Internet direct channel makes alternative (1) open to
many more companies. The Iactors that inIluence the distribution decision include buyer
considerations, product characteristics, and Iinancial and control Iactors.
-- ManuIacturers look at the amount and Irequency oI purchases by
buyers, as well as the margins over manuIacturing costs that are available to pay Ior direct selling
costs. Customers needs Ior product inIormation and applications assistance may determine whether
a company sales Iorce or independent marketing intermediaries can best satisIy buyers needs. Dell
Incs direct sales, built-to-order business design has proven to be a major competitive edge,
reinIorced by the Internet. However, Dells targets are business buyers and relatively sophisticated
consumers, which greatly inIluences the type and level oI service required. The customers techno-
readiness, or preparedness to deal over the Internet is an important consideration in evaluating the
direct Internet channel possibility.
4
-- Distribution channels may be an important aspect oI how a
company diIIerentiates itselI and its products Irom others, and this may impel decision makers toward
increased emphasis on direct channels. Dell is powerIully diIIerentiated by its direct business model.
The Internet can change the economics oI distribution in Iavor oI direct marketing.
Eor example, the last Iive years have shown substantial growth in custom online ordering, a
Iorm oI mass customization. On its Web site Colorworks, MasterIoods USA (the division oI
Mars that makes M&Ms, oIIers consumers a palette oI 21 colors to coat M&MsIor example
in their school colors. The cost is nearly three times that oI regular M&Ms, but it provides a
growing niche business. Similarly, P&G allows consumers to design eye moisturizer and Ioun-
dation makeup products at its reIlect.com site; Yankee Candle Co. allows buyers to mix and
match colors and scents to customize the candle; and Branches Hockey allows the enthusiast to
speciIy the custom hockey stick. Advantages include higher prices and impressive customer loy-
alty. On the other hand, Nikes custom online ordering at Nikeid.com was constrained by the
need Ior consumers to try on the sneakerso they have moved to Web kiosks in Niketown
stores to combine regular retail with the custom product.
5
-- Companies oIten consider product characteristics in deciding
whether to use a direct or distribution-channel strategy. Complex goods and services oIten require
close contact between customers and the producer, who may have to provide application
assistance, service, and other supporting activities. Eor example, chemical-processing equipment,
mainIrame computer systems, pollution-control equipment, and engineering-design services are
oIten marketed directly to end users via company sales Iorces. Another Iactor is the range oI pro-
ducts oIIered by the manuIacturer. A complete line may make distribution by the manuIacturer
economically Ieasible, whereas the cost oI direct sales Ior a single product may be prohibitive.
High-volume purchases may make direct distribution Ieasible Ior a single product. Companies
whose product designs change because oI rapidly changing technology oIten adopt direct sales
approaches. Also qualiIied marketing intermediaries may not be available, given the complexity
oI the product and the requirements oI the customer. Direct contact with the end user provides
Ieedback to the manuIacturer about new product needs, problem areas, and other concerns. Many
supporting services may be Web-based.
-- It is necessary to decide iI resources are available
Ior direct distribution, and, iI they are, whether selling direct to end users is the best use oI
the resources. Both the costs and beneIits need to be evaluated. Direct distribution gives the
manuIacturer control over distribution, since independent organizations cannot be managed in
the same manner as company employees. This may be an important Iactor to the manuIacturer.
Eor example, in the early 2000s several high-technology manuIacturers opened retail outlets. By
2004, Apple Computer had opened 75 stores in 3 years. The goal was to educate consumers about
the companys computers and music players. It is a response to the threat oI commodiIication in
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electronicsthe consumer with little brand loyalty who buys the cheapest possible product.
Similar motives underpin the opening oI retail outlets by Sony Electronics and palmOnethe
aim is to reinIorce their brands with aIIluent consumers and gain better insight into Iast-changing
trends in consumer electronics. These moves underline the importance oI market access and market
learning in sustaining competitive diIIerentiation.
6
Exhibit 10.2 highlights several Iactors Iavoring distribution by the manuIacturer. A Iirms
Iinancial resources and capabilities are also important considerations. The producers oI business
and industrial products are more likely than producers oI consumer products to utilize company
distribution to end users. This is achieved by a direct to the end user network oI company sales
oIIices and a Iield sales Iorce or by a vertically integrated distribution system (distribution
centers and retail outlets) owned by the manuIacturer. Companies with superior Internet
capabilities may also Iavor the direct channel more than others.
A producer may decide to work through middlemen to avoid investing to provide direct
contact, and to utilize the competencies oI experienced value-added organizations. Eor example,
most steel producers utilize independent service centers.
7
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We now consider the decisions that are necessary in developing a channel oI distribution strategy.
They include (1) determining the type oI channel arrangement, (2) deciding the intensity oI distri-
bution, (3) selecting the channel conIiguration (Exhibit 10.3).
Management may seek to achieve one or more objectives using the channel oI distribution
strategy. While the primary objective is gaining access to end user buyers, other related objectives
may also be important, as shown in Exhibit 10.4. These include providing promotional and
personal selling support, oIIering customer service, obtaining market inIormation, and gaining
Iavorable revenue/cost perIormance. Recall the moves into retail by Apple, Sony, and palmOne
to build brand values with consumers.
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The major types oI channels are conventional channels and vertical marketing systems (VMS). The
conventional channel oI distribution is a group oI vertically linked independent organizations, each
trying to look out Ior itselI, with limited concern Ior the total perIormance oI the channel. The
relationships between the conventional channel participants are rather inIormal and the members
are not closely coordinated. The Iocus oI the channel organizations is on buyer-seller transactions
rather than close collaboration throughout the distribution channel.

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dvntge
pporting
-ervice- re
reqired
Di-trition
y the
mnfctrer
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orgniztion
Rpidly chnging
mrket environment
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prch-ing
proce--
mll nmer of
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nd infreqent
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The second type oI distribution channel is the vertical marketing system (VMS). Marketing
executives in an increasing number oI Iirms realize the advantages to be gained by managing the
channel as a coordinated or programmed system oI participating organizations. We consider
later the inIluence oI supply chain management approaches and the Internet on the operations oI
channels. These vertical marketing systems dominate the retailing sector and are signiIicant
Iactors in the business and industrial products and services sectors.
A primary Ieature oI a VMS is the management (or coordination) oI the distribution channel
by one organization. Programming and coordination oI channel activities and Iunctions are
directed by the Iirm that is the channel manager. Operating rules and guidelines indicate the
Iunctions and responsibilities oI each participant. Management assistance and services are
supplied to the participating organizations by the Iirm that is the channel leader.
Three types oI vertical marketing systems may be used: ownership, contractual, and
administered. During recent years, a Iourth Iorm oI VMS has developed in which the channel
organizations Iorm collaborative relationships rather than control by one organization. We
consider this as a relationship VMS.
- Ownership oI distribution channels Irom source oI supply to end user
involves a substantial capital investment by the channel coordinator. This kind oI VMS is also
less adaptable to change compared to the other VMS Iorms. Eor these reasons a more popular
alternative may be to develop collaborative relationships with channel members (e.g., supplier/
manuIacture alliances). Such arrangements tend to reduce the coordinators control over the
channel but overcome the disadvantages oI control through ownership. Nonetheless, in highly
competitive markets, the need Ior control oI distribution may make channel ownership more
attractive. Globally, many auto manuIacturers are establishing their own retail outlets and buying
out independent Iranchisees and distributors to regain channel control to build an ownership
VMS, replacing conventional channels.
The contractual Iorm oI the VMS may include various Iormal arrange-
ments between channel participants including Iranchising and voluntary chains oI independent
retailers. Eranchising is popular in Iast Ioods, lodging, and many other retail lines. Traditional
automobile dealerships are another example oI a contractual VMS. Wholesaler-sponsored retail

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(1) Type of chnnel rrngement

Owner-hip Contrctl Admini-tered
(2) De-ired inten-ity of di-trition
nten-ive elective Excl-ive
(3) election of chnnel configrtion
Conventionl Verticlly coordinted
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chains are used by Iood and drug wholesalers to establish networks oI independent retailers.
Contractual programs may be initiated by manuIacturers, wholesalers, and retailers. Eor example,
the outstanding growth oI Krispy Kreme doughnuts is based in part on Iranchised stores in the
United States which provide a third oI the companys income. Interestingly, Krispy Kremes
international expansion is based on the Iranchised part oI its operation.
8
- The administered VMS exists because one oI the channel members
has the capacity to inIluence channel members. This inIluence may be the result oI Iinancial
strengths, brand image, specialized skills (e.g., marketing, product innovation), and assistance

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Source: Harper W. Boyd,

Jr., Orville C. Walker, Jr.,
and Jean-Claude Larreche,
Marketing Management, 3rd
ed. (New York:
Irwin/McGraw-Hill, 1998),
317. Copyright The

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and support to channel members. Eor example, DeBeers managed the worldwide distribution oI
rough diamonds through its marketing cartel Ior over a century, acting as buyer oI last resort
to achieve market stability and steady price appreciation Ior diamondsby 1998 DeBeers had a
diamond stockpile oI $5 billion. However, DeBeers shiIted strategy in 2000 to leverage its
Diamonds Are Eorever positioning concept with consumers and to brand diamondsthe
company has moved down the value chain to participate in the Iinished jewelry market.
9
- This type oI channel shares certain characteristics oI the administered
VMS, but diIIers in that a single Iirm does not exert substantial control over other channel
members. Instead, the relationship involves close collaboration and sharing oI inIormation. The
relationship VMS may be more logical in channels with only two or three levels. An example is
the relationship between Radio Shack and Sprint (telephone services).
The economic perIormance oI vertical marketing systems is likely to be higher than that in
conventional channels iI the channel network is properly designed and managed. However, the
participating Iirms in the channel must make certain concessions and be willing to work toward
overall channel perIormance. There are rules to be Iollowed, control is exercised in various ways,
and generally there is less Ilexibility Ior the channel members. Also, some oI the requirements oI
the total VMS may not be in the best interests oI a particular participant. Nonetheless, competing
in a conventional distribution channel against a VMS is a major competitive challenge, so a
channel member may Iind membership in a VMS to be beneIicial.
The remarkable story oI Linux illustrates how inIormal relationship-building by parties at diIIer-
ent stages in the value change can transIorm an industry. The Innovation Eeature describes how IBM
and Intel, producing computer hardware, and Dell, the leading reseller, have supported Linuxs
open-source soItware expansion. Commentators suggest that industry animosity toward the
operating systems dominance oI MicrosoIt has motivated much oI the support given to Linux.
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Step 2 in channel strategy is selecting distribution intensity (Exhibit 10.3). Industrie Natuzzi SpAs
management made an important distribution intensity decision in 1982 when it rejected the R.H.
Macy & Company proposal to serve as the leather Iurniture producers exclusive retailer in the New
York area.
10
Instead, the Italian manuIacturer decided to distribute its products in a wide range oI
retail outlets, though only to one in each price and quality categorythe Iirst product to reach the
United States was the peoples soIa, priced at $999. By 2000, Natuzzi had 220 retail customers in
New York alone, including Macy & Company. In the mid-2000s Natuzzi holds leading market
shares in the United States and Europe, with 50 percent oI its global sales made in the United States.
Distribution intensity is best examined in reIerence to how many retail stores (or industrial
product dealers) carry a particular brand in a geographical area. II a company like Natuzzi decides
to distribute its products in many oI the retail outlets in a trading area that might normally carry such
a product, it is using an intensive distribution approach. A trading area may be a portion oI a city,
the entire metropolitan area, or a larger geographical area. II one retailer or dealer in the trading area
distributes the product, then management is Iollowing an exclusive distribution strategy. Examples
include Lexus automobiles and Caterpillar industrial equipment. Selective distribution Ialls between
the two extremes. Rolex watches and Coach leather goods are distributed on a selective basis.
Choosing the right distribution intensity depends on managements targeting and positioning
strategies and product and market characteristics. The major issues in deciding distribution
intensity are:
IdentiIying which distribution intensities are Ieasible, taking into account the size and
characteristics oI the market target, the product, and the requirements likely to be imposed by
prospective intermediaries (e.g., they may want exclusive sales territories).
Selecting the alternatives that are compatible with the proposed market target and marketing
program positioning strategy. Eor example, exclusive distribution was not consistent with
Natuzzis U.S. targeting strategy.
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Choosing the alternative that (1) oIIers the best strategic Iit, (2) meets managements Iinancial
perIormance expectations, and (3) is attractive enough to intermediaries so that they will be
motivated to perIorm their assigned Iunctions.
The characteristics oI the product and the market target to be served oIten suggest a particular
distribution intensity. Eor example, an expensive product, such as a Toyota Lexus luxury
automobile, does not require intensive distribution to make contact with potential buyers.
Moreover, several dealers in a trading area could not generate enough sales and proIits to be
successIul due to the luxury cars limited sales potential. Similarly, Samsungs move to the higher
end oI consumer electronics points to a selective rather than intensive distribution strategy. In
contrast, Kodak Iilm needs to be widely available in the marketplace.
The distribution intensity should correspond to the marketing strategy selected. Eor example,
Estee Lauder distributes cosmetics through selected department stores that carry quality
products. Management decided not to meet Revlon head-on in the marketplace, and instead

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concentrates its eIIorts on a small number oI retail outlets. In doing this, Estee Lauder avoids
huge national advertising expenditures and uses promotional tactics to help attract its customers
to retail outlets. Buyers are oIIered Iree items when purchasing other speciIied items.
Strategic requirements, managements preIerences, and other constraints help determine the
distribution intensity that oIIers the best strategic Iit and perIormance potential. The requirements
oI intermediaries need to be considered, along with managements desire to coordinate and
motivate them. Eor example, exclusive distribution is a powerIul incentive to intermediaries and
also simpliIies management activities Ior the channel leader. But iI the company that is granted
exclusive distribution rights is unable (or unwilling) to Iully serve the needs oI target customers,
the manuIacturer will not take advantage oI the sales and proIit opportunities that could be
obtained by using more intermediaries.

The third step in selecting the distribution strategy is deciding: (1) how many levels oI
organizations to include in the vertical channel, and (2) the speciIic kinds oI intermediaries to be
selected at each level (Exhibit 10.3). The type (conventional or VMS) oI channel and the distri-
bution intensity selected help in deciding how many channel levels to use and what types oI
intermediaries to select. DiIIerent channel levels are shown in Exhibit 10.1. As an example, an
industrial products producer might choose between distributors and sales agents (independent
organizations that receive commissions on sales) to contact industrial buyers. Several Iactors
may inIluence the choice oI one oI the channel conIigurations shown in Exhibit 10.1.
- -- It is important to know where the targeted end users might
expect to purchase the products oI interest. The intermediaries that are selected should provide
an avenue to the market segments(s) targeted by the producer. Analysis oI buyer characteristics
and preIerences provides important inIormation Ior selecting Iirms patronized by end users.
This, in turn, guides decisions concerning additional channel levels, such as the middlemen
selling to the retailers that contact the market target customers.
-- The complexity oI the product, special application requirements,
and servicing needs are useIul in guiding the choice oI intermediaries. Looking at how
competing products are distributed may suggest possible types oI intermediaries, although
adopting competitors strategies may not be the most promising channel conIiguration. The
breadth and depth oI the products to be distributed are also important considerations since
intermediaries may want Iull lines oI products.
- - -- Large producers with extensive capabilities
and resources have a lot oI Ilexibility in choosing intermediaries. These producers also have a
great deal oI bargaining power with the middlemen, and, the producer may be able (and willing)
to perIorm certain distribution Iunctions. Such options are more limited Ior small producers with
limited capabilities and resource constraints.
- The Iunctions that need to be perIormed in moving products Irom
producer to end user include various channel activities such as storage, servicing, and
transportation. Studying these Iunctions is useIul in choosing the types oI intermediaries that are
appropriate Ior a particular product or service. Eor example, iI the producer needs only the
direct-selling Iunction, independent manuIacturers agents may be the right middlemen to use.
Alternatively, iI inventory stocking and aIter-sales service are needed, then a Iull-service
wholesaler may be essential.
- - Evaluation oI the experience, capabilities, and moti-
vation oI the intermediaries that are under consideration Ior channel membership is also important.
Eirms within the same industry oIten vary in skills and experience. Also, qualiIied channel members
may not be available. Eor example, some types oI middlemen will not distribute competing products.
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A channel with only one level between the producer and end user simpliIies the coordination
and management oI the channel. The more complex the channel network, the more challenging
it is to complete various distribution Iunctions. Nevertheless, using specialists at two (or more)
levels (e.g., brokers, wholesalers, dealers) may oIIer substantial economies oI scale through the
specialization oI Iunctions. The channel conIiguration that is selected typically takes into
account several important trade-oIIs. As an example, manuIacturers agents (independent sales
representatives) may provide the producer greater channel control compared to Iull-service
wholesalers. However, the agents make it necessary Ior the manuIacturer to perIorm several
Iunctions, such as inventory stocking, invoicing, and service.

The major channel-strategy decisions we have examined are summarized in Exhibit 10.3.
Management (1) chooses the type(s) oI channel to be used, (2) determines the desired intensity
oI distribution, and (3) selects the channel conIiguration. One oI the Iirst issues to be resolved is
deciding whether to manage the channel, partner with other members, or be a participant. This
choice oIten rests on the bargaining power a company can exert in negotiating with other
organizations in the channel system and the value (and costs) oI perIorming the channel
management role. The options include deciding to manage or coordinate operations in the
channel oI distribution, becoming a member oI a vertically coordinated channel, or becoming a
member oI a conventional channel system. The Iollowing Iactors need to be assessed in the
choice oI the channel strategy.
-- As emphasized throughout the chapter the market target decision needs to be
closely coordinated with channel strategy, since the channel connects products and end users. The
market target decision is not Iinalized until the channel strategy is selected. InIormation about the
customers in the market target can help eliminate unsuitable channel-strategy alternatives.
Multiple market targets may require more than a single channel oI distribution. One advantage oI
middlemen is that they have an established customer base. When this customer base matches the
producers choice oI market target(s), market access is achieved very rapidly.
- The channel selected should oIIer the most Iavorable
combination oI value-added competencies. Making this assessment requires looking at the
competencies oI each participant and the trade-oIIs concerning Iinancial and Ilexibility and
control considerations.
-- Two Iinancial issues aIIect the channel strategy. Eirst, are the
resources available Ior launching the proposed strategy? Eor example, a small producer may not
have the money to build a distribution network. Second, the revenue-cost impact oI alternative
channel strategies needs to be evaluated. These analyses include cash Ilow, income, return on
investment, and operating capital requirements (see Appendix to Chapter 2).
-- Management should decide how much Ilexibil-
ity it wants in the channel network and how much control it would like to have over other
channel participants. An example oI Ilexibility is how easily channel members can be added (or
eliminated). A conventional channel oIIers little opportunity Ior control by a member Iirm, yet
there is a lot oI Ilexibility in entering and exiting Irom the channel. The VMS oIIers more control
than the conventional channel. Legal and regulatory constraints also aIIect channel strategies in
such areas as pricing, exclusive dealing, and allocation oI market coverage.
- Suppose a producer oI industrial controls Ior Iluid
processing (e.g., valves, regulators) is considering two channel strategy alternatives: using
independent manuIacturers representatives (agents) versus recruiting a company sales Iorce to
sell its products to industrial customers. The representatives receive a commission oI 8 percent
on their dollar sales volume. Salespeople will be paid an estimated $100,000 in annual salary and
expenses. Salespeople must be recruited, trained, and supervised.
-
An illustrative channel strategy evaluation is shown in Exhibit 10.5. The company sales Iorce
alternative is more expensive (using a two-year time Irame) than the use oI independent sales agents.
Assuming both options generate contributions to proIit, the trade-oII oI higher expenses needs to be
evaluated against Ilexibility and control considerations. One possibility that is oIten used by
manuIacturers seeking access to a new market is to initially utilize manuIacturers representatives
with a longer-term strategy oI converting to a company sales Iorce. This oIIers an opportunity to
gain market knowledge while keeping selling expenses in line with actual sales.
- -
We have looked at distribution largely Irom the producers viewpoint. Wholesalers and retailers
are also concerned with channel strategies, and some oI them may exercise primary control over
channel operations. Eor example, The Limited is a powerIul Iorce in its channels, as is Wal-Mart.
Large Iood wholesalers and retailers are major Iactors in their channels oI distribution. Moreover,
decisions by wholesalers, distributors, brokers, and retailers about which manuIacturers products
to carry oIten aIIect the perIormance oI all channel participants.
Channel strategy can be examined Irom any level in the distribution network. The major
distinction lies in the point oI view (retailer, wholesaler, producer) used to develop the strategy.
Intermediaries may have Iewer alternatives to consider than producers and, thus, less Ilexibility
in channel strategy. Nevertheless, their approach to channel strategy is oIten extremely active
rather than passive.

AIter deciding on the channel design, the actual channel participants are identiIied, evaluated, and
recruited. Einding competent and motivated intermediaries is critical to successIully implementing
the channel strategy. Channel management activities include choosing how to assist and support
intermediaries, developing operating policies, providing incentives, selecting promotional
programs, and evaluating channel results. These activities consume much oI managements time,
since once established the channel design may be diIIicult to modiIy.
Importantly, changes in channel design may have serious consequences Ior the members.
Consider, Ior example, the impact oI adding a direct Internet channel to distribution strategy.
Direct Internet sales compete with distributors and salespeople in the value chain. One oI Dells
key advantages with its direct business model was that it was very diIIicult Ior existing market
leaders like IBM and H-P to operate a direct business modelthey were tied to traditional
distribution channels and were reluctant to compete with their own distributors.

-
-
-- -
--
- - -
-
- --
- ----

*Includes 8 commission plus management time Ior recruiting and training representatives.
Includes $100,000 Ior 10 salespeople, plus management time.
-
To gain a better insight into channel management, we discuss channel leadership, management
structure and systems, physical distribution management, channel relationships, conIlict resolution,
channel perIormance, and legal and ethical considerations.
-
Some Iorm oI interorganization management is needed to assure that the channel has satisIactory
perIormance as a competitive entity.
11
One Iirm may gain power over other channel organizations
because oI its speciIic characteristics (e.g., size), experience, and environmental Iactors, and its
ability to capitalize on such Iactors. Gaining this advantage is more Ieasible in a VMS than in a
conventional channel.
PerIorming the leadership role may also lead to conIlicts arising Irom diIIerences in the
objectives and priorities oI channel members. ConIlicts with retailers created by the channel
strategy changes are illustrative. The organization with the most power may make decisions that
are not considered Iavorable by other channel members.
--
Channel coordination and management are oIten the responsibility oI the sales organization
(Chapter 13). Eor example, a manuIacturers salespeople develop buyer-seller relationships with
wholesalers and/or retailers. The management structure and systems may vary Irom inIormal
arrangements to highly structured operating systems. Conventional channel management is more
inIormal, whereas the management oI VMS is more structured and programmed. The VMS
management systems may include operating policies and procedures, inIormation system
linkages, various supporting services to channel participants, and setting perIormance targets.
- -
Physical distribution (logistics) management has received considerable attention Irom distribution,
marketing, manuIacturing, and transportation proIessionals. The objective is improving the
distribution oI supplies, goods in process, and Iinished products. The decision to integrate physical
distribution with other channel Iunctions or to manage it separately is a question that must be
resolved by a particular organization. There are instances when either approach may be appropriate.
Physical distribution is a key channel Iunction and thus an important part oI channel strategy and
management. Management needs to Iirst select the appropriate channel strategy, considering
the physical distribution Iunction and other essential channel activities. Once the strategy is selected,
physical distribution management alternatives can be examined Ior the value-chain network.
Recent moves to extend physical distribution management in the Iorm oI supply chain strategy are
considered later in the chapter.
--
Chapter 7 considers various Iorms oI relationships between organizations, examining the degree
oI collaboration between companies, the extent oI commitment oI the participating organizations,
and the power and dependence ties between the organizations. We now look at how these issues
relate to channel relationships.
Channel relationships are oIten transactional in conventional
channels but may become more collaborative in VMSs. The extent oI collaboration is inIluenced
by the complexity oI the product, the potential beneIits oI collaboration, and the willingness
oI channel members to work together as partners. Just-in-time inventory programs, total quality
management activities, and supply chain models encourage collaboration and inIormation
sharing between suppliers and producers.
- - The commitment and trust oI
channel organizations is likely to be higher in VMSs compared to conventional channels. Eor
example, a contractual arrangement (e.g., Iranchise agreement) is a commitment to work together.
Yet, the strength oI the commitment may vary depending on the contract terms. Eor example,
-
contracts between manuIacturers and their independent representatives or agents typically allow
either party to terminate the relationship with a 30-day notiIication.
Highly collaborative relationships among channel members call Ior a considerable degree oI
commitment and trust between the partners. The cooperating organizations provide access to
conIidential product plans, market data, and other trade secrets. Trust normally develops as the
partners learn to work with each other and Iind the relationship to be Iavorable to each partners
objectives.
In VMSs, power is concentrated with one organization and the other
channel members are dependent on the channel manager. This concentration oI power does not exist
with the relationship VMS. Power in conventional channels is less concentrated than it is in VMSs,
and channel members are less dependent on each other. Conventional channel relationships may,
nevertheless, result in some channel members possessing more bargaining power than others.
Hallmark Cards is the market leader in the greeting card industry. However, building and
sustaining that position has required an evolving distribution strategy over time. These changes
posed a diIIicult power and dependence challenge that had to be met. Eor decades Hallmark
relied on independent specialty shops to sell its cards. Increasingly, through the 1990s mass
merchandisers like Target stores accounted Ior a rapidly growing share oI the market. Not-
withstanding the impact on small specialty store owners, Hallmark had to expand into this
distribution channel or continue to lose market share. By the late 1990s many mass merchandise
retailers carried Hallmark cards. By the 2000s, Hallmark had partnered with MicrosoIt to oIIer
personalized cards via the Internet, as well as selling soItware packages via Amazon.com to
allow consumers to produce their own cards Irom templates, and providing e-cards and online
greeting cards Irom its Web site.
In many sectors, suppliers Iace unprecedented pressure Irom powerIul channel members. New
merchandising strategies with this eIIect include house branding and category killers.
12
House
branding includes retailers who have established the retail store network as the brand, such as Gap,
Banana Republic, and Victorias Secret. These retailers rely on contract manuIacturers to produce
their brands. Category killers are companies like Toys R Us, Home Depot, Staples, and Linens n
Things that attempt to dominate one segment oI the market, oIten with very low prices. Suppliers
may have substantially less control over these channels than in the past. Responses may include
suppliers reclaiming important value-added services Irom distributors to build stronger relationships
with end users; eliminating layers in the conventional channel; or creating new channels.

SigniIicantly Ior consumer goods suppliers, many major retail chains have expanded internationally.
The globalization oI distribution channels is underlined by the launch oI Internet-based online
exchanges. With the ability to source and merchandise globally, eIIicient supply chains, and powerIul
inIormation technology, major retailers have more bargaining power than many oI their suppliers.
Increasingly, industrywide Iorms include online exchanges on the Internet. Eor example, in
retail, Sears Roebuck in the United States, Sainsbury in the United Kingdom, along with
Germanys Metro and Erances CarreIour have established GlobalNet Exchange (GNX). Other
major organizations like Wal-Mart and Sun Microsystems are instead developing private
exchanges on the Internet, linking them with their suppliers but not their competitors.
13
Similarly, in 2000 another group oI large retailers Irom around the world announced an Internet-
based alliance to create the Worldwide Retail Exchange. Participants included Target, Albertsons,
CVS, Kmart, and SaIeway Inc. in the United States; Tesco, Marks & Spencer, Woolworth, and
KingIisher in the United Kingdom; Auchan and Casino in Erance; and Royal Holland in the
Netherlands. The alliance had 64 members with combined revenues oI $900 billion, and estimated
it had taken $1 billion out oI its members costs. In Iull operation the Exchange will link them with
more than 100,000 suppliers in Iood, general merchandise, and health care products. The goal is to
have suppliers located throughout the world compete with each other through a single Web site with
-
complete price transparency. Though in their inIancy, such schemes are likely to be a prototype Ior
the globalization oI channels oI distribution.
14
Although they are Iacing problems oI technology integration as well as antitrust questions, it is
estimated that Internet-based procurement systems may cut 30 percent oII costs.
15
In business-to-
business marketing, it is telling that beginning in 1999, major purchasers like Boeing and Motorola
were warning that suppliers unable or unwilling to make the transition to Web-based commerce
would be locked out oI their businesses.
16
The implication is that suppliers Iace competition at a global level even in what would
previously have been seen as domestic business. Buyers able to access online exchanges or
participate in online reverse auctions have in eIIect globalized the distribution channel.
An important trend in distribution is the use oI multiple channels to gain greater access to end
user customers. Eor example, Dayton Hudson (renamed Target Corporation in 2000) aIter the
sales oI its Marshall Eields and Mervyns store groups in 2004, operates three retail Iormats:
Target, Target Greatland and Super Target, as well as its online business Target.com.
17
Many
suppliers are using the Internet channel to bypass traditional distributors. Eor example, Lego and
Mattell oIIer their entire product ranges online, auto manuIacturers sell direct to consumers over
the Web, and business customers can buy electric motors Irom ABB.
18
One implication is that increasingly suppliers Iace the challenge oI managing multiple
channels to the same market. The problem is to deIine innovative channel combinations that best
meet customer needs. However, in many situations the way channels are used is deIined by
customer choice. Customers may channel surI Eorrester Research estimates that as many as
halI oI all customers shop Ior inIormation in one channel, then deIect Irom that channel to make
the purchase in another medium. Where customers have become more adversarial, buy more
strategically, and have the inIormation and technology to make more inIormed decisions, it may
be risky to assume that discrete channels serving static market segments is a sustainable option.
Channel decisions must be inIormed by understanding the various paths buyers Iollow as they
move through the purchase process.
19
Eor example, consider the case oI the Iinancial services supplier with three main channels all
carrying the same products: a direct channel using the Internet, a network oI retail branches, and
Iinancial services intermediaries. The challenge is to understand how diIIerent groups oI
customers use each channelpossibly the retail branch builds awareness, the intermediary
provides inIormation, and the Web site makes the sale. That understanding provides the basis Ior
managing conIlicts between the channels and investing selectively in each to match it to
customer needs. Williams-Sonoma, Ior instance, has a cross-channel selling strategy with sales
split 60/40 between retail outlets and online/catalog sales. The company continues to Iind ways
oI improving each channel so it drives results in the otherscatalogs do not simply sell
products, by acting as in-home advertising they bring the company to the attention oI new
customers who are encouraged to use the stores.
20
-
ConIlicts are certain to occur between the channel members and in multichanneling between
channels, because oI diIIerences in objectives, priorities, and corporate cultures. Looking at a
proposed channel relationship by each participating organization may identiIy areas (e.g., incom-
patible objectives) that are likely to lead to major conIlicts. In such situations, management may
decide to seek another channel partner. EIIective communications beIore and aIter establishing
the channel relationships can also help to eliminate or reduce conIlicts.
Several methods are used to resolve actual and potential conIlicts.
21
One useIul approach is to
involve channel members in the decisions that will aIIect the organizations. Another helpIul
method oI resolving or reducing conIlict is developing eIIective communications channels between
channel members. Pursuing objectives that are important to all channel members also helps to
reduce conIlict. Einally, it may be necessary to establish methods Ior mediation and arbitration.
-
ConIlicts between channel members may require resolution in court iI the stakes merit such
extreme action. In 2001, Levi Strauss won a decision in the European Court oI Justice against the
powerIul British retailer Tesco. In Europe Levi jeans are a premier brand sold at a premium price
(the British manuIacturers recommended price Ior Levi 501s is around twice the U.S. price).
Levis reIused to supply their jeans to the discounter supermarket Tesco. Tesco used their global
sourcing to buy 501s outside Europe, imported them, and sold them in British supermarkets Ior
around $40. Levis view was that the supermarket distribution channel was undermining its brand,
and that it had the right to determine where its products were sold. Levis actions in upholding
its rights to control the distribution channels Ior its brand have attracted considerable adverse
consumer and media comment.
22

The perIormance oI the channel is important Irom two points oI view. Eirst, each member is
interested in how well the channel is meeting the members objectives. Second, the organization
that is managing or coordinating the channel is concerned with its perIormance and the overall
perIormance oI the channel. Tracking perIormance Ior the individual channel members includes
various Iinancial and market measures such as proIit contribution, revenues, costs, market share,
customer satisIaction, and rate oI growth. Several criteria Ior evaluating the overall perIormance
oI the channel are shown in Exhibit 10.4.
Companies gain a strategic advantage by improving distribution productivity. Reducing
distribution costs and the time in moving products to end users are high-priority action areas in
many companies. Much oI the impact oI Toyotas successIul strategy in the auto market is Irom
huge cost savings in the value chainIrom operations through supply chain to distribution.
Monitoring the changes that are taking place in distribution and incorporating distribution
strategy considerations into the strategic planning process are essential strategic marketing
activities. Market turbulence, global competition, and inIormation technology create a rapidly
changing distribution environment. Eurthermore, multichanneling creates new challenges in
measuring channel eIIectiveness.
23
--
Various legal and ethical considerations may impact channel relationships. Legal concerns by
the Iederal government include arrangements between channel members that substantially lessen
competition, restrictive contracts concerning products and/or geographical coverage, promotional
allowances and incentives, and pricing practices.
24
State and local laws and regulations may also
impact channel members.
The importance oI ethics is shown by a research survey oI Fortune 1000 companies indicating
that 98 percent oI the responding companies have Iormal ethics policy statements or documents,
and more than one-halI have an executive speciIically assigned to deal with ethics and conduct
issues.
25
Ethical issues are heavily inIluenced by corporate policies and practices. Corporate
pressures on perIormance may create ethical situations. Deciding whether a practice is ethical is
sometimes complex. Complexity increases in international channels crossing diIIerent cultures.
Channel decisions that impact other channel members may create ethical situations. Many
companies have established internal standards on how business should be conducted. Written
statements oI working relationships among channel members may also include such statements.
Eor example, the Target Corporation publishes a statement oI Standards oI Vendor Engagement,
speciIying the ethical and environmental standards to be maintained by its suppliers, backed by a
compliance inspection program.
-
The distribution channels that are available in international markets are not totally diIIerent
Irom the channels in a particular country such as the United States. Uniqueness is less a Iunction
oI structural alternatives and more related to the vast range oI operational and market variables
-
that inIluence channel strategy.
26
Several channel oI distribution alternatives are shown in
Exhibit 10.6. The arrows show many possible channel networks linking producers, middlemen,
and end users.
- -
While the basic channel structure (e.g., agents, wholesalers, retailer) is similar across countries, there
are many important diIIerences in distribution patterns among countries. Only when the varied
intricacies oI actual distribution patterns are understood can the complexity oI the distribution task
be appreciated.
27
Generalization about distribution practices throughout the world is obviously not
possible.
Studying the distribution patterns in the nation(s) oI interest is important in obtaining guidelines
Ior distribution strategy. On one hand, various global trends such as satellite communications, the
Internet, regional cooperative arrangements (e.g., European Union), and transportation networks
(e.g., intermodal services) impact distribution systems in various ways reIlecting globalization.
Global market turbulence and corporate restructuring create additional inIluences on distribution
strategies and practices.
However, even in the Internet era designing channels to reach overseas customers, particularly
in the developing countries, may require some adaptability and the use oI high technology may not
always provide the solution. The Global Eeature describes how Unilever has adapted its distribution
strategy in Tanzania.
-
The channel strategy analysis and selection process presented in the chapter can be used Ior devel-
oping or evaluating international channel strategy, recognizing that many situational Iactors aIIect
channel decisions in speciIic countries. The Iactors aIIecting the choice oI international channels
include cost, capital requirements, control, coverage, strategic product-market Iit, and the likelihood
that the middlemen will remain in business over a reasonable time horizon.
28
The political and eco-
nomic stability oI the country is, oI course, very important. Stability needs to be evaluated early in
the decision to enter the country.

-
-
Source: Phillip R. Cateora,
and John L. Graham,
International Marketing,
414. Copyright The
Home contry
Dome-tic prodcer
or mrketer -ell-
to or throgh
Open di-trition
vi dome-tic
whole-le
middlemen
Export mngement
compny or -le- force
Exporter
Foreign contry
Foreign
con-mer
Foreign mrketer or
prodcer -ell- to or throgh
mporter Foreign
gent or
merchnt
whole-ler-
Foreign
retiler
-
---
In addition to the design and management oI channel systems, a strategic perspective Ior value-chain
management requires consideration oI several supply chain initiatives that have major impacts on
channel strategy.

Many organizations have adopted supply chain management structures, which have developed out
oI physical distribution and operations management. However, the impact oI supply chain strategies
has extended beyond issues oI transportation, storage, and stockholding to inIluence relationships
between channel members and customer value. Consider Ior example, the EIIicient Consumer
Response (ECR) program. ECR is a cooperative partnership between retailers and manuIacturers to
reduce supply chain costslower stock levels, Iewer damaged goods, simpler transaction manage-
ment. The ECR approaches have achieved impressive cost savings:
In a detergent project in Sweden, involving Lever Brothers, 20 percent oI the categorys
stock-keeping units (SKUs) were delisted as surplus to consumer requirements, but the result
oI better Iocus resulted in a 9 percent sales increase.
In the dental care market, a Colgate Palmolive project involved a 25 percent reduction in SKUs,
but retailer market share increased 11 percent and proIit margins by 9 percent.
30
As a result oI ECR, retailer and supplier companies are collaborating in such areas as Iorecasting,
category management, and electronic commerce.
31
Collaboration and inIormation sharing have become central to supply chain design.
Integrating processes across organizational boundaries is essential to building the seamless sup-
ply chain, where all players think and act as one.
32
The competitive impact oI supply chain
strength is emphasized: It is supply chains that compete not companies.
33

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-
-- - -
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- -- -

- -- -
-
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- - - -
--- -
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-
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-
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--
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-
34
A major development in supply chain management has emanated
Irom Japanese management approaches, and the example oI Toyota in the automotive Iield in
particular (see Case 6.5). This development Iocuses on the application oI lean thinking to supply
chains.
35
The Ioundation oI the lean supply chain is deIining value Irom the perspective oI the end-
customer, to identiIy the value stream oI activities in the supply chain that are needed to place
the correctly speciIied product with the customer. All non-value-creating activities are muda,
or waste, and should be eliminated. Attention is given to continuous Ilow oI products in the
supply chain, instead oI traditional batch and queue approaches, to eliminate time wasting,
storage, and scrap. Products are not produced upstream in the supply chain until ordered by the
downstream customer, that is, pulled through the supply chain, removing the need Ior large
inventories and customer waiting time.
The lean philosophy also advances the need Ior constant search Ior improvement and perIection.
The goal is to remove demand instability through collaboration between suppliers and distributors,
and ultimately to allow customers to order direct Irom the production system.
36
Examples oI lean
supply chains are provided by Dell Inc., and the industrywide ECR program in the U.S. grocery
sector.
While the lean supply chain arguments are compelling, some critics suggest that the lean
approach creates supply chains that are vulnerable to unexpected market change and do not have
the capacity to be responsive to customers.
- In response to the impact oI turbulent volatile markets that are diIIicult
to predict, new emphasis has been placed on creating supply chains that are not lengthy and slow-
moving pipelines, but agile and responsive to market change.
37
Supply chain agility means
using market knowledge and a virtual corporation to respond to marketplace volatility, as opposed
to the lean approach which seeks to remove waste and manage volatility out oI the supply chain
by leveling demand.
38
The agile supply chain reserves capacity to cope with unpredictable
demand.
39
While lean supply chains require long-term partnership with suppliers, the agile model
mandates Iluid and market-based relationships to enhance responsiveness to the market and
capacity Ior rapid change.
40
Agile supply chain models emphasize customer satisIaction rather
than meeting a more limited set oI value criteria based on reduced costs.
- - It is important to note that in several approaches to design-
ing modern supply chains, the Internet and customized intranets and extranets are essential
enabling technologies that support interIirm collaboration, the integration oI ordering and
IulIillment processes, and the sharing oI inIormation. The role oI the Internet in reshaping
channels is expanded below.
- -- - In spite oI the advances made in
recent years, there remain substantial barriers to eIIective supply chain collaborations.
Research suggests those barriers include complexity in technology integration and costs oI
integration; lack oI trading partner technology sophistication; lack oI clear beneIits; cultural
resistance to new trading partner paradigms; Iew Web-based applications available; and
lack oI shared technical standards.
41
Consideration should also be given to recovery Irom
the collapse oI supply chain collaborations and the impact on a companys competitive
position.
Already in many sectors,
corporate purchasers are reducing their supplier numbers to improve their companies supply
chain eIIiciency, providing another competitive pressure on suppliers. However, in addition to
this marketplace pressure, importantly supply chain strategies impact on several critical issues
Ior marketing strategy and the value chain: product availability in the market, speed to market
with innovations, the range oI product choices oIIered to customers, product deletion decisions,
prices, and competitive positioning.
-
In the market-driven company, a strategic value chain perspective requires collaboration and
integration between marketing and supply chain management. Chapter 14 considers this critical
interIace between managers Irom diIIerent Iunctions. Important issues to consider are that:
1. Supply chain decisions are made with an understanding oI the real drivers oI customer value
in diIIerent market segments, and the Iorces Ior value migration, not simply on the basis oI
measurable quality and technical product speciIication.
2. Supply chain decisions do not create inIlexibility and inability to respond to marketplace
change.
3. Supply chain decisions should be made in the light oI strategic marketing questions, such as
brand identiIication, product choice Ior customers, product promotion, and building sustainable
competitive advantage, not only short-term cost savings.
4. Supply chain strategy may not be a source oI competitive advantage, iI all players in the
market have similar technology and designs.
5. Supply chain collaborations may be vulnerable to Iailure, and recovery strategies may be
required.

One important marketing task is the regular review and evaluation oI the adequacy oI existing
distribution systems. Changes in distribution may improve both customer satisIaction and organiza-
tional eIIectiveness. While the supply chain managers Iocus is on cost eIIiciency, the strategic
value-chain issue is positioning in the market to build and sustain competitive advantage. Issues oI
cost eIIiciency in supply should not be allowed to obscure the importance oI market strategy.
In addition, value-chain strategy and channel decisions should be regarded as variable not Iixed.
Importantly, a strategic value-chain perspective mandates that channel systems and surrounding
issues should be realigned and restructured as an important source oI competitive diIIerentiation.
As market situations change, market-driven companies will respond in value-chain strategy
adjustments. The speed and magnitude oI change in many markets mandates that the value-chain
and channel structures should be reviewed regularly as a source oI competitive advantage in
building superior value Ior customers. Recall the shiIt in Benettons distribution strategy to
address its competitive weaknesses and competitive position versus Zara and H&M.
The value chain consists oI the organizations, systems, and

processes that add to customer value in moving products to
end users. A strategic value-chain perspective aims to align a
companys value chain with changing customer and competi-
tive requirements. The core oI the value chain is the channel oI
distribution. A strong channel network is an important way to
gain competitive advantage. Distribution channels provide
access to market targets. The choice between company distri-
bution to end users and the use oI intermediaries is guided by
end user needs and characteristics, product characteristics, and
Iinancial and control considerations.
ManuIacturers select the type oI channel to be used, deter-
mine distribution intensity, design the channel conIiguration,
and manage various aspects oI channel operations. These
channels are either conventional or vertical marketing systems
(VMS). The VMS, the dominant channel Ior consumer prod-
ucts, is increasing in importance Ior business and industrial
products. In a VMS, one Iirm owns all organizations in the
channel, a contractual arrangement exists between organiza-
tions, one channel member is in charge oI channel administra-
tion, or members develop collaborative relationships. Channel
decisions also include deciding on intensity oI distribution
and the channel conIiguration. Channel management includes
implementing the channel strategy, coordinating channel oper-
ations, and tracking the perIormance oI the channel.
The choice oI a channel strategy begins when management
decides whether to manage the channel or to assume a par-
ticipant role. Strategic analysis identiIies and evaluates the
channel alternatives. Several Iactors are evaluated, including
access to the market target, channel Iunctions to be perIormed,
Iinancial considerations, and legal and control constraints. The
channel strategy adopted establishes guidelines Ior price and
promotion strategies.
International channels oI distribution may be similar in
structure to those Iound in the United States and other developed
countries. Nevertheless, important variations exist in the
-
-
A. Examine the Web sites oI Aveda (www.aveda.com) and
The Body Shop (www.bodyshop.com). Compare and con-
trast the distribution networks oI these two retailers.
B. Go to the site oI the Worldwide Retail Exchange. (www.
worldwideretailexchange.org) and review the public pages
describing the history, membership, and operation oI this
international online exchange Ior retailers. IdentiIy and list
the ways in which the exchange alters distribution strategy
Ior suppliers, and the impact on consumers.
-
A. In the Innovation Eeature, The Linux Revolution, what
has really happened in the value chain Ior soItware? Will
the impact oI open-source soItware change the way this
sector delivers value to customersiI so, then how may
this unIold and develop?
B. The Global Eeature describes one companys adaptation
oI its distribution channel to local market conditions in
Tanzania. What adaptations should international market-
ers review when planning channel strategy in developing
countries and how can they Iind out what is required?
-
1. Jack Ewing and Christina Passariello, Has Benetton
Stopped Unravelling? BusinessWeek, June 23, 2003, 2223;
Arnaldo CamuIIo, Pietro Romano, and Andrea Vinelli,
Back To the Euture: Benetton TransIorms Its
Global Network, Sloan Management Review, Eall 2001,
4652.
2. Louis W. Stern, Adel I. EI-Ansary, and James R. Brown,
Management in Marketing Channels (Englewood CliIIs,
NJ: Prentice Hall, 1989), 4.
3. Chris Adams, Steel Middlemen Are Einding Eatter
ProIits in the Metal, 1he Wall Street Journal, August 8,
1997, B4.
4. A. Parasuraman and Charles L. Colby, 1echno-Ready
Marketing. How and Why Your Customers Adopt 1echno-
logy (New York: Eree Press, 2001).
5. Eaith Keenan, Stanley Holmes, Jay Greene, and Roger
O. Crockett, A Mass Market oI One, BusinessWeek,
December 2, 2002, 6265.
-- ---
1. In the late 1990s several airlines started selling tickets
using the Internet. Discuss the implications oI this method
oI distribution Ior travel agencies.
2. Distribution analysts indicate that costs Ior supermarkets
equal about 98 percent oI sales. What inIluence does this
high break-even level have on supermarkets diversiIica-
tion into delis, cheese shops, seaIood shops, and Ilowers?
3. Why do some large, Iinancially strong manuIacturers choose
not to own their dealers but instead establish contractual
relationships with them?
4. What are the advantages and limitations oI the use oI
multiple channels oI distribution by a manuIacturer?
5. Discuss some likely trends in the distribution oI automobiles
in the 21st century, including the shiIt away Irom exclusive
distribution arrangements.
6. In the late 1990s Radio Shack initiated cobranding strategies
with Compaq Computer and Sprint. Discuss the logic oI this
strategy, pointing out its strengths and shortcomings.
7. IdentiIy and discuss some oI the Iactors that should
increase the trend toward collaborative relationships in
vertical marketing systems.
8. Why might a manuIacturer choose to enter a conventional
channel oI distribution?
9. Suppose the management oI a raw material supplier is
interested in perIorming a Iinancial analysis oI a distribu-
tion channel comprised oI manuIacturers, distributors, and
retailers. Outline an approach Ior doing the analysis.
10. Discuss some oI the important strategic issues Iacing a drug
manuIacturer in deciding whether to distribute veterinary
prescriptions and over-the-counter products through veteri-
narians or distributors.
channels oI diIIerent countries because oI the stage oI economic
development, government inIluence, and industry practices.
Strategic alliances oIIer one means oI gaining market access to
the existing channels oI a company operating in a country oI
interest to the Iirm. The Internet has a dramatic impact on the
globalization oI channels oI distribution.
A strategic value-chain perspective requires that managers in
the market-driven company regularly review the adequacy oI their
channels strategy, and consider the impact oI major market and
technology changes. This perspective emphasizes the entire value
chain and the companys strategic positioning in its markets,
rather than short-term cost savings. It also requires that managers
incorporate new distribution and communications concepts into
their channel design, where this provides competitive advantage.
-
6. CliII Edwards, Boutiques Ior the Elagging Brand,
7. Chris Adams, Steel Middlemen, B4.
8. Andy Serwer, The Hole Story: How Krispy Kreme Became
the Hottest Brand in America, Fortune, June 23, 2003.
9. Cracks in the Diamond Trade, BusinessWeek, March 2,
1998, 106; Gillian OConnor and Emma Muller, De
Beers New Deal Loses a Little Sparkle, Financial 1imes,
January 17, 2001, 34.
10. Lisa Bannon, Natuzzis Huge Selection oI Leather
Eurniture Pays OII, 1he Wall Street Journal, November
17, 1994, B4.
11. Eor a complete discussion oI channel management, see
Louis W. Stern and Adel I. EI-Ansary, Marketing Channels.
4th ed. (Englewood CliIIs, NJ: Prentice Hall, Inc., 1992).
12. Robert Meehan, Create, Revise Channels Ior Customers,
Marketing News, October 23, 2000, 48.
13. Simon London, Keeping It in the Eamily, Financial
1imes, Understanding SCM Supplement, Autumn 2001, 10.
14. Peter CunliIIe, Worldwide Superstore Ior Retailers,
Daily Mail, April 1, 2000; Dan Roberts, Tesco Joins
Online Consortium, Daily 1elegraph, April 1, 2000.
15. Jonahan Eenby, B2B, or Not to Be?, Sunday Business,
March 26, 2000.
16. Weld Royal, Death oI a Salesman, www.industryweek.com,
May 17, 1999, 5960.
17. M. Howard GelIand, Dayton Hudson Keeps Its Vision,
Advertising Age, July 9, 1984, 4, 4647.
18. David Bowen, How to Use the Web as a Recession-
Busting Tool, Financial 1imes, January 18, 2001.
19. Paul E. Nunes and Erank V. Cespedes, The Customer Has
Escaped, Harvard Business Review, November 2003,
96105.
20. Ibid.
21. James A. Narus and James C. Anderson, Turn Your
Industrial Distributors into Partners, Harvard Business
Review, MarchApril 1986, 6671.
22. Sally Pook, Tesco Loses Eight to Sell Levis at American
Prices, Daily 1elegraph, November 21, 2001, 7.
23. Matt Hobbs and Hugh Wilson, The Multi-Channel
Challenge, Marketing Business, Eebruary 2004, 1215.
24. An expanded discussion oI these issues is available in Lou
E. Pelson, David Strutton, and James R. Lompkin,
Marketing Channels (Chicago: Richard D. Irwin, 1997),
Chapters 6 and 7.
25. Gary R. Weaver, Linda Klebe Trevino, and Philip L.
Cochran, Corporate Ethics Practices in the Mid-1990s:
An Empirical Study oI the Fortune 1000, Journal of
Business Ethics 18, no. 3, 1999, 283294.
26. Philip R. Cateora, International Marketing. 9th ed. (Burr
Ridge, IL: Richard D. Irwin, 1996), Chapter 15.
27. Ibid., 449.
28. Cateora, International Marketing, Chapter 15.
29. This section oI the chapter beneIited Irom the advice and
insightIul contributions oI Niall C. Piercy, School oI
Management, University oI Bath, U.K.
30. Alan Mitchell, ECRs Big Idea Requires Sharing oI
InIormation, Marketing Week, April 16, 1998, 2223.
31. Mark Tosh, ECRA Concept with Legs, Heart and Soul,
Progressive Grocer, December 1998, 45; Richard
J. Sherman, Collaborative Planning, Eorecasting and
Replenishment: Realizing the Promise oI EIIicient Consumer
Response through Collaborative Technology, Journal of
Marketing 1heory and Practice6, no. 4, 1998, 69.
32. Denis R. Towill, The Seamless Supply Chain: The
Predators Strategic Advantage, International Journal of
1echnology Management 13, no. 1, 1997, 3756.
33. Martin Christopher, Marketing Logistics (OxIord: Butter-
worth-Heinemann, 1997).
34. This section is based on Nigel E. Piercy, Marketing
Implementation: The Implications oI Marketing Paradigm
Weakness Ior the Strategy Execution Process, Journal of
the Academy of Marketing Science26, no. 3, 1998, 222236.
35. James P. Womack and Daniel T. Jones, Lean 1hinking.
Banish Waste and Create Wealth in Your Corporation
(New York: Simon and Schuster, 1996); James P.
Womack and Daniel T. Jones, Beyond Toyota: How to
Root Out Waste and Pursue PerIection, Harvard
Business Review, September/October 1996, 140158;
James P. Womack and Daniel T. Jones, Erom Lean
Thinking to the Lean Enterprise, Harvard Business
Review, March/April 1994, 93103.
36. Daniel T. Jones, The Route to the Euture, Manufacturing
Engineer, Eebruary 2001, 3337.
37. Martin Christopher, The Agile Supply Chain, Industrial
Marketing Management 29, no. 1, 2000, 3744.
38. J. B. Naylor, M. M. Naim, and D. Berry, Leagility:
InterIacing the Lean and Agile ManuIacturing Paradigm in
the Total Supply Chain, International Journal of
Production Economics 62, 1999, 107118.
39. Martin Christopher and Denis R. Towill, Supply Chain
Migration Irom Lean to Eunctional to Agile and Custo-
mized, Supply Chain Management 5, no. 4, 2000, 206221.
40. B. Evans and M. Powell, Synergistic Thinking: A Pragmatic
View oI Lean and Agile, Logistics and 1ransport Focus
2, no. 10, December 2000; Mark Whitehead, Elexible:
Eriend or Eoe, Supply Management, January 6, 2000,
2427.
41. Steve Jarvis, Up the Down Supply Chain, Marketing
News, September 10, 2001, 3.

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The pricing strategies Ior goods and services are becoming increasingly challenging Ior many
Iirms because oI deregulation, inIormed buyers, intense global competition, slow growth in
many markets, and the opportunity Ior Iirms to strengthen market position. Price impacts Iinancial
perIormance and is an important inIluence on buyers value positioning oI brands. Price may
become a proxy measure Ior product quality when buyers have diIIiculty in evaluating complex
products.
Low-cost airlines such as JetBlue, Southwest Airlines, and AirTran Airways created complex
pricing situations Ior major airlines like American and Delta Airlines in the late 1990s and early
2000s. Initially, the majors avoided aggressive response to the low prices being oIIered by the
discount airlines. However, the low-cost carriers doubled their share oI U.S. domestic airline
capacity Irom 10 percent in 1995 to an estimated 20 percent in 2004.
1
By 2004 it was apparent that
the major airlines pricing strategies Ior competing against the low-cost carriers were rapidly
shiIting Irom passive to aggressive pricing initiatives. The Iavorable economy and strengthened
Iinancial positions oI the majors provided a better basis Ior meeting the discounters low Iares.
Delta and United Airlines launched their own low-price carriers. Nonetheless, the low-cost airlines
continue to create Iormidable competition Ior the majors by leveraging their substantial cost
advantages while gaining strong customer loyalty. Selecting pricing strategies Ior competing with
successIul discounters like JetBlue and Southwest Airlines will be a continuing challenge Ior the
major airlines. JetBlue and Southwest Airlines receive higher ratings Ior customer service than
American and Delta Airlines.
Pricing decisions have substantial consequences Ior many companies as illustrated by the
eIIects oI price competition in the commercial airline industry. Once implemented, it may be
diIIicult to alter price strategyparticularly iI the change calls Ior a signiIicant increase. Pricing
actions that violate laws can land managers in jail. Price has many possible uses as a strategic
instrument in business strategy.
The realities oI the pricing environment are apparent.
2
Airline electronic revenue management
pricing methods, which were pioneered by American Airlines in 1985, previewed the expanding
role oI technology in pricing today. The Internet is Iacilitating Ilexible pricing initiatives in other
product categories. Aggressive price competition occurs Irequently in a wide range oI markets Ior
both goods and services. The motivation Ior these actions includes attempts to operate at production
capacity, pursue survival actions by companies in Iinancial trouble, and respond to competitive
pressures on market-share position. Goods and services providers have money invested in Iixed
assets that management is unable or unwilling to liquidate.

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Pricing Strategy and Management
Eirst, we examine the strategic role oI price in marketing strategy and discuss several pricing
situations. Eollowing a step-by-step approach to developing or altering pricing strategy, we
describe and illustrate the steps. We then present an approach to situation analysis Ior pricing
decisions, using several application situations to highlight the nature and scope oI pricing analy-
sis. Next, deciding which pricing strategy to adopt is considered. Einally, we discuss pricing
policies and look at several special pricing issues.

Several Iactors inIluence managements decisions about how price will be used in marketing
strategy. An important concern is estimating how buyers will respond to alternative prices Ior a
good or service. The cost oI producing and distributing a product sets lower boundaries on the
pricing decision. Costs aIIect an organizations ability to compete. The existing and potential
competition in the market segments targeted by a company aIIects managements Ilexibility in
selecting prices. Einally, legal and ethical constraints create pressures on decision makers.
The Internet promises to be an increasingly important inIluence on the role oI prices in many
organizations. The Internet Eeature describes several aspects oI the impact oI the Internet on
pricing.
A strategic perspective on pricing decisions may provide new opportunities and open new
market space. Eor example, there may be advantages in pricing across the substitutes Ior a product
rather than just against the immediate competition. Consider the advantage secured by Southwest
Airlines by setting Iares that were close to the road travel costs Ior short-haul journeys, not just
against the established airlines Iares.
Another illustration oI the competitive advantage that may be achieved in some situations
by strategic pricing decisions that Iocus on the costs oI alternatives and substitutes is provided
by Berkshire Hathaways Executive Jet Company. The company sells shares oI small aircraIt Ior
corporate travel. While executives may preIer a private jet, these aircraIt are extremely expensive.
The bulk oI executive travel involves Iirst-class and business-class tickets Ior conventional airlines.
Berkshire Hathaways pricing strategy is to compete with conventional airlines Ior a greater share
oI the corporate travel budget by selling shares oI time in a corporate jet. Companies obtain the
cachet and convenience oI private air travel at a cost comparable to the annual business-class travel
budget Ior many companies. Berkshire took the business Irom premium-ticket airline customers,
but also Irom companies preIerring a time share to the Iull costs oI owning a corporate jet that
would spend much oI its time sitting on the ground.
3
A strategic pricing perspective also mandates understanding how price is viewed and under-
stood by customers. Eor example, in the industrial lighting market, traditional strategies Iocus on
corporate purchasing managers, who buy on the basis oI how much light bulbs cost and how long
they last. All competitors compete head-to-head on these aspects oI value. Management oI the
Dutch company Philips reasoned that basic price and bulb liIe do not account Ior the Iull cost oI
lighting. The Iluorescent bulb contains toxic materials that Iorce business customers to pay high
disposal costs. Typically, corporate purchasing oIIicers are not accountable Ior disposal costs.
Philips launched Alto, an expensive but environmentally Iriendly bulb, to appeal to chieI Iinancial
oIIicers (on lower total costs iI disposal is included) and to appeal to marketing departments (on
environmental image issues). The Alto bulb replaced more than 25 percent oI the total market Ior
traditional industrial Iluorescent lamps in the United States.
4
-
Strategic choices about market targets, positioning strategies and product and distribution strate-
gies set guidelines Ior both price and promotion strategies. Product quality and Ieatures, type oI
distribution channel, end users served, and the Iunctions perIormed by value-chain members all
help establish a Ieasible price range. When an organization Iorms a new distribution network,

-
selection oI the channel and intermediaries may be driven by price strategy. The inIluence oI
price on other marketing mix components may vary in diIIerent strategy situations. In some
cases, price plays a dominant role in the marketing strategy, whereas, in other situations, price
may perIorm a more passive role. Nevertheless, the strategic role oI price is too oIten not
recognized. Part oI the reason that pricing is misused and poorly understood is the common
practice oI making it the last marketing decision. We think that we must design products,
communication plans, and a method oI distribution beIore we have something to price. We then
use pricing tactically to capture whatever value we can.
5
This practice should be avoided.
Pricing plays an important strategic role in marketing strategy.
- -- -- Responsibility Ior pricing decisions varies
across organizations. Marketing executives determine pricing strategy in many companies.
Pricing decisions may be made by the chieI executive oIIicer in some Iirms such as aircraIt
producers and construction Iirms. ManuIacturing and engineering executives may be assigned
pricing responsibility in companies that produce customer-designed industrial equipment.
The vital importance oI pricing decisions argues strongly Ior cross-Iunctional participation.
Pricing impacts all business Iunctions. Operations, engineering, Iinance, and marketing execu-
tives should participate in strategic pricing decisions, regardless oI where responsibility is
assigned. Coordination oI strategic and tactical pricing decisions with other aspects oI market-
ing strategy is also critical because oI the interrelationships involved.

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When only one product is involved, the pricing decision is simpliIied. Yet,
in many instances, a line or mix oI products must be priced. Consider a situation involving a product
and consumable supplies Ior the product. One popular strategy is to price the product at competitive
levels and set higher margins Ior supplies. Examples include parts Ior automobiles and cartridge
reIills Ior computer printers. Also, the prices Ior products in a line do not necessarily correspond to
the cost oI each item. Eor example, prices in supermarkets are based on a total mix strategy rather
than individual item pricing. Understanding the composition oI the mix and the interrelationships
among products is important in determining pricing strategy, particularly when the brand identity is
built around a line or mix oI products rather than on a brand-by-brand basis. Product quality and
Ieatures aIIect price strategy. A high-quality product may beneIit Irom a high price to help establish
a prestige position in the marketplace and satisIy managements proIit perIormance requirements.
Alternatively, a manuIacturer supplying private-branded products to a retailer like Wal-Mart or
Target must price competitively in order to obtain sales. Pricing decisions require analysis oI the
product mix, branding strategy, and product quality and Ieatures to determine the eIIects oI these
Iactors on price strategy.
- Type oI channel, distribution intensity, and channel conIiguration also
inIluence price strategy. The Iunctions perIormed and the motivation oI intermediaries need to be
considered in setting prices. Value-added resellers require price margins to pay Ior their activities
and to give them incentives to obtain their cooperation. Pricing is equally important when distribu-
tion is perIormed by the manuIacturer. Pricing in coordinated and managed channels reIlects total
channel considerations more so than in conventional channels. Intensive distribution is likely to
call Ior more competitive pricing than selective or exclusive distribution. In multichannel situations,
pricing may pose a particular challenge. Eor example, iI the Web site oIIers a lower price than
conventional channels, how will members oI those channels react?
-
Pricing strategy requires continuous monitoring because oI changing external conditions, the
actions oI competitors, and the opportunities to gain a competitive edge through pricing actions.
Our earlier look at the competitive battle Ior commercial airline travelers is illustrative. There
are various situations requiring pricing actions such as:
Deciding how to price a new product or line oI products.
Evaluating the need to adjust price as the product moves through the product liIe cycle.
Changing a positioning strategy that calls Ior modiIying the current pricing strategy.
Deciding how to respond to the pressures oI competitive threats.
Decisions about pricing Ior existing products may include increasing, decreasing, or holding
prices at current levels. Understanding the competitive situation and possible actions by
competitors is important in deciding iI and when to alter prices. Demand and cost inIormation
is a strong inIluence on new-product pricing. Deciding how to price a new product also should
consider competing substitutes since Iew new products occupy a unique position in the market.
Gillettes Sensor razor was an outstanding success in the early 1990s, strengthening the
companys market position and attracting shavers away Irom disposable razors. Gillette introduced
a new razor, MACH3, in 1998. It was priced 35 percent higher than the SensorExcel, which was
substantially higher priced than its predecessor, Atra.
6
Gillettes pricing strategy Ior MACH3 was
value-driven, positioning the razor as oIIering a superior shaving experience. The triple-bladed
shaving system cost $750 million to bring to the commercialization stage plus an estimated
$300 million Ior marketing the new product in the Iirst year. The key pricing issue was whether
shavers would consider MACH3 to be worth a 35 percent premium over the cost oI SensorExcel
blades. The new razor was available in 100 countries by the end oI 1999. Gillettes consumer use
tests oI MACH3 compared to SensorExcel, and competing brands gave the razor a 2:1 preIerence,

-
strongly supporting the premium pricing strategy. Nevertheless, the venture involved substantial
risk considering $1 billion plus investment. However, by 2000 it was apparent that MACH3 was
perIorming even better than Sensor Ior the same time span aIter introduction.
- -
Prices perIorm various Iunctions in the marketing programas a signal to the buyer, an instrument
oI competition, a means to improve Iinancial perIormance, and a substitute Ior other marketing
program Iunctions (e.g., promotional pricing).
Price oIIers a Iast and direct way oI communicating with the buyer.
The price is visible to the buyer and provides a basis oI comparison between brands. Price may
be used to position the brand as a high-quality product or instead to pursue head-on competition
with another brand.
- Price oIIers a way to quickly attack competitors or, alternatively,
to position a Iirm away Irom direct competition. Eor example, oII-price retailers use a low-price
strategy against department stores and other retailers. Price strategy is always related to competition
whether Iirms use a higher, lower, or equal price.
Since prices and costs determine Iinancial perIormance,
pricing strategies are assessed as to their estimated impact on the Iirms Iinancial statements, both
in the short and the long run. Gillettes huge investment in the MACH3 razor is recovered and proI-
its generated Irom the prices paid by buyers. Global competition has Iorced many Iirms to adopt
pricing approaches that will generate revenues in line with Iorecasts. Both revenues and costs need
to be taken into account in selecting pricing strategies.
-- Prices may substitute Ior selling eIIort, advertising,
and sales promotion. Alternatively, price may be used to reinIorce these activities in the marketing
program. The role oI pricing oIten depends on how other components in the marketing program
are used. Eor example, prices can be used as an incentive to channel members, as the Iocus oI
promotional strategy, and as a signal oI value. In deciding the role oI pricing in marketing strategy,
management evaluates the importance oI prices to competitive positioning, probable buyers
reactions, Iinancial requirements, and interrelationships in the marketing program.

The major steps in selecting a pricing strategy Ior a new product or altering an existing strategy
are shown in Exhibit 11.1. Strategy Iormulation begins by determining pricing objectives, which
guide strategy development. Next, it is necessary to analyze the pricing situation, taking into
account demand, cost, competition, and legal and ethical Iactors. These analyses indicate how
much Ilexibility there is in pricing a new product or changing the pricing strategy Ior an existing
product. Interestingly, Gillettes consumer tests oI MACH3 indicated that there was little buyer
resistance to a price 45 percent above SensorExcel.
7
This inIormation indicated that management
had a lot oI Ilexibility in deciding how to price MACH3. Next, based on the situation analysis
and the pricing objectives, the pricing strategy is selected. Einally, speciIic prices and policies
are determined to implement the strategy. Each step in the pricing strategy, overviewed in
Exhibit 11.1, is examined in the rest oI the chapter.
-
Managers use their pricing strategies to achieve speciIic objectives. More than one pricing
objective is usually involved, and sometimes the objectives may conIlict with each other. II so,
adjustments may be needed on one oI the conIlicting objectives. Eor example, iI one objective
is to increase market share by 30 percent and the second objective is to obtain a high proIit
margin, management should decide iI both objectives are Ieasible. II not, one must be adjusted.
Objectives set essential guidelines Ior pricing strategy.
Pricing objectives vary according to the situational Iactors present and managements preI-
erences. A high price may be set to recover investment in a new product. This practice is typical
in the pricing oI new prescription drugs. A low price may be used to gain market position,

-
discourage new competition, or attract new buyers. Several examples oI pricing objectives
Iollow:
- Low prices may be used to gain sales and market share. Limitations
include encouraging price wars and reduction (or elimination) oI proIit contributions. Even
though buyers may have been responsive to a price Ior MACH3 that was 45 percent above
SensorExcel, Gillettes management used a 35 percent price increase that was more likely to
gain market position.
Prices are selected to contribute to Iinancial objectives
such as proIit contribution and cash Ilow. Prices that are too high may not be acceptable to buyers.
A key objective Ior Gillettes MACH3 pricing strategy was to achieve Iinancial perIormance in
combination with market position.
- Prices may be used to enhance product image, promote the use oI the
product, create awareness, and other positioning objectives. The visibility oI price (high or low)
may impact the eIIectiveness oI other positioning components such as advertising.
Price is used to encourage buyers to try a new product or to purchase
existing brands during periods when sales slow down (e.g., recessions). A potential problem is
that buyers may balk at purchasing when prices return to normal levels. Discount coupons Ior
new products like Colgates Total toothpaste help stimulate demand without actually lowering
listed prices.
The objective oI pricing actions may be to inIluence existing or poten-
tial competitors. Management may want to discourage market entry or price cutting by current
competitors. A price leader may want to encourage industry members to raise prices. One problem is
that competitors may not respond as predicted.
Intel employed an interesting strategy Ior competing with inexpensive semiconductors that
oIIered rapid graphics processing and posed a threat to Intels Ilagship Pentium chip.
8
Rather than
lowering the Pentium price to appeal to the price-sensitive market segment, Intel developed the
Cirrus chip based on the Pentium platIorm, which eliminated additional design and tooling costs.
Some oI the Pentium capabilities were not activated in the new chip, which was priced to compete
with competitors products. Intel stimulated demand without lowering the price oI its premium chip.

Pricing analysis is essential in evaluating new-product ideas, developing test marketing strategy,
and selecting a new-product introduction strategy. Pricing analysis on a regular basis is also
necessary Ior existing products because oI changes in the market and competitive environment,

-

et Pricing
Ojective-
Anlyze the
Pricing
ittion
elect
Pricing
trtegy
Determine
pecific Price-
nd Policie-

-
unsatisIactory market perIormance, and modiIications in marketing strategy over the products
liIe cycle. Intels analysis oI pricing in the price-sensitive chip market segment is illustrative. The
Iactors inIluencing the pricing situation include: (1) customer price sensitivity, (2) product costs,
(3) current and potential competitive actions, and (4) legal and ethical constraints (Exhibit 11.2).
We examine each Iactor and illustrate what is involved in the analyses.
- -
One oI the challenges in pricing analysis is estimating how buyers will respond to alternative
prices. The pricing oI P&Gs analgesic brand, Aleve, illustrates this situation. The product was
introduced in a highly competitive $2.38 billion market in 1994.
9
Aleve is the over-the-counter
version oI Naprosyn (developed by Syntex Corporation). P&G estimated Iirst-year sales oI $200
million. A $100 million marketing eIIort spearheaded Aleves market entry. The pricing was the
same as Advils though Aleve lasts 8 to 12 hours compared to Advils 8 hours. Aggressive
promotional pricing (coupons) was anticipated Irom the leading competitors, Tylenol ($700 mil-
lion sales) and Advil ($330 million). Some industry authorities expected Aleve to pose a greater
threat to the weaker brands (Bayer, BuIIerin, and Nuprin).
Analysis oI buyers responsiveness to price should answer the Iollowing questions:
1. Size oI the product-market in terms oI buying potential.
2. The market segments and market targeting strategy to be used.
3. Sensitivity oI demand in each segment to changes in price.
4. Importance oI nonprice Iactors, such as Ieatures and perIormance.
5. The estimated sales at diIIerent price levels.
Lets examine these questions Ior Aleve. The analgesic market was growing at about a 3 percent
annual rate. Aleve oIIers extended relieI beneIits to arthritis suIIerers and people with sore muscles.
P&G apparently wanted to stress the brands perIormance (value proposition) rather than encourage
price competition. Managements $200 million sales estimate would position Aleve in third place
behind Tylenol and Advil. Since Iorecasting product-market size, segmentation, and targeting is
discussed in Chapters 3, 4, and 6, the last three questions are now considered.
The core issue in pricing is Iinding out what value (beneIits-costs) the buyer places on the
product or brand.
10
Pricing decision makers need this inIormation in order to determine pricing
strategy. Basing price only on cost may lead to pricing too high or too low compared to the value
perceived by the buyer. Buyers see diIIerent values depending on their use situation, so market
segment analysis is essential. Eor example, people who want an analgesic that lasts longer are
likely to place a high value on Aleve.
- Price elasticity is the percentage change in the quantity sold oI a product
when the price changes, divided by the percentage change in price. Elasticity is measured Ior
changes in price Irom some speciIic price level so elasticity is not necessarily constant over the

-

C-tomer Price
en-itivity
Legl nd
Ethicl
Con-trint-
Prodct
Co-t-
Competitor-'
Likely
Re-pon-e-
Anlyzing
the Pricing
ittion

-
range oI prices under consideration. Surprisingly, research indicates that in some situations
people will buy more oI certain products at higher prices, thus displaying a price-quantity
relationship that slopes upward to the right, rather than the typical downward sloping volume
and price relationship. In these instances, buyers seem to be using price as a measure oI quality
because they are unable to evaluate the product. Estimating the exact shape oI the demand
curve (price-quantity relationship) is probably impossible in most instances. Even so, there are
ways to estimate the sensitivity oI customers to alternative prices. Test marketing can be used
Ior this purpose. Study oI historical price and quantity data may be helpIul. End user research
studies, such as consumer evaluations oI price, are also used. These approaches, coupled with
management judgment, help indicate the sensitivity oI sales to price in the range oI prices that
is under consideration.
An interesting discussion oI the challenges in obtaining inIormation Irom people about their
willingness to purchase a product at diIIerent prices is provided in Exhibit 11.3. The diIIerences
in responses based on how price questions are presented highlight the importance oI experience
and research skills in guiding customer research surveys.
- Eactors other than price may be important in analyzing buying situ-
ations. Eor example, buyers may be willing to pay a premium price to gain other advantages
or, instead, be willing to Iorgo certain advantages Ior lower prices. Eactors other than
price that may be important are quality, uniqueness, availability, convenience, service, and
warranty.

-
-
Source: Kent B. Monroe,
Pricing. 3rd ed. (Burr
Ridge, IL: McGraw-Hill/
Irwin, 2003), 223.
Copyright The
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50
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$2 $4 $6 $8 $10 $12 $14
Price
E
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U
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(
%
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One price Low to high High to low

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Value mapping is a useIul technique Ior analyzing how buyers perceive the value oIIerings
oI diIIerent brands.
11
Value is the sum oI beneIits oIIered by the product less the costs oI acquir-
ing the product. One approach is to Iirst develop the map based on managers opinions, Iollowed
by obtaining value perceptions Irom a sample oI consumers. The results oI the two maps can
then be compared and analyzed. An illustrative value map is shown in Exhibit 11.4 Ior brands
AE. Brands A and D oIIer better than Iair value (the diagonal line).
In some instances the buying situation may reduce the importance oI price in the buyers
choice process. The price oI the product may be a minor Iactor when the cost is small com-
pared to the importance oI the use situation. Examples include inIrequently purchased electric
parts Ior home entertainment equipment, batteries Ior appliances, and health and beauty aids
during a vacation. The need Ior important but relatively inexpensive parts Ior industrial equip-
ment is another situation that reduces the role oI price in the buyers purchase decision. Quick
Metal, an adhesive produced by Loctite Corporation, is used by maintenance personnel to
repair production equipment such as a broken gear tooth. At less than $20 a tube, the price is
not a major concern since one tube will keep an expensive production line operating until a
new part is installed.
Other examples oI nonprice Iactors that aIIect the buying situation include (1) purchases oI prod-
ucts that are essential to physical health, such as pain relieI; (2) choice between brands oI complex
products that are diIIicult to evaluate, such as DVD equipment (a high price may be used as a
gauge oI quality); and (3) image-enhancement situations such as serving prestige brands oI drinks
to socially important guests.
-- Eorecasts oI sales are needed Ior the price alternatives that management is
considering. In planning the introduction oI Aleve, P&Gs management could look at alterna-
tive sales Iorecasts based on diIIerent prices and other marketing program variations. These
Iorecasts, when combined with cost estimates, indicate the Iinancial impact oI diIIerent price
strategies. The objective is to estimate sales in units Ior each product (or brand) at the prices
under consideration.
Controlled tests can be used to Iorecast the eIIects oI price changes. Eor example, a Iast-Iood
chain can evaluate the eIIects oI diIIerent prices on demand through tests in a sample oI stores.
Experimental designs can be used to measure or control the eIIects oI Iactors other than price.
We discuss methods Ior analyzing the eIIects oI positioning strategy components and position-
ing results in Chapter 6.
- --
Cost inIormation is also needed in making pricing decisions. A guide to cost analysis is shown
in Exhibit 11.5.

-
-
-
-
perior Vle Zone
D A
E
B
C
nferior Vle Zone
Perceived Price
Perceived
Vle

-
- - Eirst, it is necessary to determine the Iixed and variable
costs involved in producing and distributing the product. Also, it is important to estimate the
amount oI the product cost accounted Ior by purchases Irom suppliers. Eor example, a large
portion oI the costs oI a personal computer are the components purchased Irom suppliers. It
is useIul to separate the costs into labor, materials, and capital categories when studying cost
structure.
Activity-based costing (ABC) is a promising technique that provides inIormation Ior pricing
strategy. Many Iirms have adopted ABC as a costing mechanism to more appropriately assign
indirect costs to goods and services. The key component oI ABC is to assign costs based upon the
activities that are perIormed to create the good or provide the service. With ABC, decision makers
obtain a much more accurate representation oI product costs. This inIormation is useIul in pricing
decisions and comparisons across product lines and customer groups. Since ABC estimates the cost
oI the product in terms oI a collection oI activities, it is much easier to evaluate pricing Ior parti-
cular attributes or service levels. Similarly, it is possible to make comparisons to competitors by
evaluating the costs oI activities necessary to oIIer product enhancements.
Eirms that successIully implement ABC do so initially as an accounting technique, yet the
ultimate objective is to Iacilitate activity-based management (ABM). In this manner, the cost
data become an integral part oI the product strategy in terms oI considering the entire value
chain, encompassing suppliers, customers, and competitors. Eor example, products that may
require packaging or delivery modiIications incur additional costs. With ABM, decision makers
have a better understanding oI these additional costs, can price accordingly, and can consider
these costs in conjunction with the oIIerings oI competitors.
- The next part oI cost analysis examines cost and volume relation-
ships. How do costs vary at diIIerent levels oI production or quantities purchased? Can economies
oI scale be gained over the volume range that is under consideration, given the target market and
positioning strategy? At what volume levels are signiIicant cost reductions possible? Volume
eIIect analysis determines the extent to which the volume produced or distributed should be taken
into account in selecting the pricing strategy.
Comparing key competitors costs is oIten valuable. Are their costs
higher, lower, or about the same? Although such inIormation is sometimes diIIicult to obtain,
experienced managers can oIten make accurate estimates. In some industries such as commercial
airlines cost inIormation is available. It is useIul to place key competitors into relative product cost
categories (e.g., higher, lower, same). Analysts may be able to estimate competitive cost inIorma-
tion Irom knowledge oI types oI costs, wage rates, material costs, production Iacilities, and related
inIormation.
It is important to consider the eIIect oI experience on costs. Experience
or learning-curve analysis (using historical data) indicates whether costs and prices Ior various
products decline by a given amount each time the number oI units produced doubles. However,
price declines may be uneven because oI competitive inIluences. When unit costs (vertical axis)
are plotted against total accumulated volume (horizontal axis), costs decline with volume. This
eIIect occurs when experience over time increases the eIIiciency oI production operations. The
experience-curve eIIect may not be same across all product categories.
12

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-- Einally, it is useIul to consider how much inIluence an organization
may have over its product costs in the Iuture. To what extent can research and development,
bargaining power with suppliers, process innovation, and other Iactors help to reduce costs over
the planning horizon? These considerations are interrelated with experience-curve analysis, yet
may operate over a shorter time range. The bargaining power oI an organization in its channels
oI distribution, Ior example, can have a major eIIect on costs, and the eIIects can be immediate.
An example oI bargaining power with suppliers by the Erench retailer CarreIour in the Iast-
growing retail market in Argentina is described in the Global Eeature.
--
Each competitors pricing strategy needs to be evaluated to determine (1) which Iirms represent the
most direct competition (actual and potential) Ior buyers in the market targets that are under con-
sideration; (2) how competing Iirms are positioned on a relative price basis and the extent to which
price is used as an active part oI their marketing strategies; (3) how successIul each Iirms price
strategy has been; and (4) the key competitors probable responses to alternative price strategies.
The discussion in Chapter 3 considers guidelines Ior competitor identiIication. It is important to
determine both potential and current competitors. The Iiber-optic cable network industry is
an interesting competitor analysis situation. In 2001, an estimated 39 million miles oI Iiber
networks covered the United States, while less than 3 percent oI this capacity was actually in use.
13
The anticipated escalating demand Ior telecommunications bandwidth encouraged many Iirms like
Quest Communications International Inc. and Level 3 Communications Inc., to rapidly build
underground Iiber-optic networks. Barriers to entry were low. Nearly 1,500 Iirms had developed
cable networks by 2001. Global Crossing Ltd., losing money on over $1 billion in revenues, spent
$20 billion to build a 100,000-mile global network. The excess capacity was expected to cause
prices Ior network space to Iall more than 60 percent in 2001. An industry shakeout is likely since
there is not enough demand to support the large number oI competitors. By 2004 Quest and Level
3 had experienced weak or negative proIit perIormance Ior the previous Iive years.
The success oI a competitors price strategy is usually gauged by Iinancial perIormance. One
problem with using perIormance to gauge pricing success is accounting Ior inIluences other than
price on proIits.

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The most diIIicult oI the Iour questions about competition is predicting what they will do in
response to alternative price actions. No changes are likely unless one Iirms price is viewed as
threatening (low) or greedy (high). Competitive pressures, actual and potential, oIten narrow the
range oI Ieasible prices and rule out the use oI extremely high or low prices relative to
competition. In new-product markets, competitive Iactors may be insigniIicant, although very
high prices may attract potential competitors.
The personal computer market oIIers an interesting look at the eIIects oI intense competition.
Dell Inc. reduced its PC prices in 2003 in major pricing actions designed to take market share
Irom Hewlett-Packard Co.
14
Dell had launched similar initiatives against Compaq Computer in
2000, and Compaq was subsequently acquired by H-P.
The aggressive price competition resulted in H-Ps PC
unit reporting a loss in third quarter 2003. A major com-
petitive hurdle Ior H-P is Dells low-cost direct-sales
business model (see Dell Inc. photo).
Game theory is a promising method Ior analyzing
competitors pricing strategies. It can be used to analyze
competitive pricing situations. The technique became
very popular in the 1990s. An interesting application oI
game theory is discussed in the Strategy Eeature. Note
how game theory highlights the dilemmas involved in PC
pricing.

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Game theory was used to design the auction process Ior the simultaneous sale oI several third
generation (3G) wireless phone licenses in Britain.
15
The process was very successIul Ior the
government. AIter 150 rounds oI bidding, Iinal bidders Ior Iive licenses paid a total oI $34 billion,
more than seven times the amount anticipated by the government.
--
The last step in analyzing the pricing situation is identiIying possible legal and ethical Iactors
that may aIIect the choice oI a price strategy. A wide variety oI laws and regulations aIIect
pricing actions. Legal constraints are important inIluences on the pricing oI goods and services
in many diIIerent national and cooperative regional trade environments. Pricing practices in the
United States that have received the most attention Irom government include:
16
Price collusion between competitors. Products with narrow proIit
margins are more likely to lead to price Iixing. The Sherman Antitrust Act prohibits price Iixing
between companies at the same level in the channel.
- Charging diIIerent customers diIIerent prices without an underlying
cost basis Ior discrimination. The Robinson-Patman Act prohibits price discrimination iI it
lessens or damages competition.
This pricing practice involves misleading the buyer by a high price that
is subsequently reduced to the normal price. This practice is prohibited by the Eederal Trade
Commission Act.
- - The Consumer Goods Pricing Act places
vertical price Iixing under the jurisdiction oI the antitrust laws.
This practice involves violating requirements concerning the Iorm and
the availability oI price inIormation Ior consumers. Unit pricing and consumer credit require-
ments are examples. Eor example, the Consumer Credit Protection Act requires Iull disclosure
oI annual interest rates and other Iinancial charges.
Ethical issues in pricing are more subjective and diIIicult to evaluate than legal Iactors.
Companies may include ethical guidelines in their pricing policies. Deciding what is or is not
ethical is oIten diIIicult. Possible ethical issues should be evaluated when developing a pricing
strategy.
Ethical issues in the pricing oI prescription drugs are a continuing challenge Ior the industry.
The drug producers are under continuing pressure Irom consumers, elected oIIicials, and special
interest groups concerning high drug prices. Drug pricing raises possible ethical issues, although
the companies indicate their prices are necessary due to large research and development expenses.
Nonetheless, one study reported that the average price oI 50 drugs most used by the elderly
increased 3.9 percent in 1999 compared to the 2.2 percent inIlation rate.
17
Price controls have been
proposed by consumer groups. The pharmaceutical industry was criticized Ior spending $14 billion
in 1999 on promotion, public relations, advertising, and drug samples to doctors. In the 2000s,
international pharmaceutical companies are under intense pressure to provide drugs used in the
treatment oI AIDS at a very low price in countries where the disease is endemic.

Analysis oI the pricing situation provides essential inIormation Ior selecting the pricing strategy.
Using this inIormation management needs to (1) determine extent oI pricing Ilexibility; and
(2) decide how to position price relative to costs and how visible to make the price oI the prod-
uct. The pricing strategy needs to be coordinated with the development oI the entire marketing
program since in most, iI not all, instances there are other important marketing program com-
ponent inIluences on buyers purchasing behavior.

-
--
Demand and cost Iactors determine the extent oI pricing Ilexibility. Within these upper and lower
boundaries, competition and legal and ethical considerations also inIluence the choice oI a speciIic
pricing strategy. Exhibit 11.6 illustrates how these Iactors inIluence Ilexibility. The price gap
between demand and cost may be narrow or wide. A narrow gap simpliIies the decision; a wide
gap provides a greater range oI Ieasible strategies. Choice oI the pricing strategy is inIluenced by
competitors strategies, present and Iuture, and by legal and ethical considerations. Management
must determine where to price within the Ilexibility band shown in Exhibit 11.6. In competitive
markets the Ieasibility range may be very narrow. Recall, Ior example, P&Gs pricing oI Aleve,
which was priced the same as a key competitors brand. New markets or emerging market
segments in established markets may allow management more Ilexibility in strategy selection.
Consider the dilemma, Ior example, Iacing executives in the tobacco industry and those
associated with it regarding the low pricing oI cigarettes in the developing world described in
the Ethics Eeature.
A pricing strategy situation is described in the Cross-Eunctional Eeature. Several important
pricing issues are highlighted. BeIore reading the next paragraph, identiIy the issues that you
believe need to be considered in deciding what action to take concerning the pricing oI Novaton.
Also decide whether you agree or disagree with the decision made by the pricing team.
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nflence-
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The Novaton illustration highlights several Iactors to consider in analyzing the pricing situation
(Exhibit 11.6). A central issue is determining why Novaton is not selling well in the market.
18
The
problem may be price but it could also be very low customer awareness (25). Surprisingly, the
teams analyses did not consider customers perceptions oI Novaton. Depending on how customers
position the brand, a price cut may not be eIIective. The inIormation about Holycons plans may be
correct but the team is basing a very important pricing decision on very limited intelligence.
Similarly, the competitors manuIacturing capacity inIormation came Irom only one person. Einally,
the competitors costs were estimated by assuming Holycon had similar operations to Novatons.
This premise may be Iaulty.
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These issues highlight serious questions about Eritzs pricing strategy.
19
It was later determined
that the underlying problem was low awareness. Interestingly, customers actually considered
Novaton to be better than Holycon. Novets market sensing inIormation was incomplete.
Holycons costs were 60 percent less than Novets costs Ior Novaton. Holycon came into the
market at prices 40 percent below Novatons original price. AIter two years oI tough price
competition Novet dropped out oI the market. This might have been avoided iI the pricing team
had recognized that a better pricing strategy would have been to position Novaton as oIIering
superior value worth its original price, and aggressively communicated the value proposition to
build awareness with potential buyers.
- -
A key decision is how Iar above cost to price a new product within the Ilexibility band (Exhibit 11.6).
A relatively low market entry price may be used with the objective oI building volume and market
position, or instead, a high price may be selected to generate large margins. The Iormer is a pene-
tration strategy whereas the latter is a skimming strategy. Analysis oI the results oI low-price
strategies in highly competitive markets indicates that while the strategies are sometimes necessary,
they should be used with considerable caution.
20
Lack oI knowledge about probable market response to the new product complicates the
pricing decision. Several Iactors may aIIect the choice oI a pricing approach Ior a new product,
including the cost and liIe span oI the product, the estimated responsiveness oI buyers to
alternative prices, and assessment oI competitive reaction.
A decision should also be made about how visible price will be in the promotion oI the new
product. The use oI a low entry price requires active promotion oI the price to gain market position.
When Iirms use a high price relative to cost, price oIten assumes a passive role in the marketing
mix. Instead, perIormance and other attributes oI the product are stressed in the marketing program.
- -
The pricing strategy selected depends on how management decides to position the product relative
to competition, and whether price perIorms an active or passive role in the marketing program. The
use oI price as an active (or passive) Iactor reIers to whether price is highlighted in advertising, per-
sonal selling, and other promotional eIIorts. Many Iirms choose neutral pricing strategies (at or
near the prices oI key competitors), emphasizing nonpricing Iactors in their marketing strategies.
21
The neutral pricing strategy seeks to remove price as the basis oI choosing among competing
brands. We examine several strategies, describing their characteristics and Ieatures.
The underlying logic oI emphasizing the high price in promotional
activities is to convey to the buyer that because the brand is expensive it oIIers superior value. While
not widely used, this pricing strategy has been used to symbolically position products such as
high-end alcoholic beverages. When the buyer cannot easily evaluate the quality oI a product, price
can serve as a signal oI value. Making price visible and active can appeal to the buyers perceptions
oI quality, image, and dependability oI products and services. A Iirm using a high-price strategy
is also less subject to retaliation by competitors, particularly iI its product is diIIerentiated Irom
other brands.
-- High prices may be essential to gain the margins necessary to serve
small target markets, produce high-quality products, or pay Ior the development oI new
products. Relatively high-priced brands are oIten marketed by Ieaturing nonprice Iactors rather
than using high-active strategies. Product Ieatures and perIormance can be stressed when the
people in the target market are concerned with product quality and perIormance. BMW and
Mercedes have successIully Iollowed this strategy Ior many years. Nonetheless, the realities
oI competing against Japanese luxury automobiles required improving the value oIIerings oI
European brands in the late 1990s.

-
Several retailers use this pricing strategy, including Home Depot
(home improvement), Dollar General Stores (apparel), OIIice Depot (oIIice supplies), Wal-Mart
(merchandise), and Pic N Pay Shoe Stores (Iamily shoes). The low-active strategy is also pop-
ular with discount stock brokers. When price is an important Iactor Ior a large segment oI buy-
ers, a low-active price strategy is very eIIective, as indicated by the rapid growth oI retailers like
Wal-Mart. However, this strategy may encourage competitors to oIIer comparable prices. It is
a more attractive option when the competition Ior the market target is not heavy or when a
company has cost advantages and a strong position in the product-market. Southwest Airlines
has perIormed very well using the low-active pricing strategy Ior its city-to-city route network.
-- This strategy may be used by small manuIacturers whose products
have lower-cost Ieatures than other suppliers. By not emphasizing a low price, the Iirm runs less
danger that potential buyers will assume the product quality is inIerior to other brands. Some
Iirms participating in conventional distribution channels may not spend much on marketing their
products and, thus, can oIIer low prices because oI lower costs. Other Iirms that have actual cost
advantages Ior comparable competing products may decide to stress value rather than price even
though they are oIIering prices lower than competing brands.
- -
The last step in pricing strategy (Exhibit 11.1) is selecting speciIic prices and Iormulating policies
to help manage the pricing strategy. Pricing methods are Iirst examined, Iollowed by a discussion
oI pricing policy. The chapter is concluded by discussing several special pricing issues.
-
It is necessary to either assign a speciIic price to each product item or provide a method Ior com-
puting price Ior a particular buyer-seller transaction. Many methods and techniques are available
Ior calculating price.
Price determination is normally based on cost, demand, competition, or a combination oI
these Iactors. Cost-oriented methods use the cost oI producing and marketing the product as the
basis Ior determining price. Demand-oriented pricing methods consider estimated market
response to alternative prices. The most proIitable combination oI price and market response
level is selected. Competition-oriented methods use competitors prices as a reIerence point in
setting prices. The price selected may be above, below, or equal to competitors prices.
Typically, one method (cost, demand, or competition) provides the primary basis Ior pricing,
although the other Iactors have some inIluence.
- - Break-even pricing is a cost-oriented approach that may be
used to determine prices. The initial computation is as Iollows:
When using this method, we select a price and calculate the number oI units that must be sold at
that price to cover all Iixed and variable costs. Management must assess the Ieasibility oI
exceeding the break-even level oI sales to generate a proIit. One or more possible prices may be
evaluated. Break-even analysis is not a complete basis Ior determining price, since both demand
and competition are important considerations in the pricing decision. With break-even price as
a Irame oI reIerence, demand and competition can be evaluated. The price selected is at some
level higher than the break-even price.
Another popular cost-oriented pricing method is cost-plus pricing. This technique uses cost
as the basis oI calculating the selling price. Costco uses this method to determine its warehouse
prices. A percentage amount oI the cost is added to cost to determine price. A similar method,
Break-even (units)
Total Iixed costs
Unit price Unit variab
lle cost

-
popular in retailing, markup pricing, calculates markups as a percentage oI the selling price.
When using markup pricing, this Iormula determines the selling price.
- Pricing decisions are always aIIected by the actions
oI competitors. Pricing methods that use competitors prices in calculating actual prices include
setting prices equal to or at some speciIied percentage above or below the competitions. In
industries such as air travel, one oI the Iirms may be viewed by others as the price leader. When
the leader changes its prices, other Iirms Iollow with similar prices. American Airlines has
attempted to perIorm such a leadership role in the United States, although its pricing changes are
not always adopted by competing airlines. Another Iorm oI competition-oriented pricing is
competitive bidding where Iirms submit sealed bids to the purchaser. This method is used in the
purchase oI various industrial products and suppliers.
Reverse auction pricing is an interesting competitive Iorm oI Internet pricing. This method oI
determining price involves sellers bidding Ior organizational buyers purchases:
In many cases, suppliers (sellers) must be prequaliIied beIore their bids are considered. These sites
generally will have links to prospective sellers. Many times, supplier perIormance is rated, and
these ratings are presented by the site as a beneIit to current and prospective buyers.
Ereemarkets.com conducts online auctions oI industrial parts, raw materials, commodities, and
services. Suppliers bid lower prices in real time until the auction is closed to Iill the purchase
orders oI large buying organizations. In 1999 this site auctioned oII more than $1 billion worth oI
purchases and saved buyers between 2 and 25 percent.
22
- The buyer is the Irame oI reIerence Ior these methods. One
popular method is estimating the value oI the product to the buyer. The objective is to determine
how much the buyer is willing to pay Ior the product based on its contribution to the buyers needs
or wants. This approach is used Ior both consumer and business products. InIormation on demand
and price relationships is needed in guiding demand-oriented pricing decisions. Internet auction
pricing is a demand-oriented method oI pricing.
Many pricing methods are in use, so it is important to select speciIic prices within the guidelines
provided by price strategy and to incorporate demand, cost, and competition considerations. Other
sources provide extensive coverage oI pricing decisions.
23
--
Determining price Ilexibility, positioning price against competition, and deciding how active a
component it will be in the marketing program do not spell out the operating guidelines neces-
sary Ior implementing the pricing strategy. Policy guidelines must be determined Ior use in
guiding pricing decisions and pricing structure.
An illustration shows how pricing decisions are guided by policies.
Mervyns, the 276-store retail chain, experienced poor perIormance in the early 1990s, due to
Iaulty merchandise selection and pricing policy.
24
The retailers pricing policy was to oIIer large
price reductions on many items that were advertised one week each month. Eor example, a
blanket was sale-priced at $17.99, compared to the regular $25 price. Since many buyers were
aware oI Mervyns pricing policy, they waited until the week the item oI interest was sale-priced.
The Iaulty policy reduced sales and proIits.
A pricing policy may include consideration oI discounts, allowances, returns, and other
operating guidelines. The policy serves as the basis Ior implementing and managing the pricing
strategy. The policy may be in written Iorm, although many companies operate without Iormal
pricing policies.
Price
Average unit cost
Markup percent*
1
*Percent expressed in decimal Iorm

-
Anytime more than one product item is involved, management must
determine product mix and line-pricing interrelationships in order to establish price structure.
Pricing structure concerns how individual items in the line are priced in relation to one anoth-
er: The items may be aimed at the same market target or diIIerent end user groups. Eor exam-
ple, department stores oIten oIIer store brands and premium national brands. In the case oI a
single product category, price diIIerences among the product items typically reIlect more than
variations in costs. Eor example, large supermarket chains price Ior total proIitability oI their
product oIIerings rather than Ior perIormance oI individual items. These retailers have devel-
oped computer analysis and pricing procedures to achieve sales, market share, and proIit
objectives. Similarly, commercial airlines must work with an array oI Iares in the pricing
structure.
The pricing oI the Toyota Camry and the Lexus ES 330 is an interesting example oI pricing
products in relation to each other. The ES 330 is targeted to the semiluxury market. The ES 330
has essentially the same body as the Camry, but the Lexus sells Ior substantially more than the
Camry. OI course, the Lexus oIIers certain unique Ieatures, but some oI the price diIIerence has
to be image rather than substance. The perIormance oI both brands is impressive.
Once product relationships are established, some basis Ior determining the price structure
must be selected. Many Iirms base price structure on market and competitive Iactors as well as
diIIerences in the costs oI producing each item. Some use multiple criteria Ior determining price
structure and have sophisticated computer models to examine alternate pricing schemes. Others
use rules oI thumb developed Irom experience.
Most product-line pricing approaches include both cost considerations and demand and
competitive concerns. Eor example, industrial-equipment manuIacturers sometimes price new
products at or close to cost and depend on sales oI high-margin items such as supplies, parts,
and replacement items to generate proIits. The important consideration is to price the entire
mix and line oI products to achieve pricing objectives.
-
Special pricing situations may occur in particular industries, markets, and competitive environ-
ments. Some examples Iollow.
Price may be used to appeal to diIIerent market segments. Eor example,
airline prices vary depending on the conditions oI purchase. DiIIerent versions oI the same basic
product may be oIIered at diIIerent prices to reIlect diIIerences in materials and product Ieatures.
Recall our earlier discussion oI Intels PC chip strategy. Industrial-products Iirms may use quantity
discounts to respond to diIIerences in the quantities purchased by customers. Price elasticity
diIIerences make it Ieasible to appeal to diIIerent segments.
- The pricing strategies oI producers using marketing
middlemen should include consideration oI the pricing needs (e.g., Ilexibility and incentives) oI
channel members. These decisions require analysis oI cost and pricing at all channel levels. II
producer prices to intermediaries are too high, inadequate margins may discourage intermediaries
Irom actively promoting the producers brand. Margins vary based on the nature and importance oI
the value-added activities that intermediaries in the channel are expected to perIorm. Eor example,
margins between costs and selling prices must be large enough to compensate a wholesaler Ior
carrying a complete stock oI replacement parts. In the multichannel situation, the question oI price
diIIerences across channels also has to be addressed.
Another special consideration is deciding how Ilexible prices will be. Will
prices be Iirm, or will they be negotiated between buyer and seller? Perhaps most important, Iirms
should make price Ilexibility a policy decision rather than a tactical response. Some companies
price lists are very rigid while others have list prices that give no indication oI actual selling
prices. It is also important to recognize the legal issues in pricing products when using Ilexible
pricing policies.

-
When considering reducing prices it is important to estimate how operating proIits will be
impacted. Estimates oI how operating proIits will be reduced Ior a 1 percent price cut provided
by McKinsey & Co. consultants are 24 percent Ior Iood and drugstores, 13 percent Ior airlines,
and 11 percent Ior computers and oIIice equipment.
25
Smaller operating proIit decreases are
estimated Ior tobacco (5 percent) and diversiIied Iinancials (2.4 percent). Thus, the impact oI
price cuts (and price wars) can be substantial.
Some companies have policies to guide pricing decisions over
the liIe cycle oI the product. Depending on its stage in the product liIe cycle, the price oI a
particular product or an entire line may be based on market share, proIitability, cash Ilow, or
other objectives. In many product-markets, price declines (in constant dollars) as the product
moves through its liIe cycle. Because oI liIe cycle considerations, diIIerent objectives and
policies may apply to particular products within a mix or line. Price becomes a more active
element oI strategy as products move through the liIe cycle and competitive pressures build,
costs decline, and volume increases. LiIe cycle pricing strategy should be consistent with the
overall marketing program positioning strategy used.
- The production and sales oI counterIeit brands costs companies like
Nike, Gillette, and MicrosoIt billions oI dollars each year.
26
The competitive challenge Ior brand
piracy is not to meet the prices Ior Iakes, which are a small Iraction oI prices Ior the actual
brands. Instead, companies whose brands are copied pursue initiatives to gain support Irom
nations like China to prohibit and police the counterIeiting activities. Poor copies reduce the
sales oI the real brands and also cause brand damage. Exhibit 11.7 provides several examples
oI brand pirating in China.

Source: Dexter Roberts,
Erederick BalIour, Paul
Magnusson, Pete Engardio,
and JenniIer Lee, Chinas
Piracy Plague,
BusinessWeek, June 5,
2000, 48.
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Pricing strategy gains considerable direction Irom the

decisions management makes about the product mix, branding
strategy, and product quality. Distribution strategy also inIlu-
ences the choice oI how price will work in combination with
advertising and sales Iorce strategies. Importantly, pricing
strategy may also inIluence distribution strategy and other
marketing program decisions. Price, like other marketing pro-
gram components, is a means oI generating market response,

-
though price can be deployed much Iaster than other mix
components.
Two important trends are apparent in the use oI pricing as
a strategic variable. Eirst, companies are designing Iar more
Ilexibility into their pricing strategies in order to cope with
the rapid changes and uncertainties in the turbulent business
environment. Second, price is more oIten used as an active
rather than passive element oI corporate and marketing
strategies. This trend is particularly apparent in the retail sector
where aggressive low-price strategies are used by Iirms such
as Wal-Mart, OIIice Depot, and Home Depot.
Product, distribution, pricing, and promotion strategies must
Iit together into an integrated positioning strategy. Pricing
strategy Ior new and existing products includes (1) setting pricing
objectives, (2) analyzing the pricing situation, (3) selecting (or
revising) the pricing strategy, and (4) determining speciIic prices
and policies. Companies use their pricing strategies to achieve
one or more oI several possible objectives. These include gaining
market position, achieving Iinancial perIormance, positioning the
product, stimulating demand, and inIluencing competition.
Analyzing the pricing situation is necessary to develop a
pricing strategy Ior a mix or line oI products, or to select a pricing
strategy Ior a new product or brand. Underlying strategy Iormu-
lation are several important activities, including analyses oI
customer price sensitivity, cost, competition, and legal and
ethical considerations. These analyses indicate the extent oI
pricing Ilexibility, by determining the pricing zone between cost
and probable demand Ior the good or service being analyzed.
Pricing may be relatively high (skimming), neutral, or
relatively low (penetration) compared to competition. The
choice oI a pricing strategy includes consideration oI price
positioning and visibility. Alternative pricing strategies can be
examined according to the Iirms price relative to the competi-
tion and how active the promotion oI price will be in the
marketing program. Pricing approaches include high-active,
high-passive, low-active, and low-passive strategies. Variations
within the Iour categories occur. In many industries market
leaders establish prices that are Iollowed by other Iirms in the
industry.
The determination oI speciIic prices may be based on costs,
competition, and/or demand inIluences. Implementing and
managing the pricing strategy also includes establishing
pricing policy and structure. Einally, several special pricing
considerations include price segmentation, distribution
channel pricing, price Ilexibility, product liIe cycle pricing,
and counterIeit products.
-
A. Explore the Web site oI American Airlines (www.aa.com).
Consider how the Web site can Iacilitate price discrimination.
B. Visit Amazon.com. Evaluate Amazons pricing strategy.
How do its prices compare to those oI brick and mortar
retailers? Critically evaluate the companys product oIIer-
ing and identiIy potential market segments.
C. Visit Oracle.com. Discuss how Oracle considers price in the
inIormation provided Ior its business process soItware suite.
D. Study the inIormation available Irom Starbucks Web site
(www.starbucks.com). Discuss how the Web site enhances
the Iirms ability to obtain premium prices.
-
A. Erom the Cross-Eunctional Eeature, develop a list oI the
pricing issues Iaced by the executives at Novet. What are
the arguments that can be made Ior avoiding the price-
cutting option?
B. Think about The Prisoners Dilemma described in the
Strategy Eeature. What would be the ethical dilemmas Ior
executives across diIIerent companies in a sector sharing
inIormation to coordinate prices? Why are such practices
unlawIul in most countries?
-- ---
1. Discuss the role oI price in the marketing strategy Ior
Rolex watches. Contrast Timexs price strategy with
Rolexs strategy.
2. The Toyota Camry and the Lexus ES 330 are very similar
but the ES 330 is priced substantially higher than the
Camry. Discuss the Ieatures and limitations oI this pricing
strategy.
3. Indicate how a Iast-Iood chain can estimate the price
elasticity oI a proposed new product such as a chicken
sandwich.
4. Real estate brokers typically charge a Iixed percentage oI
a homes sales price. Advertising agencies Iollow a similar
price strategy. Discuss why this may be sound price strat-
egy. What are the arguments against it Irom the buyers
point oI view?
5. Cite examples oI businesses to which the experience-curve
eIIect may not be applicable. What inIluence may this
have on price determination?
6. In some industries prices are set low, subsidies are pro-
vided, and other price-reducing mechanisms are used to

-
establish a long-term relationship with the buyer. Utilities,
Ior example, sometimes use incentives to encourage
contractors to install electric- or gas-powered appliances.
ManuIacturers may price equipment low, then depend on
service and parts Ior proIit contribution. What are the
advantages and limitations oI this pricing strategy?
7. Discuss why it is important to consider pricing Irom a
strategic rather than a tactical perspective.
8. Discuss some oI the ways that estimates oI the costs oI
competitors products can be determined.
9. Discuss how a pricing strategy should be developed by a
soItware Iirm to price its business-analysis soItware line.
10. Suppose a Iirm is considering changing Irom a low-active
price strategy to a high-active strategy. Discuss the impli-
cations oI this proposed change.
11. Describe and evaluate the price strategy used Ior the Lexus
430 European-style luxury sedan.
-
1. This illustration is based on Look Whos Buzzing the
Discounters, BusinessWeek, November 24, 2003, 48.
2. CAPITAL: How Technology Tailors Price Tags, 1he
Wall Street Journal, June 21, 2001, A1; Bill Saporito,
Why the Price Wars Never End, Fortune, March 23,
1992, 6871, 74, 78.
3. W. Chan Kim and Renee Mauborgne, Now Name a Price
Thats Hard to ReIuse, Financial 1imes, January 24,
2001.
4. W. Chan Kim and Renee Mauborgne, Creating New Market
Space, Harvard Business Review, JanuaryEebruary 1999,
8393.
5. Thomas Nagle, Make Pricing a Key Driver oI Your
Marketing Strategy, Marketing News, November 9, 1998,
4.
6. See Taking It on the Chin, 1he Economist, April 18,
1998, 6061; Mark Maremont, How Gillette Brought Its
MACH3 to Market, 1he Wall Street Journal, April 15,
1998, B1, B8; Mark Maremont, A Cut Above? 1he Wall
Street Journal, April 14, 1998, A1 and A10.
7. Maremont, How Gillette Brought Its MACH3 to
Market, B1.
8. This illustration is based on George E. Cressman Jr. and
Thomas T. Nagle, How to Manage an Aggressive Com-
petitor, Business Hori:ons, MarchApril 2002, 26.
9. Laura Bird, P&Gs New Analgesic Promises Pain Ior
Over-the-Counter Rivals, 1he Wall Street Journal, June
16, 1994, B9.
10. Robert J. Dolan, How Do You Know When the Price Is
Right, Harvard Business Review, SeptemberOctober
1995, 174183.
11. Guidelines Ior constructing value maps are discussed in
George E. Cressman Jr., Snatching DeIeat Irom the Jaws
oI Victory, Marketing Management, Summer 1997, 14.
12. A guide to determining experience curves is provided in
Kent B. Monroe, Pricing. Making Profitable Decisions. 3rd
ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2003), Chapter 13.
13. Rebecca Blumenstein, Overbuilt Web, 1he Wall Street
Journal, June 16, 2001, A1 and A8; Deborah Solomon,
Global Crossing Einds That the Race Has Just Begun,
1he Wall Street Journal, June 22, 2001, B4.
14. A Nasty Surprise Irom HP, BusinessWeek, September 1,
2003, 80; Gary McWilliams and Pui-Wing Tam, Dell
Price Cuts Put a Squeeze on Rival H-P, 1he Wall Street
Journal, August 21, 2003, B1 and B7.
15. Almar Latour, Disconnected, 1he Wall Street Journal,
June 5, 2001, A1 and A8.
16. These and other aspects oI marketing and the law are
discussed in Gilbert A. Churchill Jr. and J. Paul Peter,
Marketing. 2nd ed. (Chicago: Irwin/McGraw-Hill, 1998),
325327.
17. Shailagh Murry and Lucette Lagnado, Drug Companies
Eace Assault on Prices, 1he Wall Street Journal, May 11,
2000, B1 and B4.
18. The Iollowing issues are based on Cressman, Snatching
DeIeat Irom the Jaws oI Victory, Marketing Management,
Summer 1997, 1011.
19. Ibid.
20. Reed K. Holden and Thomas T. Nagle, Kamikaze
Pricing, Marketing Management, Summer 1998, 3139.
21. Ibid.
22. JeIIrey E. Rayport and Bernard J. Jaworski, e-Commerce
(New York: McGraw-Hill/Irwin, 2001), 157.
23. See, Ior example, Monroe, Pricing, Thomas T. Nagle
and Reed K. Holden, 1he Strategy and 1actics of Pricing.
2nd ed. (Englewood CliIIs, NJ: Prentice Hall, 1995).
24. Gregory A. Patterson, Mervyns EIIorts to Revamp
Result in Disappointment, 1he Wall Street Journal,
March 29, 1994, B4.
25. Janice Revall, The Price Is Not Always Right, Fortune,
May 14, 2001, 240.
26. Chinas Piracy Plague, BusinessWeek, June 5, 2000,
4448.

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Promotion strategy integrates the organizations communications initiatives, combining advertis-
ing, personal selling, sales promotion, interactive/Internet marketing, direct marketing, and public
relations to communicate with buyers and others who inIluence purchasing decisions. The Internet
oIIers a Iast-growing avenue Ior one-to-one marketing Ior business and consumer buyers. Billions
are spent every week in the United States and around the world on the various promotion com-
ponents. EIIective management oI these expensive resources is essential to gain the optimum return
Irom the promotion expenditures. Combining the components into a consistent overall promotion
strategy requires close coordination across the responsible units in the organization.
Promotion plays an essential role in achieving impressive growth and Iinancial perIormance
Ior Louis Vuitton, the largest and most proIitable luxury brand in the world.
1
The Erench producer
oI handbags, brieIcases, and wallets is continually developing new products, improving the quality
and eIIiciency oI production processes and aggressively promoting its brand against competitors.
In 2003 Vuitton increased advertising expenditures by 20 percent while the competition (Prada,
Gucci, Hermes, and Coach) cut back on spending. The 2003 advertising included a global
campaign Ieaturing JenniIer Lopez. Vuittons 2004 ads Ieature supermodels. Even with its
aggressive advertising strategy, the company spends only 5 percent oI its revenues on advertising
(halI oI the industry average). Vuittons advantage is that its 2003 revenues ($3.80 billion) were
nearly double those oI the number two competitor, Prada ($1.95 billion). Vuittons high volume
and superior operating margin provides a strong Ioundation Ior advertising and sales promotion
spending.
The communications activities that make up promotion strategy inIorm people about products
and persuade the companys buyers, channel organizations, and the public at large to purchase
brands. The objective is to combine the promotion components into an integrated strategy Ior
communicating with buyers and others who inIluence purchasing decisions. Since each Iorm
oI promotion has certain strengths and shortcomings, an integrated strategy incorporates the
advantages oI each component into a cost-eIIective promotion mix.
We begin the chapter with an overview oI promotion strategy and examine the decisions that
are involved in designing the strategy. The intent is to develop an integrated view oI communi-
cations strategy to which each oI the promotion components contributes. Next, we discuss each
component beginning with the major decisions that comprise advertising strategy and the Iactors
aIIecting advertising decisions. The Iinal section considers the design and implementation oI sales
promotion strategies. Personal selling, direct marketing, and Internet strategies are discussed in
Chapter 13.

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Promotion, Advertising, and Sales Promotion Strategies

Promotion strategy consists oI planning, implementing, and controlling an organizations
communications to its customers and other target audiences. The purpose oI promotion in the
marketing program is to achieve managements desired communications objectives with each
audience. An important marketing responsibility is planning and coordinating the integrated
promotion strategy and selecting the speciIic strategies Ior each oI the promotion components.
It is important to recognize that word-oI-mouth communications among buyers and the commu-
nications activities oI other organizations may inIluence the Iirms target audience(s).
-
- Advertising consists oI any Iorm oI nonpersonal communication concerning an
organization, product, or idea that is paid Ior by a speciIic sponsor. The sponsor makes payment
Ior the communication via one or more Iorms oI media (e.g., television, radio, magazine, newspa-
per). Advertising expenditures in the United States were expected to grow by 7 percent in 2004 to
$266 billion.
2
Network and cable TV and Internet advertising would experience the highest growth
rates (1012 percent) compared to single-digit growth Ior radio, magazines, and newspapers.
The United States accounts Ior about 53 percent oI worldwide advertising. Large advertising
expenditures are oIten necessary to introduce new consumer products and build the brand equity
oI existing products. Eor example, Energizer Holdings spent an estimated $120 million in the
United States in 2003 to launch the new Schick three-bladed razor Intuition Ior women.
3
The
intent was to take market share Irom Gillettes Venus three-bladed razor, the leading womens
brand. Intuition, priced at $7.99, dispenses its own shaving gel. Schicks razors have an 18 percent
global market share compared to 70 percent Ior Gillette.
Among the advantages oI using advertising to communicate with buyers are the low cost per
exposure, the variety oI media (newspapers, magazines, television, radio, Internet, direct mail,
and outdoor advertising), control oI exposure, consistent message content, and the opportunity
Ior creative message design. In addition, the appeal and message can be adjusted when commu-
nications objectives change. Cable television enables advertisers to target their communications
to speciIic buyers with more Iocus than the large networks. Advertising also has some dis-
advantages. It cannot interact with the buyer and may not be able to hold viewers attention.
Moreover, the message is Iixed Ior the duration oI an exposure.
- Personal selling consists oI verbal communication between a salesperson (or
selling team) and one or more prospective purchasers with the objective oI making or inIluencing
a sale. Annual expenditures on personal selling are much larger than advertising, perhaps twice as
much. Importantly, both promotion components share some common Ieatures, including creating
awareness oI the brand, transmitting inIormation, and persuading people to buy. Personal selling
is expensive. Eor example, in the U.S. pharmaceuticals sector, the industry spends more on
salespeople than on scientists. Some 70,000 U.S. salespeople cost the industry an estimated $7 bil-
lion a year.
4
The cost oI a sales call may reach $400 Ior industrial goods and services, and typically
multiple calls are necessary to sell the product.
5
One reason Ior the high call cost is the increasing
involvement oI salespeople in nonselling activities. Personal selling has several unique strengths:
Salespeople can interact with buyers to answer questions and overcome objections, they can target
buyers, and they have the capacity to accumulate market knowledge and provide Ieedback. Top
management may participate in selling by making calls on major customers.
- Sales promotion consists oI various promotional activities including trade
shows, contests, samples, point-oI-purchase displays, trade incentives, and coupons. Sales
promotion expenditures are much greater than the amount spent on advertising, and as large as
sales Iorce expenditures. This array oI special communications techniques and incentives oIIers
several advantages: Sales promotion can be used to target buyers, respond to special occasions,
and create an incentive Ior purchase. Sales promotion activities may be targeted to consumers,

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value-chain members, or employees (e.g., salespeople). One oI the more successIul sales
promotion initiatives is the Irequent Ilyer incentive program. American Airlines launched the
innovative AAdvantage program in 1981. It was Iirst developed with a core customer group oI
250,000 Irequent Ilyers.
6
The airlines reservation system enables the company to track mileage
and eIIiciently manage the program. Americans costs per member per year Ior communications
and administration are very low.
Direct marketing includes the various communications channels that enable
companies to make direct contact with individual buyers. Examples are catalogs, direct mail,
telemarketing, television selling, radio/magazine/newspaper selling, and electronic shopping. The
distinguishing Ieature oI direct marketing is the opportunity Ior the marketer to gain direct access
to the buyer. Direct marketing expenditures account Ior an increasingly large portion oI promotion
expenditures.
Included in this promotion component are the Internet,
CD-ROM, kiosks, and interactive television. Interactive media enable buyers and sellers to
interact. The Internet perIorms an important and rapidly escalating role in promotion strategy. In
addition to providing a direct sales channel, the Internet may be used to identiIy sales leads,
conduct Web-based surveys, provide product inIormation, and display advertisements. The
Internet provides the platIorm Ior a complete business strategy in the case oI Internet business
models. Marketing strategies are increasingly linked to Internet initiatives. The Internet has
become an important component oI many communications programs.
In 2002 the largest portion oI Internet users was in North America, accounting Ior one-third oI
the global online population.
7
Internet users in Europe and Asia are close behind and expanding
much Iaster than North America. The United States has an estimated 150 million users and the
next largest Internet users are in Japan (34 million). China has 26 million users, up Irom only
1 million in Iive years.
- Public relations Ior a company and its products consist oI communications
placed in the commercial media at no charge to the company receiving the publicity. Eor example,
a news release on a new product may be published in a trade magazine but the company does not
pay Ior the communication. The media coverage is an article or news item. The objective oI the
public relations department is to encourage relevant media to include company-released inIorma-
tion in media communications. Public relations activities can make an important contribution to
promotion strategy when the activity is planned and implemented to achieve speciIic promotion
objectives. (Public relations activities are also used Ior publicity purposes such as communicat-
ing with Iinancial analysts.) Publicity in the media can be negative as well as positive, and cannot
be controlled by the organization to the same extent as other promotion components. Since a
company does not purchase the media coverage, public relations is a cost-eIIective method oI
communication. The media are usually willing to cover topics oI public interest. Many companies
retain public relations consultants who proactively pursue opportunities to Ieature their companies
and brands. Eor many companies the active management oI corporate reputation is a public
relations priority because reputation impacts on many oI the stakeholders in the company.
Technology plays an important role in many companies promotion strategies. Eor example,
the Internet provides buyers with access to important inIormation in making purchase decisions.
An interesting use oI the Internet to promote new movies and gather viewer inIormation is
described in the Internet Eeature.

Market target and positioning strategies guide promotion decisions as shown in Exhibit 12.1. Several
activities are involved in designing the promotion strategy including (1) setting communication
objectives, (2) deciding the role oI each oI the components that make up the promotion program,
(3) determining the promotion budget, (4) selecting the strategy Ior each promotion component,

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(5) integrating and implementing the promotion component strategies, and (6) evaluating the
eIIectiveness oI the integrated promotion strategies. SpeciIic strategies must be determined Ior adver-
tising, personal selling, sales promotion, direct marketing, Internet, and public relations, and these
strategies need to be careIully integrated and coordinated to achieve communication objectives.
Market targets and product, distribution, and price decisions provide a Irame oI reIerence Ior
(1) deciding the role oI promotion strategy in the total marketing program, and (2) identiIying the
speciIic communications tasks oI the promotion activities. One important question is deciding
the role that the promotion strategy will play in marketing strategy. Advertising and personal selling

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Commniction
Ojective-
Role of Promotion
Component-
Promotion Bdget
Promotion Component
trtegie-
Coordintion
with Prodct,
Di-trition, nd
Price trtegie-
Adverti-ing
le-
Promotion
Plic
Reltion-
Per-onl
elling
Direct
Mrketing
nterctive/nternet Mrketing
Mrket Trgeting nd
Po-itioning trtegie-
ntegrte nd mplement Promotion
Component trtegie-
Evlte Effectivene-- of
Promotion trtegy

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are oIten a major part oI a Iirms marketing strategy. In consumer package
goods Iirms, sales promotion and advertising comprise a large portion oI
the promotion program. In business-to-business Iirms, personal selling
oIten dominates the promotion strategy, with advertising and sales
promotion playing a supporting role. The use oI sales promotion and
public relations varies considerably among companies. The role oI direct
marketing also diIIers across companies and industries. Internet initiatives
are under way in a broad range oI companies.
Interestingly, Singapore Airlines perIorms an important promotion
role in marketing the nation (see accompanying Singapore Airlines
advertisement). It is consistently one oI the more proIitable global airlines,
although much smaller than the major carriers.
8
The airlines Iavorable
image helps to position the country with executives, government oIIicials,
and tourists who experience Singapore Airlines renowned services. The
tiny city-state with a very small population has a strong brand image,
enhanced by the airlines Iavorable reputation with customers and
competitors throughout the world. The airlines advertising in business
and travel magazines is designed to Iavorably position its distinctive
bundle oI values. Global air travel is expected to double in 2010 compared
to 1990 and much oI the growth is in Asia.
-
Communication objectives help determine how the promotion strategy components are used in
the marketing program. Several illustrative communication objectives Iollow.
A communication objective, which is important Ior new-product intro-
ductions, is to trigger a need. Need recognition may also be important Ior existing products and
services, particularly when the buyer can postpone purchasing or choose not to purchase (such as
liIe insurance). Eor example, P&G emphasized the need to control dandruII in its advertising oI
Head & Shoulders shampoo in China. The ads Iocused attention on how dandruII is very visible
on people with black hair.
- Promotion activities can be used to identiIy buyers. The message seeks to get
the prospective buyer to respond. Recall, Ior example, the use oI the Internet to attract potential
movie viewers discussed in the earlier Internet Eeature. Salespeople may be given responsibility
Ior identiIying and screening prospects. The use oI toll-Iree numbers is oIten helpIul in identiIying
customers as well as issues and problems oI interest to the callers.
Promotion can aid a buyers search Ior inIormation. One oI the objectives
oI new-product promotional activities is to help buyers learn about the product. Prescription
drug companies advertise to the public to make people aware oI diseases and the brand names
oI products used Ior treatment. In the past, they targeted only doctors through ads in medical
journals and contacts by salespeople. Advertising is oIten a more cost-eIIective way to dissemi-
nate inIormation than personal selling, particularly when the inIormation can be exposed to
targeted buyers by electronic or printed media.
- Promotion helps buyers evaluate alternative products or
brands. Both comparative advertising and personal selling are eIIective in demonstrating a
brands strengths over competing brands. An example oI this Iorm oI advertising is to analyze
competing brands oI a product, showing a Iavorable comparison Ior the brand oI the Iirm placing
the ad. SpeciIic product attributes may be used Ior the comparison. Eor example, PepsiCos ads
in 2001 Ior its leading bottled water brand, AquaIina, were positioned to strip away the elite
image to make it look accessible to everyone.
9
The objective was to diIIerentiate AquaIina Irom
competing brands as the most mouthwatering water available.

-
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- - Several oI the promotion components may be used to stimulate
the purchase decision. Personal selling is oIten eIIective in obtaining a purchase commitment
Irom the buyers oI consumer durable goods and industrial products. Door-to-door selling
organizations such as Avon (cosmetics) and Cutco (knives) use highly programmed selling
approaches to encourage buyers to purchase their products. Communication objectives in
these Iirms include making a target number oI contacts each day. Point-oI-purchase sales
promotions, such as displays in retail stores, are intended to inIluence the purchase decision,
as are samples and discount coupons. One oI the advantages oI personal selling over
advertising is its Ilexibility in responding to the buyers objectives and questions at the time
the decision to purchase is being made.
- Communicating with buyers aIter they purchase a product is an
important promotional activity. Eollow-up by salespeople, advertisements stressing a Iirms
service capabilities, and toll-Iree numbers placed on packages to encourage users to seek
inIormation or report problems are illustrations oI post-purchase communications. Hotels
leave questionnaires in rooms Ior occupants to use in evaluating hotel services.
As illustrated, various communication objectives may be assigned to promotion strategy. The
uses oI promotion vary according to the type oI purchase, the stage oI the buyers decision
process, the maturity oI the product-market, and the role oI promotion in the marketing program.
Objectives need to be developed Ior the entire promotion program and Ior each promotion
component. Certain objectives, such as sales and market share targets, are shared with other
marketing program components. Examples oI communication objectives include:
Creating or increasing buyers awareness oI a product or brand.
InIluencing buyers attitudes toward a company, product, or brand.
Increasing the level oI brand preIerence oI the buyers in a targeted segment.
Achieving sales and market share increases Ior speciIic customer or prospect targets.
Generating repeat purchases oI a brand.
Encouraging trial oI a new product.
Attracting new customers.
Encouraging long-term relationships.
In the Iollowing sections and the next chapter we discuss and provide examples oI objectives Ior
each promotion component.
-
Communication objectives are useIul in deciding the speciIic role oI each component in the
promotion program. Eor example, the role oI the sales Iorce may be to obtain sales or, instead, to
inIorm channel oI distribution organizations about product Ieatures and applications. Advertising
may be used to generate repeat purchases oI a brand. Sales promotion (e.g., trade shows) may be
used to achieve various objectives in the promotion mix. Direct marketing may play a major role
in certain companies.
Early in the process oI developing the promotion strategy, it is useIul to set guidelines as to the
expected contribution Ior each oI the promotion program components. These guidelines help
determine the strategy Ior each promotion component. It is necessary to decide which communi-
cation objective(s) will be the responsibility oI each component. Eor example, advertising may be
responsible Ior creating awareness oI a new product. Sales promotion (e.g., coupons and samples)
may encourage trial oI the new product. Personal selling may be assigned responsibility Ior getting
wholesalers and/or retailers to stock the new product. It is also important to decide how large the
contribution oI each promotion component will be, which will help to determine the promotion
budget.

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Selecting an optimal budget Ior promotion expenditures is complex because Iactors other than
promotion also inIluence sales. Isolating the speciIic eIIects oI promotion may be diIIicult due to
lags in the impact oI promotion on sales, eIIects oI other marketing program components (e.g.,
retailers cooperation), and the inIluences oI uncontrollable Iactors (e.g., competition, economic
conditions). Realistically, budgeting in practice is likely to emphasize improving promotion
eIIectiveness compared to past results. Because oI this, more practical budgeting techniques are
normally used. These methods include (1) objective and task, (2) percent oI sales, (3) competitive
parity, and (4) all you can aIIord. These same approaches are used to determine advertising and
sales promotion budgets. The personal-selling budget is largely determined by the number oI
people in the sales Iorce and their qualiIications. Direct marketing budgets are guided by the unit
costs oI customer contact such as cost per catalog mailed.
In many companies, the promotion budget may include only planned expenditures Ior advertising
and sales promotion. Typically a separate budget is developed Ior the sales organization, which may
contain sales promotion activities such as incentives Ior salespeople and value-chain members. Public
relations budgets also are likely to be separate Irom promotion budgeting. Even so, it is important to
consider the size and allocation oI total promotion expenses when Iormulating the promotion strategy.
Unless this is done, the integration oI the components is likely to be Iragmented. Internet budgets may
be separate or included with the promotion component that utilizes Internet capabilities.
An example oI a promotion budget (excluding sales Iorce and public relations) Ior a pharmaceu-
tical product is shown in Exhibit 12.2. Note the relative size oI advertising and sample expenditures.
The sampling oI drugs to doctors by salespeople represents a substantial amount oI the promotion
budget. Sampling is an important promotion component in this industry.
- This logical and cost-eIIective method is probably the most widely
used budgeting approach. Management sets the communication objectives, determines the tasks
(activities) necessary to achieve the objectives, and adds up costs. This method also guides deter-
mining the role oI the promotion components by selecting the component(s) appropriate Ior
attaining each objective. Marketing management must careIully evaluate how the promotion
objectives are to be achieved and choose the most cost-eIIective promotion components. The
eIIectiveness oI the objective and task method depends on the judgment and experience oI the
marketing team. The budget shown in Exhibit 12.2 was determined using the objective and task
method. The pharmaceutical Iirm executives involved in the budgeting process included product
managers, the division manager, sales management, and the chieI marketing executive.
- Using this method, the budget is calculated as a percent oI sales and
is, thereIore, quite arbitrary. The percentage Iigure is oIten based on past expenditure patterns. The
method Iails to recognize that promotion eIIorts and results are related. Eor example, a 10 percent-
oI-sales budget may be too much or not enough promotion expenditures to achieve sales and other
promotion objectives. Budgeting by percent oI sales can lead to too much spending on promotion
when sales are high and too little when sales are low. In a cyclical industry where sales Iollow
up-and-down trends, a strategy oI increasing promotion expenditures during low sales periods may
be more appropriate.

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Promotion expenditures Ior this budgeting method are guided by how
much competitors spend. Yet competitors may be spending too much (or not enough) on
promotion. Another key shortcoming oI the competitive parity method is that diIIerences in
marketing strategy between competing Iirms may require diIIerent promotion strategies. Eor
example, Revlon uses an intensive distribution strategy, while Estee Lauder targets buyers
by distributing through selected department stores. A comparison oI promotional strategies oI
these Iirms is not very meaningIul, since their market targets, promotion objectives, and use oI
promotion components are diIIerent.
Since budget limits are a reality in most companies, this method is
likely to inIluence all budget decisions. Top management may speciIy how much can be spent
on promotion. Eor example, the guideline may be to increase the budget to 110 percent oI last
years actual promotion expenditures. The objective and task method can be combined with the
all-you-can-aIIord method by setting task priorities and allocating the budget to the higher
priority tasks.
Research sponsored by the Marketing Science Institute indicates that in
practice, promotion budgeting in consumer products Iirms involves a process that is a combination
oI rational, political, and expedient actions. The Cross-Eunctional Eeature summarizes the study
Iindings.
The Eeature highlights the interactive nature oI determining the promotion budget. Trade-oIIs
must be evaluated concerning budget needs oI promotion components, priorities among the com-
ponents, and total budget limits. These discussions among the team members and top management
play an important role in promotion strategy integration.
-
Determining the strategy Ior each promotion component includes setting objectives and budget,
selecting the strategy, and determining the activities (and timing) to be pursued. Eor example,
advertising activities include choosing the creative strategy, Iormulating the message(s), and
selecting the media to carry the ads.
In this chapter we discuss advertising and sales promotion strategy determination. Public relations
strategy involves similar initiatives to advertising strategy determination. The Iollowing chapter
examines sales Iorce, Internet, and direct marketing strategies.
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Several Iactors may aIIect the composition oI the promotion program as shown by Exhibit 12.3.
Advertising, public relations, personal selling, direct marketing, Internet, and sales promotion
strategies are likely to be Iragmented when responsibility is assigned to more than one department.
Moreover, there are diIIerences in priorities, and evaluating the productivity oI the promotion
components is complex. Eor example, coordination between selling and advertising is diIIicult in
Iirms marketing to industrial buyers, and these Iirms tend to Iollow personal-selling-driven pro-
motion strategies. The separation oI selling and advertising strategies also prevails in a variety oI
consumer products Iirms. An important marketing management issue is how to integrate the
promotion strategy components.
Integrated marketing communications (IMC) strategies are replacing Iragmented advertising,
publicity, and sales programs. These approaches diIIer Irom traditional promotion strategies in
several ways as described by the Iollowing characteristics oI IMC strategies in retailing:
1. IMC programs are comprehensive. Advertising, personal selling, retail atmospherics, behavioral-
modiIication programs, public relations, investor-relations programs, employee communications,
and other Iorms are all considered in the planning oI an IMC.
2. IMC programs are uniIied. The messages delivered by all media, including such diverse inIluences
as employee recruiting and the atmospherics oI retailers upon which the marketer primarily relies,
are the same or supportive oI a uniIied theme.
3. IMC programs are targeted. The public relations program, advertising programs, and dealer/
distributor programs all have the same or related target markets.
4. IMC programs have coordinated execution oI all the communications components oI the
organization.
5. IMC programs emphasize productivity in reaching the designated targets when selecting com-
munication channels and allocating resources to marketing media.
10
The Gap, the apparel retailer, has been unusually successIul in implementing an integrated
marketing-communications program.
11
Management positions advertising into the IMC strategy.
Advertising plays a key role at the Gap but other marketing Iunctions are equally important. The
IMC strategy is eIIectively combined with the marketing strategy components.
Developing and implementing integrated communications strategies is essential Ior manuIac-
turers as well as retailers, and Ior both consumer and business products. EIIective management oI
these strategies has a positive impact on revenues and the productivity oI promotion strategy:

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Adverti-ing/-le-
promotion-driven
Per-onl -elling-
driven Blnced
Lrge
Low
mll
Chnnel
Low
No
mll
High
Lrge
Direct
High
Ye-
Nmer nd di-per-ion of yer-
Byer-' informtion need-
ize nd importnce of prch-e
Di-trition
Prodct complexity
Po-tprch-e contct reqired

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The move toward integrated marketing communications is one oI the most signiIicant marketing
developments that occurred during the 1990s, and the shiIt toward this approach is continuing as we
begin the new century. The IMC approach to marketing communications planning and strategy is
being adopted by both large and small companies and has become popular among Iirms marketing
consumer products and services as well as business-to-business marketers. There are a number oI
reasons why marketers are adopting the IMC approach. A Iundamental reason is that they
understand the value oI strategically integrating the various communications Iunctions rather than
having them operate autonomously. By coordinating their marketing communications eIIorts,
companies can avoid duplication, take advantage oI synergy among promotional tools, and develop
more eIIicient and eIIective marketing communications programs.
12
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Tracking the eIIectiveness oI promotion strategy involves (1) evaluating the eIIectiveness oI each
promotion component, and (2) assessing the overall eIIectiveness oI the integrated promotion
strategy. In this and the next chapter we discuss measurement oI eIIectiveness oI the individual
promotion components. Cross-Iunctional teams can be used to assess overall promotion strategy
eIIectiveness. Comparisons oI actual results to objectives can be employed in the evaluation oI
each promotion component and the eIIectiveness oI the integrated promotion strategy.
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Managements assessment oI how advertising can contribute to the communication objectives has
an important inIluence in deciding advertisings role. Estimating advertisings impact on buyers
helps management to decide advertisings role and scope in the marketing program and choose
speciIic objectives Ior advertising. As we discussed in the chapter introduction advertising plays
a key role in Louis Vuittons marketing strategy Ior its luxury products.
IdentiIying and describing the target audience are the Iirst step in developing advertising
strategy. Next, it is important to set speciIic objectives and decide on the advertising budget.
There may be an adjustment (up or down) oI this initial budget as the speciIic advertising activ-
ities and media choices are determined. The selection oI the creative strategy Iollows. SpeciIic
messages need to be designed Ior each ad. Ads may be pretested. Choices oI the advertising
media and programming schedules implement the creative strategy. The Iinal step is putting the
advertising strategy under way and evaluating its eIIectiveness. We examine each oI these activ-
ities, highlighting important Ieatures and strategy issues. In the discussion we assume that the
target audience(s) has been selected.
- -
- - The earlier discussion oI communication objectives identiIied var-
ious objectives that may be relevant Ior advertising. These include need recognition, identiIying
buyers, brand building, evaluation oI alternatives, decision to purchase, and customer retention.
More than one objective may be applicable Ior a particular advertising strategy.
Exhibit 12.4 shows alternative levels Ior setting advertising objectives. In moving Irom
the most general level (exposure) to the most speciIic level (proIit contribution) the objectives
are increasingly more closely linked to the purchase decision. Eor example, knowing that
advertising causes a measurable increase in sales is much more useIul to the decision maker than
knowing that a speciIic number oI people are exposed to an advertising message. The key issue
is whether objectives such as exposure and awareness are related to purchase behavior. Eor
example, how much will exposure to the advertising increase the chances that people
will purchase a product? Objectives such as exposure and awareness oIten can be measured,
whereas determining the sales and proIit impact oI advertising may be more diIIicult to measure
due to the impact oI other Iactors on sales and proIits. Because oI the ease oI measurement,

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exposure and awareness objectives are used more oIten than attitude change, sales, and proIit
objectives.
Several questions are presented in Exhibit 12.5 that are useIul in determining advertising
objectives. The questions Iocus on alternative purposes oI advertising ranging Irom generating
immediate sales to brand image building. A checklist oI speciIic objectives is shown Ior each oI
the nine questions. The intent is to suggest alternative objectives Ior each question.
The budgeting methods Ior promotion discussed earlier in the chapter
are also used in advertising budgeting. The objective and task method has a stronger supporting
logic than the other methods. Consider, Ior example, the Italian governments advertising program
intended to Iavorably position Italian Iashion designers and craItsmen as the worlds Iinest.
13
The
objectives were to increase Italys share oI U.S. imports and enhance the prestige oI its brands.
The Italian Trade Commission budgeted $25 million on advertising and other promotion activities
in the Iive-year period through 1997 to achieve these objectives. The aggressive campaign generated
positive results with an increase in Italys U.S. imported apparel share Irom 4.5 to 5.9 percent. Much
larger increases were obtained by the more expensive imports like Versace and Giorgio Armani.
Analytical models oI sales response have been developed to help guide advertising budgeting
decisions Ior Irequently purchased consumer products.
14
One model uses multiple regression
analysis with ad expenditures and other predictors Ior estimating brand sales. Data Irom several
previous time periods are used to build the models. A key assumption is that historical relation-
ships will hold in the Iuture.
Budget determination, creative strategy, and media/programming strategy are closely inter-
related, so these decisions need to be closely coordinated. A preliminary budget may be set,
subject to review aIter the creative and media/programming strategies are determined. Using
objective and task budgeting, creative plans and media alternatives should be examined in the
budgeting process.

The range oI advertising objectives shown in Exhibit 12.5 indicates the possible Iocus oI the
creative strategy. Eor example, iI the objective is to enhance the image oI a brand, then the
message conveyed by the ad would seek to strengthen the brand image. This theme is illustrated
by one oI BMWs 2004 magazine ads introducing the new X5 4.8: No matter how we disguise
it, its heritage keeps showing through.
The creative strategy is guided by the market target and the desired positioning Ior the
product or brand. In Chapter 6, we discuss positioning according to the functions perIormed by
the brand, the symbol to be conveyed by the brand, or the experience provided by the brand. The
creative theme seeks to eIIectively communicate the intended positioning to buyers and others
inIluencing the purchase oI the brand.

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ncre-ing
Difficlty of
Me-rement
ncre-ing
Uncertinty ot
Adverti-ing- mpct
on Prch-ing
Behvior Type of
Objective
Expo-re
Awrene--
Attitde Chnge
le-
Profit

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Source: William Arens, Contemporary Advertising, 7th ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1999), R18. Copyright The McGraw-Hill Companies. Used with permission.

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There are several successIul advertising campaign themes that have been used Ior many years.
Examples include Nikes Just Do It; Youre in good hands with Allstate; Intel inside; and
Timexs It takes a licking and keeps on ticking.
15
Interestingly, some oI the highest-rated and
lowest-rated ads have been created by the same advertising agency. (We discuss the agencys role
later in the chapter.)
Creative advertising designs enhance the eIIectiveness oI advertising by providing a uniIying
concept that binds together the various parts oI an advertising campaign. Advertising agencies,
which typically receive 15 percent oI gross billings, are experts in designing creative strategies.
The agency proIessionals may design unique themes to position a product or Iirm in some
particular way or use comparisons with competition to enhance the Iirms brands. Choosing the
right creative theme Ior the marketing situation can make a major contribution to the success oI
a program. While tests are used to evaluate creative approaches, the task is more oI an art than
a science. Perhaps the best guide to creativity is an agencys track record.
Several challenges are impacting the creative process and changing the design oI creative
strategies:
The new generation oI advertising creatives will Iace a world oI ever-growing complexity. They
must handle many challenges oI integrated marketing communications (IMC) as they help their
clients build relationships with highly Iragmented target markets. They will need to understand the
wide range oI new technologies aIIecting advertising (computer hardware and soItware, electronic
networking, high-deIinition television, and more). And they have to learn how to advertise in
emerging international markets.
16
The creative strategy used Ior Murphys Oil Soap shows the importance oI a market segment Iocus
and brand positioning through creative advertising. Eor nearly 100 years the soap was marketed in a
single region oI the United States.
17
Eourteen years aIter a national rollout program starting in 1976,
the brand gained sixth position in its product category. Sales in 1990 increased to over $30 million,
eight times more than in 1980. The brand was positioned as an eIIective wood cleaner. Its Great
Houses advertising campaign displayed impressive old homes highlighting the beauty oI wood and
the special requirements oI a wood-cleaning product. More recent advertising and sales promotion
have positioned the soap as eIIective in cleaning wood surIaces . . . and more.
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A companys advertising agency or media organization normally guides media selection and
scheduling decisions. They have the experience and technical ability to match media and sche-
duling to the target audience(s) speciIied by the Iirm. The media, timing, and programming Ior
television and radio decisions are inIluenced largely by two Iactors: (1) access to the target
audience(s), and (2) the costs oI reaching the target group(s). A comparison oI advertising rates
Ior several media is shown below:
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*CPM cost per thousand exposures.

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The audience coverage varies considerably so the access to the target audience is also important. The
various media provide extensive proIile inIormation on their viewers. Standard Rates and Data
Services publishes advertising costs Ior various media. The costs are determined by circulation
levels and the type oI publication. In deciding which medium to use, it is important to evaluate the
cost per exposure and the characteristics oI the subscribers. The medium should provide coverage
oI the market target Ior the product or brand being advertised. High media costs help explain why
companies may transIer resources to online advertising, such as banners and click-throughs, where
production and media costs are much lower.
Media models are available to analyze allocations and decide which media mix best achieves
one or more objectives.
19
These models typically use an exposure measure (Exhibit 12.4) as the
basis Ior media allocation. Eor example, cost per thousand oI exposure can be used to evaluate
alternative media. The models also consider audience characteristics (e.g., age group composition)
and other Iactors. The models are useIul in selecting media when many advertising programs and
a wide range oI media are used.
The Iragmentation oI many consumer markets is driving signiIicant amounts oI advertising
spending Irom traditional mass media to more Iocused narrowcast media. The Innovation
Eeature describes some oI these changes.
-
Advertising agencies perIorm various Iunctions Ior clients including developing creative designs
and selecting media. Eull-service agencies oIIer a range oI services including marketing research,
sales promotion, marketing planning. The typical basis oI compensation is a 15 percent Iee on
media expenditures. Eor example, $1 million oI advertising provides a commission oI $150,000.
The agency pays the $850,000 Ior the media space and bills the client $1,000,000. Cash discounts
Ior payment may be involved.
- The normal basis oI operation between a corporate client and the
agency is a cooperative eIIort. The client brieIs the agency on the marketing strategy and the role
oI advertising in the marketing program. In some instances agency executives may be involved
in the development oI the marketing strategy. The better the agency understands the companys
marketing program, the more eIIective the agency can be in providing advertising services. The
agency may assign one or more personnel Iull-time to a client with a large advertising budget.

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Choosing an advertising agency is an important decision. It is also necessary to evaluate the
relationship over time since a companys advertising requirements change. Good agency relation-
ships are usually the result oI teaming with an agency that has the capabilities and commitment
needed by the client. Several Iactors that should be considered in evaluating an agency are shown
in Exhibit 12.6.
- The traditional method oI compensation oI the agency is a 15 percent
commission on media expenditures. Most agencies operate on some type oI commission arrange-
ment, though the arrangement may involve a commission Ior media placement and a separate
arrangement Ior other services. Eor example, media placement would receive a 5 percent commis-
sion, whereas other services associated with the advertising would yield an additional 10 percent.
These changes in the original 15 percent commission are the consequence oI advertising specialists
(e.g., media buying) oIIering reduced Iees.
Clients may work out Ilexible payment arrangements with their agency. The agency may keep
a record oI its costs and the client pays Ior the services it requires. The resulting compensation
may be greater or less than the traditional 15 percent commission. In some arrangements agencies
may share cost savings with the client.
- - Large, Iull-service agencies like Dentsu in Tokyo and Young &
Rubicam in New York account Ior the dominant portion oI billings. Nonetheless, several local
and regional agencies have created pressures Ior change throughout the industry. Concerns oI
clients about arbitrary commission rates and lack oI Ilexibility in client services have led to
placing business with small specialty agencies that provide media buying, creative design, and
other services. There are many local and regional agencies that serve small and medium-size
clients.

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Source: William E. Arens, Contemporary Advertising, 6th ed. (Burr Ridge, IL: Richard D. Irwin, 1996), 93. Copyright The McGraw-Hill Companies. Used with permission.

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- Normally, an agency does not serve clients competing in the same industry. The
agency requires access to sensitive inIormation (e.g., sales by product line, by geographical area) in
order to eIIectively serve the client. The advertiser is hesitant to share conIidential inIormation when
the agency has clients who are viewed as competitors. Achieving the one-client objective is more
diIIicult in working with companies that have smaller advertising budgets. It is important when
selecting an agency to determine who its clients are and what sort oI policies the agency Iollows
concerning serving clients that are competitors.
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BeIore the advertising strategy is implemented, it is advisable to establish the criteria that will
be used Ior measuring advertising eIIectiveness. Advertising expenditures are wasted iI Iirms
spend too much or allocate expenditures improperly. Measuring eIIectiveness provides necessary
Ieedback Ior Iuture advertising decisions. Importantly, the quality oI advertising can be as critical
to getting results as the amount oI advertising.
- As previously discussed, advertisings impact on
sales may be diIIicult to measure because other Iactors also inIluence sales and proIits. Most
eIIorts to measure eIIectiveness consider objectives such as attitude change, awareness, or expo-
sure (Exhibit 12.4). Comparing objectives and results helps managers decide when to alter or
stop advertising campaigns. Services such as Nielsens TV ratings are available Ior the major
media. These ratings have a critical impact on the allocation oI advertising dollars, although
some recent research Iindings question the accuracy oI the ratings. Various measurement con-
cerns have resulted in several changes in the rating process.
- - -- Several methods are used to evaluate advertising
results. Analysis oI historical data identiIies relationships between advertising expenditures and
sales using statistical techniques such as regression analysis. Recall tests measure consumers
awareness oI speciIic ads and campaigns by asking questions to determine iI a sample oI people
remembers an ad. Longitudinal studies track advertising expenditures and sales results beIore,
during, and aIter an advertising campaign. Controlled tests are a Iorm oI longitudinal study in
which extraneous eIIects are measured and/or controlled during the test. Test marketing can be
used to evaluate advertising eIIectiveness. EIIort/results models use empirical data to build a
mathematical relationship between sales and advertising eIIort.
Consumer panels provide a useIul method Ior measuring advertising eIIectiveness Ior Ire-
quently purchased consumer Iood and drug products in cities with cable TV. The panel is com-
prised oI a group oI consumers that agrees to supply inIormation about their purchases on a
continuing basis. Cash register scanning oI the purchases oI panel members provides data on
brands purchased, prices, and other inIormation. Samples oI consumers can be split into groups
that are exposed or not exposed to advertising on cable television. With the use oI equivalent
samples, the inIluence on sales oI Iactors other than advertising can be controlled. The diIIerence
in sales between the control and the experimental (exposed) groups over the test period measures
the eIIect oI advertising.
Advertising research is used Ior more than just measuring the eIIectiveness oI advertising.
Research can be used Ior various activities in advertising strategy development, including generating
and evaluating creative ideas and concepts, and pretesting concepts, ideas, and speciIic ads.
An example oI a popular test used to evaluate TV commercials is shown in Exhibit 12.7. The
test commercial is shown in selected test cities. AIter the commercial is shown, a sample oI
people who viewed the program is asked several questions to determine reactions to the
commercial. The basis oI the evaluation is the respondents recall about the commercial. While
such tests have been criticized because they do not evaluate ad quality or relevance, recall
continues to be the primary way commercials are evaluated.

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Sales promotion expenditures are increasing more rapidly than advertising in many companies.
20
ManuIacturers expenditures Ior sales promotion are estimated to be as high as 75 percent oI the total
spent on the two promotion components. Both advertising and sales promotions are receiving major
attention by companies in their attempts to boost productivity and reduce costs. When marketing
expenditures account Ior one-third or more oI total sales in many companies, the bottom-line impact
oI improving the eIIectiveness oI promotion expenditures and/or lowering costs is substantial.
Sales promotion activities provide extra value or incentives to consumers and value-chain partic-
ipants.
21
The intent is to encourage immediate sales. Managers oIten use the term promotion when
reIerring to sales promotion activities. Sales promotion is some Iorm oI inducement (e.g., coupon,
contest, rebate, etc.). It is intended to accelerate the selling process to build sales volume. Importantly,
sales promotion activities can be targeted to various points oI inIluence in the value chain.
We look at the nature and scope oI sales promotion, the types oI sales promotion activities, the
advantages and limitations oI sales promotion, and the decisions that make up sales promotion
strategy.
-
Japanese companies employ an interesting Iorm oI promotionshowrooms that have hands-on
new product displays.
22
The intent is to give people the opportunity to examine new products
placed in attractive surroundings. The items displayed are not Ior sale in the showrooms. The
sponsors want potential buyers to see the products, try them out, and become Iamiliar with their
Ieatures. Eor example, the Matsushita Electric Works showroom has a state-oI-the-art home
displaying the newest Japanese Iurnishings and appliances, as well as many gadgets.

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Environment. 3rd ed. (Burr
Irwin, 1994), 612.
Copyright The

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The responsibility Ior sales promotion activities oIten spans several marketing Iunctions, such
as advertising, merchandising, product planning, and sales. Eor example, a sales contest Ior
salespeople is typically designed and administered by sales managers and the costs oI the contest
are included in the sales department budget. Similarly, planning and coordinating a sampling or
coupon reIund program may be assigned to a product manager. Point-oI-purchase promotion
displays in retail stores may be the responsibility oI the Iield sales organization.
Total expenditures Ior sales promotion by business and industry in the United States are much
larger than the total spent on advertising, probably more than double advertising expenditures.
The complete scope oI sales promotion is oIten diIIicult to identiIy because the activities are
included in various departments and budgets. Unlike advertising, sales promotion expenditures
are not published.
A relevant issue is deciding how to manage the various sales promotion activities. While
these programs are used to support advertising, pricing, channel oI distribution, and personal
selling strategies, the size and scope oI sales promotion suggest that the responsibility Ior
managing sales promotion should be assigned to one or a team oI executives. Otherwise, sales
promotion activities are Iragmented, and may not be properly integrated with other promotion
components. The chieI marketing executive should assign responsibility Ior coordination and
evaluation oI sales promotion activities.
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Many activities may be part oI the total promotion program, including trade shows, specialty adver-
tising (e.g., imprinted calendars), contests, point-oI-purchase displays, coupons, recognition programs
(e.g., awards to top suppliers), and Iree samples. Expenditures Ior sales promotion may be very
substantial. Companies may direct their sales promotion activities to consumer buyers, industrial
buyers, channel members, and salespeople, as shown in Exhibit 12.8. Sales promotion programs Iall
into three major categories: incentives, promotional pricing, and inIormational activities.

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consumer goods and services. It includes a wide variety oI activities, as illustrated in Exhibit 12.8.
A key management concern is evaluating the eIIectiveness oI promotions such as coupons, rebates,
contests, and other awards. The large expenditures necessary to support these programs require that
the results and costs be objectively assessed.
The sponsoring oI sports events and individuals is a major initiative by various companies
and brands. Sales promotion results Irom the association oI the brand with the event or person.
An example is PepsiCos sponsorship oI the Pepsi 400 NASCAR race. Similarly, sports celebri-
ties may be sponsored, such as cyclist Lance Armstrong in the Tour de Erance. The strategy issue
is determining the beneIits versus costs oI these sales promotion activities.
The use oI Iactory tours and visiting centers is an interesting Iorm oI sales promotion that is
being aggressively pursued by various manuIacturers oI consumer products, in their eIIorts to
overcome the diIIiculties oI communicating to consumers via traditional advertising media. The
Strategy Eeature describes the experiential marketing initiatives oI several companies.
- - Many oI the sales promotion methods that are used Ior
consumer products also apply to industrial products, although the role and scope oI the methods
may vary. Eor example, trade shows perIorm a key role in small and medium-sized companies
marketing strategies. The advantage oI the trade show is the heavy concentration oI potential buyers
at one location during a very short time. The cost per contact is much less than a salesperson calling
on prospects at their oIIices. While people attending trade shows also spend their time viewing com-
petitors products, an eIIective display and buyer/seller interactions oIIer a unique opportunity to
hold the prospects attention.
The Internet has many oI the Ieatures oI trade shows while eliminating certain oI their lim-
itations. Eor example, the Web enables the Erench woolens manuIacturer Carreman to provide its
customers Iabric samples in one day.
23
The company posted its top Iabrics on the Etexx Web site
Ior online sample ordering. Management is optimistic that its customers will respond Iavorably to
the initiative. Etexx, a start-up based in Nice, created an e-marketplace Ior buyers and sellers oI
Iabrics.
Sales promotion programs that target industrial buyers may consume a greater portion oI the
marketing budget than advertising. Many oI these activities support personal selling strategies.

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They include catalogs, brochures, product inIormation reports, samples, trade shows, application
guides, and promotional items such as calendars, pens, and calculators.
- Sales promotion is an important part oI manuIac-
turers marketing eIIorts to wholesalers and retailers Ior such products as Ioods, beverages, and
appliances. Catalogs and other product inIormation are essential promotional components Ior many
lines. The Internet oIIers an alternative way to make catalog inIormation available. Promotional
pricing is oIten used to push new products through channels oI distribution. Various incentives are
popular in marketing to value-chain members. Specialty advertising items such as calendars and
memo pads are used in maintaining buyer awareness oI brands and company names.
- Incentives and inIormational activities are the primary
Iorms oI promotion used to assist and motivate company sales Iorces. Sales contests and prizes
are popular. Companies also make wide use oI recognition programs like the salesperson oI the
year. Promotional inIormation is vital to salespeople. Presentation kits help salespeople
describe new products and the Ieatures oI existing products.
A high-tech promotion tool with strong potential is the automated sales presentation created
with integrated use oI sound, graphics, and video brieIcase computers. These multimedia or
interactive techniques give salespeople powerIul presentation capabilities, allowing them access
to a complete product inIormation system available in the notebook computer.
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Because oI its wide array oI incentive, pricing, and communication capabilities, sales promotion
has the Ilexibility to contribute to various marketing objectives. A marketing manager can tar-
get buyers, channel members, and salespeople and the sales response oI the sales promotion
activities can be measured to determine their eIIectiveness. Eor example, a company can track
its coupon redemption or rebate success. Many oI the incentive and price promotion techniques
trigger the purchase oI other products.
Sales promotion is not without its disadvantages, however. In most instances, rather than a sub-
stitute Ior advertising and personal selling, sales promotion supports other promotional eIIorts.
Control is essential to prevent some people Irom taking advantage oI Iree oIIers, coupons, and
other incentives. Value-added resellers may build inventories on products receiving manuIac-
turers trade discounts. Incentives and price-promotional activities need to be monitored. An
eIIective advertisement can be run thousands oI times, but promotional campaigns are usually not
reusable. Thus, the costs oI development must be evaluated in advance.
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The steps in developing the sales promotion strategy are similar to the design oI advertising strat-
egy. It is necessary to Iirst deIine the communications task(s) that the sales promotion program
is expected to accomplish. Next, speciIic promotion objectives are set regarding awareness lev-
els and purchase intentions. It is important to evaluate the relative cost-eIIectiveness oI Ieasible
sales promotion methods and to select those that oIIer the best results/cost combination. Both the
content oI the sales promotion and its timing should be coordinated with other promotion activ-
ities. Einally, the program is implemented and is evaluated on a continuing basis. Evaluation
measures the extent to which objectives are achieved. Eor example, trade show results can be
evaluated to determine how many show contacts are converted to purchases.
Promotion strategy is a vital part oI the positioning strategy. The

componentsadvertising, sales promotion, public relations,
personal selling, direct marketing, and interactive/Internet
marketingoIIer an impressive array oI capabilities Ior
communicating with market targets and other relevant
audiences. However, promotion activities are expensive.
Management must decide the size oI the promotion budget
and allocate it to the promotion components. Each promotion

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activity oIIers certain unique advantages and also shares several
characteristics with the other components.
Promotion strategy is guided by the market targeting and
positioning strategies. Communication objectives must be
determined and the role oI each promotion component selected
by marketing management. Budgeting indicates the amount and
allocation oI resources to the promotion strategy. The major
budgeting methods are objective and task, percent oI sales,
competitive parity, and all you can aIIord. Several product and
market Iactors aIIect whether the promotion strategy will
emphasize advertising, sales promotion, personal selling, or
seek a balance between the Iorms oI promotion. The eIIective
integration oI the communications program is a major chal-
lenge Ior many Iirms. Einally, the eIIectiveness oI the pro-
motion strategy is evaluated.
The steps in developing advertising strategy include identi-
Iying the target audience, deciding the role oI advertising in
the promotional mix, indicating advertising objectives and
budget size, selecting the creative strategy, determining the
media and programming schedule, and implementing the pro-
gram and measuring its eIIectiveness. Advertising objectives
may range Irom audience exposure to proIit contribution.
Advertising agencies oIIer specialized services Ior developing
creative strategies, designing messages, and selecting media
and programming strategies. Measuring advertising eIIective-
ness is essential in managing this expensive resource.
Our discussion oI sales promotion highlights several methods
that are available Ior use as incentives, advertising support, and
inIormational activities. Typically, Iirms use sales promotion
activities in conjunction with advertising and personal selling
rather than as a primary component oI promotion strategy.
Promotion programs may target consumer buyers, industrial
buyers, middlemen, and salespeople. Sales promotion strategy
should be based on the selection oI methods that provide the best
results/cost combinations Ior achieving the communications
objectives.
A. Discuss how Godiva Chocolatiers Web site (www.godiva.
com) corresponds to the brand image portrayed by its retail
stores. What are the promotion objectives that Godivas
management seems to be pursuing on the Web site?
B. Go the Web sites oI NBC and the BBC (www.nbc.com and
www.bbc.co.uk). Contrast the ways NBC and the BBC pro-
mote their daily TV programs online. Which similarities
and diIIerences do you detect? Suggest ways oI improve-
ment considering the respective cultural Irame oI reIerence
and target market Ior NBC and BBC.
C. Discuss how Apples (www.apple.com) marketing strategy
Ior iPod Mini is enhanced by a Web-based approach.
-
A. Consider the promotion activities described in the Internet
Eeature. Discuss how these initiatives oIIer compelling
advantages over traditional promotion strategies.
B. Review the Strategy Eeature concerning the use oI the
Iactory as a theme park. IdentiIy other products and markets
where this sales promotion method may display Iavorable
beneIits and cost relationships.
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1. Compare and contrast the role oI promotion in an inter-
national public accounting Iirm with promotion by
American Airlines.
2. IdentiIy and discuss the Iactors that are important in deter-
mining the promotion program Ior the Iollowing products:
a. Video tape recorder/player.
b. Personal computer.
c. Boeing 7E7 Dreamliner commercial aircraIt.
d. Residential homes.
3. What are the important considerations in determining a
promotion budget?
4. Under what conditions is a Iirms promotion strategy more
likely to be advertising/sales promotion-driven rather than
personal selling-driven?
5. Discuss the advantages and limitations oI using awareness
as an advertising objective. When might this objective be
appropriate?
6. IdentiIy and discuss the important diIIerences between
advertising and sales promotion strategies in the marketing
promotion strategy.
7. Coordination oI advertising and personal selling strategies
is a major challenge in large companies. Outline a plan Ior
integrating these strategies.
8. Discuss the role oI sales promotion methods in the promo-
tion strategy oI a major airline.
9. How and to what extent is the Internet likely to be useIul
in companies promotion strategies?
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1. This illustration is based on The Vuitton Machine,
BusinessWeek, March 22, 2004, 98100, 102.
2. Mad Ave: The Sizzle Will Be a Harder Sell,
BusinessWeek, January 12, 2004, 119.
3. Suzanne Vranica, Schick Challenges Gillette with $120
Million Campaign, 1he Wall Street Journal, April 17,
2003, A18.
4. Gardiner Harris, Drug Makers Go Hollywood, Einding
Marketing Pays, 1he Wall Street Journal, July 6, 2000, 1.
5. Mark W. Johnston and Greg W. Marshall, Sales Force
Management. 7th ed. (Burr Ridge, IL: McGraw-Hill/
Irwin, 2003), 48.
6. Exclusive Interview: Mike Gunn oI American Airlines,
Colloquy 3, no. 2 (1992), 810.
7. George E. Belch and Michael A. Belch, Advertising and
Promotion. 6th ed. (Burr Ridge, IL: McGraw-Hill/Irwin,
2004), 695.
8. SIA Presses Ior Higher Yields with New AircraIt, IEE
Systems, Aviation Week & Space 1echnology, June 4,
2001, 6970.
9. Betsy McKay, PepsiCo Bases Water Ads on Nothing,
1he Wall Street Journal, June 25, 2001, B10.
10. Roger D. Blackwell, From Mind to Market (New York:
Harper Business, 1997), 182183.
11. Ibid.
12. Belch and Belch, Advertising and Promotion, 11.
13. Wendy Bounds and Deborah Ball, Italy Knits Support Ior
Eashion Industry, 1he Wall Street Journal, December 15,
1997, B8.
14. Advertising budgeting models are discussed in Gary
L. Lilien, Phillip Kotler, and Sridhar Moerlhy, Marketing
Models (Englewood CliIIs, NJ: Prentice-Hall, 1992),
Chapter 6.
Promotion. 5th ed. (New York: Irwin/McGraw-Hill, 2001),
262.
16. William E. Arens, Advertising. 9th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2004), 384.
17. Dr. John Loden, Megabrands (Homewood, IL: Business
One Irwin, 1992), 188190.
18. Belch and Belch, Advertising and Promotion. 5th ed. 517.
19. Roland T. Rust, Advertising Media Models (Lexington,
MA: D.C. Heath, 1986).
20. George S. Low and Jakki J. Mohr, Advertising vs. Sales
Promotion: A Brand Management Perspective, Journal of
Product & Brand Management 9, no. 6 (2000), 389414;
Andrew J. Parsons, Eocus and Squeeze: Consumer
Marketing in the 90s, Marketing Management, Winter
1992, 5155.
21. Belch and Belch, Advertising and Promotion, 6th ed.,
Chapter 16.
22. Mary Roach, Attack oI the Killer Showroom, American
Way, November 15, 1995, 108, 110, and 112.
23. Streamlining, BusinessWeek, E.Biz, September 18,
2000, EB70.

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Sales organizations in many companies have experienced signiIicant changes over the last decade.
Transactional selling activities are being perIormed via the Internet, while salespeople are more
Iocused on collaborative and consulting relationships. Contrary to some Iorecasts the role oI selling
has not deteriorated. However, major shiIts have occurred in how the selling Iunction is being
perIormed. Personal selling, the Internet, and direct marketing responsibilities have been impacted
by the changes. The Internet has become an important avenue oI direct contact between customers
and companies selling goods and services. Companies may use a combination oI salespeople,
direct marketing, and the Internet to perIorm selling and sales support Iunctions. Coordinating an
organizations activities across multiple customer contact initiatives is essential to avoid conIlicts
and enhance overall results.
SalesIorce.com is an interesting example oI a dot.com start-up, which has developed a successIul
business model supplying customer management soItware over the Net Ior use by salespeople. A
key Ieature oI the soItware is that it is sold as a service to customers at $65 per month Ior each
individual user. SalesIorce.com has nearly 10,000 customers like SunGuard Data Systems Inc.,
which purchase the customer management soItware service Ior 1,000 salespeople worldwide.
1
The
company has customers in 65 countries. SalesIorce.com illustrates how Internet inIormation tech-
nology can enhance the capabilities and eIIorts oI salespeople. By replacing large up-Iront soItware
purchases with monthly service charges SalesIorce.com oIIers customers a compelling value oppor-
tunity. Since this Ieature can be duplicated by soItware competitors such as Siebel Systems, Oracle,
and PeopleSoIt, SalesIorce.com may have diIIiculty sustaining its competitive edge.
OIIice Depot Inc. is an interesting example oI a company that has successIully implemented an
Internet strategy while avoiding conIlict with the large direct sales Iorce oI its Business Services
Group that sells to medium-to-large size organizational customers. The companys Internet strategy
is described in the Internet Eeature.
In this chapter we Iirst discuss developing and implementing sales Iorce strategy. Next, we
consider the issues and initiatives concerning Internet strategy. Einally, we describe and illustrate
the various methods used in direct marketing.
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prospects and build the types oI customer relationships that management considers necessary to
accomplish the organizations marketing objectives. Personal selling activities vary considerably

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across companies based on how personal selling contributes to marketing positioning strategy and
promotion strategy. Eor example, a PIizer pharmaceutical salesperson maintains regular contact
with doctors and other proIessionals, but actual purchases are made at retail outlets where the
prescriptions are Iilled. Nonetheless, PIizers salespeople play a vital role in the companys
marketing strategy. The drug salesperson provides inIormation on new products, distributes
samples, and works toward building long-term relationships.
Developing sales Iorce strategy includes six major steps as shown in Exhibit 13.1. Eirst, the role
oI the sales Iorce in the promotion strategy is determined. This requires deciding how personal
selling is expected to contribute to the marketing program. Second, the selling process must be
determined, indicating how selling will be accomplished with targeted customers. Third, in selecting
sales channels, management decides how Iield selling, major account management, telemarketing,
and the Internet will contribute to the selling process. Eourth, the design oI the sales organization

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Sales Force, Internet, and Direct Marketing Strategies

Determine the role

of the -le- force in
the promotion -trtegy
Define the -elling
proce-- (how -elling
will e ccompli-hed)
Decide if nd how
lterntive -le-
chnnel- will e
tilized
De-ign the -le-
orgniztion
Recrit, trin, nd
mnge -le-people
Evlte performnce
nd mke dj-tment-
where nece--ry

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must be examined to determine its eIIectiveness. A new design needs to be selected Ior a new
organization. EiIth, salespeople are recruited, trained, and managed. Einally, the results oI the selling
strategy are evaluated and adjustments are made to narrow the gap between actual and desired
results.
Salespeoples interactions with many customers and the geographical dispersion oI salespeople
are likely to create more ethical issues than are experienced in other types oI jobs. Sales managers
may encounter a wide range oI ethical issues as discussed in the Ethics Eeature.

Salespeoples responsibilities may range Irom order takers to extensive collaboration as consultants
to customers. While management has some Ilexibility in choosing the role and objectives oI the sales
Iorce in the marketing program, several Iactors oIten guide the role oI selling in a Iirms marketing
strategy, as shown in Exhibit 13.2. Considerable direction as to how personal selling will be used is
provided by the target market, product characteristics, distribution policies, and pricing policies. The
selling eIIort needs to be positioned into the integrated communications program. It is also useIul
to indicate how the other promotion-mix components, such as advertising, support and relate to
the sales Iorce. Sales management needs to be aware oI the plans and activities oI other promotion
components.
The objectives assigned to salespeople Irequently involve managements expected sales results.
Sales quotas are used to state these expectations. Companies may give incentives to salespeople who
achieve their quotas. Team selling incentives may also be used. Objectives other than sales are
important in many organizations. These include increasing the number oI new accounts, providing
services to customers and channel organizations, retaining customers, selecting and evaluating
middlemen, and obtaining market inIormation. The objectives selected need to be consistent with
marketing strategy and promotion objectives, and measurable so that salesperson perIormance can
be evaluated.
Sales & Marketing Management uses Iour categories oI responsibilities to deIine the range oI
personal selling roles. The categories are as Iollows:
2
- Selling is largely based on price and the products involved are oIten
commodities.
In these selling situations, price and Ieatures are equally important.
The product is matched to clients needs and price is secondary to obtaining
a successIul product application.
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These situations involve consulting-type relationships using team
approaches. Price is relevant but is not the driver.
The Internet is replacing salespeople in transactional selling, whereas it is more likely to provide
support Ior the other three categories.
The Sales & Marketing Management compensation survey reported average total compensation
Ior top-perIormance salespeople at $153,417 in 2003.
3
Incentive pay (bonus and commissions) was
43 percent oI total compensation. Average compensation Ior midlevel perIormers was $92,337.
Substantial 2004 pay increases Ior salespeople were Iorecast by most oI the executives surveyed in
the S&MMsurvey.
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The salespeople that sell to ultimate consumers (door-to-door sales, insurance sales, real estate
brokers, retail store sales, etc.) comprise a major portion oI the number oI salespeople, but a much
greater volume oI sales is accounted Ior by organizational (business-to-business) salespeople.
4
Organizational sales may be to resellers (e.g., retail chains), business users, and institutions. Con-
sumer and organizational sales are similar in several respects, but organizational sales may involve
more complex products, larger and more extensive purchasing processes, diIIerent selling skills,
and more extensive management processes (e.g., training, coaching, directing, and evaluating).
Illustrative sales positions Ior organizational salespeople include new business, trade selling,
missionary selling, and consultative/technical selling.
5
--- This selling job involves obtaining sales Irom new buyers. The buyers
may be one-time purchasers or repeat buyers. Eor example, recruiting a new online business customer
by an OIIice Depot salesperson is an illustration oI a one-time selling situation. Alternatively, the

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Source: Mark W. Johnston

and Greg W. Marshall,
Sales Force Management.
87. Copyright The
The firm'-
mrketing
ojective-,
-trtegy,
nd re-orce-
Emph-i- devoted
to per-onl
-elling reltive
to other promotionl
tool-
pecific
per-onl
-elling
ctivitie-
reqired
Accont
mngement
policie-
Commniction-
t-k- to e
ccompli-hed
y the promotion
mix
The trget
mrket
Prodct
chrcteri-tic-
Di-trition
policie-
Pricing
policie-

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selling strategy may be concerned with obtaining new buyers on a continuing basis. Commercial
insurance and real estate sales Iirms use this strategy.
This Iorm oI selling provides assistance and support to value-chain members
rather than obtaining sales. A manuIacturer marketing through wholesalers, retailers, or other
intermediaries may provide merchandising, logistical, promotional, and product inIormation
assistance. PepsiCos Iield sales organization assists retailers in merchandising and support
activities, works closely with bottlers, and builds relationships with Iast-Iood and other retailers
selling drinks on premises.
-- A strategy similar to trade selling is missionary selling. In these selling
situations the producers salespeople work with the customers oI a channel member to encourage
them to purchase the producers product Irom the channel member. Eor example, commercial
airline sales representatives contact travel agencies and corporate customers, providing them with
schedule inIormation on new routes and encouraging them to book Ilights on their airline.
- Eirms that use this strategy sell to an existing
customer base, and provide technical and application assistance. These positions may involve the
sales oI complex equipment or services such as management consulting. Selling oI commercial
aircraIt to airlines is another example oI consultative selling.
An organization may use more than one oI the above selling strategies. Eor example, a trans-
portation services company might use a new business strategy Ior expanding its customer base and
a missionary selling strategy Ior servicing existing customers. The skills needed by the salesperson
vary according to the selling strategy used.
Several changes are under way in many sales organizations. The reIorming process requires
redesigning the traditional sales organization, leveraging inIormation technology to lower costs
and provide quick response, designing the sales strategy to meet diIIerent customer needs, build-
ing long-term relationships with customers and business partners, and responding proactively to
global competitive opportunities and challenges. The sales Iorce continues to be essential in
many organizations, but salespeople are being asked to assume new responsibilities, and the
methods Ior keeping score are changing. An interesting analysis oI the changes occurring in both
consumer and business marketing is shown in the Strategy Eeature. It highlights the evolving
emphasis on customer relationship management and the use oI the Internet and direct marketing
methods in combination with personal selling processes.
--
Several selling and sales support activities are involved in moving Irom identiIying a buyers needs
to completing the sale and managing the postsale relationships between buyer and seller. The
resulting selling process includes (1) prospecting Ior customers, (2) opening the relationship,
(3) qualiIying the prospect, (4) presenting the sales message, (5) closing the sale, and (6) servicing
the account.
6
The process may be very simple, consisting oI a routine set oI actions designed to close
the sale. Alternatively, the process may extend over a long time period, with many contacts and
interactions between the buyers, other people inIluencing the purchase, the salesperson assigned to
the account, and technical specialists in the sellers organization. Recall the diIIerent selling roles
discussed earlier, which range Irom routine actions (transactional selling) to consulting relationships
(value-added selling).
Sales management determines the selling process by indicating the customers and prospects
the Iirm is targeting and the guidelines Ior developing customer relationships and obtaining sales
results. This process is managements strategy Ior achieving the sales Iorce objectives in the
selling environment oI interest. Salespeople implement the process Iollowing the guidelines set
by management, such as the product strategy (relative emphasis on diIIerent products), customer
targeting and priorities, and the desired selling activities and outcomes.

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The selling process is normally managed by the salesperson who has responsibility Ior a
customer account, although an increasing number oI companies are assigning this responsibility
to customer relationship management teams. Account management includes planning and exe-
cution oI the selling activities between the salesperson and the customer or prospect. Some
organizations analyze this process and set guidelines Ior use by salespeople to plan their selling
activities. Process analysis may result in programmed selling steps or alternatively, may lead to
highly customized selling approaches where the salesperson develops speciIic strategies Ior each
account. A company may also use team selling (e.g., product specialists and salesperson), major
account management, telemarketing, and Internet support systems.
Corporate restructuring in the 1990s created the need to reengineer sales processes in many
companies.
7
Indications oI a possible need Ior a change in the sales process include Iaulty
Iorecasting, inconsistent sales perIormances, sales declines, lost customers, new customers
Irom acquisitions, drops in proIit margins, and price wars. The changes made by EedEx Corp.
are illustrative.
8
Management combined its air and ground Ireight sales Iorces in 2000. Rather
than having to deal with separate sales Iorces, customers are now contacted by salespeople rep-
resenting both air and ground services. The changes provided more uniIorm coverage and elim-
inated costly duplicated coverage. EedEx has had strong sales and proIit growth since 2000,
moving Irom $18.3 to an estimated $27 billion in sales Ior 2005 and $2.32 to an estimated $3.85
earnings per share in 2005 These changes are illustrative oI customer management strategies
being implemented by several companies.
The selling process provides guidelines Ior sales Iorce recruiting, training, allocation oI eIIort,
organizational design, and the use oI selling support activities such as telemarketing and the
Internet. Understanding the selling process is essential in coordinating all elements oI the market-
ing program.
- -
An important part oI deciding the personal selling strategy is consideration oI the alternative chan-
nels to end user customers. Management must decide (1) which channel(s) to use in contacting
value-chain members and end users; and (2) how telemarketing, Internet, and direct marketing will


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be used to support the Iield sales Iorce. Eor example, management may decide to contact major
accounts using national or global account managers, contact regular accounts using the Iield sales
Iorce and service, small accounts via telemarketing or the Internet. The reality is that direct contact
by Iace-to-Iace salespeople is very expensive and this resource should be analyzed in terms oI
beneIits and costs.
The choice oI a particular sales channel is inIluenced by the buying power oI customers,
the selling channel threshold levels, and the complexity oI buyer-seller relationships.
9
We discuss
customer contact requirements to illustrate the strengths and limitations oI alternative sales channels.
- The purchasing potential oI customers and prospects oIten places
them into diIIerent importance categories. The major or global account represents the most
important customer category. This customer (1) purchases a signiIicant volume on an absolute dollar
basis and as a percent oI a suppliers total sales, and (2) purchases (or inIluences the purchase) Irom
a central or headquarters location Ior several geographically dispersed organizational units.
10
The
buying power oI a suppliers total customer base may range Irom several major accounts to a large
number oI very low volume purchasers. Customers and prospects can be classiIied into (1) major
accounts, (2) other customers requiring Iace-to-Iace contact, and (3) accounts whose purchases (or
potential) do not justiIy regular contact by Iield salespeople.
- - The number oI customers in each buying power category inIluences
the selection oI selling channels. The need Ior a multiple selling channel strategy should be deter-
mined. Eor example, the amount oI telemarketing eIIort that is needed determines whether a
telemarketing or electronic support unit should be considered. Similarly, enough major accounts
should exist in order to develop and implement a major account program. II the customer base does
not display substantial diIIerences in purchasing power and servicing requirements, then the use oI
a single sales Iorce channel may be appropriate.
- - The account management relationship is also
a key Iactor as to the type oI sales channel that is appropriate. Eor example, a customer that (1) has
several people involved in the buying process; (2) seeks a long-term, cooperative relationship with
the supplier; and (3) requires specialized attention and service creates a relatively complex buyer-
seller relationship.
11
Such a relationship coupled with suIIicient buying power suggests the use oI
a major account management channel. In contrast, a simple, routinized buying situation suggests
direct marketing or Internet buyer-seller linkages. The Iield selling channel corresponds best to
customer relationships that Iall between very complex and highly routinized.
There is a trend toward greater use oI customer management strategies by many companies.
Eor example, Newell Rubbermaid Inc., producer oI a range oI consumer household products, has
a major sales Iorce initiative under way to introduce new products and build relationships with
retailers.
12
The nearly 900 salespeople work with stores in spotlighting Newell Rubbermaid
products and conduct product comparisons in the stores Ior end users. Hundreds oI college
graduates have been recruited to strengthen relationships with retailers.
- -
Designing a sales organization includes selecting an organizational structure and deciding the
size and deployment oI salespeople to geographical areas and/or customers and prospects.
- The organizational approach adopted should support the Iirms
sales Iorce strategy. As companies adjust their selling strategies, organizational structure may
also require changes. EedExs shiIt to a single sales Iorce Ior its air and ground services is illus-
trative. There is a clear trend toward a greater Iocus on customers (market driven) rather than
products or geography as the basis Ior the design oI the sales organization.
The characteristics oI the customer base, the product(s), and the geographic location oI buyers
are the more important inIluences on the design oI the sales organization. The answers to several
questions are helpIul in narrowing the choice oI an organizational design.

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1. What is the selling job? What activities are to be perIormed by salespeople?
2. Is specialization oI selling eIIort necessary according to type oI customer, diIIerent products,
or salesperson activities (e.g., sales and service)?
3. Are channel-oI-distribution relationships important in the organizational design?
4. How many and what kinds oI sales management levels are needed to provide the proper
amount oI supervision, assistance, and control?
5. Will sales teams be used, and iI so, what will be their composition?
6. How and to what extent will sales channels other than the Iield sales Iorce be used?
The sales Iorce organizational design needs to be compatible with the selling strategy and other
marketing program strategies. The major types oI organization designs are shown in Exhibit 13.3.
These designs take into account the scope oI the product portIolio and diIIerences in customer
needs. Whenever the customer base is widely dispersed, geography is likely to be relevant in the
organizational design. The market-driven design is heavily inIluenced by the customer base,
although geographical location may also inIluence the design. The product/market design takes
both Iactors into account in determining how the organization is structured. Similar customer
needs and a complex range oI products point to the product-driven design. II the product or the
customer base does not dominate design considerations, a geographical organization is used. The
assigned area and (or) accounts that are the responsibility oI the salesperson comprise the sales
territory or work unit.
- Sales management must decide how many salespeople are needed
and how to deploy them to customers and prospects. Several Iactors outside the salespersons
control oIten aIIect his or her sales results, such as market potential, number and location oI
customers, intensity oI competition, and market (brand) position oI the company. Sales Iorce
deployment analysis needs to consider both salesperson Iactors and the relevant uncontrollable
Iactors.

-
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C-tomer need-
different
Complex
rnge of
prodct-
imple
prodct
offering
Mrket-
driven
de-ign
Prodct/
mrket-
driven
de-ign
Geogrphy-
driven
de-ign
Prodct-
driven
de-ign
C-tomer need-
-imilr

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Several methods are available Ior analyzing sales Iorce size and the deployment oI selling
eIIort including (1) revenue/cost analysis, (2) single-Iactor models, (3) sales and eIIort response
models, and (4) portIolio deployment models. Normally, sales and/or costs are the basis Ior
determining sales Iorce size and allocation.
Revenue/cost analysis techniques require inIormation on each salespersons sales and/or costs.
One approach compares each salesperson to an average breakeven sales level, thus helping
management to spot unproIitable territories. Another approach analyzes the proIit perIormance oI
accounts or trading areas, to estimate the proIit impact oI adding more salespeople, or to determine
how many people a new sales organization needs. These techniques are very useIul in locating
high- and low-perIormance territories.
Single-factor models assume that size and/or eIIort deployment are determined by one Iactor,
such as market potential or workload (e.g., number oI calls required), whose values can be used
to determine required selling eIIort. Suppose there are two territories, X and Y. Territory X has
double the market potential (opportunity Ior business) oI territory Y. II selling eIIort is deployed
according to market potential, X should get double the selling eIIort oI Y.
Consideration oI multiple inIluences (e.g., market potential, intensity oI competition, and
workload) on market response can improve salesperson deployment decisions. Several promis-
ing sales and effort response models are available to assist management on sales Iorce size and
deployment decisions.
13
Exhibit 13.4 shows the inIormation provided by one oI these models.
The analysis indicates that Joness territory requires only about 36 percent oI a person whereas
Smiths territory needs about 2.36 people. The inadequate sales coverage in Smiths territory is
risky in terms oI dissatisIaction and loss oI customers. The allocations are determined by incre-
mentally increasing selling eIIort in high-response areas and reducing eIIort where sales
response is low. Note that Exhibit 13.4 includes only two territories oI a large sales organiza-
tion. Sales response is determined Irom a computer analysis oI the selling eIIort-to-sales
response relationship.

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-

-

*In $000.
Each territory is made up oI several trading areas.

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The Novartis pharmaceutical company headquartered in Basel, Switzerland, is an interesting
example oI a company that made changes to strengthen its sales Iorce in the early 2000s. The
Global Eeature describes several oI Novartis actions.
We know that salespeople diIIer in ability, motivation, and perIormance. Managers are
involved in selecting, training, monitoring, directing, evaluating, and rewarding salespeople. A
brieI look at each activity highlights the responsibilities and Iunctions oI a sales manager.
- A major study oI the chieI sales executives in over
100 Iirms selling business-to-business products asked them to indicate on a 1 to 10 scale how
important 29 salesperson characteristics are to the success oI their salespeople.
14
The executives
indicated that the three most signiIicant success characteristics are (1) being customer-driven
and highly committed to the job; (2) accepting direction and cooperating as a team player; and
(3) being motivated by ones peers, Iinancial incentives, and oneselI.
Exhibit 13.5 shows several characteristics that are oIten important Ior diIIerent types oI selling
situations. The characteristics vary based on the type oI selling strategy being employed, so we must
Iirst deIine the job that is to be perIormed. Managers use application Iorms, personal interviews,
rating Iorms, reIerence checks, physical examinations, and various kinds oI tests to assist them in
making hiring decisions. The personal interview is widely cited as the most important part oI the
selection process Ior salespeople.
Some Iirms use Iormal programs to train their salespeople; others use inIormal
on-the-job training. Eactors that aIIect the type and duration oI training include size oI Iirm, type
oI sales job, product complexity, experience oI new salespeople, and managements commitment
to training. Training topics may include selling concepts and techniques, product knowledge,
territory management, and company policies and operating procedures.
In training salespeople, companies may seek to (1) increase productivity, (2) improve morale,
(3) lower turnover, (4) improve customer relations, and (5) enable better management oI time
and territory.
15
These objectives are concerned with increasing results Irom the salespersons
eIIort and/or reducing selling costs. Sales training should be evaluated concerning its beneIits
and costs. Evaluations may include beIore-and-aIter training results, participant critiques, and
comparison oI salespeople receiving training to those that have not been trained. Product knowl-
edge training is probably more widespread than any other type oI training.
- - The manager that supervises salespeople has a
key role in implementing a Iirms selling strategy. He or she Iaces several important management
issues. Coordinating the activities oI a Iield sales Iorce is diIIicult due to lack oI regular contact.

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Compensation incentives are oIten used to encourage salespeople to obtain sales. However,
salespeople need to be internally motivated. As discussed earlier, sales executives want salespeople
who are customer-driven and committed to the company and to team relationships.
The most widely used compensation plan is a combination oI salary and incentive (80 percent
salary and 20 percent incentive pay is a typical arrangement). The compensation plan should be
Iair to all participants and create an appropriate incentive. Salespeople also respond Iavorably to
recognition programs and special promotions such as vacation travel awards.
Managers assist and encourage salespeople, and incentives highlight the importance oI results,
but the salesperson is the driving Iorce in selling situations. Sales management must match
promising selling opportunities with competent and selI-motivated proIessional salespeople while
providing the proper company environment, leadership, and collaborative support. Although most
sales management proIessionals consider Iinancial compensation the most important motivating
Iorce, recent research indicates that personal characteristics, environmental conditions, and
company policies and procedures are also important motivating Iactors.
16
A recent study involving a large (1,000 ) sample oI business-to-business salespeople Iound
that salespeople who experienced higher levels oI management monitoring and directing displayed
higher perIormance, job satisIaction, and organizational commitment.
17
These Iindings suggest
that higher levels oI management control are associated with Iavorable salesperson attitudes and
behavior.
-
Sales management is continually working to improve the productivity oI selling eIIorts. During
the last decade personal selling costs increased much Iaster than advertising costs, so achieving
high sales Iorce perIormance is important. The evaluation oI sales Iorce perIormance considers
sales results, costs, salesperson activities, and customer satisIaction. Several issues are important
in evaluation, including the unit(s) oI analysis, measures oI perIormance, perIormance standards,
and Iactors that the sales organization and individual salespeople cannot control.
-- Evaluation extends beyond the salesperson to include other organizational
units, such as districts and branches. Selling teams are used in some types oI selling. These
companies Iocus evaluations on team results. Product perIormance evaluation by geographical
area and across organization units is relevant in the Iirms that produce more than one product.
Individual account sales and cost analyses are useIul Ior customers such as national accounts and
accounts assigned to salespeople.

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Source: Mark Johnston and
Greg Marshall, Sales Force
Management. 7th ed. (Burr
Ridge, IL: McGraw-Hill/
Irwin, 2003), 312.
permission.
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-- Management needs yardsticks Ior measuring salesperson
perIormance. Eor example, the sales Iorce oI a regional Iood processor that distributes through
grocery wholesalers and large retail chains devotes most oI its selling eIIort to calling on retailers.
Since the Iirm does not have inIormation on sales oI its products by individual retail outlet, eval-
uations are based on the activities oI salespeople rather than sales outcomes. This type oI control
system Iocuses on behavior rather than outcomes.
Sales managers may use both activity (behavior) and outcome measures oI salesperson
perIormance. Research indicates that multiple item measures oI several activities and outcomes
are useIul in perIormance evaluation.
18
Illustrative areas include sales planning, expense control,
sales presentation, technical knowledge, inIormation Ieedback, and sales results. Achievement oI
the sales quota (actual sales/quota sales) is a widely used outcome measure oI sales perIormance.
Other outcome measures include new business generated, market share gains, new-product sales,
and proIit contributions.
PerIormance evaluation is inIluenced by the sales management control system used by the
organization. Emphasis may be placed on salesperson activities, on outcomes, or a combination
oI activities and outcomes. The objective is to use the type oI control that is most eIIective Ior the
selling situation. Direct selling organizations like Avon and Mary Kay Iocus more on outcome
control. Companies like American Airlines and PIizer include both activity and outcome control.
An important aspect oI management control is the compensation plan. When salespeople are
compensated primarily by commission earnings on sales results, pay becomes the primary
management control mechanism.
- Although internal comparisons oI perIormance are
Irequently used, they are not very helpIul iI the perIormance oI the entire sales Iorce is unacceptable.
A major problem in setting sales perIormance standards is determining how to adjust them Ior Iactors
that are not under the salespersons control (i.e., market potential, intensity oI competition, diIIerences
in customer needs, and quality oI supervision). A competent salesperson may not appear to be
perIorming well iI assigned to a poor sales territory (e.g., salesperson Jones in Exhibit 13.4). Such
diIIerences need to be included in the evaluation process since territories oIten are not equal in terms
oI opportunity and other uncontrollable Iactors.
We know that evaluating perIormance is one oI sales managements more diIIicult tasks.
Typically, perIormance tracking involves assessing a combination oI outcome and behavioral
Iactors. In compensation plans other than straight commission, perIormance evaluation may
aIIect the salespersons pay, so obtaining a Iair evaluation is important.
By evaluating the organizations personal selling strategy, management may identiIy various
problems requiring corrective action. Problems may be linked to individual salespeople or to
decisions that impact the entire organization. A well-designed inIormation system helps in the
diagnosis oI perIormance and guides corrective actions when necessary.

We now consider Internet strategy alternatives, examine integration oI Internet initiatives with
marketing and promotion strategies, discuss options Ior measuring eIIectiveness, and look at the
Internets Iuture in business and marketing strategies. Also, recall our discussion oI the topic in
Chapters 2 and 11.
The Internet is a worldwide means oI exchanging inIormation and communicating through
a series oI interconnected computers.
19
It oIIers a Iast and versatile communications capability.
Internet initiatives span a wide range oI global industries and companies, and there have been
successes but also many Iailures, stimulated by overly optimistic expectations and Iaulty
implementation. Initiatives have been pursued by both traditional enterprises and new business
designs. One oI the more visible new Internet enterprises is Amazon.com Inc., the online retailer
that reported its Iirst proIitable year in 2003 with sales oI $5.3 billion. Business-to-business use

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oI the Internet is Iar more extensive than consumer adoption oI the Internet. The impacts oI the
Internet on business organizations in the Iuture are expected to be both transIormational as well
as incremental in scope.

The Iirst step in strategy development is to determine the role oI the Internet in the organiza-
tions business and marketing strategies. As discussed in Chapter 2, this role may involve a sep-
arate business model, a value-chain channel, a marketing communications tool, or a promotional
medium:
Marketers lured by the Internets promise oI immediacy, interactivity, availability, customization,
and global reach need to evaluate when it really pays to reach customers through the Internet and
how the Internet best Iits into overall marketing strategy. To do so, they need to pay even closer
attention to customers and rethink how to evaluate market opportunities, set marketing strategy,
and deploy marketing programs.
20
Several examples oI how companies are using the Internet are described in Exhibit 13.6. The
various initiatives ranging Irom e-commerce to customer relationships show how the Internet is
leveraging the operating processes oI many companies.
-
The capabilities oI the Internet Iall into two broad categories: a communications medium,
and a direct response medium enabling users to purchase and sell products. A summary oI the
communications Ieatures oI the Internet Iollows:
21

Source: Michael J. Mandel

and Robert D. HoI,
Rethinking the Internet:
E-Biz: Down but Hardly
Out, BusinessWeek,
March 26, 2001, 128.

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-- - Advertising on the Internet oIIers important advantages to
many companies. The opportunity Ior global exposure provides a useIul brand building capability.
-- Providing product, application, and company inIormation via
the Internet is essential in the competitive marketplace. This capability oIIers an opportunity Ior
direct one-on-one contact.
- The Internet oIIers a very cost-eIIective means oI
obtaining inIormation, such as user proIiles. However, concerns have been voiced about invasion
oI consumer privacy.
Access to users provides an opportunity to build a brand that is unique com-
pared to other media. This highlights the importance oI developing eIIective designs Ior Web sites.
- The Internet oIIers an important avenue oI aIter-the-sale cus-
tomer contact. Dell Inc. oIIers a wide range oI services to its corporate customers via the Internet.
We now consider what is involved in developing an e-commerce capability. This initiative may
be pursued by an existing company such as Avon Products Corp. or a new Web-based business
model.

Designing and launching a new e-commerce business that enables buyers to purchase products is
a major initiative. Moreover, Iaulty evaluation oI market opportunities and inadequate planning
have resulted in many Web-based business Iailures. Several interrelated decisions must be made:
1. Which customer groups should I serve?
2. How do I provide a compelling set oI beneIits to my targeted customer? How do I diIIerentiate
my value proposition versus online and oIIline competitors?
3. How do I communicate with customers?
4. What is the content, look-and-Ieel, level oI community, and degree oI personalization oI
the Web site?
5. How should I structure my organization? What business services and applications soItware
choices do I need to consider?
6. Who are my potential partners? Whose capabilities complement ours?
7. How will this business provide value to shareholders?
8. What metrics should I use to judge the progress oI the business? How do I value the business?
22
The intent oI the present discussion is to describe what is involved in an e-business initiative; an
extensive coverage oI the topic is provided by several other sources.
23
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The earlier discussion highlights several unique Ieatures oI the Internet as a communications
medium. Properly designed and managed, Web-based initiatives provide important opportunities
Ior oIIering superior customer value. These include:
24
1. Very Iocused targeting is possible via the Web.
2. Messages can be designed to address the needs and preIerences oI the target audience.
3. The Web oIIers a compelling opportunity Ior interaction and Ieedback.
4. A core value oIIering oI the Internet is access to a wide range oI inIormation.
5. The sales potential oIIered by the Internet is substantial (see Exhibit 13.6).
6. The Internet provides an exciting opportunity Ior communications innovation.
7. The exposure opportunities oI the Internet are signiIicant, enabling many small companies
and proIessionals to attain cost-eIIective access to customers and prospects.
8. The speed oI response via the Internet is impressive.

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The extensive value opportunities oIIered by the Web explain the many initiatives pursued by
companies. Nonetheless, there are some risks associated with the use oI the Internet as a commu-
nications medium. These include diIIiculties in eIIectiveness measurement, changes in audience
characteristics, access and response delays, multiple-ad exposure, potential Ior deception, and costs
that may be higher than traditional media.
25
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Measurement problems associated with the Internet are particularly challenging. This is not
surprising given the explosive growth oI Web-based initiatives and the limited experience with
the medium. Nonetheless, there are many sources oI measurement data. Evaluating the quality
and relevance oI alternative measurement sources requires careIul assessment by the organization
pursuing Internet strategies.
In an attempt to provide guidelines Ior Internet eIIectiveness measurement an industry study was
undertaken that resulted in a 2002 report.
26
The voluntary guidelines included Iive recommended
measures Ior independent auditing and veriIication. The metrics proposed were ad impressions,
clicks, unique visitors, total visits, and page impressions.

Perhaps the Internet shakeout was inevitable because oI the race to develop Internet capabilities
and business designs. Acknowledging the setbacks, it is apparent that Internet initiatives will
expand signiIicantly in the Iuture. Internet technology and applications will experience an excit-
ing Iuture:
Although the speciIic details are unpredictable and unimportant, digital technology will inevitably
accelerate, intensiIy, and reduce the cost oI marketing activities. What is important is that
marketing managers will help guide the companys customers toward better utilization oI the
companys products and services.
27
The reality is that the Internet will not result in a massive transIormation oI business practices.
28
Its impact is expected to be much greater Ior companies and organizations that are very dependent
on the Ilow oI inIormation. The impact oI the Internet in the Iuture promises to be revolutionary
Ior certain industries and incremental Ior others. We have experienced the impact oI the Internet
on sales oI books, music, and air travel. Internet evolutions Iorecast Ior the Iuture include jewelry,
payments, telecom, hotels, real estate, and soItware.
29
Eor example, while Internet jewelry sales
account Ior only $2 billion oI the $45 billion total industry sales, rapid growth is expected.
-
The purpose oI direct marketing is to make direct contact with end user customers through alter-
native media (e.g., computer, telephone, mail, and kiosk). Many direct marketing methods are
available, each oIIering certain advantages and limitations. The rapid growth oI direct marketing
during the last decade indicates that importance placed by many companies on these direct avenues
to customers. Eor example, Williams-Sonoma, the kitchenware retailer, generates 40 percent oI its
annual revenues Irom catalog sales.
30
Using a two-stage strategy, the company Iirst builds a cata-
log customer base in a metro area. At the second stage, Williams-Sonoma opens a retail store when
suIIicient catalog shoppers are identiIied, targeting catalog buyers with store promotion mailings.
Eirst, we look at several considerations in the use oI direct marketing. Next, the major direct
marketing methods are discussed. Einally, we consider at how direct marketing strategies are
developed and implemented.
-- -
The expanding popularity oI direct marketing methods is driven by a combination oI Iactors such as
socioeconomic trends, low costs, databases, and buyers demands Ior value. We examine how these
inIluences aIIect companies use oI mail, phone, media, and computers to contact individual buyers.

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- Several trends make the availability oI direct marketing purchases
attractive to many buyers. Two working spouses impose major time constraints on households,
so direct purchase via direct channels is a useIul way oI saving time as well as making contact
at the convenience oI the customer. Many single-person households also Iavor direct marketing
purchases. Buyers can shop at home, save time, and avoid shopping congestion. Rapid response
to order processing and shipping enables buyers to obtain their purchases in a Iew days. Liberal
exchange policies reduce the risks oI direct purchases.
-- -- While the cost per contact varies according to the method oI direct
contact, the marketers costs are much lower than Iace-to-Iace sales contact. Telephone contact
ranges Irom $10 to $20, compared to much lower costs per contact by computer, mail, and
advertising media. The availability oI databases that can target speciIic customer groups enables
companies to selectively target buyers. Companies like American Express can market products
to their credit card users. Similarly, airline Irequent Ilyer mailing lists provide cost-eIIective
access to buyers. The availability oI credit cards simpliIies the payment process.
- The use oI computerized databases escalated during the last decade,
driven by hardware and soItware technology advances. The availability oI computerized databases
is an important determinant oI successIul direct marketing.
31
The inIormation in the systems
includes internal data on customers and purchased data on customers and prospects. The customer
and prospect inIormation contained in databases can be used to generate mailing lists and prospect
lists and to identiIy market segments. These segments oIIer a direct communications channel with
customers and prospects.
The shopping inIormation provided via direct marketing, convenience, reduced shopping
time, rapid response, and competitive prices give buyers an attractive bundle oI value in many
buying situations. EIIective database management enables direct marketing to identiIy buyers who
purchase on a continuing basis.
The diIIerentiated needs and wants oI buyers can be addressed through direct marketing, thus
enhancing the value oIIered by the direct marketer. OIIerings may be mass-customized when the
direct marketer has the capability to modularize the product oIIering. Eor example, kiosks can
be linked to inIormation networks that transmit customized customer orders.
-
Various direct marketing methods are shown in Exhibit 13.7. We brieIly examine each method
to highlight its Ieatures and limitations.
- Contact by mail with potential buyers may generate orders by
phone or mail, or instead to encourage buyers to visit retail outlets to view goods and make
purchases. Examples oI companies using catalogs and other printed matter to encourage direct

-
Method of
Cu-tomer
Acce--
Electronic
hopping
Kio-k
hopping
Ctlog-
Direct
Mil
Rdio/
Mgzine/
New-pper
Televi-ion
Telemrketing

-

-
-
response include Lands End (clothing), L.L. Bean (outdoor apparel and equipment), Calyx &
Corolla (Ilowers), and the ConIerence Board Inc. (management conIerences).
This Iorm oI direct marketing consists oI the use oI telephone contact
between the buyer and seller to perIorm all or some oI the selling Iunction. Telemarketing oIIers
two key advantageslow contact cost and quick access by both buyer and seller. It may be
used as the primary method oI customer contact, or as a way to support the Iield sales Iorce.
Telemarketing escalated in importance during the last decade, and is a vital part oI the selling
activities oI many companies. Telemarketing, like the Internet, is a potential avenue oI conIlict
with an organizations Iace-to-Iace sales Iorce, and may be an annoyance Ior consumers.
-- Many companies use television, radio, magazines, and newspapers
to obtain sales Irom buyers. Direct response Irom the advertising is obtained by mail, telephone,
and Iax. People see the ads, decide to buy, and order the item Irom the organization promoting
the product.
The TV Home Shopping Network markets a wide range oI products Ior many companies. The
products are displayed and their Ieatures described. Prices are discounted below list prices.
The buyer places an order using a toll-Iree number. Individual companies may also market their
products using commercials Ior speciIic products such as housewares, magazines, and music
recordings.
Magazines, newspapers, and radio oIIer a wide range oI direct marketing advertisements. The
intent oI the direct-response communications is to persuade the person reading or hearing the ad
to order the product. The advantage oI using these media is the very low cost oI exposure. While
the percent oI response is also low, the returns can be substantial Ior products that buyers are
willing to purchase through these media.
The computer age has created two major methods oI direct marketing:
computer ordering by companies Irom their supplier, and consumer and business shopping via the
Internet as discussed earlier in the chapter. Electronic shopping by business buyers is appropriate
when the customers requirements involve routine repurchase oI standard items, and direct access
to the buyer is not necessary. Electronic capabilities may be used to support a Iield sales Iorce
rather than as the sole method oI customer contact. Computer ordering helps the seller establish
a close link to customers, and reduces order cycles (time Irom order placement to receipt) and
inventory stocks. Computer ordering enables the buyer to reduce inventory levels, cut costs, and
monitor customer preIerences. Eor example, Wal-Marts computerized scanning equipment in its
stores inIorms the retailer about what (and where) customers are buying and meeting their needs
via the computerized ordering system. While some customers may resist becoming dependent on
suppliers through electronic linkages, there is a strong trend toward closer ties between suppliers
and organizational buyers.
As discussed earlier in the chapter virtual shopping on the Internet has received much
publicity during the last Iew years. Many companies are considering the potential opportunities
oI direct marketing to computer users. The business-to-business sector accounts Ior the largest
portion oI total Internet sales. There are three types oI networks: (1) The Internet is a global
interlink oI computer networks that have a common soItware standard; (2) The intranet is a
company internal capability using Internet soItware standards; and (3) The extranet consists oI
providing external partners access to the intranet.
32
Eor example, a retail chain may serve
customers via the Internet, coordinate store operations via the intranet, and utilize the extranet to
interact with Ireelance product designers and other external partners.
- Similar in concept to vending machines, kiosks oIIer buyers the opportunity
to purchase Irom a Iacility (stand) located in a retail complex or other public area (e.g., airport).
Kiosks may have Internet linkages. Airline tickets and Ilight insurance are examples oI products
sold using kiosks. In some instances the order may be placed at the kiosk but delivered to the
customers address. The advantage to the seller is exposure to many people, and the buyer beneIits

-

-
-
Irom the shopping convenience. Kiosks are best suited Ior selling products that buyers can easily
evaluate due to prior experience.
-
It is apparent that direct marketing oIIers several advantages Ior sellers.
33
This marketing approach
enables selective reach and segmentation opportunities. Considerable Ilexibility in accessing poten-
tial buyers is provided via direct marketing. Timing contact can be managed and personalized.
Importantly, the eIIectiveness oI direct marketing can be measured Irom direct response.
Direct marketing also has certain limitations.
34
It may have negative image Iactors (e.g., junk
mail). Accuracy oI targeting is only as good as the lists used to access potential buyers. There
may also be limited content support in direct-response advertising. Also, postal rates increase
over time.

As highlighted in our discussion, direct marketing promotion has the primary objective oI
obtaining a purchase response Irom individual buyers. While the methods diIIer in nature and
scope, all require the development oI a strategy. Market target(s) must be identiIied, objectives
set, positioning strategy developed, communication strategy Iormulated, program implemented
and managed, and results evaluated against perIormance expectations.
The direct marketing strategy should be guided by the organizations marketing strategy. Direct
marketing provides the way oI reaching the customer on a one-to-one basis. Product strategy must
be determined, prices set, and distribution arranged. Direct marketing may be the primary avenue
to the customer as in the case oI L.L. Bean Inc. in its targeting oI the outdoor apparel niche
using catalog marketing. Other companies may use direct marketing as one oI several ways oI
communicating with their market targets. Dell Inc. employs direct sales contact with business
customers, telephone sales, and Internet sales. The Internet may also be used by Dells customers
to obtain inIormation beIore placing an order by phone.
Management analyzes the Iirms marketing strategy, the target

market, product characteristics, distribution strategy, and pricing
strategy to identiIy the role oI personal selling in the promotion
mix. New business, trade selling, missionary selling, and consul-
tative/technical selling strategies illustrate the possible roles that
may be assigned to selling in various Iirms. The selling process
indicates the selling activities necessary to move the buyer Irom
need awareness to a purchase decision. Various sales channels are
used in conjunction with the Iield sales Iorce to accomplish the
selling process activities.
Sales Iorce organizational design decisions include the type
oI organizational structure to be used, the size oI the sales Iorce,
and the allocation oI selling eIIort. Deployment involves deci-
sions regarding sales Iorce size and eIIort allocation. Managing
the sales Iorce includes recruiting, training, supervising, and
motivating salespeople. Evaluation and control determine the
extent to which objectives are achieved and determine where
adjustments are needed in selling strategy and tactics.
The Internet provides a unique and compelling means oI elec-
tronic contact between buyers and sellers. The core capability oI
the Internet is communicating with buyers and prospects via an
interactive process. The Internet is a new medium and companies
are learning how to obtain its advantages and avoid its risks. The
key organizational decision is deciding what role the Internet will
play in the business and marketing strategies. The options range
Irom a separate business model to a promotional medium.
The Internet oIIers several communications Ieatures includ-
ing disseminating inIormation, creating awareness, obtaining
research inIormation, brand building, encouraging trials,
improving customer service, and expanding distribution.
Developing an Internet business model is a major initiative
involving the design oI a new business. Eaulty evaluation oI
market opportunities and inadequate planning have resulted in
many Web-based Iailures.
The Internets unique Ieatures oIIer important opportunities
Ior providing superior customer value. It also has some poten-
tial risks in its use as a communications medium. A major
challenge is measuring the eIIectiveness oI Internet initiatives.
The purpose oI direct marketing is to obtain a sales response
Irom buyers by making direct contact using mail, telephone,
advertising media, or computer. The rapidly expanding adoption
oI direct marketing methods that occurred in the last decade is the
consequence oI several inIluences including socioeconomic
trends, low costs oI exposure, computer technology, and buyers
demands Ior value. Direct marketing is used by many companies
to contact organizational and consumer buyers.

-

-
-
Direct marketing oIIers several advantages including
selective reach, segmentation opportunities, Ilexibility, timing
control, and eIIectiveness measurement. However, certain direct
methods may convey a negative image.
Companies have many options available Ior direct marketing
to buyers. The methods include catalogs, direct mail, tele-
marketing, television, radio, magazines/newspapers, electronic
shopping, and kiosk shopping. Developing a strategy Ior using
each method includes selecting the market target(s), setting
objectives, selecting positioning strategy, developing the com-
munications strategy, implementing and managing the strategy,
and evaluating results.
A. Examine the Web site oI SalesIorce.com. Discuss how the
Internet service provider can assist sales managers in their
sales Iorce management activities.
B. Visit Nokias U.S. Web site (www.nokiausa.com). Evaluate
Nokias sales approach online. How does Nokia enhance its
direct marketing strategy through Web-based oIIerings?
How could the company increase traIIic to its online sales
platIorm without creating channel conIlict?
C. Review the Web site oI Merrill Lynch (www.ml.com). How
does Merrill Lynch leverage its global position to adjust to
local markets through the Internet? Why is the Internet par-
ticularly relevant Ior Iirms in the Iinancial services industry?
-
A. Review the Global Eeature concerning Novartis sales Iorce
initiatives. Discuss how these changes should be integrated
with the drug companys promotion and marketing
strategies.
B. The Strategy Eeature highlights several changes in
the language oI marketing. To what extent do these
changes suggest marketing to consumer end users and
business customers may involve several similar strategy
characteristics?
-- ---
1. What inIormation does management require to analyze the
selling situation?
2. Suppose an analysis oI sales Iorce size and selling eIIort
deployment indicates that a company has a sales Iorce oI the
right size but that the allocation oI selling eIIort requires
substantial adjustment in several territories. How should
such deployment changes be implemented?
3. What questions would you want answered iI you were try-
ing to evaluate the eIIectiveness oI a business units sales
Iorce strategy?
4. Discuss some oI the advantages and limitations oI recruit-
ing salespeople by hiring the employees oI companies with
excellent training programs.
5. Is incentive compensation more important Ior salespeople
than Ior product managers? Why?
6. Select a company and discuss how sales management
should deIine the selling process.
7. What are the unique capabilities oIIered by the Internet to
business users oI the communications medium?
8. Discuss whether the Internet may replace conventional
catalogs and direct mail methods oI promotion.
9. Direct marketing is similar in many ways to advertising.
Why is it important to view direct marketing as a speciIic
group oI promotion methods?
10. Discuss the reasons why many companies are interested in
the marketing potential oI the Internet.
11. Select one oI the direct marketing methods and discuss the
decisions that are necessary in developing a strategy Ior
using the method.
12. Suppose you have been asked to evaluate whether a
regional camera and consumer electronics retailer should
obtain Internet space. What criteria should be used in the
evaluation?
1. Who Says CEOs Cant Eind Inner Peace? BusinessWeek,
September 1, 2003, 7778.
2. What a Sales Call Costs, Sales & Marketing Management,
September 2000, 7981.
3. Christine Galea, The 2004 Compensation Survey, Sales
& Marketing Management, May 2004, 2930.
4. The Iollowing discussion is based on Mark W. Johnston
and Greg W. Marshall, Sales Force Management. 7th ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2003), 4950.
5. Ibid.
6. Johnston and Marshall, Sales Force Management, 5156.
7. Andy Cohen, Starting Over, Sales & Marketing Manage-
ment, September 1995.
8. Rick Brooks, EedEx Eiscal Eourth-Quarter ProIit Rose by
11, Surpassing Expectations, 1he Wall Street Journal,
June 29, 2000, B2.
9. The Iollowing discussion is drawn Irom Raymond
W. LaEorge, David W. Cravens, and Thomas N. Ingram,
Evaluating Multiple Sales Channel Strategies, Journal
-
-

-

-
-
of Business and Industrial Marketing, Summer/Eall 1991,
3748.
10. Jerome A. Colletti and Gary S. Tubridy, EIIective Major
Account Management, Journal of Personal Selling and
Sales Management, August 1987, 110.
11. Ibid.
12. Erik Ahlberg, Newell Rubbermaid Rebirth Is a Work in
Progress, 1he Wall Street Journal, November 27, 2002,
B3A.
13. Johnston and Marshall, Sales Force Management, Chap-
ter 5.
14. David W. Cravens, Thomas M. Ingram, Raymond W.
LaEorge, and CliIIord E. Young, Hallmarks oI EIIective
Sales Organizations, Marketing Management, Winter 1992,
5667.
15. Johnston and Marshall, Sales Force Management, Chap-
ter 10.
16. Ibid., Chapter 7.
17. David W. Cravens, Greg W. Marshall, Eelicia G. Lassk,
and George S. Low, The Control Eactor, Marketing
Management 13, no. 1, JanuaryEebruary 2004, 3944.
18. David W. Cravens, Thomas M. Ingram, Raymond W.
LaEorge, and CliIIord E. Young, Behavior-Based and
Outcome-Based Sales Eorce Control Systems, Journal of
Promotion. 6th ed. (New York: McGraw-Hill Irwin, 2004),
486.
20. Bernard Jaworski and Katherine Jocz, Rediscovering the
Customer, Marketing Management, September/October
2002, 24.
21. The Iollowing is based on Belch and Belch, Advertising
and Promotion, 492493.
22. JeIIrey E. Rayport and Bernard J. Jaworski, e-Commerce
(New York: McGraw-Hill/Irwin, 2001), 12.
23. See, Ior example, ibid.
25. Ibid., 505506.
26 Ibid., 502503.
27. Glen L. Urban, Digital Marketing Strategy (Upper Saddle
River, NJ: Pearson Prentice Hall, 2004), 180.
28. Michael J. Mandel and Robert D. HoI, Rethinking the
Internet, BusinessWeek, March 26, 2001, 117122.
29. Timothy J. Mullaney, E-Biz Strikes Again, BusinessWeek,
May 10, 2004, 8090.
30. Sandra Baker, Mail Bonding, Fort Worth Star 1elegram,
December 16, 1996, B1 and B3.
31. William J. McDonald, Direct Marketing (Burr Ridge, IL:
Irwin/McGraw-Hill, 1998), 93.
32. Log On, Link Up, Save Big, BusinessWeek, June 22,
1998, 136.
34. Ibid.

-

The ultimate perIormance oI market targeting and positioning decisions rests on how well the
marketing strategy is implemented and managed on a continuing basis. Placing the strategy into
action and adjusting it to eliminate perIormance gaps are essential success Iactors.
The importance oI eIIective implementation and control approaches is illustrated by the strate-
gic turnaround at Cisco Systems Inc.
1
In early 2001, customers across the world were drastically
reducing orders, and Cisco was Iacing the need Ior a major strategy overhaul. In 2001, Cisco
reduced the work Iorce by 8,500 employees, took 18 percent oII the payroll, and began to rebuild
the business. By 2004 Ciscos revenue had grown to $22 billion with strong proIit perIormance.
Ciscos strategy Ior the Iuture is to lead the next Internet revolution. This will include an array oI
new services, new applications, new products, and signiIicant improvements in eIIiciencies. New
-

-

-
Marketing Strategy Implementation and Control

--
MARKETNG
STRATEGY
Annual
Marketing
Plan mplementation
Evaluation
Revision
Annual
Marketing
Plan
business ventures include net-phone service, storage, security, wireless, home networking gear,
and optical networking.
Cisco still Iaces major strategic challenges, but its strategy overhaul illustrates the need Ior rig-
orous and systematic plan development allied with close attention to implementation and evaluation.
We begin with an overview oI several issues in developing the marketing plan, Iollowed by a
discussion oI implementing the plan. We examine internal marketing as an approach to eIIective
implementation. Next, developing a strategic evaluation and control program is overviewed.
Einally, the major evaluation activities are discussed and illustrated. These activities include
conducting the strategic marketing audit, selecting perIormance criteria and measures, determining
inIormation needs and analysis, evaluating perIormance, and taking needed actions to keep
perIormance on track.

The marketing plan guides implementation and control, indicating marketing objectives and the
strategy and tactics Ior accomplishing the objectives. Since Chapter 2 presents a step-by-step
planning process, we brieIly consider several planning issues and oIIer examples oI marketing
planning activities. Our perspective at this stage is more on implementation than analysis:
A written plan is a key step in ensuring the eIIective execution oI a strategic marketing program
because it spells out what actions are to be taken, when and by whom.
2
-
The relationships between marketing strategy and the annual marketing plan are shown in
Exhibit 15.1. The planning cycle is continuous. Plans are developed, implemented, evaluated, and
revised to keep the marketing strategy on target. Since a strategy typically extends beyond one
year, the annual plan is used to guide short-term marketing activities. The planning process is a
series oI annual plans guided by the marketing strategy. An annual planning period is necessary,
since several oI the activities shown require action within 12 months or less and budgets also
require annual planning.
A look at the marketing planning process used by a large pharmaceutical company illustrates
how planning is done. This process is described in Exhibit 15.2.
-
An outline Ior developing the marketing plan is presented in Chapter 2. Many plans Iollow
this general Iormat. An executive summary provides top management and other executives not
closely involved in implementation with an overview oI the plan. The summary outlines the current
situation, indicates marketing objectives, summarizes strategies, outlines action programs, and
indicates Iinancial expectations.
3

-

-
Implementing and Managing Market-Driven Strategies
The marketing plan outline Ior Sonesta Hotels is shown in Exhibit 15.3. The activities include
making the situation assessment, setting objectives, developing targeting and positioning strategies,
deciding action programs Ior the marketing-mix components, and preparing supporting Iinancial
statements (budgets and proIit-and-loss projections).
The typical planning process involves considerable coordination and interaction among Iunc-
tional areas. Team planning approaches like the pharmaceutical companys planning workshop
are illustrative (Exhibit 15.2). SuccessIul implementation oI the marketing plan requires a broad
consensus among various Iunctional areas.
4
Eor example, a consensus is essential between product
managers and sales management. Collaboration between product managers and sales managers is
essential to provide sales coverage Ior the product portIolio. Multiple products require negotiation
in reaching agreement on the amount oI sales Iorce time devoted to various products. Recall the
Chapter 14 discussion oI the importance oI eIIorts to secure the integration oI marketing with other
Iunctions and units in the organization, and approaches to achieving this.
--
Planning is an organizational process in which interactions and discussions between executives
shape outcomes. Planning involves more than analytical techniques and computation. Research
suggests that problems Iaced in making marketing planning eIIective may be addressed by
considering the behavior oI executives in conducting planning and the organizational context in
which planning is done, as well as by Iormal training in planning techniques and procedures.
5
An
eIIective planning process is closely linked to successIul implementation oI plans. Exhibit 15.4
shows the planning process as having three dimensions: analytical, behavioral and organizational,
which should be managed consistently.
The analytical dimension oI planning process consists oI the tools Ior systematic planning
analytical techniques, Iormal procedures and systemswhich are needed to develop robust
and tested plans and strategies. The behavioral dimension oI planning is concerned with how
managers perceive planning activities and the strategic assumptions they make, as well as the
degree and extent oI participation in planning. Correspondingly, the organizational dimension oI
planning is concerned with the organizational structure in which planning is carried out, along
with the associated inIormation resources and corporate culture. One challenge to management
is to manage all these aspects oI the planning process in a consistent way.
The Innovation Eeature describes how a manager addresses planning process issues at an
SBU oI the 3M Corporation in the United Kingdom. It illustrates the advantages oI linking the
planning process to implementation issues.

--
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-
- - -- -
- - --
- - - - -
- - - -
- -
- - - - - -
-
- --
-- - -- - -

-

-
- -
Source: Adapted Irom Howard Sutton, 1he Marketing Plan in the 1990s (New York: The ConIerence Board, 1990), 3435. Reprinted with permission Irom The ConIerence Board.
- - - - - -
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--- -
-
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--- -
- - -
- -
--- - - - -
- -
- - -

- - --- - -
-
- -- - -

-- --- -

- - - - -
--- --- -
-- - -
-
- - - --

--
-

-

- - -- -
- - - - -- -
- -- - - - --
-
- - - -
- - --
- -
- - - -
- - - -

-

- - - --
-

--- - -
- -
- - - -

-
- -

-
- -

-

- - - --
-
-

- - - -

-
-
- - -- - -
- - - -
- --
- - -
-
- -
-
- - - - -- -- -
- - - -- -
- -
- - -
- -

Implementation eIIectiveness determines the outcome oI marketing planning. The management
oI the planning process may enhance implementation eIIectiveness by building commitment and
ownership oI the plan and its execution. Eor example, actively managing the participation oI
diIIerent Iunctions and executives Irom diIIerent specializations may improve the Iit between the

-


plan and the companys real capabilities and resources, and avoid implementation barriers.
Marketing managers may increasingly Iunction as boundary-spanners both internally between
Iunctional areas and externally with suppliers, organizational partners, and customers.
6
Additional
eIIorts to make the strategy implementation process more eIIective are a high priority in many
companies. Many companies now recognize that implementation capabilities are an important
corporate capability that requires detailed management attention.
7
--
Recent research underlines the inIluence oI two sets oI Iactors on marketing strategy implemen-
tation: structural issues, including the companys marketing Iunctions, control systems, and
policy guidelines, and behavioral issues, concerning marketing managers skills in bargaining
and negotiation, resource allocation, and developing inIormal organizational arrangements.
8
We
consider several organizational and interpersonal aspects oI eIIective implementation process.
A good implementation process spells out the activities to be implemented, who is respon-
sible Ior implementation, the time and location oI implementation, and how implementation will

- -
- - -
- --- - - --
- - - - ---
- - --
-
- - -
-
-
- -
- ---
- - --
--
- -
-- -

- - --
- -
-
-- - -

- - - - - --
-

- -
-- - - -- - -
- --
-- -
- -
-- -
-- -- - -
- -
--
-
- - -
- - - --
-
- -
-
-- -
- -
--
- -

-- -
- - -
-
-
-- -
- -- -
-- -
- - -
-
-
--
-- --
- - --
- -
-
-
-
--
--
- -

-

-
be achieved (Exhibit 15.5). Lets evaluate the Iollowing statement Irom a product managers
marketing plan:
Sales representatives should target all accounts currently using a competitive product. A plan
should be developed to convert 5 percent oI these accounts to the company brand during the year.
Account listings will be prepared and distributed by product management.
In this instance, the sales Iorce is charged with implementation. An objective (5 percent conver-
sion) is speciIied but very little inIormation is provided as to how the accounts will be converted.
A strategy is needed to penetrate the competitors customer base. The sales Iorce plan must
translate the proposed actions and objective (5 percent conversion) into assigned salesperson
responsibility (quotas), a timetable, and selling strategy guidelines. Training may be necessary
to show the product advantagesand the competitors product limitationsthat will be useIul
in convincing the buyer to purchase the Iirms brand.
The marketing plan can be used to identiIy the organizational units and managers that are respon-
sible Ior implementing the various activities in the plan. Deadlines indicate the time available Ior
implementation. In the case oI the plan above, the sales manager is responsible Ior implementation
through the sales Iorce.

Managers are important Iacilitators in the implementation process, and some are better imple-
menters than others. Planners and implementers oIten have diIIerent strengths and weaknesses. An
eIIective planner may not be good at implementing plans. Desirable implementation skills include:
The ability to understand how others Ieel, and good bargaining skills.
The strength to be tough and Iair in putting people and resources where they will be most
eIIective.
EIIectiveness in Iocusing on the critical aspects oI perIormance in managing marketing activities.
The ability to create a necessary inIormal organization or network to match each problem
with which they are conIronted.
9
Research underlines the importance oI engendering a sense oI role signiIicance among those
responsible Ior implementation.
10
In addition to skillIul implementers, several Iactors Iacilitate the
implementation process. These include organi:ational design, incentives, and effective communi-
cations. The Ieatures oI each Iactor are highlighted.
- Certain types oI organizational designs aid implementation. Eor exam-
ple, product managers and multiIunctional coordination teams are useIul implementation methods.

--
--
Nigel E. Piercy, Market-
Lead Strategic Change.
A Guide to 1ransforming
the Process of Going to
Market (OxIord:
Butterworth-Heinemann,
2002), 586.
Marketing
planning
process
Techniues
procedures
systems
planning models
Managerial perceptions
participation
strategic assumptions
Process
consistency
Structure
information
culture
Behavioral
process
dimension
Organizational
process
dimension
Analytical
process
dimension

-

-
Management may create implementation teams consisting oI representatives Irom the business
Iunctions and/or marketing activities involved. The Ilat, Ilexible organization designs discussed in
Chapter 14 oIIer several advantages in implementation, since they encourage interIunctional coop-
eration and communication. Recall also the Chapter 14 discussion oI venture marketing organiza-
tions as Iluid groupings applying venture capitalism principles to develop and implement strategies
around new opportunities. These designs are responsive to changing conditions.
As organizations shiIt Irom Iunctional to process structures, the resulting changes promise to
strengthen as well as complicate implementation strategies.
11
The use oI cross-Iunctional teams will
aid implementation activities. The challenges oI process deIinition, design, and management call Ior
new skills and a multiIunctional perspective, which will complicate implementation activities and
require careIul attention by management.
- Various rewards may help achieve successIul implementation. Eor example, special
incentives such as contests, recognition, and extra compensation are used to encourage salespeople
to push a new product. Since implementation oIten involves teams oI people, creation oI team
incentives may be necessary. PerIormance standards must be Iair, and incentives should encourage
something more than normal perIormance.
- Rapid and accurate movement oI inIormation through the organization is
essential in implementation. Both vertical and horizontal communications are needed in linking
together the people and activities involved in implementation. Meetings, status reports, and
inIormal discussions help to transmit inIormation throughout the organization. Computerized
inIormation and decision-support systems like corporate intranets help to improve communica-
tions speed and eIIectiveness.
Problems oIten occur during implementation and may aIIect how Iast and how well plans are put
into action. Examples include competitors actions, internal resistance between departments, loss oI
key personnel, supply chain delays aIIecting product availability (e.g., supply, production, and
distribution problems), and changes in the business environment. Corrective actions may require
appointing a person or team Ior troubleshooting the problem, increasing or shiIting resources, or
changing the original plan.

One interesting approach to enhancing strategy implementation eIIectiveness is the adoption oI
internal marketing methods. Internal marketing involves developing programs to win line manage-
ment support Ior new strategies, to change the attitudes and behavior oI employees working at key

--
Activities
to be
implemented
Time and
location of
implementation
How
implementation
will be done
Responsibility
for
implementation

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points oI contact with customers, to gain the commitment oI those whose problem-solving skills are
important to superior execution oI the strategy. Exhibit 15.6 shows internal marketing and external
marketing programs as parallel outputs Irom the planning process. While external marketing
positions the strategy in the customer marketplace, internal marketing is aimed at the internal
customer within the company. Internal marketing goals may include promoting the external
marketing strategy and how employees contribute, develop better understanding between customers
and employees (regardless oI whether they have direct contact), and provide superior internal
customer service to support external strategy.
12
An internal marketing approach involves examining each element oI the external marketing
program to identiIy what changes will be needed in the companys internal marketplace and how
these changes can be achieved. II used as part oI the planning process, analysis oI the internal
marketplace can isolate organizational change requirements (e.g., new skills, processes, organiza-
tional structures), implementation barriers (e.g., lack oI support and commitment in key areas oI the
company), and new opportunities (by uncovering organizational capabilities otherwise overlooked).
13
Internal marketing is a promising way oI identiIying and resolving some oI the implementation
issues associated with the move Irom Iunctional to process-based organizational designs.
One developing aspect oI internal marketing is the opportunity to actively market plans and
strategies not only inside the company, but also with partner organizations and their employees.
Global advertising business, WPP, has targeted internal marketing as the Iastest growth area Ior
marketing services.
14
EIIective implementation may rest also on company-wide eIIorts to put
marketing plans and strategies into eIIect. The Cross-Eunctional Eeature describes the operation
oI internal marketing at Southwest Airlines.
-
One comprehensive way to deal with diIIiculty in the implementation oI the marketing plan is
to employ the balanced scorecard method.
15
This process is a Iormalized management control
system that implements a given business-unit strategy by means oI activities across Iour areas:
Iinancial, customer, internal business process, and learning and growth (or innovation).
The balanced scorecard was created by Kaplan and Norton in reaction to the diIIiculties that
many managers experienced when trying to implement a particular strategy. A strategy is oIten not
deIined in a manner that describes how it might be achieved. Merely communicating the strategy
to employees does not provide any instruction as to what actions they must take to help achieve the
strategy. More importantly, managers might even take action to the detriment oI other areas in an
organization when attempting to implement the strategy. The balanced scorecard provides a Irame-
work to minimize such an occurrence by encouraging implementation oI a common strategy,
which is communicated and coordinated across all major areas oI the organization. The balanced

Source: Reprinted Irom

Market-Led Strategic
Change. A Guide to
1ransforming the Process
of Going to Market,
Nigel E. Piercy,
Copyright 2001,
with permission
Irom Elsevier.
Plan
nternal
marketing
program
Targeted at key
groups in the
company, alliance
partner companies,
and other influencers
Targeted at key
customers, segments
and niches, and other
external influencers
Strategy
External
marketing
program

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component oI the balanced scorecard reIlects the need to consider how all areas oI the organiza-
tion Iunction together to achieve a common goal oI strategy implementation.
The major beneIit oI the balanced scorecard is that an oIten aggregate, broadly deIined strategy
is translated to very speciIic actions. Through execution and monitoring oI these actions, manage-
ment can assess the success oI the strategy and also modiIy and adjust the strategy iI necessary.
Another major beneIit oI the balanced scorecard methodology is that it is Ieasible Ior any business-
unit-level strategy and provides a means to link perIormance evaluation to strategy implementation.
Eor example, the marketing plan outline in Exhibit 15.3 Ior Sonesta Hotels can be adapted to the
balanced scorecard Iormat. The marketing plan Ior Sonesta Hotels is designed to achieve speciIic
objectives through a set oI strategies. In Part VII, A.3., the most diIIicult area is determining which
activities will lead to achieving market segment objectives and ensuring that activities in the sales
area do not interIere with activities in another area. The balanced scorecard approach allows
consideration oI speciIic sales activities, which will accomplish the objective but also Iormally
includes an assessment oI the strategy component (Part A.2.) across all aspects oI the business
unit at the same time. This assessment is more Iorward Iocused than concentrating only on sales,
advertising, and public relations. It also helps to include perIormance measures and targets that are
more long-term oriented and are not solely Iinancially based. ThereIore, a consideration oI sales
activities to execute a marketing strategy would also involve how these activities aIIect Iour major
areas oI the company: (1) the Iinancial perspective; (2) the customer; (3) internal business processes;
and (4) learning and growth. This integrated assessment would consider how the strategy would
aIIect all major areas oI the company and what perIormance indicators should be monitored in each
oI the Iour major areas. In this manner, it is much easier to integrate the marketing plan with the
overall business strategy.

It is important that the organizations competitive and marketing strategy be compatible with the
internal structure oI the business and its policies, procedures, and resources.
16
Several internal
Iactors that may impact the implementation oI marketing strategy are shown in Exhibit 15.7. These
Iactors include higher-level corporate and business strategies, SBU and corporate relationships
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(e.g., extent oI autonomy), the SBUs internal organization structure and coordination mechanisms,
and the speciIic actions programmed in the marketing plan.
Coping with the inIluence oI these Iactors during implementation requires close coordination
oI the strategies at the Iour levels shown in Exhibit 15.7. Marketing plans must be compatible with
this internal structure. Otherwise implementation and perIormance are constrained. Eor example,
a major objective oI the marketing-planning process oI the pharmaceutical company discussed
earlier is to identiIy, communicate, and respond to issues and concerns at these Iour levels.
The importance oI internal Iit is shown by Hennes and Mauritz (H&M), the largest apparel
retailer in Europe and a highly successIul global Iashion business. H&M sells cheap chicvery
new, very extreme, very cheap Iashion clothes to younger buyers. As well as outsourcing manu-
Iacturing to a huge network oI garment shops in low-wage locations, H&M is run on principles
oI Irugality internally as well. Overheads are minimized everywhereexecutives rarely Ily
business class; taking cabs is Irowned upon; all employee cell phones were taken away in the
1990s and even now only a Iew key employees have them. The Iit between H&Ms strategy and
positioning, and its internal culture and management approach may help explain its success.
17

Encouraging and Iacilitating a market orientation throughout the business is an important respon-
sibility oI marketing management. The chieI executive oIIicer oI a large transportation services
company states that the marketing and operations Iunctions are the customer-service components
oI the Iirm, and that the role oI accounting, Iinance, human resources, and inIormation systems is
to support customer service activities. He emphasizes that the supporting Iunctions are evaluated
on the basis oI how eIIectively they meet the needs oI marketing and operations. Since the entire

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Source: Harper W. Boyd,

Jr., and Orville C. Walker,
Jr., Marketing Management
(Burr Ridge, IL: Richard
D. Irwin, 1990), 826.
Copyright The
R&D Manufacturing Finance
Marketing
policies and
strategies
Marketing
plans for
individual
product-market
entries
SBUs
organization
structure;
interfunctional
coordination
processes
CorporateSBU
relationship
SBUs
strategy
Corporate
strategy
External
environment
SBUs
performance

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organization is concerned with delivering customer satisIaction, this CEOs operating philosophy
encourages (and rewards) a customer-driven approach throughout the organization.
One oI the major challenges Ior marketing executives is spreading the customer message
throughout the company, its partners in alliances and networks, and its suppliers. The reality oI
integration may require nothing less.
18
- - - A key issue in developing a market orientation throughout the organi-
zation is convincing every employee that customer satisIaction is a shared responsibility. Training
programs are used to achieve this objective. The starting point is getting the entire management
team to recognize its role and responsibility Ior market-oriented leadership. Customer advisory
groups are sometimes used in developing an internal awareness about the importance oI the
marketplace. MultiIunctional (e.g., Iinance, marketing, operations) teams or task Iorces may also
be helpIul integrating methods.
Both the characteristics and culture oI an organization aIIect the development oI a market orien-
tation. Small companies achieve this integration more easily than large, multilayered corporations.
The corporate culture may aid or constrain integration. Managers oI nonmarketing Iunctions must
be encouraged to recognize the importance oI meeting customer needs through their activities. A
strong commitment and active participation by the chieI executive oIIicer are essential to integrate
marketing into the thinking and actions oI everyone in the Iirm. The chieI executive oIIicer oI
Southwest Airlines has been very successIul in achieving this objective (Cross-Eunctional Eeature).
The airline is a customer-driven organization.

The implementation oI marketing strategy is aIIected by external organizations such as strategic
alliance partners, marketing consultants, advertising and public relations Iirms, channel members,
and other organizations participating in the marketing eIIort. These outside organizations present a
major coordination challenge when they actively participate in marketing activities. Their eIIorts
should be identiIied in the marketing plan and their roles and responsibilities clearly established and
communicated. There is a potential danger in not inIorming outside groups oI planned actions, dead-
lines, and other implementation requirements. Eor example, the organizations advertising agency
account executive and other agency staII members need to be Iamiliar with all aspects oI promotion
strategy as well as the major aspects oI marketing strategy (e.g., market targets, positioning strate-
gies, and marketing-mix component strategies). Withholding inIormation Irom participating Iirms
hampers their eIIorts in strategy planning and implementation.
The development oI collaborative relationships between suppliers and producers improves
implementation. Supply chain management strategies encourage reducing the number oI suppliers
and building strong relationships (see Chapter 10). We noted earlier that internal marketing is
playing a growing role in sustaining alliance and network-based organizations based on partnering.
Companies that are eIIective in working with other organizations are likely to also do a good job
with implementation inside the organization, since they have skills in developing eIIective working
relationships. Total quality programs also encourage internal teamwork among Iunctions.
II the balanced scorecard approach is used in con-
junction with a market orientation, some modiIication may be necessary.
19
The balanced scorecard
advocates measures oI perIormance across Iour main areas, which should remain in balance.
However, many companies seeking a market orientation do so through emphasis on a particular core
competency. These competencies may range Irom product or brand leadership to a strong customer
Iocus. Consequently, companies with such a strong Iocus on an area oI primary importance will
continue to need a more extensive set oI perIormance measures in those areas even with adoption
oI the balanced scorecard approach. Thus, a company competing on the basis oI product leadership
is dependent upon continual innovation to retain a strong market presence. Some advocate that
in this case, the balanced scorecard should not be balanced and an emphasis should be placed on
the innovation perspective. Similarly, other perspectives may be emphasized according to the
organizations core competency.

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Even with an unbalanced approach the balanced scorecard methodology assists in linking
business strategy to actions. With a Iormalized consideration oI all major areas in the business,
it is more likely that appropriate perIormance measures can be created and that important areas
will not be overlooked.

Marketing strategy has to be responsive to changing conditions. Evaluation and control keep the
strategy on target and show when adjustments are needed. The relentless pursuit oI cost reduction
and enhanced customer value through strategy adjustments is a reality Ior businesses/companies
competing in the 21st century:
Eor every line item in a marketing budgetproduct development costs, advertising and promotional
expenses, costs Ior salespeople, and so onspeciIic and measurable standards oI perIormance must
be set so that each oI these elements oI marketing perIormance can be evaluated.
20
Strategic evaluation requires analyzing inIormation to gauge perIormance and taking the actions
necessary to keep results on track. Managers need to continually monitor perIormance and, when
necessary, revise their strategies due to changing conditions. Strategic evaluation, the last stage in
the marketing strategy process, is really the starting point. Strategic marketing planning requires
inIormation Irom ongoing monitoring and evaluation oI perIormance. Discussion oI strategic
evaluation has been delayed until now in order to Iirst consider the strategic areas that require

Sources: Roger
D. Blackwell, From Mind
to Market (New York:
HarperBusiness, 1997),
188189; Todd
Wasserman, Gerry
Khermouch, and
JeII Green, Mining
Everybodys Business,
Brandweek, Eebruary 28,
2000, 3236; Russell
S. Winer, A Eramework
Ior Customer Relationship
Management. California
Management Review 43,
no. 4 (2001), 89105.
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evaluation and to identiIy the kinds oI inIormation needed Ior assessing marketing perIormance.
Thus, the Iirst 14 chapters establish an essential Ioundation Ior building a strategic evaluation
program. We now examine the impact oI Customer Relationship Management systems, an over-
view oI evaluation activities, and the role oI the strategic marketing audit.
- -
Recall that the widespread adoption oI customer relationship management (CRM) systems to
integrate all customer data Irom diIIerent sources, in combination with electronic point-oI-sale
customer data capture, oIIers several new and powerIul resources Ior strategic evaluation and
control (see Chapter 7 Appendix). Eor example, data mining is becoming an important tool Ior
improving marketing strategies. Penetrating analysis oI databases may reveal important
purchasing patterns and the eIIect oI marketing actions. Exhibit 15.8 illustrates this use oI new
data sources. Data mining applications indicate the important role oI inIormation technology in
marketing strategy implementation and control.
The ability to identiIy proIitability at the level oI the individual customer by combining CRM and
purchase data with other databases is becoming an especially important capability oI strategic app-
raisal Ior marketing management. Together with growing emphasis on customer retention rather
than just acquisition, a Iocus on customer liIetime value is important in guiding management deci-
sions and evaluating the eIIectiveness oI marketing strategy. CRM systems have the potential to
greatly expand the measures oI perIormance used, and to take a more Iine-grained look at marketing
eIIectiveness related to customer acquisition and deIection rates, customer tenure, customer value
and worth, proportion oI inactive customers, and cross-selling.
21
The availability oI CRM inIorma-
tion is making new types oI evaluation and control measurements available Ior management to
assess the added-value achieved by marketing investments. We discuss marketing metrics Iurther
below.
An illustration oI the powerIul linkages between marketing inIormation Ior evaluation and review
and innovative strategies and organizational change is provided by the Whirlpool Corporation. This
companys use oI CRM data to drive a strategy oI customer Iocus in a previously product-driven
organization is described in the Strategy Eeature.
-
Evaluation consumes a high proportion oI marketing executives time and energy. Evaluation
may seek to (1) Iind new opportunities or avoid threats, (2) keep perIormance in line with man-
agements expectations, and/or (3) solve speciIic problems that exist.
An example oI a threat identiIied via product-market analysis Ior an apparel company is the
shiIt away Irom wearing suits and more Iormal business attire toward sports clothing. These
changes in preIerences are major threats Ior companies that produce mens suits. Similarly,
Royal Doulton is a premier brand oI Iormal chinaware, Iamed Ior its expensive dinnerplates,
which saw its sales Ialling at 20 percent a year in the late-1990s, because oI the move by con-
sumers toward inIormal dining, and managements inability to reposition the brand. Closely
tracking innovation in Web applications and earnings Irom acquisitions at Cisco Systems Inc. is
an example oI inIormation to keep perIormance in line with management expectations. Einally,
evaluating the eIIectiveness oI alternative TV commercials is an example oI solving speciIic
problems.
Areas oI evaluation include environmental scanning, product-market analysis, brand equity
analysis, marketing program evaluation, and gauging the eIIectiveness oI speciIic marketing mix
components such as advertising. The major steps in establishing a strategic evaluation program
are described in Exhibit 15.9. Strategic and annual marketing plans set the direction and guide-
lines Ior the evaluation and control process. A strategic marketing audit may be conducted when
setting up an evaluation program, and periodically thereaIter. Next, perIormance standards and
measures need to be determined, Iollowed by obtaining and analyzing inIormation Ior the purpose
oI perIormance-gap identiIication. Actions are initiated to pursue opportunities or avoid threats,
keep perIormance on track, or solve a particular decision-making problem.

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A marketing audit is useIul when initiating a strategic evaluation program. Since evaluation
compares results with expectations, it is necessary to lay some groundwork beIore setting up a
tracking program. This complete review and assessment oI marketing operations is similar in
some respects to the situation analysis discussed in Part Two. However, the marketing audit goes
beyond customer and competitive analysis to include all aspects oI marketing operations. The
audit is larger in scope than the situation analysis and is a more complete review oI marketing
strategy and perIormance. The audit can be used to initiate a Iormal strategic marketing planning

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Conduct strategic
marketing audit
Select performance
criteria and measures
Obtain and
analyze information
Assess performance and
take necessary action

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program, and it may be repeated on a periodic basis. Normally, the situation analysis is part oI
the annual development oI marketing plans. Audits may be conducted every three to Iive years,
or more Irequently in special situations (e.g., acquisition/merger).
A guide to conducting the strategic marketing audit is shown in Exhibit 15.10. This Iormat
can be adapted to meet the needs oI a particular Iirm. Eor example, iI a company does not use
indirect channels oI distribution, this section oI the audit guide will require adjustment.
Likewise, iI the sales Iorce is the major part oI a marketing program, then this section may
be expanded to include other aspects oI sales Iorce strategy. The items included in the audit
correspond to the strategic marketing plan because the main purpose oI the audit is to appraise
the eIIectiveness oI strategy being Iollowed. The audit guide includes several questions about
marketing perIormance. The answers to these questions are incorporated into the design oI the
strategic tracking program.
There are other reasons besides starting an evaluation program Ior conducting a strategic
marketing audit. Corporate restructuring may bring about a complete review oI strategic market-
ing operations. Major shiIts in business activities such as entry into new product and market areas
or acquisitions may require strategic marketing audits. The growing impact oI Internet-based
business models may also encourage management to undertake an audit.
-
The next two stages in the evaluation and control process (Exhibit 15.9) are (1) selecting the
perIormance criteria and the measures to be used Ior monitoring perIormance, and (2) identiIying
the inIormation management needs to perIorm various marketing control activities.
--
As marketing plans are developed, perIormance criteria need to be selected to monitor perIor-
mance. SpeciIying the inIormation needed Ior marketing decision making is important and
requires managements concentrated attention. In the past, marketing executives could develop
and manage successIul marketing strategies by relying on intuition, judgment, and experience.
SuccessIul executives in the 21st century need to combine judgment and experience with inIor-
mation and decision support systems. Similarly, the balanced scorecard approach is used by many
companies to help select perIormance measures that are linked to strategy. InIormation systems

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are increasingly important in gaining a strategic edge in industries such as airline services, direct
marketing, packaged Ioods, wholesaling, retailing, and Iinancial services.
The purpose oI objectives is to state the results that management is seeking and also provide
a basis Ior evaluating the strategys success. Objectives set standards oI perIormance. Progress
toward the objectives in the strategic and short-term plans is monitored on a continuing basis. In
addition to inIormation on objectives, management requires other kinds oI Ieedback Ior use in
perIormance evaluation. Some oI this inIormation is incorporated into regular tracking activities
(e.g., the eIIectiveness oI advertising expenditures). Other inIormation is obtained as the need
arises, such as a special study oI consumer preIerences Ior diIIerent brands.
Examples oI perIormance criteria are discussed in several chapters. Criteria should be selected
Ior the total plan and its important components. Illustrative criteria Ior total perIormance include
sales, market share, proIit, expense, and customer satisIaction targets. Brand-positioning map
analyses may also be useIul in tracking how a brand is positioned relative to key competitors.
These assessments can be used to gauge overall perIormance and Ior speciIic market targets.
PerIormance criteria are also needed Ior the marketing mix components. Eor example, new
customer and lost customer tracking is oIten included in sales Iorce perIormance monitoring.
Pricing perIormance monitoring may include comparisons oI actual to list prices, extent oI
discounting, and proIit contribution. Since many possible perIormance criteria can be selected,
management must identiIy the key measures that will show how the Iirms marketing strategy is
perIorming in its competitive environment and point to where changes are needed. Recall that the
growing impact oI CRM systems oIIers management access to a larger number oI perIormance
measures, particularly those relating to customer retention and deIection.
22
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The critical issue oI selecting appropriate perIormance criteria is also illustrated by renewed
attention given to the development oI marketing metrics, or measures oI the impact oI marketing
on the whole business, provided to senior management. The goal is to make better causal links
between marketing activities and Iinancial returns to the business.
23
Eor example, Shells large expenditure on sponsoring Eerrari in Eormula One motor racing
underlines the need Ior Iinancial justiIication Ior this expenditure. BeIore signing a new Iive-year
sponsorship contract, Shell management evaluated costs and beneIits in Iive ways:
Comparing attitudes toward the Shell brand oI those who were aware oI the Eerrari link, and
those who were not.
Examining change in purchasing behavior associated with shiIts in attitudes toward the brand.
Commissioning an independent evaluation oI brand value, including branding, sales, price
premium, and advertising eIIects.
Making country-by-country comparisonsdiIIerent Shell companies had merchandized
the sponsorship locally to varying extents, so iI the sponsorship was proIitable, those who
promoted it more should have obtained more beneIit.
Surveying manager opinion and their ratings oI the impact oI the sponsorship on return on
investment.
AIter top management review, Shell approved the new Iive-year contract Ior the sponsorship as
an important part oI the companys marketing strategy.
24
Tim Ambler, oI London Business School, proposes the Iollowing questions to assess iI a
companys marketing tracking system, or perIormance measures, are adequate:
Are the results reported to senior management regularly?
Are the results compared with the Iorecast levels in business plans?
Are they compared with key competitors using the same indicators?
Is short-term perIormance adjusted to allow Ior changes in market-based assets?

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Is consumer behavior (purchase, Irequency, retention, usage) researched and the drivers oI
behavior understood and monitored (e.g., satisIaction and brand awareness)?
25
In Amblers research into marketing metrics, the most important marketing metrics used
by companies are: relative perceived quality; loyalty/retention; total number oI customers;
customer satisIaction; relative price (market share/volume); market share (volume or value);
perceived quality/esteem; complaints (level oI dissatisIaction); awareness; and distribution/
availability.
26
Conclusions about the types oI metrics that may be useIul are shown in
Exhibit 15.11.
Importantly, metrics should be chosen to reIlect strategic priorities and the issues most
closely linking marketing investments with proIits. Eor example, Ior monitoring external market
perIormance, Iootwear retailer Payless ShoeSource uses two types oI marketing metrics:
(1) spending eIIiciency and eIIectiveness (e.g., ROI by advertising medium, advertising to sales
spending ratios), and (2) business building (e.g., customer traIIic, ratio oI loyal to new
customers). On the other hand, at Iood company Cadbury Schweppes, in the Managing Ior Value
program, key measures include: perIormance against strategic milestones; market share,
advertising spending, brand and advertising awareness, average purchases, and percent oI total
volume Irom new products.
27
Many major organizations are developing new sets oI metrics to
give top management better insight into perIormance against competitors and the value achieved
Irom marketing investments.

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Sources: Adapted Irom
Tim Ambler, Marketing
Metrics, Business
Strategy Review 11, no. 2,
2000, 5968. Tim Ambler,
Marketing and the Bottom
Line. 2nd ed. (Hemel
Hempstead: Prentice Hall,
2003).
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The costs oI acquiring, processing, and analyzing inIormation are high, so the potential beneIits oI
needed inIormation must be compared to costs. Normally, inIormation Ialls into two categories:
(1) inIormation regularly supplied to marketing management Irom internal and external sources,
and (2) inIormation obtained as needed Ior a particular problem or situation. Examples oI the
Iormer are sales and cost analyses, market share measurements, and customer satisIaction surveys.
Recall the growing impact oI CRM systems in enhancing the availability oI this type oI inIorma-
tion. InIormation Irom the latter category includes new-product concept tests, brand-preIerence
studies, and studies oI advertising eIIectiveness.
Several types oI inIormation may be needed by management. InIormation Ior strategic planning
and evaluation can be obtained Irom these sources:
1. The internal information system is the backbone oI any strategic evaluation program. These
systems range Irom primarily sales and cost reports to highly sophisticated computerized
marketing inIormation systems and CRM/datamining technology.
2. Standardi:ed information services are available by subscription or on a one-time basis, oIten
at a Iraction oI the cost oI preparing such inIormation Ior a single Iirm. Nevertheless, these
services are expensive. Standardized services are available in both printed Iorm and in data
Iiles Ior computer analysis. Nielsens TV rating data service is an example.
3. Marketing managers may require special research studies. A study oI distributor opinions
concerning a manuIacturers services is an example.
4. The Iirms strategic intelligence system is concerned with monitoring and Iorecasting
external, uncontrollable Iactors that inIluence the Iirms product-markets. These eIIorts
range Irom Iormal inIormation activities to inIormal surveillance oI the marketing
environment.
Sources and types oI marketing inIormation are discussed in Chapter 5.
----
The last stage in the marketing evaluation and control process is determining how the actual
results compare with planned results. When perIormance gaps are too large, corrective actions
are taken.
- -
Strategic evaluation activities seek to (1) identiIy opportunities or perIormance gaps, and
(2) initiate actions to take advantage oI the opportunities or to correct existing and pending
problems. Strategic intelligence, internal reporting and analysis activities, standardized
inIormation services, and research studies supply the inIormation needed by marketing decision
makers.
The real test oI the value oI the marketing inIormation system is whether it helps marketing
management to identiIy problems. In monitoring, there are two critical Iactors to take into
account:
Strategic analysis should lead to a clear explanation
oI an opportunity or problem since this will be needed to guide whatever strategic action
may be taken. OIten it is easy to conIuse problem symptoms with problem causes.
Management must also separate normal variations in
perIormance Irom signiIicant gaps in perIormance, since the latter are the ones that require
strategic action. Eor example, how much oI a drop in market share is necessary to signal a
perIormance problem? Limits need to be set on the acceptable range oI strategic perIormance.

-

-
No matter how extensive the inIormation system may be, it cannot interpret the strategic impor-
tance oI the inIormation. This is the responsibility oI management.
28
An illustration oI opportunity monitoring is provided by the emergence oI concerns about
environmental and green issues in many countries.
Environmental concerns are ongoing areas oI strategic evaluation. Companies must
identiIy important areas oI concern and implement strategies that take into account consumer,
public policy, and organizational priorities. Surprisingly, European consumers appear to be
changing their priorities about eco-Iriendly products,
29
while in the United States, polls
suggest in 2001 that only 50 percent oI Americans considered themselves to be environmen-
talists, as compared to 76 percent in 1989.
30
Buyers may not be willing to pay a premium Ior
green products.
Several explanations are oIIered Ior these changes including lower perIormance, higher
prices, and environmentally responsible regular products. British supermarket chain Iceland
decided in 2000 to move totally to organic produce in its own-label products, to make organic
Iood part oI mass market grocery shopping, in line with the growth oI sales oI this type oI
produce. In 2001, Iollowing a 6 percent Iall in sales and loss oI one-IiIth oI the companys
market value, the decision was reversed. Icelands largely blue-collar consumers did not Iind
organic products appealing and objected to having the choice taken away. Philips, the European
electronics multinational, claims that its success in marketing green products is based on
understanding the need to link green product attributes like energy reduction, materials reduction
and toxic substance reduction, with other consumer beneIits (e.g., lower costs, convenience,
higher quality oI liIe).
31
Company experiences with the paradoxes oI consumer attitudes toward the purchase oI green
products underline the importance oI extremely careIul interpretation oI the available evidence
beIore decisions are made, and continuous monitoring oI changes. Nonetheless, major changes
in perceptions oI environmental responsibility may also create important opportunities. The
change in direction at InterIaces Inc. described in the Ethics Eeature is an interesting example
oI a CEO combining his environmental and ethical judgment with responsiveness to customer
concerns eIIectively.
In a quite diIIerent sector, John Browne running BP, the worlds largest oil company, is happy
to be cast as the green oilman. Brownes strategy oI bold acquisitions and mergers, backed by
insightIul public relations eIIorts, has put BP at the IoreIront oI the global energy industry. BP has
branded itselI the green energy company with its imaginative Beyond Petroleum advertising.
Notwithstanding Browne being awarded an Earth Day Oscar by Greenpeace Ior Best Impression
oI an Environmentalist, BP Iaces signiIicantly Iewer problems with the environmental lobby
than rival Exxon.
32

Operating results such as sales, market share, proIits, order-processing time, and customer satis-
Iaction display normal up and down Iluctuations. The issue is determining whether these variations
represent random variation or instead are due to special causes. Eor example, iI a salespersons
sales over time remain within a normal band oI variation, then the results are acceptable under the
present operating conditions. Random high and low variations do not indicate unusually high or
low perIormance. II this range oI perIormance is not acceptable to management, then the system
must be changed. This may require salesperson training, redesign oI the territory, improvement in
sales support, or other changes in the salespersons operating system.
Statistical process-control concepts and methods are useIul in determining when operating
results are Iluctuating normally or instead are out oI control. Quality control charts can be used
to analyze and improve results in marketing perIormance measures such as the number oI orders
processed, customer complaints, and territory sales.
33
Control-chart analysis indicates when the
process is experiencing normal variation and when the process is out oI control.

-

-
The basic approach to control-chart analysis is to establish average and upper and lower con-
trol limits Ior the measure being evaluated. Examples oI measures include order-processing time,
district sales, customer complaints, and market share. Control boundaries are set using historical
data. Euture measures are plotted on the chart to determine whether the results are under control or
instead Iall outside the acceptable perIormance band determined by the upper and lower control
limits. The objective is to continually improve the process that determines the results.
-
Many corrective actions are possible, depending on the situation. Managements actions
may include exiting Irom a product-market, new-product planning, changing the target-market
strategy, adjusting marketing strategy, or improving eIIiciency.
An illustration shows how strategic evaluation and control guide corrective action. Consider,
Ior example, Nokia in Einland with unequaled brand recognition and distribution channels in the
electronics sector, and huge purchasing power and manuIacturing skills (see Case 1-1). In 2004,
Nokia shocked investors by announcing a slow down in sales growth, and that market share had
dropped below 30 percent Ior the Iirst time.
34
The warning indicators Irom the market were that while Nokia is still number 6 in the Interbrand
survey oI brands, there are some signs it is slipping in consumer surveys. Compared to rivals
Samsung and Sony Ericsson, Nokias phones are seen as dowdy, uninspired, and unIashionable
and the portIolio lacks a clamshell (Ilip-top) phone. The company was looking at a massive
21 percent drop in its average selling price. Eurthermore, growth in the global mobile phone market
is slowing. At the same time, basic wireless technology is becoming commoditizedaverage prices
Ior phones are Ialling 4 percent annually. Commoditization opens the way Ior new low-cost
competitors to enter the market.
In addition, Nokias strengths in producing huge volumes oI standardized phones is not set up
to cope with increasing demands Irom operators Ior highly customized handsets. The company
has been consistently late to market with new technologies, such as cameras, color screens, and
Iast data transIer rates.
Nokia management moved quickly to cut prices on selected handsets to hold market share,
but then to address the larger issues emerging Irom their analysis oI the market:
-
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--
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-

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--
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-- - -
-- --- -
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-- -- -
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The challenge Ior Nokia is regaining market share and proIit margins by Iinding a way out oI
the commoditized handsets business. The company has been through such turbulence beIore and
emerged stronger.
Managing in a changing environment is what strategic marketing is all about. Responding to
and anticipating change are the essence oI evaluation and control. Executives develop innovative
marketing strategies and monitor their eIIectiveness, altering the strategies as a result oI changing
conditions.
Marketing strategy implementation and control are vital links

in a series oI strategic marketing activities. These actions
emphasize the continuing process oI planning, implementing,
evaluating, and adjusting marketing strategies. Strategic
evaluation oI marketing perIormance is the Iirst step in
strategic marketing planning and the last step aIter launching a
strategy. The objective is to develop an approach to strategic
evaluation, building on the concepts, processes, and methods
developed in Chapters 1 through 14. Strategic evaluation is
one oI marketing managements most demanding and
time-consuming responsibilities. While the activity lacks the
glamour and excitement oI new strategy development,
perceptive evaluation oIten separates the winners Irom
the losers. The management oI successIul companies
anticipate and respond eIIectively to changing conditions and
pressures. Regular strategic evaluation processes guide these
responses.
Marketing strategy implementation and control are guided by
the marketing plan and budget (Exhibit 15.1). The plan indicates
the activities to be accomplished, how this is to be done, and
the costs. The planning process moves into action through the
annual marketing plan. It shows the activities to be implemented,
responsibilities, deadlines, and expectations. Growing attention
is being given to the management oI planning process Ior eIIec-
tive strategy implementation, emphasizing not only analytical
approaches, but also the commitment oI managers to planning
and the necessary organizational support.
Implementation (Exhibit 15.4) makes the plan happen.
Many companies are concerned with enhancing implementa-
tion eIIectiveness. Organizational design, communications,
and internal marketing may impact on implementation
eIIectiveness. The balanced scorecard is a promising approach
to coordinating a comprehensive approach to improving
marketing implementation.
Much oI the actual work oI managing involves strategic
and tactical evaluation oI marketing options. Yet perIorming
this Iunction depends greatly on managements under-
standing oI the planning process and the decisions that Iorm
plans. Strategic evaluation is a continuing cycle oI making
plans, launching them, tracking perIormance, identiIying
perIormance gaps, and initiating problem-solving actions. In
accomplishing strategic evaluation, management must select
perIormance criteria and measures and then set up a tracking
program to obtain the inIormation needed to guide evaluation
activities. The choice and tracking oI perIormance measures is
increasingly impacted by the adoption oI customer relationship
management (CRM) systems. As an initial step in the strategic
evaluation program (and periodically thereaIter), a strategic
marketing audit provides a useIul basis Ior developing the
program.

-

-
-
A. Review the Ethics Eeature describing the environmental
strategy implemented at InterIaces Inc. List the attractions
Irom a marketing perspective oI adopting an environmen-
tally responsible position. Discuss whether companies
can undertake environmental initiatives unless there is a
commercial advantage.
B. Read the Cross-Eunctional Eeature describing the internal
marketing eIIorts at Southwest Airlines. Do happy
employees always mean happy customers? IdentiIy and
list situations where you do not believe that this is true.
-
A. Visit the Web site Ior 1-800-ELOWERS (www.1800
flowers.com). How does this company employ its Web site
to adapt to a constantly changing environment?
B. Enter the phrase marketing implementation into your
search engine and review the Iirst 20 sites indicated. View
several oI those representing consultants and agencies
oIIering products and services to support marketing imple-
mentation. Which sound likely to be eIIective? What role,
iI any, can external agencies play in developing eIIective
marketing strategy implementation initiatives?
It is so easy Ior practicing managers to become preoccupied
with day-to-day activities, neglecting to step back and review
overall operations. The development oI marketing metrics
reporting the added-value oI marketing to the whole company to
senior management supports this need Ior strategic review.
Regular audits and continuous monitoring oI the market and
competitive environment can prevent sudden shocks and can
alert management to new opportunities. Building on Iindings
Irom the strategic marketing audit, the chapter examines the
major steps in acquiring and using inIormation Ior strategic
analysis. While the execution oI the steps varies by situation,
they oIIer a useIul basis Ior guiding a strategic evaluation
program in any type oI Iirm. An important part oI this process is
setting standards Ior gauging marketing perIormance. These
standards help determine what inIormation is needed to monitor
perIormance.
-- ---
1. Discuss the similarities and diIIerences between strategic
marketing planning and evaluation.
2. What is involved in managing marketing planning as a
process? What issues should be addressed in managing plan-
ning process in a company manuIacturing high-technology
components Ior the automotive sector?
3. Selecting the proper perIormance criteria Ior use in tracking
results is a key part oI a strategic evaluation program.
Suggest perIormance criteria Ior use by a Iast-Iood retail
chain to monitor strategic marketing perIormance.
4. What justiIication is there Ior conducting a marketing
audit in a business unit whose perIormance has been very
good? Discuss.
5. Examination oI the various areas oI a strategic marketing
audit shown in Exhibit 15.7 would be quite expensive and
time consuming. Are there any ways to limit the scope oI
the audit?
6. Several kinds oI inIormation are collected Ior a strategic
marketing evaluation. Develop a list oI inIormation that
would be useIul Ior a strategic evaluation in a liIe insur-
ance company.
7. One oI the more diIIicult management control issues is
determining whether a process is experiencing normal
variation or is actually out oI control. Discuss how manage-
ment can resolve this issue.
8. What role can internal marketing play in enhancing the
eIIectiveness oI both planning and implementation?
9. How can the balanced scorecard methods assist managers
in their implementation eIIorts?
10. Discuss how management control diIIers Ior a strategic
alliance compared to internal operations.
11. What are the important Iactors that managers should take
into account to improve the implementation oI strategies?
12. Discuss the role oI customer relationship management
(CRM) and data mining in improving marketing planning,
implementation, and control activities.
-
1. This illustration is based on Quentin Hardy, What Makes
Cisco Run, Forbes, July 26, 2004, 6674. Peter Burrows,
Ciscos Comeback, BusinessWeek, November 24, 2003,
4248.
2. Orville C. Walker, Harper W. Boyd, John Mullins, and Jean-
Claude Larreche, Marketing Strategy. A Decision-Focused
Approach. 4th ed. (Burr Ridge IL: McGraw-Hill/Irwin,
2003), 319.

-

-
3. Donald R. Lehmann and Russell S. Winer, Analysis for
Marketing Planning. 4th. ed. (Homewood, IL: Richard
D. Irwin Inc., 1997), 1013.
4. Ibid., 57.
5. Nigel E. Piercy and Neil A. Morgan, The Marketing
Planning Process: Behavioral Problems Compared to
Analytical Techniques in Explaining Marketing Planning
Credibility, Journal of Business Research29, 1994, 167178.
6. Erederick E. Webster, The Euture Role oI Marketing in the
Organization, in Donald R. Lehmann and Katherine E. Jocz
(eds.), Reflections on the Futures of Marketing(Cambridge,
MA: Marketing Science Institute, 1997, 3966.
7. Nigel E. Piercy, Marketing Implementation: The Impli-
cations oI Marketing Paradigm Weakness Ior the Strategy
Execution Process, Journal of the Academy of Marketing
Science 26, no. 3, 1998, 222236. Nigel E. Piercy and Erank
V. Cespedes, Implementing Marketing Strategy, Journal of
Marketing Management 12, 1996, 135160.
8. Charles H. Noble and Michael P. Mokwa, Implementing
Marketing Strategies: Developing and Testing a Managerial
Theory, Journal of Marketing, October 1999, 5773.
9. Thomas V. Bonoma, Making Your Marketing Strategy
Work, Harvard Business Review, MarchApril 1984, 75.
10. Noble and Mokwa, 71.
11. David W. Cravens, Implementation Strategies in the
Market-Driven Strategy Era, Journal of the Academy of
Marketing Science, Summer 1998, 237238.
12. Dana James, Dont Eorget StaII in Marketing Plan,
Marketing News, March 13, 2000, 1011.
13. Nigel E. Piercy and Neil A. Morgan, Internal Marketing:
The Missing HalI oI the Marketing Programme, Long
Range Planning 24, no. 2, 1991, 8293.
14. . . . As Sorrell Starts Internal Marketing Drive, Marketing
Week, July 12, 2001, 10.
15. Robert S. Kaplan and David P. Norton, 1he Balanced
Scorecard (Boston: Harvard Business School Press, 1996).
16. This discussion is based on Harper W. Boyd Jr. and Orville
C. Walker Jr. Marketing Management (Homewood, IL:
Richard D. Irwin,1990), 824825.
17. Kerry Capell and Gerry Khermouch, Hip H&M,
BusinessWeek, November 11, 2002, 3942.
18. James Mac Hulbert, Noel Capon, and Nigel E. Piercy, 1otal
Integrated Marketing. Breaking the Bounds of the Function
(New York: The Eree Press, 2003).
19. See Slater, Stanley E., Eric M. Olson, and Venkateshwar
K. Reddy, Strategy-Based PerIormance Measurement,
Business Hori:ons, JulyAugust 1997, 3744, Ior a complete
discussion on the modiIication oI the balanced scorecard
approach necessary to achieve a market orientation.
20. Orville C. Walker, Harper W. Boyd, John Mullins, and Jean-
Claude Larreche, Marketing Strategy. A Decision-Focused
Approach. 4th ed. (Burr Ridge, IL: McGraw-Hill/Irwin,
2003), 332.
21. Lawrence A. Crosby and Sheree L Johnson, High PerIor-
mance Marketing in the CRM Era, Marketing Manage-
ment, September/October 2001, 1011.
22. Larry Yu, SuccessIul Customer-Relationship Manage-
ment, Sloan Management Review, Summer 2001, 1829.
23. Wayne R. McCullough, Marketing Metrics, Marketing
Management, Spring 2000, 64.
24. Marketers Still Lost in the Metrics, Marketing, August
10, 2000, 1517.
25. Tim Ambler, Marketing and the Bottom Line. 2nd ed.
(Hemel Hempstead: Prentice Hall, 2003).
26. Allyson L. Stewart-Allen, Marketing Metrics Ior Corporate
Boards, Marketing News, December 4, 2000, 14.
27. Tim Ambler, 2003.
28. An interesting evaluation oI providing decision makers
with support in the interpretation oI evidence is Iound in
D. V. L. Smith and J. H. Eletcher, 1he Art and Science of
Interpreting Market Research Evidence (Chichester:
Wiley, 2004).
29. Tara Parker-Pope, Europeans Environmental Concerns
Dont Make It to the Shopping Basket, 1he Wall Street
Journal, August 18, 1995, B3A.
30. Vadim Liberman, The Green Conundrum, Across the
Board, May/June 2001, 1718.
31. Jacquelyn A. Ottman, Green Marketing, In Business,
September/October 2000, 31.
32. Nelson D. Schwartz, Inside the Head oI BP, Fortune,
July 26, 2004, 5661.
33. James Mac Hulbert, Noel Capon, and Nigel E. Piercy,
1otal Integrated Marketing.
34. This account is based on Andy Reinhardt, Adeline Bonnet,
and Roger O. Crockett, Can Nokia Get the Wow Back?

-
A
Aaker, David A., 187n, 188n, 278,
290n, 291n
Abell, Derek E., 93n
Abramson, Michael L., 185n
Achrol, Ravi S., 187n, 213n, 214n,
413n, 421n
Adams, Chris, 314n, 315n
Ahlberg, Erik, 379n
Ahrenbring, Jan, 59
Ala-Pietila, Pekka, 57
Albright, Tom, 683n, 689n
Allchin, James E., 473
Allen, Jay, 547
Allen, Paul G., 16
Alpert, Mark I., 93n
Alsop, Ronald, 290n
Ambler, Tim, 440, 441n, 447n
Anderson, James C., 213n, 214n, 315n
Anderson, Ray C., 444
Angelmar, Reinhard, 515n
Anhalt, Karen Nickel, 507n
Ante, Spencer E., 302n, 474n, 589n
Antoine, Richard L., 612
Arens, William, 349n, 352n, 359n
Arndt, Michael, 44n, 249n, 550n
Arnold, Catherine, 139n, 147n
Assael, Henry, 123n
AuIreiter, Nora A., 414n, 421n
Avedon, Richard, 385
Azalbert, Thierry, 515n
B
Babbio, Lawrence T., 452
Bailey, Earl L., 95n
Baker, Sandra, 379n
Baker, Stephen, 58n, 59n
BaldauI, Sari, 57
Baldwin, Carliss Y., 213n
BalIour, Erederick, 335n
Ball, Deborah, 359n
Ballmer, Steven A., 396, 469472
Band, William, 421n
Bannon, Lisa, 315n
Barclay, Donald W., 596n, 670
Barker, Robert, 109n
Barr, Larry, 481490
Barr, Steve H., 147n
Barrett, Amy, 165n
Barrett, Craig R., 148, 169
Baxter, Andrew, 213n
Beamon, Kelly, 290n
Beaupre, Phillipe, 610
Behar, Howard, 381382
Belch, George E., 359n, 379n
Belch, Michael A., 359n, 379n
Bell, Charles, 253, 256
Bell, Gerry, 44n
Bell, Steve, 420n
Belluzzo, Richard E., 470
Benetton, Luciano, 230
Benjamin, Medea, 155
Bennett, Drake, 384n
Berelson, Bernard, 123n
Berkowitz, Eric N., 80n, 123n
Berner, Robert, 550n, 620n
Berry, D., 315n
Berry, Leonard L., 123n, 214n, 290n
Berthon, Pierre, 290n, 421n
Bianco, Anthony, 122n, 123n, 187n,
351n, 550n
Billings, Chris, 683689
Bird, Laura, 337n
Bissell, John, 420n
Bittar, Christine, 420n
Black, JenniIer, 154
Blackett, Tom, 285
Blackwell, Roger D., 146n, 359n, 434n
Blair, Donald W., 158
Blair, Edward, 137n
Blumenstein, Rebecca, 337n
Bonnet, Adeline, 447n
Bonoma, Thomas V., 447n
Bonsignore, Michael R., 205
Bostrom, Sue, 263
Boudette, Neal E., 466n
Bounds, Wendy, 359n
Bowen, David, 315n
Bower, Marvin, 67
Bowers, Patricia, 161
Boyd, Harper W., Jr., 27n, 300n, 432n,
446n, 447n
Bradicich, Kevin, 147n
Brady, Diane, 93n, 550n
Branson, Richard, 26, 284
Bray, Nicholas, 123n
Bremner, Brian, 507n
Brooks, Rick, 378n
Brown, James, 314n, 651, 663
Brown, Ken, 93n
Brown, Shona L., 249n
Bryan, Lowell, 69
Bulkeley, William M., 147n
Burgum, Douglas J., 473
Burke, Raymond R., 188n, 267n
Burke, Steven, 402n
Burn, Jean-Marie, 520
Burrows, Peter, 13n, 84n, 93n, 290n,
393n, 399n, 446n, 474n, 626n
Bursk, Edward C., 258n
Busky, James, 330
Byne, John A., 70n
Byrne, Harlan S., 406n
Byrnes, Nanette, 290n, 550n
C
Cacciotti, Jerry, 163
Cadbury, N. D., 188n
Cadotte, Ernest R., 123n
Camar, Mark, 605606, 608611
Campbell, Dale, 159, 161
CamuIIo, Arnaldo, 314n
Cannor, Joe, 534n
Cantalupo, James R., 253254, 256
Capell, Kerry, 44n, 146n, 387n, 447n
Capellas, Michael D., 396
Capon, Noel, 123n, 214n, 290n, 421n, 447n
Cardini, C., 214n
Carey, John, 249n
Carlisle, Kate, 384n
Carlton, Jim, 290n
Carney, Lloyd, 57
Carson, Scott E., 148
Carter, Larry R., 261
Carter, Michael, 596n
Cassano, Silvana, 230
Cassettari, Michael, 147n
Castellano, Jose Maria, 6
Castellini, Jerome A., 380
Cateora, Philip R., 187n, 315n, 418n
Cecil, John, 147n
Cespedes, Erank V., 315n, 447n
ChaIkin, Jeremiah H., 64
Chambers, John T., 258263
Chandler, Brue, 165
Chandrasekher, Anand, 148
Chandy, Rajesh K., 249n, 290n
Chatterjee, Rahul, 550562
Cherry, Wayne K., 455
Chiagouris, Larry, 291n
Cho, Eujio, 501507
Cholerton, Edward M., 149
Christensen, Clayton, 187n, 224, 248n
Christensen, LeiI, 143
Christopher, Martin, 315n
Churchill, Gilbert A., Jr., 295n, 337n
Cid, Eva, 689n
Clark, Kim B., 213n
Clarke, JeII, 393
Clarke, Thomas E., 153, 156
Claxtan, John D., 490n
Clewes, Debbie, 427n
Cochran, Philip L., 315n

-
Name Index
Cockrell, Nathan, 385
CoIIee, John, 60
Cohen, Andy, 378n, 406n
Cohen, Dana Eismen, 153
Cohn, Laura, 146n
Colby, Charles L., 314n
Cole, JeII, 213n
Coleman, Brian, 214n
Colletti, Jerome A., 379n
Collins, Jim, 456, 586
Collins, Timothy M., 213n, 214n
Collis, David J., 44n
Conaway, Charles, 69
Conlin, Michelle, 444n
Conway, Patrick, 562, 562n, 566574
Cooper, Robert, 248n, 249n, 290n
Cooper, Wayne E., 66
Cox, James E., Jr., 94n
Cravens, David W., 19n, 188n, 213n, 214n,
290n, 378n, 379n, 421n, 447n
Cravens, Karen S., 51n, 213n, 214n
CrawIord, C. Merle, 232n, 242n, 249n
Cressman, George E., Jr., 330n, 337n
Crittenden, William E., 640n
Croce, Robert W., 165
Crockett, Roger O., 152n, 314n, 447n, 453n
Crosby, Lawrence A., 436n, 447n
Cross, Joseph, 627, 629630, 634, 636, 639
Crossen, Cynthia, 147n
CunliIIe, Peter, 315n
Cusamano, Michael A., 467
Cutler, Stephen M., 60
Czaplewski, Andrew J., 431n
D
Dahringer, Lee, 589n
Dalbard-Martin, Erancais, 522
Daniel, Caroline, 214n
Davis, Stan, 683n, 689n
Dawson, Chester, 384n, 507n
Dawson, Havis, 565n
Day, George S., 18n, 19n, 44n, 93n, 123n,
146n, 147n, 187n, 214n, 215n,
290n, 403n, 420n
Dayton, Sky, 151
Dearborn, Barbara, 166
Dearborn, Kathleen Kerwin, 356n
de Beul, Joris, 54
Deighton, John, 365n
Deighton, Nigel, 58
Delessert, Christiane, 62
Dell, Michael S., 388393
Denaux, Guillermo, 384
Denson, Charlie, 158
Deshpande, Rohit, 18n, 147n
Dessarts, Remy, 522
Devine, John, 455
Di Benedetto, C. Anthony, 232n, 242n, 249n
DiBona, Charles, 473
Dickson, Peter R., 122n, 123n
Dillon, William R., 87n, 131n, 132n, 135n,
147n, 235n, 240n, 249n, 290n, 354n
DiStasi, May Ann, 161
Dolan, Andy, 16n
Dolan, Elizabeth G., 154
Dolan, Robert J., 337n
Donner, Erederic, 453
Doorley, Thomas L., 213n, 214n
Douglas, Dean, 150
Downes, L., 291n
Downey, H. Kirk, 214n
Downey, W. David, 574n
Doyle, Peter, 18n, 421n
Doz, Yves L., 214n
Drucker, Peter E., 29, 44n, 142, 147n
Dyer, JeIIrey H., 214n
E
Eaton, Ken, 549
Echikson, William, 6
EdgecliIIe-Johnson, Andrew, 421n
Edmondson, Gail, 33n, 104n, 146n, 199n,
214n, 507n
Edmunds, Marian, 216n
Edwards, CliII, 169n, 213n, 296n, 315n, 480n
Egan, Robert W., 474
Eidam, Michael, 104n
Eisenbardt, Kathleen M., 249n
Eitel, Maria S., 153
El-Ansary, Adel I., 314n, 315n
Elgin, Ben, 44n, 139n, 464n
Ellison, Lawrence J., 389
Emmelhainz, Margaret A., 214n
Engardio, Pete, 253n, 296n, 335n, 480n
Eppinger, Stephen D., 229n, 246n, 249n
Erlandsen, Torger, 536, 537, 544
Etzel, Michael J., 290n
Evans, B., 315n
Evans, Philip B., 147n
Everett, G. Carl, 393
Ewing, Jack, 314n
E
Eagerlin, Karl Gunnar, 386
Eairlamb, David, 146n
Earley, James, 504
Earley, John V., 18n
Earquhar, Peter H., 290n
Eenby, Jonathan, 315n
Eerguson, JeIIery M., 431n
Eernandez, Gary, 602
Eield, Christopher, 123n
Eine, Christopher, 150
Eine, John, 330
Eiorina, Carleton S., 390, 620625
Eirtle, Neil H., 87n, 131n, 132n, 135n,
147n, 235n, 240n, 249n, 290n, 354n
Eleming, Harris, 690, 697701
Eletcher, J. H., 447n
Elickenger, Rob, 150
Elint, Jerry, 123n
Eoley, Michael, 562
Eolz, Jean-Martin, 464466
Eord, David, 562, 562n
Eord, Patrick D., 573
Eord, William C., Jr., 456
Eorsythe, Greg, 61
Eoster, George, 51n
Eoster, Richard N., 68
Eox, Martha Lane, 287
Erance, Mike, 550n
Ereed, Donald, 631
Eriedland, Jonathan, 326n
Eritz, Mary, 330
Eroelich, John, 574n, 581582
G
Gagnon, Pierre, 605, 606, 609611
Galea, Christine, 378n
Ganz, Axel, 515533
Gardner, John T., 214n
Garone, Stephen J., 204n, 214n, 285n
Garrison, Margaret, 267n
Gary, Loren, 192n, 214n
Gates, William H., III, 392, 469472
GelIand, M. Howard, 315n
George, Mark, 648649
George, Peter, 154
GeorgeoII, David M., 95
Gerstner, Lou, 192
GetzoII, James, 85
Ghosn, Carlos, 504
Giancarlo, Charles H., 263
Gilmore, James H., 249n
Ginter, James L., 122n, 123n
Goldin, Robert S., 256
Gonzalez, Maria, 192n, 214n
Graham, John L., 187n, 418n
Grant, Peter, 93n
Grapas, Martine, 520
Gray, Robert, 291n
Green, Heather, 152n
Green, JeII, 434n
Green, William, 93n
Greenberg, Jack M., 253256
Greenbury, Richard, 142
Greene, Jay, 249n, 314n, 474n, 670n
Greenley, Gordon, 19n
Grey, William, 587
Greyser, Stephen A., 258n
Grossman, Elliott S., 95n
Grossman, Mindy, 158
Grover, Ron, 177n, 187n, 341n, 464n
Grow, Brian, 33n
Guasperi, John, 421n
Guilding, Chris, 51n

-
Name Index
Gundry, Lisa, 421n
Gupta, Mahendra, 51n
Gupta, Rajat, 6570
Guthrie, Jonathan, 290n
H
Haddad, Charles, 361n
Hagel, John, 213n
Haig, Bob, 640
Haisch, Mary Ann, 160
Halamka, John D., 151
Hallen, Lars, 213n
Halliday, Jean, 402n
Hamel, Gary, 19n, 44n, 93n, 214n
Hamm, Steve, 19n, 302n, 474n
Hammond, Allen, 19n
Hammond, Wade Drew, 689n
Han, Julie Y., 290n
Harbison, J. R., 192n
Hardy, Quentin, 446n
Harris, Gardiner, 359n
Harris, Ward, 63
Harrison, Brian, 596597, 605
Hart, Margaret, 204n, 214n
Hartley, Steven W., 80n, 123n
Hauser, John R., 188n
Hayes, Vic, 150
Heckman, James, 291n
HeIIernan, Paul, 154
Heitz, Jean-Erancois, 470
Hellstrom, Kurt, 57
Helyar, John, 187n
Henderson, John C., 213n, 214n
HenkoII, Ronald, 123n
Hibbets, Aleecia, 683n, 689n
Hills, Gerald E., 290n
Himelstein, Linda, 39n
Hobbs, Matt, 315n
Hoberman, Brent, 287
HoI, Robert D., 372n, 379n
Hogan, Mark T., 455
Holden, Reed, 327n, 337n
Holland, Charles H., 188n
Holland, John, 392
Hollenbeck, George P., 421n
Holmes, Stanley, 4n, 21n, 152n, 159n,
206n, 314n, 384n
Holsinger, Yvonne, 161
Holveck, David P., 166
Homburg, Christian, 421n
Honomichl, Jack, 147n
Hooley, Graham J., 188n
Hopkins, David S., 44n
Horsburgh, Scott D., 420n
Houlder, Vanessa, 147n
Hughes, Jonathan, 214n
Hulbert, James Mac, 123n, 290n,
421n, 447n
Hulme, Ron, 6768
Hunt, Shelby D., 44n, 198n
Hurwood, David L., 95n
I
Ihlwan, Moon, 19n, 214n, 253n, 480n
Ihlwan, N. J. Moon, 296n
Immelt, JeIIrey R., 392
Ingram, Thomas N., 378n, 379n
Ingrassia, Lawrence, 248n, 290n
Ireland, Ross, 263, 448
J
Jager, Durk I., 612, 614615
James, Dana, 290n, 447n
Jang Ha Sung, 251
Jarvis, Steve, 315n
Jaworski, Bernard, 187n, 188n,
337n, 379n
JeIIries, Tom, 330
Jenkins, Roger L., 123n
Jenkner, Rick, 490n
Jensen, Elizabeth, 572n
Jensen, Ove, 421n
Joachimsthaler, Erich, 290n, 291n
Jobs, Steve, 13
Jocz, Katherine E., 19n, 379n, 404n,
420n, 447n
Johanson, Jan, 213n
John, D. R., 291n
Johnson, David W., 159, 161
Johnson, Sheree L., 436n, 447n
Johnston, Mark W., 96n, 359n, 362n,
363n, 370n, 378n, 379n, 421n
Johnston, Zachary T., 248n
Joiner, C., 291n
Jones, Charles, 123n
Jones, Daniel T., 315n
Jordan, Miriam, 123n
Joy, Bill, 396, 398
K
Kahn, Barbara E., 123n
Kale, Prashant, 214n
Kallasvuo, Olli-Pekka, 57
Kaplan, Robert S., 18n, 44n, 290n, 447n
Kara, Ali, 123n
KauIIman, Robert J., 318n
Kaynak, Erdener, 123n
Keenan, Eaith, 245n, 314n
Keller, Kevin Lane, 290n
Kemp, Ted, 407n
Kennard, William E., 450
Kennedy, Donald, 144
Kerin, Roger, 80n, 123n, 551n
Kerstetter, Jim, 290n, 302n, 474n, 670n
Kerwin, Kathleen, 420n, 459n, 506n
Khermouch, Gary, 291n
Khermouch, Gerry, 387n, 434n, 447n
Kickul, Jill, 421n
KilleIer, Nancy, 67
Killian, Linda, 123n
Kilpatric, Michael, 159
Kim, Eric B., 480
Kim, Tae S., 647
Kim, W. Chan, 122n, 337n
Klein, Lisa R., 421n
KleinIeld, Klaus, 67
Klick, Howard, 166
Kline, Roger, 70
Knight, Philip H., 153159
Knook, Pieter, 150
Knox, Simon, 215n, 218n
Kohli, Ajay, 421n
Koo Ki Seol, 477
Koselka, Rita, 188n
Kotler, Philip, 18n, 19n
Kotler, Phillip, 188n, 249n, 359n
Kovar, Joseph E., 291n
Krauss, Michael, 291n
Kripalani, Manjeet, 19n, 177n, 187n, 294n
Kuczmarski, Thomas D., 248n
Kumar, Ajith, 421n
Kumar, V., 217n
Kunii, Irene M., 58n
Kunitake Ando, 475
L
LaIley, Alan G., 1, 612618
LaEorge, Raymond W., 378n, 379n
La Eranco, Robert, 147n
Lagnado, Lucette, 337n
Laine, Erick, 640641
Lamb, Charles W., Jr., 188n
Lambert, Douglas M., 214n
Lambert, Michael D., 393
Lambkin, Mary, 187n
Lamont, Lawrence M., 627n, 689n
Lancellot, Mike, 640
Lane, Nikala, 147n
Lane, Stuart, 427n
Langrehr, Erederick W., 589n
Larreche, Jean-Claude, 27n, 300n,
446n, 447n
Larsen, Ralph, 70, 162
Lassk, Eelicia G., 379n
Latour, Almar, 93n, 249n, 337n
Laudon, Jane Price, 147n
Laudon, Kenneth C., 147n
Laughlin, Jay L., 123n
Lauritano, Paul, 214n
Lawver, Teri L., 414n, 421n
Lazo, Shirley A., 406n
Leach, Mark P., 574n
Leahy, Dan, 562, 562n, 567, 570, 573

-
Name Index
Lederhausen, Mats, 253, 256
Lee, Charles R., 452
Lee, JenniIer, 335n
Lee, Louise, 65n, 85n, 101n, 156n, 157n
Lee Hun Jai, 251
Lee Kun Hee, 251, 478
Leemon, Daniel O., 63
Lehmann, Donald R., 19n, 44n, 82n, 404n,
409n, 420n, 421n, 447n
Leighton, Allan, 287
Lenehan, James T., 164
Lesser, Eric, 147n
Levine, Daniel S., 123n
Lewis, Nicole, 421n
Liberman, Vadim, 447n
Liebmann, Wendy, 157
Lilien, Gary L., 188n, 249n, 359n
Limkakeng, Ish, 262
Lindahl, Gran, 197
Linehan, John, 473
Liri, Yuji, 290n
Little, John D. C., 147n
Loden, D. John, 44n, 359n
Loken, B., 291n
Lompkin, James R., 315n
London, Simon, 315n
Long, Pat, 147n
Lothson, David, 162
Loveman, Gary, 147n
Low, George S., 290n, 345n, 359n, 379n
Lowry, Tom, 453n, 550n
Lublin, Joanne S., 420n
Lun, Candance D., 414n, 421n
Luther, William, 141
Lutz, Robert A., 455
Lynch, Peter, 61
Lynn, Gary S., 248n
Lynn, Matthew, 291n
Lyons, Daniel, 248n
M
Maceira de Rosen, Sagra, 230
Macinnis, Deborah J., 187n, 188n
Mackenzie, Roderick L., 547
Macnair, R. David C., 159, 160
Madden, Thomas J., 87n, 131n, 132n, 135n,
147n, 235n, 240n, 249n, 290n, 354n
Magnusson, Paul, 335n, 420n, 506n
Maklan, Stan, 215n, 218n
Malone, Michael, 123n
Maltz, Elliott, 421n
Mandel, Michael J., 372n, 379n
Marchant, Valerie, 147n
Maremont, Mark, 337n
Maronak, Erick E., 63
Marsella, Anthony, 44n
Marsh, Peter, 197n
Marshall, Greg W., 96n, 359n, 362n,
363n, 370n, 378n, 379n, 421n
Martin, Roger L., 19n
Maslow, A. H., 123n
Mathers, John, 285
Matlock, Carol, 21n
Matya, Tom, 574n, 581
Mauborgne, Renee, 123n, 337n
Mazur, Laura, 19n
Mazzola, Mario, 261
McCall, Morgan W., 421n
McCammon, Bert C., Jr., 213n
McCreary, Charles H., III, 455
McCullough, Wayne R., 447n
McCune, Tripp, 152
McDonald, Malcolm, 123n
McDonald, Robert A., 612
McDonald, William J., 379n
McDonnell, James C., 147n
McDonnell, Kevin, 490491
McDougall, Gordon, 605n
McEadden, Gordon O., 155
McIntyre, Shelby H., 147n
McKay, Betsy, 359n
McKenna, Regis, 213n
McNealy, Scott G., 267, 394398,
664670
McQuarrie, Edward E., 147n
McWilliams, Gary, 337n
Meehan, Robert, 315n
Mendonca, Larry, 70
Menzer, John B., 548
Merrick, Amy, 291n
Mesquita, Luiz, 574n
Miles, Raymond, 44n
Milliman, John E., 431n
Milunovich, Steven, 389
Mingo, Edward D., 188n
Miron, Michael, 147n
Mitchell, Adrian, 75n
Mitchell, Alan, 315n
Mockler, Robert J., 147n
Moerlhy, Sridhar, 359n
Mohr, Jakki J., 345n, 359n, 508n
Mokwa, Michael P., 447n
Mollinson, Caitlin, 109n
Molskness, John, 62
MoncrieI, William C., 188n
Monroe, Kent B., 323n, 337n
Montgomery, Cynthia A., 44n
Moorthy, K. Sridhar, 188n, 249n
Morgan, Neil A., 122n, 123n, 447n
Morgan, Robert M., 44n, 198n
Moriarity, Rowland T., 123n
Morone, Joseph, 248n
Morton, John Douglas, 156
Muelrath, Don, 640
Mui, C., 291n
Mullaney, Timothy J., 379n
Muller, Emma, 315n
Mullins, John, 446n, 447n
MumIord, Miles, 256258
Munk, WolIgang, 515n
Murdick, Robert, 95
Murphy, Michael J., 490n
Murphy, Patrick E., 562n
Murry, Shailagh, 337n
N
Nagle, Thomas, 327n, 337n
Naim, M. M., 315n
Nardelli, Robert, 421n
Narus, James A., 213n, 315n
Narver, John C., 18n, 146n
Naylor, J. B., 315n
NeII, Jack, 420n, 421n
Nelson, James E., 551n
Neville, Shawn, 158
Nevin, John R., 44n
Newman, William H., 44n
Nimocks, Suzanne, 68
Noble, Charles H., 447n
Norton, David P., 18n, 44n, 447n
Nunes, Paul E., 315n
Nussbaum, Bruce, 238n
O
OBrien, Brendan, 564n
OBrien, Louise, 123n
OC Hamilton, Joan, 145n
OConnell, Vanessa, 161n
OConnor, Gillian, 315n
OConnor, Rochelle, 29
ODonohoe, Brian, 490, 497500
Oh Dong Jin, 475
Ohmae, Kenichi, 214n
Ohno, Taichi, 505
OKane, Paul, 568n, 573n
OKeeIIe, Barry, 566n, 568n
Okuda, Hiroshi, 504
Olins, RuIus, 291n
Oliver, Ryan, 534n
Ollila, Jorma, 5459
Olson, Eric M., 248n, 421n, 447n
Olson, Sally, 330
Omidyar, Pierre, 11
Ono, Yumiko, 290n
Oosterman, Wade, 670
Osher, John, 617618
OSullivan, Don, 562n
Ottman, Jacquelyn, 447n
P
PacoIsky, Nina, 330
Pahren, Judy, 455
Palmer, Ann Therese, 550n
Palmer, Nick, 213n
Palmeri, Chris, 33n, 290n, 420n, 506n

-
Name Index
Palmisano, Samuel J., 583589
Panke, Helmut, 265
Panus, Chris, 648649
Papadopoulos, Greg, 57
Parasuraman, A., 123n, 314n
Parise, Salvatore, 213n, 214n
Park, Andrew, 393n
Park, C. W., 187n, 188n
Parker, Mark G., 158
Parker, Tom, 534, 537, 541, 544545
Parker-Pope, Tara, 420n, 447n
Park Sang Jin, 478
Park Sung Chil, 250
Parmar, Arundhati, 127n, 213n
Parsons, A. J., 291n, 359n
Passariello, Christina, 314n
Pasztor, Andy, 213n
Patterson, Gregory A., 147n, 337n
Paulson, Albert S., 248n
Payne, Adrian, 218n
Pecaut, David K., 85
Pekar, P., 192n
Pelson, Lou E., 315n
Peppard, Joe, 218n
Peppers, Don, 122n, 215n, 219
Perot, Ross, 600
Persson, Erling, 387
Persson, SteIan, 385387
Peter, J. Paul, 295n, 337n
Peters, Alex, 448
Peters, Tim, 393
Peterson, Joe, 467
Peterson, Per A., 162
Peterson, Robin T., 139n
Philips, Ken, 484
Piercy, Niall C., 315n
Piercy, Nigel E., 19n, 122n, 123n, 146n,
147n, 188n, 214n, 287n, 290n,
421n, 430n, 447n
Pine, B. Joseph, II, 249n, 356
Pitt, Leyland E., 290n, 421n
Pollay, Richard W., 490n
Pond, Randy, 261, 262
Pook, Sally, 315n
Poon, Christine A., 167
Port, Otis, 249n
Porter, Michael E., 7, 19n, 22, 44n, 84, 85,
93n, 187n, 214n, 421n
Pottruck, David S., 5965
Powell, M., 315n
Prada, Paulo, 507n
Prahalad, C. K., 19n, 44n, 93n, 213n,
214n, 231n, 249n
Prendigast, Paul, 256258
Q
Queen, James E., 455
Quelch, John A., 421n
Quinn, James Brian, 44n
R
Ramaswamy, Venkat, 213n, 231n, 249n
Ranga, V. Kasturi, 123n
Rangaswamy, Arvind, 188n
Rankine, Kate, 147n
Rao, Vithala R., 94n
Rapoport, Carla, 35n
Rau, Bob, 624
Raynor, Michael E., 187n, 224, 248n
Rayport, JeIIrey E., 337n, 379n
Reddy, Venkateshwar K., 447n
Redstone, Sumner M., 449
Reed, Stanley, 146n
Reichheld, Erederick E., 215n, 217n
Reinartz, Werner, 217n
Reinhardt, Andy, 447n
Renart, Lluis G., 651n
Revall, Janice, 337n
Rigby, Darrell, 215n, 218n, 248n
Roach, Mary, 359n
Roberts, Dexter, 214n, 335n
Roering, Kenneth J., 416n, 421n
Rogers, Everett M., 249n
Rogers, Martha, 122n, 215n
Rogovin, Ralph, 256258
Rollins, Kevin B., 260, 388, 392
Romanelli, Elaine, 187n
Romano, Pietro, 314n
Rosenbush, Steve, 152n, 453n
Ross, Wilbur L., Jr., 550
Rotenier, Nancy, 123n
Rourke, Mike, 589, 591, 594
Rouxel, Thierry, 521, 522
Royal, Weld, 315n
Ruckert, Robert W., 416n
Ruddleston, Ian, 44n
Rudelius, William, 80n, 123n
Ruekert, Robert W., 248n, 421n
Ruskin, Gary, 144
Rust, Roland T., 359n
Ryals, Lynette, 215n, 218n
S
Saltos, Etta, 160161
Salzman, Marian, 157
Samuelson, James, 123n
SanIord, Linda, 587
Sanzo, Richard, 45n
Saporito, Bill, 337n
Saunders, John A., 188n
Savander, Niklas, 5556
Schaja, Morty, 63
ScheIter, Phil, 215n
Scheid, Steven L., 62
Scheinman, Daniel A., 262
SchiIrin, Matthew, 192n, 213n, 214n
Schmertz, David, 149
Schmidt, Eric E., 155
Schmidt, Terry, 151
SchoenIeld, Gary H., 155
Schomer, David C., 382
Schultz, Don E., 278, 290n, 420n, 421n
Schultz, Heidi, 122n
Schultz, Howard, 380382
Schwab, Charles R., 5965
Schwartz, Nelson D., 447n
Scott, Lee, Jr., 547
Scott, William B., 214n
Seamon, Erica B., 248n
Sebastian, Yvonne, 161
Seidenberg, Ivan G., 448453
Sellers, Patricia, 18n
Semel, Terry S., 459464
Serra, Joseph, 651, 663
Serwer, Andy, 315n
Seybould, Patricia B., 146n
Seyed-Mohamed, Nazeem, 213n
Shaheen, George, 39
Shansby, J. Gary, 187n
Shapiro, Benson P., 18n
Sharda, Ramesh, 147n
Shaw, Bob, 147n
Sherman, Richard J., 315n
Sherman, StratIord, 421n
Shipp, Shannon H., 213n, 421n
Shirouzu, Norhiko, 249n
Shocker, Allan D., 93n
Shoemaker, John C., 399
Shultz, Don, 122n
Siebert, Muriel, 64
Simmonds, K., 51n
Simon, Anthony, 689690, 697701
Simon, Margaret, 689690, 697701
Singh, Harbir, 214n
Skapinker, Michael, 147n
Skilling, JeIIrey K., 65, 68
Slater, Stanley E., 18n, 19n, 146n, 447n
Slywotzky, Adrian J., 44n, 93n, 147n
Small, Lawrence R., 94n
Smith, Alison, 291n
Smith, Bill, 263
Smith, D. V. L., 447n
Smith, Geri, 384n
Smith, John E. Jack Jr., 453
Smith, Orin, 381
Smith, Roger, 453
Snow, Charles, 44n
Snyder, Edward E., 54
Solomon, Deborah, 337n
Solvik, Peter, 258, 262
Souder, William E., 421n
South, Gill, 213n
Spagat, Elliot, 249n
Spilotro, Kathryn W., 248n
Spitzer, Eliot, 60
Sprunk, Eric, 158
Srivastava, Rajendra K., 93n
Stanton, William J., 290n
Steiner, Gary A., 123n

-
Name Index
Steingraber, Ered, 597, 598
Stempel, Robert, 458
Stepanek, Marcia, 143
Stern, Louis W., 314n, 315n
Stevens, Bruno, 19n
Stewart, Thomas A., 147n, 421n
Stewart-Allen, Allyson L., 447n
Stitt, Jim, 640
Stone, Merlin, 44n, 147n
Strachota, John, 575
Strachota, Orville, 575, 581
Strachota, Steve, 575
Strachota, Tom, 574n, 575577, 582
Streeter, Sara, 508n
Strickland, A. J., III, 46n
Strutton, David, 315n
Sudman, Seymour, 137n
Sullivan, Alanna, 113n, 123n
SutcliIIe, Kathleen M., 146n
Sutton, Howard, 44n
Swan, Robert, 39
Swartz, Gordon S., 123n
SwoIIord, Gary B., 318n
Symonds, William C., 93n
T
Tait, Nikki, 123n
Talbot, David, 248n
Tam, Pui-Wing, 337n
Taylor, Charles R., 123n
Taylor, JeII, 109
Tellis, Gerald J., 249n, 290n
Thomas, David, 11n
Thomas, Paulette, 44n
Thomke, SteIan, 249n
Thompson, Arthur A., Jr., 46n
Thompson, David, 63
Thompson, Stephanie, 291n
Thornton, Emily, 65n
Tieman, Ross, 562n
Tierney, Christine, 33n, 159n
Tiplady, Rachel, 193n
Toben, Doreen, 452
Tolliver, Mark, 398
Tomkins, Richard, 219n, 291n
TopIer, Morton L., 393
Tosh, Mark, 315n
Towill, Denis R., 315n
Townley, Preston, 44n
Townsend, Anthony, 150
Treville, Suzanne, 248n
Trevino, Linda Klebe, 315n
Troy, Kathryn, 19n
Turner, Mark, 311n
U
Ulrich, Karl T., 229n, 246n, 249n
Urban, Glen L., 188n, 249n, 379n
V
Valeriani, Nick, 166
Vlikangas, Liisa, 44n
Van Amum, Patricia, 420n
van der Zande, Yolanda, 589, 596
Van Horne, James, 45
Veale, Garry, 122n
Vence, Deborah L., 147n
Vinelli, Andrea, 314n
von Hippel, Eric, 249n
Vranica, Suzanne, 359n
W
Wagoner, G. Richard, Jr., 453459, 504
Waldrop, Judith, 249n
Walker, Bruce J., 290n
Walker, Chip, 290n
Walker, Orville C., Jr., 27n, 248n, 300n,
416n, 421n, 432n, 446n, 447n
Walters, Richard, 248n
Wang, Bin, 318n
Wansley, Brant, 291n
Wassermann, Todd, 434n
Watson, Thomas J., Jr., 584
Watson, Thomas J., Sr., 584, 586
Weaver, Gary R., 315n
Webb, Maynard, 399
Weber, Klaus, 146n
Webster, Erederick E., Jr., 19n, 29, 44n,
213n, 214n, 404n, 447n
Wegleitner, Mark, 452
Weinaug, Eran, 640, 648649
Weinstein, Michael, 166
Weiss, Gary, 61
Weitzer, Dorothy L., 170
Welch, Andrew, 285
Welch, David, 459n
Welch, Donald J., 152
Weldon, William C., 162167
Wells, Melanie, 44n
Wensley, Robin, 19n, 93n
Whitman, Margaret, 394
Widbladh, Hjalmar, 57
Wiele, Andreas, 515, 521522, 527, 530
Wilkinson, J. B., 589n
Willman, John, 562n
Wilson, Hugh, 315n
Wilson, Sam, 261
Winer, Russell S., 82n, 217n, 218n, 409n,
421n, 434n, 447n
WingIield, Mick, 13n
Winston, Mary, 160
WolIram, Roland, 155
Womack, James P., 315n
Wong, Jack, 670
Wood, Brian, 388
Woodham, Doug, 68
WoodruII, David, 291n
WoodruII, Robert B., 93n, 123n, 290n
Workman, John P., 421n
Wreden, Nick, 421n
Wurster, Thomas S., 147n
Y
Yang, Zhilin, 139n
Yapp, Robin, 16n
Yates, Darin S., 617620
Yavitz, Boris, 44n
YoIIie, David B., 467
Young, CliIIord E., 379n
Young, D., 123n
Yu, Larry, 447n
Yun Jong Yong, 250, 475
Z
Zagnoli, P., 214n
Zaltman, Gerald, 188n
Zander, Edward, 394, 664
Zeeb, Susan, 154
Zegel, Susan, 550n
Zeithaml, Valarie A., 123n
Zeitler, William M., 390
Zellner, Wendy, 44n, 176, 206n, 550n
Zook, Chris, 248n

-
A
ABB, use oI Internet, 197
Abbott Laboratories, 166
ABC Bank, 179
Abrasive Systems Division, 427
A.C. Nielsen Company, 133, 275
Accenture, 192, 197
Accessible memory, 129
Accor, 100, 216
Accounting
marketings link to, 404
strategic management
accounting, 5053
Accounts receivable turnover, 47
Acquisitions, Ior idea generation, 233
Actionable segments, 110
Activity-based costing, 52, 325
Activity-based management, 325
Activity ratio, 47
Adidas, 154, 158
Administered VMS, 300301
Advertising
advantages/disadvantages oI, 339
deIinition, 339
expenditures on, 339
as part oI promotion strategy, 339
Advertising agencies
agency relationship, 351352
checklist Ior evaluating, 352
compensation Ior, 351, 352
industry composition, 352
problem areas Ior, 353
role oI, in advertising
strategy, 351353
Advertising strategy, 347353
advertising objectives, 347349
budget determination, 348
creative strategy, 348350
measuring eIIectiveness, 353
media decisions, 350351
role oI advertising agency in, 351353
scheduling decisions, 350351
tracking advertising perIormance, 353
Adware, 139
Aer Lingus, 195
AeroIlot, 67
Aeromexico, 196
AELAC (American Eamily LiIe
Assurance Company oI
Columbus), 199200
Agile supply chains, 312
Airbus, 20, 177, 193194, 211
corporate strategy, 21
Air Canada, 195
Air Erance, 195
Airline industry
Irequent Ilyer programs, 201
global airline alliances, 195196
interorganizational relationships
and, 193
market Ior airplanes, 90, 91
pricing competition, 316
Air New Zealand, 195
Albertsons, 307
Alitalia, 196
All Nippon Airways, 195
Allstate, 350
All you can aIIord budgeting, 345
Alternative evaluation, 342
in buying decision process, 80
Alza Corporation, 166
Amazon, 38, 190191, 224, 307, 371
American Airlines, 86, 170, 195, 201, 274,
333, 340, 371
American Express, 108109, 266267,
269, 284, 375
American Marketing Association, 266
Ameritrade, 65
Amgen Inc., 166
AMR Research, 372
Analysis, in decision-support
systems, 141
Analytical CRM, 216217
Anheuser-Busch, 335
Annual Statement Studies, 45
Ansett Australia, 195
Apex Chemical Company,
case, 256258
Apollo Group/University oI Phoenix, 73
Apple, 84, 89, 150, 273, 283, 297
innovations oI, 12, 13
Arbitron Inc., 138
Asiana Airlines, 195
Ask Jeeves Inc., 155
Assets, distinctive capabilities, 7
A.T. Kearney, case, 596605
Atlas Air, 100, 102
AT&T, 54, 148, 149, 152, 197198, 233,
277, 434
Attitudes, oI buyers, and market
segmentation, 106
Attribute costing, 52
Auchan, 307
Auctions, online, 318
reverse auction, 333
Audi, 175, 199
Austrian Airlines, 195
Autodesk, 125, 170
Average collection period, 47
Avon, 38, 343, 371
Awards, 355, 356
B
BAE Systems, 193
Bain & Co., 215, 218
Balanced scorecard approach, 3, 430431,
433434
objectives and, 25
Banana Republic, 27, 185
segmentation and positioning
challenges Ior, 101
Band-Aid, 277
BASE, 229
Baskin-Robbins, 34
BehaviorScan, 118, 241242
Beijing Automotive, 202
Belo Corporation, 234
Benchmarking, 52
Benetton, 230, 268, 313
recovery strategy oI, 292293
Berkshire Hathaway, 317
BestIoods, 335
Binney & Smith Inc., 356
Blair Water PuriIiers India, case, 550562
BMI British Midland, 195
BMW, 98, 110, 179, 270, 278, 331, 348
brand portIolio, 264266
outsourcing strategy, 199
positioning MINI, 104
rebuilding strategy, 33
Boeing, 21, 37, 90, 105, 148, 177, 192,
193194, 201, 211, 229, 308, 409
CEO ethical concerns and customer
relationship management, 4
Boingo, 149, 151
Bollywood, 177
Bombay Company, The, 190191, 413
learning Irom market, 126, 127
Boston Consulting Group, 161, 271
Boston ScientiIic Corporation, 165
BP, 443
Brand analysis, 272277
brand positioning analysis, 275
product cannibalization, 275276
product grid analysis, 275
product liIe cycle analysis, 274275
tracking brand perIormance, 273274
Brand building strategies, 282283
promotion and, 342
Brand equity, 272, 276277
brand health reports, 277
deIinition, 276
measuring, 276
Brand extension
deIinition, 284
risks oI, 284
Brand health reports, 277

-
Brand identity, 272, 277279
combination branding, 278279
corporate branding, 278
identity implementation, 279
private branding, 279
product line branding, 278
speciIic product branding, 278
value proposition, 278
Brand leveraging strategy, 284285
brand extension, 284
cobranding, 284285
licensing, 285
line extension, 284
overleveraging, 285
stretching brand vertically, 284
Brand management
brand analysis, 272277
product liIe cycle
analysis, 274275
tracking brand perIormance,
273274
brand equity, 272, 276277
deIinition, 276
measuring, 276
brand identity, 277279
extending brand identiIication
concept, 278
options Ior, 278279
brand portIolio management, 287288
challenges Ior, 268
managing products/brands over
time, 279287
brand leveraging strategy, 284285
brand strengthening strategies,
282283
global branding, 286
improving product perIormance,
280282
Internet brands, 286287
product portIolio modiIications, 282
responsibility Ior
marketings role in product
strategy, 271272
product/brand management, 270
product group/marketing
management, 271
product portIolio management, 271
Brand manager, 408409
responsibility oI, 270
Brand portIolio, 272
management, 287288
Brand positioning analysis, 275
Brand revitalization, 283
Brands; see also Strategic brand
management
counterIeiting oI, 335
creative strategy and, 348
deIinition, 266
Internet, 286287
managing products/brands over time,
279287
vs. product, 266
role oI brands, 267268
services as, 266267
strategic, 272
value oI top twenty-Iive, 269270
Brand strengthening strategies
brand building strategies, 282283
brand revitalization, 283
strategic brand vulnerabilities, 283
Brand valuation, 52
Brand vulnerabilities, 283
Break-even analysis, 4850
Break-even pricing, 332
British Airways, 100, 195, 219
British Petroleum, 231
British Telecom, 197198
Budget
Ior advertising strategy, 348
all you can aIIord, 345
competitive parity, 345
in marketing plan, 41, 50
objective and task, 344
percent oI sales, 344
Ior promotion strategy, 344345
Budweiser, 270
Bureaucratic organizational Iorm, 416
Bush Boake Allen, 231
Business analysis, new product planning,
236237
cost estimation, 237
preliminary marketing plan, 237
proIit projections, 237
revenue Iorecasts, 236
Business composition, 2627
Business segment, 2627
Business strategy
interrelation with corporate strategy, 21
marketing strategy and, 2830
responsibilities, 29
strategic marketing, 2930
Buyer partnerships, 198199
Buyers; see also Consumers
attitudes, 106
bargaining power oI, and competition
analysis, 85
buying decision process, 7980
customer group identiIication,
111114
customized oIIerings, 116
in emerging markets, 172
environmental inIluences, 8081
global consumer segments, 114
identiIying and describing, 79
markets segments and, 9798
in mature markets, 174175
needs and preIerences oI, 105107
nonprice Iactors and, 323324
perceptions, 106107
price as signal to, 320
price sensitivity, 322323
promotion to attract, 342
purchase behavior, 107108
response diIIerences, 109110,
114116
Buying decisions, classiIying, 107108
Buzzsaw.com, 125
C
Cadbury Schweppes, 107, 441
Calvin Klein, 34
Calyx & Corolla, 376
Camar Automotive Hoist, case, 605611
Campbell Soup Company, 134, 240
case, 159161
Canadian Airlines, 195
Cannibalization, 246247, 275276
Capabilities; see also Distinctive
capabilities
customer linking, 14
market sensing, 14
Capital, case, 515533
CareGroup, 148, 151
CarreIour, 307
competition, 326
Carreman, 356
Cash Ilows, discounting, 50
Cash ratio, 47
Casino, 307
Casio, 117
Catalogs, 357
as direct marketing, 375376
Category management, 409
Caterpillar, 180
Cathay PaciIic, 195
Cell phone industry, 5459, 7172
Channel leadership, 306
Channel management, 305309
channel globalization, 307308
channel leadership, 306
channel perIormance, 309
commitment and trust in, 306307
conIlict resolution, 308309
degree oI collaboration, 306
legal and ethical considerations, 309
management structure and systems, 306
multichanneling, 308
physical distribution management, 306
power and dependency, 307
Channel manager, 299
Channel oI distribution
common, 295
deIinition, 293
direct distribution by manuIacturers,
296298
Subfect Index

-
Channel oI distributionCont.
distribution Iunctions, 293295
globalization oI, 307308
international channels, 309310
managing channel, 305309
multichanneling, 308
objectives and measurement
criteria, 300
selecting strategy, 304305
selection criteria, 310
Ior services, 295296
types oI, 298301
vertical marketing system, 298301
Channel strategy
channel conIiguration, 303304
diIIering channel levels, 305
distribution intensity, 301303
objectives and measurement criteria, 300
selection criteria, 304305, 310
types oI distribution channels,
298301
Charles Schwab & Co.
case, 5965
value-chain initiatives, 85
ChieI knowledge oIIicer, 411
China
counterIeiting brands in, 335
as customer source and globalization
issues, 15
partnership with Korea, 212
China Airlines, 100
Chrysler, 199
CiIra, 196
Cima Mountaineering Inc., case, 689703
Cisco, 148, 149, 270, 372
case, 258263
strategic overhaul, 422423
Citibank, 269
Clorox, 179
Cluster analysis, 114
CNBC, 192
CNN, 192
Coach, 301
Cobranding, 284285
Coca-Cola, 175, 204, 222, 239, 245, 269,
277, 280, 284
Colgate, 311
brand strategy, 283
Collaboration
in channel management, 306
examining potential Ior, 196198
Collaborative development, 239
Columbia TriStar, 177
Combination branding, 278279
Cometa, 148, 149, 152
Commercialization oI new products,
243244
Commitment, in channel management,
306307
Communication
global marketing strategies, 418419
marketing plan implementation, 429
in promotion strategy, 342343
Compaq, 84, 89, 222, 327
Compensation
Ior advertising agencies, 351, 352
salespeople, 370
Competency, as objective oI organizational
relationships, 206207
Competition
CRM and competitive
diIIerentiation, 219
direct distribution by manuIacturers
and, 297
horizontal, 85
inIluencing as pricing objective, 321
phases oI, 89
price as instrument oI, 320
research to determine positioning
eIIectiveness, 183184
vertical, 85
Competition-oriented pricing
approaches, 333
Competitive advantage
in cost analysis, 325
CRM and, 219
learning organizations, 126
marketing program decisions, 181
strategic pricing decisions, 317
Competitive arena
deIining, 8285
industry analysis, 83
value-added chain, 83
Competitive bidding, 333
Competitive parity budgeting, 345
Competitive position monitoring, 52
Competitive space
analyzing competition, 8188
describing and analyzing end
users, 7881
developing strategic vision about
Iuture, 8889
markets and strategies interlinked,
7273
market size estimation, 9091
product-market scope and structure,
7378
value migration, 73
Competitor analysis
anticipating competitors actions, 88
deIining competitive arena, 8285
competitive Iorces, 8485
industry analysis, 83
value-added chain, 83
identiIying new competitors, 88
key competitors
descriptive proIile oI, 86
evaluating strengths and
weaknesses, 8788
market segment analysis, 119120
overview oI steps in, 8182
price analysis and, 326328
in pricing strategy, 326328
prisoners dilemma, 327
in situation analysis, 31
Competitor intelligence
market orientation and, 4
systems, 130
Competitor perIormance appraisal, 52
Competitor proIile, 8688
Complex markets, 99
ConAgra, 33, 39, 159, 224
Concept evaluation, new product planning,
234236
Concept test, 234236
ConIerence Board Inc., 203, 204n, 376
on downsizing, 22
on marketing plan, 4041
survey on value initiatives, 10,
1112, 14
ConIlict
conIlict resolution in channel
management, 308309
in organizational relationship
management, 208
ConIused positioning, 185
Consultative/technical selling strategy, 364
Consumer Credit Protection Act, 328
Consumer Goods Pricing, 328
Consumer markets, 103104
Consumer panels, 353
Consumers; see also Buyers
needs oI, and market segmentation,
105106
sales promotion targeted at, 356
Contests, 355, 356
Continental, 21, 196
Continuous learning
about markets
accessible memory, 129
inIormation distribution Ior
synergy, 127128
mutually inIormed interpretations,
128129
objective inquiry, 126127
inIormation systems, 138141
marketing intelligence systems and
knowledge management,
142144
marketing research inIormation
collecting existing inIormation,
131133
impact oI Internet on inIormation
cost and availability, 138
special research studies, 134138
standardized inIormation services,
133134
market orientation and organizational
learning, 125130
Subfect Index

-
situation analysis, 3132
types oI inIormation available,
129130
Contractual VMS, 299300
Contribution analysis, 48
Contribution margin, 48
Control
channel strategy selection and, 304
in marketing strategy, 37
organizational relationships and,
209210
over costs in cost analysis, 326
sales Iorce, 370371
Control-chart analysis, 443444
Controlled tests, 353
Conventional channel oI distribution, 298
Conventional test marketing, 242
Coordination oI activities, distinctive
capabilities, 7
Corning, 202
Corporate branding, 278
Corporate strategy
characteristics oI, 22
components oI, 2428
business composition, 2627
capabilities, 2526
competitive advantage, 2728
corporate vision, 2425
key issues, 23
objectives, 25
strategic business unit, 2627
structure, systems and processes, 27
deIinition, 24
interrelation with business and
marketing strategy, 21
organizational change, 2224
internal redesign, 23
new organization Iorms, 2324
vertical disaggregation, 2223
Corporate vision
vision statement, 25
Cost analysis
activity-based costing, 325
competitive analysis, 325
composition oI product cost, 325
control over costs, 326
experience eIIect, 325
liIe cycle costing, 53
quality costing, 53
strategic costing, 53
target costing, 53
value-chain costing, 53
volume eIIect on cost, 325
Cost-beneIit analysis, oI
segmentation, 110
Costco, 20, 168, 279, 405
internal partnering and, 205, 206
Cost-oriented pricing approaches,
332333
Cost-plus pricing, 332333
Cost-reduction strategies, organizational
relationships and, 207208
Costs
oI direct marketing, 375
estimations oI, and new product
planning, 237
Iinancial constraints and need
Ior interorganizational
Iixed, 48
oI research studies, 136
variable, 48
CounterIeit products, 335
Coupons, 355, 356
Coverage ratio, 47
Crane & Company, 118
Cranite Systems, 152
Crayola, 356
Creative strategy, in advertising,
348350
Credit Lyonnaise, 105
Crest, 179
CRM; see Customer relationship
management (CRM)
Cross classiIication analysis, 112
Cross-Iunctional assessment, market
orientation, 56
Cross-Iunctional coordination, market
orientation and, 5
Cross-Iunctional relationships, marketing
program decisions, 182
CSA Czech, 196
Cultural diIIerences, in organizational
Culture, Ior innovation, 225, 226227
Current Market Outlook, 90
Current ratio, 46
Customer analysis
customer satisIaction, 118119
Ior market segmentation, 118119
Customer Ieedback, online, 139
Customer Iocus
in end user customer relationships,
200201
market orientation, 4
Customer Iunction, 77
Customer group identiIication
cross classiIication analysis, 112
database segmentation, 113
experience and available inIormation,
111112
segmentation illustrations, 113114
Customer knowledge, leveraging,
143144
Customer liIetime value, 217, 219
Customer linking capabilities, 14
Customer privacy, invasion oI, 144
Customer proIiles
building, 81
Customer relationship management
(CRM), 32, 98, 130, 215219, 412
beneIits oI, 215
customer Iocus and, 200201
data mining, 140, 435
deIinition, 215
importance oI
competitive diIIerentiation, 219
customer value, 219
inIormation-based competitive
advantage, 219
lack oI competitive advantage, 219
perIormance metrics, 218
short-term vs. long-term
value, 218219
levels oI, 216218
analytical, 216217
operational, 216
strategic, 217
purchase behavior and segment
identiIication, 107
requirements Ior eIIective
implementation oI, 217218
response diIIerences and segmentation,
114116
sales Iorce strategies and, 365, 366
strategic evaluation, 435
Web sites Ior additional inIormation,
219
Customer research; see also Research
to determine positioning eIIectiveness,
183184
Customers; see also Buyers; End users
buying power oI and sales channel, 366
close customer relationships, 116
complexity oI relationship in sales
channel, 366
customer group identiIication, 111114
customer-supplier relationships,
198199
diverse customer base, 116
idea generation by, 231
in market orientation, 433
price sensitivity and price analysis,
322324
promotion and retention oI, 343
response diIIerences, 114116
Customer satisIaction, Ior customer
analysis, 118
Customer segment, market complexity
and, 77
Customer service
improving through Internet, 373
Customer-supplier relationships, 198199
Customer value
assessing, in end user customer
relationships, 201
creating, 1012
distinctive capabilities, 8, 11
Subfect Index

-
Customer valueCont.
new product planning and, 223224
objectives oI analysis, 223
value initiatives, 1112
Customization
direct distribution by manuIacturers, 297
mass, 116117
as product improvement, 281
Customized oIIerings, 116
Customized products, 246
CUTCO International, 343
case, 640650
CVC, 28
CVS, 307
CyberTrader, 65
D
Daewoo Electronics, 15
DaimlerBenz, 287288
DaimlerChrysler, 38, 143, 173, 335, 402
partnering with Hyundai, 202
Dairyland Seed Company, case, 574583
Databases
Ior continuous learning about
markets, 32
created through CRM, 216217
database systems as inIormation
system, 140
in decision-support systems, 140141
Ior direct marketing, 375
as standardized inIormation services,
133134
Database segmentation, 113
Database systems, 130
Data mining, 140, 435
Dayton Hudson, 308
DeBeers, 301
Debt to assets ratio, 47
Debt to equity ratio, 47
Deceptive pricing, 328
Decision support systems, 130, 140141
Declining markets, 171
Dell Computer, 2, 3, 4, 7, 8, 13, 22, 27,
38, 84, 104, 124, 149, 152, 201,
270, 284, 297, 301, 302, 305, 312,
327, 377, 405
case, 388393
Delphi technique, 96
Delta, 86, 196, 284
Demand, stimulating as pricing
objective, 321
Demand-oriented pricing approaches, 333
Demographic variables, 103
Dentsu, 352
Dependence, in channel management, 307
Deutsch, 152
Deutsche Telekom, 54
Developmental strategy, oI corporate
strategy, 23
Digital Convergence Corporation, 234
Direct mail, 375376
Direct marketing
advantages oI, 377
database management, 375
low access costs, 375
methods oI, 375377
purpose oI, 374
reasons Ior using, 374375
socioeconomic trends, 375
strategy, 377
value, 375
Direct response media, as direct
marketing, 376
Discounting cash Ilows, 50
Disney, 269, 277, 284
Disruptive innovations, 224
Distinctive capabilities, 610
channel conIiguration, 303304
corporate strategy and, 2526
customer value, 11
identiIying, 89
major components oI, 68
assets, 7
coordination oI activities, 7
organizational process, 78
skills and accumulated knowledge, 7
types oI, 910
value and, 10
Distribution; see also Channel oI
distribution
296298
distribution Iunctions, 293295
distribution intensity and channel
strategy, 301303
international patterns oI, 309310
Internet impact on, 293, 294
types oI, 298301
vertical marketing system, 298301
Distribution channel pricing, 334
Distribution channel relationships, 199200
Distribution strategy, role oI price in, 319
DiversiIication, 25, 26
Diversity, interorganizational relationships
and, 191
Dollar General Stores, 332
Donaldson, LuIkin & Jenrette, 153
Door-to-door selling, 343
DoubtIul positioning, 185
Dow, 229, 231
Downsizing, 22
Dura-plast, Inc., case, 534545
E
EADS, 193
Earnings per share, 46
Earthlink Inc., 151
Eastman Chemical, 372
EasyJet, 293
eBay, 20
brieI history oI, 11
EchoStar Communications Corporation, 189
Eckerd retail drug chain, 28
E-commerce strategy, 373
Econometric methods oI Iorecasting, 95
Economist Intelligence Unit Report, 12
Education, Ior-proIit colleges, 73
EIIicient Consumer Response program, 311
EIIicient Networks Inc., 149
EIIort/results tests, 353
Electronic shopping, as direct
marketing, 376
Eli Lilly, 209, 229
EMC, 284
Emerging markets
deIinition, 171
market targeting strategy, 171173
Encyclopedia Britannica, 247, 283
End user customer relationships, 200202
assessing customer value, 201
customer Iocus, 200201
End users; see also Buyers; Customers
channel conIiguration and, 303
identiIying and describing, 79
Enron, 6569
Environmental inIluences, consumer
purchasing activities, 8081, 443
Environmental issues, products and,
281282
Epinions.com, 139
Epoch Partners, 65
Epson, 335
Ericsson, 54, 57, 5859, 150
Ernst & Young, 142
Estee Lauder, 302303
Ethical issues
Boeing Co. and, 4
in collecting and using inIormation,
144145
customer privacy, 144
higher demand Ior ethical behavior
and social responsiveness, 17
Internet, spyware and adware, 139
neuromarketing, 144
in price analysis, 328
price oI cigarettes in developing
world, 329
selling and sales management, 362
Ethicon Endo-Surgery Inc., 166
Evaluation
in marketing strategy, 37, 434439
organizational relationships and,
209210
sales Iorce, 370371
Exclusive distribution, 301, 303
Executives, qualiIications oI, and global
marketing strategies, 419
Subfect Index

-
Exide Technologies, 66
Experience-curve analysis, 325
Experiential concept, 179
Experiential marketing, 356
External marketing, 429430
External markets, metrics Ior, 441
E
Eeature/beneIit selling, 362
Eeatures, as product improvement, 281
Eederal Trade Commission Act, 328
EedEx, 365, 366
Einance, marketings link to, 404
Einancial Accounting Standards Board, 26
Einancial analysis
break-even analysis, 4850
contribution analysis, 48
Ior marketing plan, 4553
model, 48
ratio analysis, 4547
situational analysis, 4548
supplemental, 5053
unit oI, 45
Einancial considerations, channel strategy
selection and, 304
Einancial constraints, need Ior
and, 193194
Einancial perIormance, price to improve,
320, 321
Einancial planning, 50
Einer segmentation strategies, 116117
Einmeccanica SpA, 192
Einnair, 195
Eirst-purchase models, 243
Eixed-assets turnover, 47
Eixed-charge coverage, 47
Eixed costs, 48
Elat organizations, 401402, 429
Elexibility
channel strategy selection and, 304
management, 209
pricing strategy and, 329331, 334335
supply-chain management and, 313
Elextronics International Ltd., 58, 59
Eoot Locker Inc., 156, 158
Eootwear Market Insights, 154
Eord, 38, 74, 144, 270, 356
Eorecasting
guidelines Ior, 94
market opportunity analysis, 9091
price analysis and, 324
techniques Ior, 9496
test marketing, 184
Eorrester Research Inc., 308, 372, 407
Fortune, 309
Eox, Internet marketing, 341
Eragmented markets, deIinition, 171
Eranchises, 299
Erequent Ilyer programs, 201
Euji, 89, 194, 202, 204
Eunctional concept, 179
Eunctional organizational design, 407
G
Game theory, 327
Gap, 27, 101, 176, 185, 346
Gartner Group, 217
Gartner Inc., 149
Gateway, 84, 222
Gatorade, 31, 178
General Electric, 207, 221, 268, 269, 406
case, 481490
General Eoods Corporation, 134
General Mills, 177
General Motors, 34, 38, 67, 70, 148, 149,
170, 173, 402, 415
case, 453459
Generic market segmentation, 102
Generic product market, 75
Geographic location, 103
Geography-driven design, 418
sales Iorce organization, 367
Gillette, 109, 175, 269, 275276, 319,
320, 321, 335
Giorgio Armani, 348
GlaxoSmithKlein Biologicals, 15
Global Account Manager/Management,
201, 412
Global branding, 286
Global Crossing Ltd., 66, 69, 326
Global Exchange, 155
Globalization
as challenge to strategic marketing,
1516
channel management and, 307308
labor costs and, 15
Global marketing strategies
coordination and communication,
418419
executive qualiIications, 419
marketing plan, 4142
organizational considerations, 418
strategic alliances, 419
variations in business Iunctions, 418
Global markets
deIinition, 171
GlobalNet Exchange (GNX), 307
Global relationships
network corporations, 210
trading companies, 210211
GlobeSecNine, 189
Goldman, Sachs & Co., 60, 65, 150
Goodyear, 275
Google Inc., competitive situation oI, 31, 32
GORE-TEX, 89, 25
Government corporations, 211
Government relationships
government corporations, 211
multiple-nation partnerships, 211
role oI, in global relationships,
211212
single-nation partnership, 211
Grocery industry, online, 38, 39
Gross proIit margin, 46
Group buying, Internet and, 318
Group manager, 271
Growth markets, market targeting strategy,
173174
H
H. J. Heinz & Co., 159
Hallmark Cards, 245, 307
Hardy Soup, 240
Harley-Davidson, 201
positioning and targeting, 185
Harrahs Entertainment, 133
Healthy Choice Eoods, 224, 284
Hennes and Mauritz (H&M), 230, 292, 432
case, 385387
Hero Motors Ltd., 110
Hershey Eoods, 402
Hewlett-Packard, 7, 8, 11, 25, 67, 129, 152,
209, 229, 245, 268, 269, 305, 327
case, 620625
High-active pricing strategy, 331
High-passive pricing strategy, 331
Holycon, 330331
Home Depot, 67, 332
HomeGrocer.com, 39
Homescan Online, 133
Honda, 270
Honeywell Inc., 205
Horizontal competition, 85
Horizontal price Iixing, 328
Horizontal relationships, 198199
Hot spots, 148149
House branding, 307
Human resource management, marketings
link to, 404405
Hybrid/process-type, 402403
Hyundai
partnering with DaimlerChrysler, 202
positioning strategy, 179
I
Iberia, 195
IBM, 2122, 25, 84, 97, 142, 143, 148,
149, 152, 180, 192, 193, 224, 269,
278, 283, 301, 302, 305, 409
case, 583589
Subfect Index

-
IBMCont.
Iceland, 443
ICI Eertilisers, 110
Idea generation
by customers, 231
incentives, 233
research and development, 233
sources oI, 229231
IdentiIiable segments, 110
Identity implementations, 272
IDEO, 238
iEormation Group, 85
Illustrative market segment analysis,
113114, 120121
IMS Health Inc., 138
IMS International, 133
Incentives
idea generation and, 233
in marketing plan
implementation, 429
Ior salespeople, 370
as sales promotion, 355
Income, market segments and, 110
Incremental innovation, 222
India, as customer source and
globalization issues, 15
Inditex, 5, 6
Industrial design, 238
Industrial market, sales promotion
targeted at, 356357
Industrial products, test marketing, 242
Industry analysis, 83
Industry structure
emerging markets and, 172
global markets, 176177
growth market, 174
market targeting strategy and, 171
mature markets, 175
InIormation
accessible memory Ior, 129
acquisition oI, and market
orientation, 5
disseminating through Internet, 373
distribution Ior synergy, 127128
ethical issues in collecting and
using, 144145
Ior evaluating competitors, 86
marketing research inIormation
131133
impact oI Internet on inIormation
cost and availability, 138
133134
market sensing capabilities, 14
Ior strategic evaluation, 442
types oI marketing inIormation
available, 129130
InIormational activities, as sales
promotion, 355
InIormation oIIicer, 411
InIormation Resources Inc., 112, 118, 133,
134, 138, 241242, 275
InIormation search, in buying decision
process, 80
InIormation systems, 138141
database systems, 140
decision-support systems, 140141
management inIormation systems,
139140
InIormation technology, organizational
Ingram Micro, 402
Innovation
adoption oI, 243
characteristics oI successIul, 225
company growth and, 221
creating customer value, 12
culture and strategy Ior, 225, 226227
disruptive innovations, 224
incremental, 222
substantial, 222
technology advancement and, 16
transIormational, 222, 224225
Innovators Solution, 1he (Christensen &
Raynor), 224
Insight Express, 134
Integrated marketing communications
(IMC), 346347
Integrated perIormance measurement, 53
Integration, organizational design and
challenges oI, 403406
Intel, 148, 149, 150, 152, 222, 226, 229,
269, 301, 302, 321, 322
market initiatives, 169
Intensive distribution, 301
Interactive marketing, as part oI
promotion strategy, 340
Interbrew, 409
InterIace Inc., 443, 444
Intermediaries, channel conIiguration
and, 303304
Internal inIormation systems, 131133, 442
Internal marketing, 429430
Internal markets, metrics Ior, 441
Internal partnerships, 198199
beneIits oI, 205
guidelines Ior developing, 205
Internal redesign, 23
Internal structure, marketing plan
implementation and, 431432
International channels, 309310
Internet; see also Internet strategy
ABB use oI, 197
catalogs, 357
channel globalization, 307308
communication Ieatures oI
brand building, 373
creating awareness and interest, 373
disseminating inIormation, 373
improving customer service, 373
obtaining research inIormation, 373
customer Ieedback on, 139
distribution and, 293, 294
electronic shopping as direct
marketing, 376
groceries online, 38, 39
impact on price, 317, 318
Internet-based supply chains, 312
as major Iorce Ior change, 3738
marketing strategy Ior, 3738
monitoring and control oI new
products, 244
online market research, 134
online surveys, 139
organizational design and, 407408
peer-to-peer product assessment, 139
positioning Internet-based channel,
411412
reverse auction, 37
sales Iorce and, 360
spyware and adware, 139
trade shows on, 356
viral marketing, 341
voice over Internet protocol
(VOIP), 88
Wi-Ei, 148152
wireless phone industry, 5459
Internet strategy, 371374
deciding Internet objectives, 372373
e-commerce strategy, 373
Iuture oI, 374
measuring eIIectiveness, 374
positive results oI, 372
value opportunities and risks, 373374
Interorganizational relationships;
see Organizational relationships
Intuit, 5
Inventory to net working capital, 47
Inventory turnover, 47
Investment industry, 5965
Ipsos, 138
J
Jaguar, 277
Japan
Ministry oI International Trade and
Industry, 211
JC Penney, 28
Jeep, 199
JetBlue, 20, 28, 224
Johnson Controls, 405
marketing and sales teamwork at, 406
Johnson & Johnson, 67, 70, 134, 180, 268
case, 162167
Subfect Index

-
Joint ventures, 204205
Judgmental Iorecasting, 94
Jury oI executive opinions, 96
K
Kantar Group, The, 138
Kao, 243
Kawasaki, 194
Kelloggs, 159, 224, 277, 284
Key Account Management, 201
Key Account Manager, 412
Key competitor, 8688
Kimberly-Clark, 107, 222, 402
KingIisher, 307
Kiosk shopping, as direct marketing,
376377
KLM, 100, 196
Kmart, 28, 66, 69, 307
Knowledge management, 142144
importance oI, 142
leveraging customer knowledge,
143144
role oI chieI knowledge oIIicer,
142143
Kodak, 73, 89, 277
Korea, partnership with China, 211
Korean Air, 196
KraIt Eoods, 245, 403
Krispy Kreme, 300
Krogers, 279
L
Labor costs, globalization and, 15
LanChile, 195
Land Rover, 285
Lands End, 372, 376
Lastminute.com, 287
Lateral partnerships, 198199
Lead customer analysis, 223
Leadership structure, in organizational
Lead user analysis, 231
Lean supply chain, 312
Learning; see also Continuous learning
about markets, 126129
accessible memory, 129
inIormation distribution Ior
synergy, 127128
mutually inIormed interpretations,
128129
competitive advantage and, 126
Learning-curve analysis, 325
Learning organization
competitive advantage and, 126
market orientation, 5, 125126
Legal issues
in price analysis, 328
Lego, 308
Leverage ratio, 47
Leveraging strategy, 284285
cobranding, 284285
licensing, 285
line extension, 284
overleveraging, 285
stretching brand vertically, 284
Lever Brothers, 311
Levi, 98, 282, 309
expanding in mature market, 175
LG, 15, 211
Licensing, 285
LiIe cycle costing, 53
LiIestyle variables, 103104
Light-emitting diodes (LED), 221
Limited, The, 305
Line extension, 284
Linksys, 148, 149
Linux, 150, 302
Lion, 243
Liquidity ratio, 4647
L.L. Bean, 376, 377
Loctite Corporation, 324
Long-term debt to equity ratio, 47
Loral Space and Communications Ltd., 192
LOreal, case, 589596
LOT Polish Air, 195
Louis Vuitton, 3, 179, 281, 338
Low-active pricing strategy, 332
Low-passive pricing strategy, 332
Loyalty programs, 107
Lucent Technologies, 71
LuIthansa, 100, 195
Lutron Electronics, 116
M
Macy & Company, 301
Magazines
costs oI advertisement, 350
market segmentation and, 104
Magna Steyr, 199
Major-account program, 417
Management, structure oI, and channel
management, 306
Management inIormation systems,
130, 139140
Manco, 126
Manistique Papers, knowledge
sharing at, 143
Mannesmann, 55
ManuIacturers
296298
Market access, channel strategy selection
and, 304
Market coverage analysis, 86
Market-driven design, sales Iorce
organization, 367
Market-driven development, 3536
strategic brand management, 36
value chain, price and promotion
strategies, 36
Market-driven organization;
see also Organizational design
designing, 3637
Market-driven strategy
achieving, 1214
aligning structure and process, 14
challenges Ior new era oI, 1417
creating value, 1012
customer linking capabilities, 14
designing, 3234
marketing relationship strategy, 34
planning Ior new products, 34
distinctive capabilities, 610
globalization challenge, 1516
implementing and managing, 3637
designing eIIective market-driven
organization, 3637
strategy implementation and
control, 37
market orientation and, 36
market sensing capabilities, 14
reasons to pursue, 3
technology diversity challenge, 16
underlying logic oI, 2
Market entry barriers, competition
analysis, 8485
Market-Iocused design, 410
Marketing
corporate role oI, 410411
new roles in, 411412
role and Iunction oI, 29
role in product strategy, 271
shiIting language oI, 365
supply-chain management and, 312313
Marketing audit, 436439
Marketing coalition company, 412413
Marketing concept, vs. market
orientation, 4
Marketing decision-support systems,
140141
Marketing Fact Book, 1he, 118, 119
Marketing inIormation, types oI, 129130
Marketing intelligence systems, 142144
Marketing manager
role oI, 29
Subfect Index

-
Marketing metrics, 440441
Marketing mix, 34
Marketing organizations
corporate marketing, 410411
new Iorms oI, 412414
new marketing roles, 411412
organizing concepts, 415417
transIorming vertical
organizations, 412
venture marketing organizations,
413414
Marketing plan
budgeting, 50
contents oI, 37, 423424
Iinancial analysis Ior, 4553
Iorecasting, 50
Irequency oI, 39
as guide Ior implementation, 423
international, 4142
managing process oI, 424
new products, 244
outline, 4042, 425426
parts oI, 4041
planning unit, 40
responsibility Ior, 40
Marketing plan implementation
balanced scorecard, 430431, 433434
communication, 429
comprehensive approach, 430431
improving, 428429
incentives, 429
internal marketing Ior, 429430
internal structure and, 431432
organizational design and, 428429
process issues, 427428
role oI external organization in,
433434
skills Ior, 428
Marketing program, 34
Marketing program decisions, 180182
competitive advantage, 181
cross-Iunctional relationships, 182
designing positioning strategy,
181182
pricing strategy, 181
product strategy, 181
promotion strategy, 181
value-chain strategy, 181
Marketing relationships, 34
Marketing research; see also Research
131133
deIinition, 130
generating ideas and, 232
industry, 136138
problem deIinition, 130131
research studies, 134138
Marketing research inIormation
131133
impact oI Internet on inIormation cost
and availability, 138
133134
Marketing research studies, 129
Marketing Science Institute, 247, 345
Marketing strategy
alteration in, as product improvement
strategy, 281
business strategy and, 2830
designing market-driven strategies,
3234
marketing relationship strategy, 34
planning Ior new products, 34
evaluation and control, 434439
implementing and managing
market-driven strategy, 3637
designing eIIective market-driven
organizations, 3637
strategy implementation and
control, 37
Ior Internet, 3739
interrelation with corporate strategy, 21
market-driven development, 3536
strategic brand management, 36
value chain, price and promotion
strategies, 36
Ior new product, 237, 239241
market targeting, 241
organizational design, 401
perIormance measures, 439440
plan implementation, 426433
responsibilities, 29
continuous learning, 3132
market vision and structure, 31
segmenting markets, 31
strategic marketing, 2930
Market opportunity analysis, 9091
Market orientation, 36
achieving, 56
competitor intelligence, 4
cross-Iunctional assessment, 56
cross-Iunctional coordination, 5
customer Iocus, 4
customer in, 433
customer value, 5
inIormation acquisition, 5
learning organizations, 5
vs. marketing concept, 4
marketing plan implementation,
432433
nature oI, 3
organizational learning and, 125126
perIormance implications, 5
shared diagnosis and action, 6
Market position
building, as objective oI organizational
relationships, 207
gaining as pricing objective, 321
Market potential, 90
Markets
access to, and interorganizational
relationships, 194
changing composition oI, 77
complex, 99
consumer, 103104
gaining understanding oI, 7374
learning about, 126129
organizational, 104105
simple, 99
size estimation, 9091
stable, 99
strategies interlinked with, 7273
turbulent, 99
Market segmentation, 97121
activities and decisions, 102
creating new market space, 100
Iiner strategies, 116117
goal oI, 31
identiIying market segments,
102107, 110
buyers needs and preIerences,
105107
characteristics oI people and
organizations, 103105
customer group identiIication,
111114
Iorming groups based on response
diIIerences, 114116
product use situation
segmentation, 105
purpose oI segmentation
variable, 103
importance oI, 9798
market characteristics and, 99
market-driven strategy and, 99102
market selection Ior, 102
market targeting and strategic
positioning, 100101
matching opportunities to
capabilities, 100
method oI, 117118
one-to-one marketing, 9798
requirements Ior
actionable segments, 110
cost/beneIit segmentation, 110
identiIiable segments, 110
product diIIerentiation,
110111
response diIIerences, 109110
stability over time, 110
situation analysis and, 31
stability over time, 110
value opportunities and, 100
Subfect Index

-
Market segmentation strategies, 114116
based on response diIIerences,
114116
cluster analysis, 114
cross classiIication analysis, 112
experience and available inIormation,
111112
Iiner strategies, 116117
mass customization, 116117
microsegmentation, 116
perceptual maps, 114116
segmentation illustrations, 113114
selecting, 117121
variety-seeking strategy, 117
Market segments
actionable, 110
close customer relationships, 116
diverse customer base, 116
estimating segment attractiveness, 120
identiIying, 102107
buyers needs and preIerences,
105107
characteristics oI people and
organizations, 103105
product use situation
segmentation, 105
purpose oI segmentation
variable, 103
strategic analysis oI
competitor analysis, 119120
customer analysis, 118119
estimating segment
attractiveness, 120
positioning analysis, 120
segment analysis illustration,
120121
segmentation Iit and
implementation, 120
Market selectivity strategies, organizational
Market sensing, 129
capabilities, 14
Iramework, 128
Market share, 90
Market space, 100
Market targeting
Ior new products, 241
Market targeting strategy, 168177
emerging markets, 171173
examples oI, 168169
Iactors inIluencing targeting
decision, 170171
global markets, 176177
growth markets, 173174
industry structure and, 171
mature markets, 174175
product diIIerentiation, 170
purpose oI, 3334
segment targeting, 170
targeting alternatives, 169170
Market test, 96
Market vision, 31
Marks & Spencer, 142, 307
Marlboro, 269
Marriott, 111, 201
partnering strategy, 201
Mars, 297
Mary Kay, 371
Mass customization, 116117
in product design, 239
MasterIoods, 297
Matrix design, 410, 418
Matsushita, 57, 89, 354
Mattel, 308, 356
Mature markets, market targeting strategy,
174175
McDonalds, 151, 176, 269, 281
case, 253256
McDonnell Douglas, 211
MCI Communications Corporation, 140
McKinsey & Company, case, 6570
Media
advertising strategy and decisions oI,
350351
changes in mass markets, 351
Mercedes-Benz, 199, 269, 331
Merrill Lynch & Co., 59, 60, 63, 64
Mervyns, 333
MeshNetworks, 148, 149
META Group, 372
Metro, 307
Mexicana, 195
Microsegmentation, 116, 169
MicrosoIt Corporation, 13, 16, 32, 57, 89,
148, 149, 150, 222, 269, 283, 301,
302, 307, 335
case, 467474
Missionary selling, 364
characteristics important to, 370
Mitsubishi, 192, 194
Mobil, 113114
Models, in decision-support systems, 141
Modularity in product design, 239
interorganizational relationships and,
190191
Momentum accounting, 277
Monster.com, 286
overview oI, 109
Mont Blanc, 185
Morgan Stanley, 60
Motorola, 34, 37, 54, 56, 58, 150, 189,
204, 268, 308
Multichanneling, 308
Multiple-nation partnerships, 211
Multivariate testing, 183
Muriel Siebert & Co., 64
Murphy Brewery Ireland, Limited, case,
562574
Murphys Oil Soap, 350
Music industry, innovation in, 13
Mutually inIormed interpretations,
128129
N
Nabisco, 280281
Nanophase Technologies Corporation,
case, 627640
NASCAR, 356
Natuzzi, 301
NCR, 150
Need recognition, 342
Needs and preIerence variables, 103
NescaIe, 270
Nestle, 159, 176, 177, 204, 268, 282,
286, 409
brand management strategy, 35, 36
Net proIit margin, 46
Network corporations, 210
Network organization, 413
Networks, as new organizational Iorm,
2324
Neuromarketing, 144
New Balance Athletic Shoe Inc.,
154, 158
New business selling, 363364
New markets, developing, as objective oI
organizational relationships, 207
New product models
consumer adoption process, 243
Iirst-purchase models, 243
repeat-purchase, 243
New product planning and development,
221247
business analysis, 236237
characteristics oI successIul
innovators, 224
commercialization oI, 243244
concept evaluation, 234236
customer value and, 223
development process, 237239
collaborative development, 239
industrial design, 238
process development, 239
product speciIications, 238
prototype, 237, 238
use tests, 238239
eIIective development processes,
227228
Iorecasting, 95
idea generation
methods oI generating ideas,
231233
sources oI, 229231
Subfect Index

-
New product planning and
developmentCont.
innovative culture and strategy Ior,
221, 222, 225, 226227
marketing plan, 244
marketing strategy, 34, 239241
matching capabilities to value
opportunities, 223224
monitoring and control, 244
product models, 243
responsibility Ior, 228
screening, 233234
steps in, 226
test marketing
conventional, 242
external inIluences, 243
industrial products, 242
length oI test, 243
scanner-based test marketing,
241242
simulated test marketing, 241
test sites Ior, 242243
transIormational innovation, 224225
types oI new products, 222
variations in process
customized, 246
platIorm products, 245
proactive cannibalization, 246247
process-intensive products, 246
technology push processes, 245
New product team, 409
Nielsen Media Research, 133
Nike, 34, 180, 281, 284, 297, 335, 350
case, 153159
Nikon, 105
Nintendo, 222
Nokia, 136, 150, 268, 269
case, 5459
strategic evaluation and, 443445
NOP World US, 138
Nortel Networks, 71
NorthPoint Communications
Group Inc., 66
Northwest, 196
Novartis, sales Iorce strategy, 369
Novaton, pricing issues, 330331
Novell Inc., 155
Novotel, 107, 216
NYCwireless, 150151
O
Objective and task budgeting, 344
Objective inquiry, 126127
Objectives
in advertising strategy, 347349
oI corporate strategy, 23, 25
OIIice Depot, 332
Internet strategy, 360, 361
Old Navy, 27, 185
Olivetti, 207
One-to-one marketing, 9798
Oneworld, 195
Operating proIit margin, 46
Operational CRM, 216
Operations, marketings link to, 404
Oracle, 209, 360
Organic organizational Iorm, 416
Organizational capabilities, closely related
to organizational process, 7
Organizational change, 401402
internal redesign, 23
vertical disaggregation, 2223
Organizational design, 400419
characteristics oI good, 415
global marketing strategies and, 418
integration challenge, 403406
Internets impact on, 407408
marketing plan implementation
and, 428429
marketings corporate role, 410411
new Iorms oI
marketing coalition company,
412413
new marketing roles, 411412
transIorming vertical
organizations, 412
venture marketing organizations,
413414
organizational change, 401402
organizing concepts, 415417
partnering with other organizations,
406407
Ior sales Iorce, 366367, 416417
strategy and, 401
types oI
Ilat, 401402
Iunctional, 407
hybrid/process-type, 402403
market-Iocused design, 410
matrix design, 410
product-Iocused, 407408
vertical, 401
Organizational markets, 104105
Organizational process
closely related to organizational
capabilities, 7
distinctive capabilities, 78, 10
Organizational purchase, 80
Organizational relationships
control and evaluation, 209210
examining potential Ior collaborative
global relationships, 210212
network corporations, 210
strategic role oI government in,
211212
growth trends in strategic
relationships, 192
objective oI relationship
developing new markets and
building market position, 207
identiIying and obtaining new
technologies and competencies,
206207
market selectivity strategies, 207
restructuring and cost-reduction
strategies, 207208
partnership capabilities, 209
rationale Ior interorganizational
access to markets, 194
environmental turbulence and
diversity, 191192
Iinancial constraints, 193194
increasing complexity oI
technology, 192193
inIormation technology, 194
skill and resource gaps, 192194
value-enhancing opportunities,
190191
relationship management guidelines
conIlict, 208
cultural diIIerences, 209
Ilexibility, 209
leadership structure, 208209
learning Irom partners
strengths, 209
planning, 208
technology transIer, 209
trust and selI-interest, 208
types oI
customer-supplier relationship,
198199
distribution channel relationships,
199200
end user customer relationships,
200202
internal partnering, 205
joint ventures, 204205
strategic alliances, 202204
Organizational structure, market-driven
strategy and, 14
Organizations
designing eIIective market-driven,
3637
global dimensions oI, 417419
Outsourcing, 239, 406
BMW example, 199
competitive analysis, 83
Overpositioning, 185
Ownership VMS, 299
P
Packard Bell, 84
Palm Inc., 222, 278
Subfect Index

-
PalmOne, 298
Palm Pilot, 273
Panasonic, 57, 98, 222
Partnering, with other organizations,
406407
Partnerships, internal, 205
Payless ShoeSource, 441
Penetration strategy, 331
PeopleSoIt, 360
PepsiCo, 34, 7273, 239, 246, 268, 270,
285, 356, 364, 402
Percent oI sales budgeting, 344
Perceptions, oI buyers, and market
segmentation, 106107
Perceptual maps, 86, 87, 114116
PerIormance
implications oI market orientation, 5
sales Iorce standards, 371
PerIormance measurement
actions based on, 444445
criteria Ior, 439440
CRM and, 218
identiIying opportunities and
perIormance gaps, 442443
marketing metrics, 440441
Ior marketing strategy, 439440
normal and abnormal variability, 443444
obtaining and analyzing
inIormation, 442
Personal selling; see also Sales Iorce;
Sales Iorce strategy
advantages oI, 339
categories oI, 362363
Peterson Publishing Company, 104
Petroleum InIormation Corporation, 133
PIizer, 169170, 361
case, 508515
Pharmaceutical industry
database marketing and customer
privacy, 144
pricing strategy oI prescription drugs, 328
Philips Electronics, 16, 89, 221, 227, 443
Physical distribution management, channel
management, 306
Pic N Pay Shoe Stores, 332
Pier 1 Imports, 185
Pilkington, 16
Pitney-Bowes, 229
Planning, in organizational relationship
management, 208
Planning unit, 40
PlatIorm products, 245
PocketBroker, 65
Point-oI-purchase selling, 343
Polaroid Corporation, 4, 73, 268
Population, trends oI, in U.S., 81
Porsche, 125
Positioning analysis, in market segment
analysis, 120
Positioning concept
deIinition, 178
experiential, 179
Iunctional, 179
selecting, 179180
symbolic, 179
Positioning eIIectiveness, 178, 182185
Positioning models, 184
Positioning strategies, 177185
deIinition, 34, 178
determining eIIectiveness, 182185
customer and competitor research,
183184
positioning models, 184
test marketing, 184
development oI, 3536
errors
conIused positioning, 185
doubtIul positioning, 185
overpositioning, 185
underpositioning, 185
major initiatives oI, 178179
in market-driven strategy, 34
marketing program decision, 180182
Ior new products, 241
overview oI, 178179
price in, 317319
scope oI, 180
selecting positioning concept,
179180
Postpurchase behavior, in buying decision
process, 80
Power, in channel management, 307
Prada, 112
PreIerence mapping analysis, 275
Prescription drugs, pricing oI, 328
Price; see also Pricing strategy
improving Iinancial perIormance, 320
as instrument oI competition, 320
Internets impact on, 317, 318
marketing program considerations, 320
in positioning strategy, 317319
responsibility Ior pricing decisions,
318319
as signal to buyer, 320
Price analysis, 321328
cost analysis, 324326
customer price sensitivity, 322324
Iorecasts and, 324
legal and ethical issues, 328
strategic pricing, 53
value mapping, 324
Price diIIerences, Internet and, 318
Price discrimination, 328
Price elasticity, 322323
Price Iixing, 328
Price Ilexibility, 329331
Price inIormation, 318
Price leader, 333
Price segmentation, 334
Pricing objectives
achieve Iinancial perIormance, 321
gain market position, 321
inIluence competition, 321
product positioning, 321
setting, 320321
stimulate demand, 321
Pricing policy, 333
Pricing strategy, 316335
break-even pricing, 332
competition-oriented approaches, 333
cost analysis, 324326
cost-oriented approaches, 332333
cost-plus pricing, 332333
counterIeit products, 335
customer price sensitivity, 322324
demand-oriented approaches, 333
determining speciIic prices, 332333
distribution channel pricing, 334
high-active strategy, 331
high-passive strategy, 331
low-active strategy, 332
low-passive strategy, 332
marketing program considerations, 320
oI prescription drugs, 328
price analysis, 321328
price Ilexibility, 329331, 334335
price objectives, 320321
price positioning and visibility, 331
price segmentation, 334
pricing policy and structure, 333334
prisoners dilemma, 327
product liIe cycle pricing, 335
reverse auction pricing, 333
role oI price in, 317319
set pricing objectives, 320321
steps in, 320, 321
Pricing structure, 334
Prisoners dilemma, 327
Prius, 281
Privacy, invasion oI customer privacy, 144
Private branding, 279
Proactive cannibalization, 246247
Problem deIinition in market research,
130131, 134
Problem recognition, in buying decision
process, 80
Process development, 239
Processes, 27
Process-intensive products, 246
Procter & Gamble, 1, 6, 20, 134, 180, 205,
233, 243, 268, 278, 279, 281, 283,
286, 297, 322, 335, 342, 418
case, 612620
Subfect Index

-
Procter & GambleCont.
organizational change at, 400401
Product(s); see also New product planning
and development
vs. brand, 266
customer satisIaction and, 118119
customized, 116, 246
deIinition, 31
279287
platIorm, 245
process-intensive, 246
variety-seeking, 117
Product cannibalization, 275276
Product cost, cost analysis and, 325
Product diIIerentiation, 110
market targeting strategy through, 170
Product director, 271
Product-driven design, sales Iorce
organization, 367
Product elimination, 281
Product-Iocused design, 407408
Product grid analysis, 275
Product group/marketing
management, 271
Product improvement strategies,
280282
Product liIe cycle, 171172
industry structure and, 171
pricing and, 335
rate oI change, 274
strategies Ior, 275
Product line branding, 278
Product manager, 408409
Product market
deIinition, 74
determining boundaries and
structure, 7576
Iormation oI
changing composition oI
market, 77
extent oI market complexity, 77
purpose oI analysis, 7677
generic, 75
guidelines Ior deIinition, 75
illustrative structure, 78
matching needs with product
beneIits, 7475
product-type, 75
Product/market-driven design, sales Iorce
organization, 367
Product perIormance
additions to product line, 280
cost reduction, 280281
environmental eIIects oI products,
281282
marketing strategy alteration, 281
monitoring and control oI new
products, 244
product elimination, 281
product improvement, 281
tracking brand perIormance, 273274
Product portIolio, modiIications to, 282
Product portIolio management, 271
Product positioning, pricing objective
and, 321
Product speciIications, 238, 271
Product strategy
elements oI, 36
marketings role in, 271
role oI price in, 319
variety-seeking strategy, 117
Product-type market segmentation, 102
Product-type product-market, 75
Product usage rate, 113
Product use situation segmentation, 105
Product-variant market segmentation, 102
Product-variants, 75
ProIit, projections oI and new product
planning, 237
ProIitability ratio, 46
Pro Iorma income statements, 50
Progressive Insurance, customer needs at
center oI strategy, 74, 75
Promotional pricing, as sales promotion,
355, 357
Promotion strategy
advertising, 339
budgeting Ior, 344345
communication objectives, 342343
components oI, 339340
deciding role oI promotion
components, 343
developing, 340342
direct marketing, 340
eIIectiveness oI, 347
integrated marketing communications
(IMC), 346347
integrating and implementing, 346347
interactive/Internet marketing, 340
personal selling, 339
public relations, 340
role oI selling in, 362363
sales promotion, 339340
Prototype, 237238
PSA Peugeot Citron SA, case, 464466
Psion, 204
Psychographic variables, 103
Public relations, as part oI promotion
strategy, 340
Purchase behavior, market segmentation
and, 107108
Purchase-behavior variables, 103
Purchase decision
in buying decision process, 80
promotion and, 343
Q
Qantas, 195
QualiIlyer, 196
Quality control charts, 443
Quality costing, 53
Quest, 326
Quick ratio, 46
Quintiles Transnational, 14
R
Radio, satellite, 173
Radio Shack, 8, 189, 190, 234, 301
Rateitall.com, 139
Ratio analysis, 4547
Real-time pricing, 318
Rebates, 355, 356
Recall tests, 353
Red Hat, 302
Reebok, 154
Relational organizational Iorm, 416
Relationships; see also Organizational
relationships; Strategic
relationships
horizontal relationships, 194
rationale Ior interorganizational
vertical relationships, 194
Relationship strategies, in marketing
strategy, 34
Relationship VMS, 301
Repeat-purchase models, 243
Research
advertising, 353, 354
customer and competitor research to
determine positioning
eIIectiveness, 183184
generating ideas and, 232
obtaining inIormation through
Internet, 373
studies, 134138
Research and development
cutting in expenditures Ior, 233
idea generation, 229, 233
joint ventures Ior, 204205
new technologies and organizational
prototype design, 237238
Research studies, 134138
costs oI, 136
Subfect Index

-
deIining problem, 134
evaluating and selecting suppliers, 136
marketing research industry, 136138
online, 134
quality oI research, 136
research proposal, 135
understanding limitations oI
research, 136
Resource allocation, corporate strategy
and, 23
Response diIIerence
Ior customer group identiIication,
114116
in market segments, 109110
Restructuring strategies, organizational
Return on common equity, 46
Return on investment, 49
Return on stockholders equity, 46
Return on total assets, 46
Revenue/cost analysis, sales Iorce
deployment, 368
Revenue Iorecasts, new product planning,
236237
Reverse auction, 37, 333
Revlon, 302
Rio Nitrus, 13
Rivalry, among existing Iirms, 84
Robinson-Patman Act, 328
Rolex, 176, 179, 301
Rollerblade, 229
Roper Starch Worldwide, 114
Royal Doulton, 435
Royal Holland, 307
Rubbermaid Inc., 37, 277, 281
Russia, proIile oI middle class in, 79
Ryanair, 293
S
Sabritas, 73
SaIeway, 307
Sagem, 57
Sainsbury, 307
Sales, marketings link to, 404
Sales and eIIort response models, sales
Iorce deployment, 368
Sales channel, 365366
complexity oI customer
relationship, 366
customer buying power, 366
organizing multiple, 417
threshold level, 366
Sales Iorce
changes in, 360, 365
Internet and, 360
organizing, 416417
sales promotion targeted at, 357
types oI sales jobs, 363364
SalesIorce.com, 360
Sales Iorce estimation, 94, 96
Sales Iorce management
deployment oI, 367368
Iinding and selecting salespeople, 369
supervising and motivating
salespeople, 369370
training, 369
Sales Iorce strategy, 362
categories oI personal selling roles,
363364
deIining selling process, 364365
deployment oI sales Iorce, 367368
ethical issues oI, 362
evaluation and control, 370371
major-account program, 417
managing sales Iorce, 369370
organizational design, 366367
organizing multiple sales channels, 417
overview oI developing, 360362
role oI selling in promotion strategy,
362363
sales channel, 365366
types oI sales jobs, 363364
Sales Iorecast, 90
Salespeople; see Sales Iorce; Sales Iorce
management
Sales promotion, 354357
activities oI, 355357
advantages/limitations oI, 357
to consumer targets, 356
developing strategy, 357
expenditures on, 354, 355
to industrial targets, 356357
nature and scope oI, 354355
to sales Iorce, 357
to value-chain members, 357
Salomon Smith Barney, 60
Salus Biotech, 15
Sampson Tyrrell Enterprise, 285
Sams Club, 168
Samsung, 13, 15, 28, 7172, 202, 211,
270, 444
case, 250253, 475480
distribution transIormation, 296
Sara Lee, 180, 239
SAS, 100, 195
Satellite radio, emerging market Ior, 173
SBC Communications Inc., 149
Scanner-based test marketing, 241242
Scios Inc., 167
Screening, new product planning, 233234
Screening experiment, 183
Sears, 278, 307
Segmentation illustrations, 113114
Segmentation variables, purpose oI, 103
Segment identiIication; see Market
segmentation
Segment targeting, market targeting
strategy through, 170
Selective distribution, 301
SelI-interest, in organizational relationship
management, 208
Selling; see also Sales Iorce; Sales Iorce
strategy
categories oI, 363364
deIining process, 364365
role in promotion strategy, 362363
Services
as brand, 266267
channels Ior, 295296
Shared diagnosis and action, market
orientation, 6
Shell, 440
Sherman-Antitrust Act, 328
Shisheido, 280
Showrooms, 354
Siebel Systems, 360
Siemens, 67, 192, 372
Signode Corporation, 114
Simple markets, 99
Simulated test marketing, 241
Singapore Airlines, 195, 342
Single-Iactor models, sales Iorce
deployment, 368
Single-nation partnership, 211
Sinopec, 205
Sirius, 173, 189
Situation analysis, 3032
continuous learning, 3132
market vision and structure, 31
ratio analysis, 4548
segmenting markets, 31
Situation summary, 40, 41
Skills and accumulated knowledge,
Skimming strategy, 331
Skoda, 283
SkyTeam, 195
Slendertone, case, 490501
Smith & Nephew-Innovex, case, 651663
Snytex Corporation, 322
Socioeconomic trends, 375
SoIitel, 107, 216
Sogo shosha, 210211
Solution selling, 362
Sonesta Hotels, marketing plan
outline, 425426
Sony, 57, 89, 177, 222, 270, 281, 298
Sony Ericsson, 444
Southwest Airlines, 3, 8, 22, 317
internal marketing, 431
Southwestern Bell Telephone Company, 142
SpaceShipOne, 16
Spanair, 195
Specialization, 415
Special research studies, 442
Sponsored events, 356
Sprint, 189, 301
Subfect Index

-
Spyware, 139
St. Josephs Health System, 165
Stable markets, 99
Standardization strategies, 176
Standardized inIormation, 442
Standardized inIormation services, 129,
133134
Standard Rates and Data Services, 351
Stanley Tools, 229
Staples, 411
Internet and, 407
Star Alliance, 195
Starbucks Corporation, 151
case, 380384
venture marketing organization at,
413414
Statistical demand analysis, 96
StonyIield Earm, 245
Strategic alliances, 202204
alliance vulnerabilities, 204
deIinition, 202
global marketing strategies, 419
kinds oI alliances, 203
reasons Ior Iorming, 203
success oI some, 202203
success requirements Ior, 204
weaknesses in, 202
Strategic analysis
developing strategic plan and, 28
market segments
customer analysis, 118119
estimating segment
attractiveness, 120
positioning analysis, 120
segment analysis illustration,
120121
segmentation Iit and
implementation, 120
Strategic brand management, 264289
brand analysis, 272277
tracking brand perIormance,
273274
brand equity, 272, 276277
deIinition, 276
measuring, 276
brand identity, 277279
extending brand identiIication
concept, 278
options Ior, 278279
brand portIolio management, 287288
challenges Ior, 268
elements oI, 36
280282
279287
brand leveraging strategy, 284285
brand strengthening strategies,
282283
280282
product portIolio modiIications, 282
responsibility Ior
marketings role in product
strategy, 271272
product/brand management, 270
product group/marketing
management, 271
product portIolio management, 271
role oI brands, 267268
Strategic business unit
characteristics oI ideal, 27
corporate strategy and, 2627
criticism oI, 27
deIinition, 26
developing strategic plan Ior, 28
Strategic costing, 53
Strategic CRM, 217
Strategic evaluation, 434439
actions based on, 444445
customer relationship
management, 435
identiIying opportunities and
perIormance gaps, 442443
marketing audit, 436439
marketing metrics, 440441
normal and abnormal variability, 443444
obtaining and analyzing inIormation, 442
overview oI activities, 435
perIormance criteria and measures,
439440
Strategic Horizons, 356
Strategic intelligence system, 442
Strategic management accounting, 5053
Strategic marketing
challenges Ior new era oI, 1417
CRM and, 218219
globalization challenge, 1516
role and Iunction oI, 2930
technology diversity challenge, 16
Strategic marketing audit, 436439
Strategic partnering, 34
Strategic plan, 28
Strategic pricing, 53
Strategic relationships; see also
Organizational relationships
growth trends in, 192
range oI, 190
rational Ior interorganizational
reasons Ior, 189
Strategic vision, developing about
Iuture, 8889
Structure, 27
Style, as product improvement, 281
Substantial innovation, 222
Substitutes, competition analysis, 85
Sumerset Houseboats Inc., 200
SunGuard Data Systems Inc., 360
Sun Microsystems, 57, 267, 302, 307
case, 394399, 664670
Supervising, salespeople, 369370
Supplier partnerships, 198199
Suppliers
bargaining power oI, and competition
analysis, 85
customer-supplier relationships,
198199
Supply-chain management, 311313
agile supply chains, 312
EIIicient Consumer Response
program, 311
Ilexibility and change, 313
impact oI, on marketing, 312313
Internet-based supply chains, 312
lean supply chain, 312
limitations and risks in, 312
SurveyMonkey, 139
Surveys, online surveys, 139
Swissair, 100, 195
Swiss Army, 284
Symbian, 57
Symbolic concept, 179
Symbol Technologies, 150
Synergy, corporate strategy and, 23
Synovate, 138
Systems, 27
T
Tandy Corporation, 8
Target Corporation, 140, 279, 307,
308, 309
Target costing, 53
Targeting; see Market targeting
Technical selling, characteristics
important to, 370
Technology
as challenge to strategic
marketing, 16
impact on markets, 71, 73
importance oI, 7172
increasing complexity oI, and
need Ior interorganizational
inIormation technology and
organizational relationships, 194
market complexity and, 77
obtaining new, as objective oI
organizational relationships,
206207
Subfect Index

-
transIer oI, in organizational
Technology push processes, 245
Telecommunications industry
cell phone industry, 5459, 7172
voice over Internet protocol (VOIP), 88
TeleIonica, 69
Telemarketing, as direct marketing, 376
Television
costs oI, 350
declining audience ratings, 351
testing oI, 353, 354
Telus Mobility, case, 670683
Tesco, 3, 38, 125, 128, 140, 307, 309
Test marketing
Ior advertising eIIectiveness, 353
cost oI, 184
determining positioning
eIIectiveness, 184
Ior new product
conventional, 242
external inIluences, 243
industrial products, 242
length oI test, 243
scanner-based test marketing,
241242
simulated test marketing, 241
test sites Ior, 242243
use tests, 238239
Test sites, 242243
Thai Air International, 195
Third Generation (3G), 150, 236
Thomson Venture Economics, 149
3G, 5459
3M Company, 34, 226, 409
marketing planning process at, 427
Threshold levels, 366
TiIIany & Co., 3
Time-series analysis
advanced, 9495, 96
traditional, 94, 96
Times-interest-earned, 47
Timex, 350
TiVo, 149
T-mobile, 149
TNS, 138
Tobacco industry, price oI cigarettes in
developing world, 329
Tommy HilIiger, 239
Toshiba, 84, 149
Total-assets turnover, 47
Toyota, 74, 269, 281, 309, 334, 403, 405
case, 501507
Toys R Us, 332
Trade selling, 364
Trade show
on Internet, 356
as sales promotion, 356
Trading companies, 210211
Training, Ior salespeople, 369
Transactional organizational Iorm, 416
Transactional selling, 360, 362
TransIormational innovation, 222
Transitional markets, 171
Travelocity.com, 38
Trend Micro, 15
Tri-Cities Community Bank, case, 683689
Trust
management, 208
Turbulent markets, 99
Twentieth Century Eox, 177
Tyco International Ltd., 166
Tylenol, 281
U
Underpositioning, 185
Unilever, 107, 271, 286, 418
distribution, 311
United Airlines, 86, 195
United Parcel Service, 148
United States Automobile Association
(USAA), 102
United Technologies, 372
Urban OutIitters Inc., 129
U.S. Surgical Corporation, 166, 223, 228
U.S. Trust Corporation, 60, 63
US Airways, 195
User expectation, 94, 96
Use situation variables, 103
Use tests, 238239
V
Value; see also Customer value
Value-added chain, in competitive
analysis, 83
Value-added competencies, channel
strategy selection and, 304
Value-added selling, 363
Value chain, in marketing strategy, 36
Value-chain analysis, competitor analysis,
119120
Value-chain costing, 53
Value-chain members, sales promotion
targeted at, 357
Value-chain strategy
channel oI distribution strategy, 298305
deIinition, 292
Iactors aIIecting channel selection, 310
international channels, 309310
managing the channel, 305309
strategic role oI distribution, 293298
supply chain management issues,
311313
Value-enhancing opportunities,
and, 190191
Value initiatives, 1112
Value mapping, 324
Value migration, 73
Value opportunities
matching to capabilities, 100
Value proposition, 278
Vanguard Group, 170
Vans Inc., 155
Vantage Partners, 192
Variability, normal and abnormal,
443444
Variable costs, 48
Variables, in market segmentation, 103
Variety-seeking strategy, 117
Varig Brazilian Airways, 195
Venture marketing organizations,
413414
Venture team, 409
Verizon Communications, 149
case, 448453
Versace, 348
Vertical competition, 85
Vertical disaggregation, 2223
Vertical market, 104
Vertical marketing system, 298301
administered, 300301
contractual, 299300
ownership, 299
relationship, 301
Vertical organizations, 401
transIorming, 412
Vertical relationships, 194
Victorias Secret, 277, 278, 280, 434
Viral marketing, 341
Virgin Airways, 219
Virgin Group, 26, 284
Virtual shopping, 184, 275, 276
Vision statement, 25
VNU, 133, 138
VodaIone Group, 55
Voice over Internet protocol (VOIP), 88
VoiceStream, 149
Volkswagen, 199, 229
Volume, eIIect on cost, 325
W
Walgreens, 411
Wal-Mart, 3, 8, 15, 22, 28, 85, 140, 168,
196, 279, 305, 307, 434
case, 545550
competition, 326
Warren Kade, 192
Web site, costs oI, 350
Subfect Index

-
Webvan, 39
Westat Inc., 138
Whirlpool, customer relationship
management at, 436
Wi-Ei
case, 148152
deIinition, 148
hurdles, 151
reasons Ior takeoII, 149
steps to set up, 152
Williams-Sonoma, 308, 374
Wings, 196
Woolworth, 307
World Bank, 142
Worldwide Retail Exchange, 307
Wrigleys, 175
WSL Strategic Retail, 157
X
Xerox, 143, 202, 204, 229230, 233
XM Satellite Radio, 173
Y
Yahoo! Inc., 32
case, 459464
Yamaha, 335
Yankee Candle Co., 297
Young & Rubicam, 157, 234, 277, 352
Z
Zara, 3, 7, 14, 230, 292, 313, 403
cross-Iunctional assessment, 5, 6
Zoomerang, 139
Subfect Index

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presentation Ior each chapter

Source: Graph Irom

Market-driven strategies begin with an understanding oI the

Source: Excerpt Irom

Start with the generic need satisfied by

Source: U.S. Bureau oI the

Evaluate key competitors. 3

Many Iirms begin with very inIormal Iorecasting

Market segmentation is oIten a requirement Ior competing in

Understanding markets and competition is critical to achieving market orientation. Every

Capabilities for Continuous Learning about Markets

InIormation perIorms a vital strategic role in an organization.

Source: And Now, A

Choosing the right market target strategy can aIIect the

The competitive realities oI surviving and prospering in the

Corporate expenditures on CRM technology are running

It is important that the adoption and implementation oI

The Web site oI the Database Marketing Institute, with a

A site with extensive inIormation about developments in data

The Web site oI the Teradata Division oI NCR. It contains an

Designing Market-Driven Strategies

Source: Chart Irom

New-product planning is a vital activity in every company, and it

This Iorm oI line extension may include moving up or

Strategic brand management provides the Ioundation Ior

(1) Type of chnnel rrngement

Source: Harper W. Boyd,

The value chain consists oI the organizations, systems, and

Pricing strategy gains considerable direction Irom the

Promotion strategy is a vital part oI the positioning strategy. The

Determine the role

Source: Mark W. Johnston

Source: Michael J. Mandel

Management analyzes the Iirms marketing strategy, the target

Marketing Strategy Implementation and Control

Source: Reprinted Irom

Source: Harper W. Boyd,

Marketing strategy implementation and control are vital links

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