extract pages from marketing-strategy - wm p1-2

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1/51

orporate Strategy Decisions

and Their Marketing

Implications

RedEnvelope~Marketing Upscale Gifts Online

In 1997 two ~cent MBA g~duates ~a~ed

a company called 911Giks. The firm com-

bined a Web site and a toll-free cu~omer

se~ice center with gifts provided by two estab-

lished me~hants to cater to last-minute crisis shop-

pe~. Although the new company att~ed gift-

givers, it also had some weaknesse~ The company

name, with i~ connota~on of wailing ambu~nce%

turned off many poten~al cu~om e~; the firm~

supplie~ prodded an unins~d a~o~ment of gifts;

and a lack of capi~l inhib~ed the company~ ability

to grow. As a ~su~ by early 1999 the firm was

t~ading waten The site had managed only about $1

million in sales the p~ous yean Consequentl~ the

owne~ decided to ~invent the compan~

New Mission

and orpo~te Strategy

The owne~ fir~ move was to hire a m arketing-

savvy chief executive officen They att~ed Hila~

Billings, a 36-yeaF~d manage~ away from

William~Sonoma whe~ she had succes~ul~ de-

veloped the firm~ Po~e~ Barn catalog operation.

Aker analyzing 911Giks ~ngths and weak-

nesses, she c~ked a new mission and competitive

~tegy for the compan~ Instead of pos~oning it-

self as a center for emergency gifts, the firm would

aim for upscale elegance. Fu~he~ it would t~ to

broaden the defin~on of gift-gMng oppo~unF

ties. "Most online ~tailers are inhe~n~y sel&

pu~hase," Ms. Billings says. They "~purpose

themse~es ju~ befo~ Christmas as gik compa-

nies. The~ a big diffe~nce between that and a

company that thinks only about gifts."

Within six weeks of becoming CEO, Ms. Billings

had developed marketing and business plans de-

tailing how the firm would accomp~h i~ new

strategic minion and had hind the co~ of a new

management team. She then made the rounds of

Silicon Valley~ venture capitalists with a slide show

detailing the company~ new plans and subse -

quently obtained $21 million in new finandng

from Sequoia Capital and $10 million from Weston

P~sidio in exchange for appro~mate~ a one-third

owne~hip of the compan~

The New Marketing Plan

The Target IVlar~et

Con~stent with the firm~ new strateg~ minion, it

ta~eted its ma~eting effo~s at a more selec~ve seg-

ment of potential cu~ome~. The new ~rg~ manet

was similar to the one Ms. Billings knew from her

days at William~Sonoma: high income over

$85,000 per yea~, w~l-educated professional~

31


2/51

32

Section One

~oducUon to Strategy

including both men and wom en. The focus was

also on people who were connected to the Inter-

net and had a hi~o~ of buying online.

To unde~tand the needs and prefe~nces of the

firm~ target cu~omers, manage~ did a little qual-

itative ma~eting msea~h, informal~ inter~ewing

some prospe~we cu~om e~ and ana~ng pa~

sales patterns. But ~ the firm ~lied more

heavily on the cu~omer knowledge its manage~

had gained through pa~ experience. ~We talked

about our ~arget] cu~omer in a ve~ intimate

wa~" one manager ~calls. "What kind of clothes

they wore, what kind of car they drove. We put up

a poster labeled him and her and wed put Post-

it Notes under each with products we thought

theyd want to bu~"

The New Product Line and Company Brand

Armed with information and intu~on concerning

the desi~s of the target market, company man-

age~ set about upg~ding the product line. A vari-

ety of supplie~ were contacted to provide prod-

ucts that ~flected a h~h-qual~ upscale point of

view: things such as amber hea~ necMace~ old-

fashioned thermometers, and seven stalks of

bamboo an Asian symbol of good luck in a

c~al vase for $46. The firm also pa~ne~d with

supplie~ to develop its first wave of exclusive mer-

chandB~ a series of gik baskets that might be de-

scribed as "lifestyle kits." For in~anc< for fishing

fanatics they developed a fishing c~el filled with

12 hand-cut fish~haped cookies for $48.

Another criterion the firm used to ~organ~e its

produd offe~ngs was a high gross margin. Mo~ of

the firm~ products car~ margins of 50 percent or

more, a necessa~ offset for lavish spending on

cu~omer se~ice, which Ms. Billings says is un-

avoidab~ in view of the company~ strategy of pur-

suing futu~ growth, in pa~, by building cu~omer

loyalty and repeat purchases. "You have to own

your cu~omers experience--and that comes at a

price." About half of the 450 stock keeping units

(SKU that 911Gifts had been selling were

dropped, and more than 300 items were added.

To simplify a cu~omer~ sea~h for the pedect

gik, the company also ~designed its Web site. The

new Web site allowed custome~ to navigate

through the offerings by type of ~d~ent, by gift-

giving occa~on, or by product category.

Finall~ to more clearly ~flect the firm~ new up-

scale positionin~ the company name was changed

to RedEnv~ope. The name derives from an Asian

cu~om of marking special occa~ons by giving cash

or small presents enclosed in a ~d envelope. It also

suggested a dB~nc~ve packaging approach: all

RedEnv~ope gifts are d~e~d in a ~d gift box

with a hand-tied bow.

Advertising and Promotion

With only a few weeks to go befo~ the peak holi-

day selling season, RedEnv~ope decided to devote

a third of its new capital to advertising aimed at

building cu~omer awa~ness of the site. Rather

than costly TV ads, the firm concent~ted its money

on a series of print ads to be run in newspape~ and

magazines, such as the

New York ~me~

with ~ad

e~hips similar to RedEnv~ope~ target market. The

company also paid to establBh pa~ne~hips with a

number of online hubs such as America Online,

Web po~als such as Yahoo and Excite, and a select

group of more narrowly focused Web sites such as

iVilhgezom. It devoted $2 million to these pa~neF

ships--paN for through either a flat fee or a per-

centage of sales--for a simple reason: "To be

whe~ people are shopping online means being on

the po~als," says RedEnv~ope~ vice president for

business dev~opment. Finall~ the firm pu~ues peo-

ple who prefer a more ~ad~on~ form of nonAo~

shopping by dev~o~ng a series of print catabgs.

Dbtdbu on and Order Ful~lment

RedEnv~ope owns its own inventory, ma~eting,

syAems management, and cu~omer seHice oper-

ations. But it does not yet have suffident capital to

develop its own physical logistics and order fulfill-

ment operation. Consequentl~ the company con-

tracted with ComAIl~nc< a fu~llment firm in

Ohio, to provide warehouse space and everything

that goes with it, including the worke~ expe~ed

to produce scads of sma~ w~pped packages.

The ComAIliance facili~ is located at the end of an

Airborne Exp,% runwa~ Thus, me~handBe that

leaves the warehouse by 2 A.M. can be in the air by

4:30 and to its des~na~on by noon. This setup al-

lowed RedEnvelope to make a promise that was

the core of its early brand-building effo~s: Chrisb

mas Eve delive~ of giffs o~e~d by m idnight on

December 23.

Customer Feedback

Once the site was up and running, manage~ were

able to track pu~hases houdy and quickly ~formu-


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Chapter Two Corpo~ Stra~gy Decisions and The~ Ma~edng Implications 33

late the product mix. For example, a line of wines

was not selling as quickly as expected, generating

only six purchases an houn It was replaced with a

Zen fountain that sold reliably at a rate of one every

five minutes.

The Results

RedEnv~ope~ new management team brought

the new operation online 60 days befo~ Chd~mas

in 1999. In two months the company shipped

20,000 packages and generated more revenue

than the firm had managed in the p~ceding two

years. Its Web alliances and ads were particu~dy

effe~e. Mos t important, the firm lived up to its

promises. It filled 98 pe~ent of its orde~ accu-

~tel~ shipped 99 pe~ent of its packages on time,

and only 2 pe~ent of ~dpients wanted to return

their gifts.

On the minus side, during the first months of its

exBtence the company shelled out nearly $4 in

marketing for eve~ $1 in gross sales. But as aware-

ness of the firm~ brand began to grow within its

target market, RedEnvelope was able to ~duce its

heavy m edia adverti~ng budget, lower its cus-

tomer acquB~on cost to less than $30, and ~pidly

build both its cuAomer base and revenues. Sales

revenues topped $70 million in fiscal 2003, and

while the firm was not yet profitabl< it generated

a positive cash flow from operations of $1.4 million

in the first quaRer of fiscal 2004. Indeed, at the

time of this writing the firm~ manage~ felt the fu-

ture was so p romising they planned a $31 million

initial public offering of company stock.

STRATEGIC CHALLENGES ADDRESSED IN CHAPTER

The corporae ~r~egy cra~ed by HflNry Bi~ings a~er joining RedEnvelope provides a

clear sense of direcOon and useful guidance for

the

firmN managers when devdoping com-

peti~ve, markefin~ and other functionN s~egies because R speaks to the dimen~ons of

~ramgy we discussed in Chap~r 1. Fir~, it defines the overa~ mission and scope of the

firm by clearly focu~ng on m arketing e~gant and unique gi~s for all occa~ons to an up-

scNe segment of online consumers. It also lays out goals and objemives for the compan~

particuNfly concerning revenue growth and the attainment of profitabili~and specifies

competitive and corporate development sgategies for ach ieving those objectives. Specifi-

cally, RedEnvelope seeks growth plimarily through increased penmration of Rs target cus-

tomer segment, and profitabi~ty by focusing on high-margin merchandise and lowering

cu~omer acquisition co~s by improving thek loyalty and repeat purchases.

RedEnvdop e~ objectives and devdopmen t s~eg> in turn, influence the way it allo-

cates Rs resources and ~verages its core competencies in order to build and mN ntain a

competitive advantage. The firm hired expe~enced lnanage~ with extensive knowledge of

the target segment, Nlocated substantial resources to ~acking customer purchase pa~erns

and preferences, formed all~nces with supp~ers to develop exclusive and unique products

that fit those preferences, and invested heavily in the people and sy~ems necessary to pro-

vide excd~nt serv~e and build customer loyaRg FinNly, the firm seeks synergy across the

va~ous produc~ it offers by investing in advertising and promotion activities aimed at

building a s~ong corporate identity and awareness of the RedEnvd ope bran and by de-

vdoping the necessary capabilities--both internally or through alliances--to provide su-

perior service and timely order fulfilment regardless of what the cu~olner buys.

The successful reformul~ion of RedEnvdope~ corpor~e s~egy i~u~rams the im-

po~ance of a deta~ed under~anding of target cu~omers, potential competitor, and

the

market envkonment when developing s~egies at any level. Indee HilNry B~lings was

hked as the firm~ CEO partly because of her extensive experience in marketing high-

margin merchandise to a ~milar target segment at WillNm>Sonomm As we pointed out in

Chapmr 1, markmers close contact with cugomers and the external envkonment o~en

means they play a crucial role in influencing s~ategies formulamd at higher ~vels in the

firm, even when they~e not appointed CEO.


4/51

34

Section One

~oducdon to St~gy

EXHIBIT 2.

Strategy component

Scope, minion, and intent

O~ectives

Source of competitive

advantage

Development strategy

Resource Nloca~on

Souses of ~ne~y

Cryolite St~teg), Components and Issues

~y Issues

What bugnes~e9 should the firm be in?

What cu~omer needg manet segmentg and/or techn~ogies should be focused on?

What is the flrm~ endudng strategk purpose or intent?

What performance ~men~ons should the firm~ business units and employees

focus on?

What is the target level of performance to be achieved on each ~mengon?

What is the time frame in which each target should be attained?

What human, tech~caL or other resources or competendes avai~e to the firm

provide a basis for a sustainable competitive advantage?

How can the firm achieve a desi~d level of growth over time?

Can the desi~d growth be attained by expan~ng the firm~ current bu~nesses?

Will the company have to d~e~ify into new bu~nesses or product-markets to

achieve its futu~ growth o~ectives?

How should the firm~ limited finandN resources be allocated across its bu~nesses

to produce the highe~ ~turns?

Of the aRerna~ve ~ tegies that each business might puGue, which will produce

the g~ate~ returns for the dolla~ invested?

What competendes, knowledg~ and cu~ome~based intangiMes ~.g., b~nd ~cog-

niEon, ~putation) might be developed and shard across the firm~ bu~nesses?

What operationM ~sou~eg faci%eg or func~ons (e.g., plants, R&D, sale~o~

m~ht the flrm~ bu~nesses share to inc~ase their efficiency?

On fl~e other hart& a w~defined corpor~e ~ramgy also influences and constrains the

strateg~ de~ons that marke~ and other functionM managers can make at lower orga-

n~ional levels. RedEnv~ope~ mission of offering ~egant and unique gi~s for all occa-

sions dearly influences the kinds of Reins the firm~ anarketers can--and cannot--add to

the product line. And its o~ecfive of ach~ving profitability by m~ntaining high margins

rules out aggressive pfiNng pohc~s and frequent sales promotions.

In vie~v of the interactions and interdependences between corpor~e-~vel ~rategy deci-

sions and ~r~eg~ mark~ing programs for individual product-market entries, this chapter

examines the components of a well-defined corporate s~amgy in more detail: (1) the over-

all scope and mission of the organization, (2) c~npany goals and objective~ (3) a source

of co~npetitive advantage, (4) a devdopment s~egy for future gro~vth, (5) the allocation

of corporate resources across the firm~ various bu~nesse~ and 6) flae search for synergy

via the sharing of corpor~e resources, competenc~s, or programs across bu~nesses or

product liues. Exhib~ 2.1 summarizes some of the crucial questions that need to be ad-

dressed by each of these six compon ents.

While a market orieut~ion and the analyticN tools that marketing managers use

to examine cu~omer deskes and comp~Ro~ ~rengths and weal~esses~an provide use-

ful insights to guide deN~ons concerning a~ elements of corpora~ ~rateg~ they are par-

ficuNfly germane for revealing the most aUractive avenues for future growth and for


5/51

Chapter Two Corpora~ Stra~gy Decisions and The~ Markedng Implica~ons 35

CORPORATE

de~rm~g wNch buNnesses w woduc> maNe~ are 1Ne~ to produce the gma~ r~urns

on the company~ resources. In turn, all six componems of corporae ~mm gy have m~or

im~ications for ~e s~eNc markN~g plans of~e firm~ various produms or ser~ces. To-

ge~ec ~ey define the general s~am~c direction, o~ective~ and resource con~m~

witNn wh~h those maNeting pNns mu~ opine. We exmnine %e maNN~g implications

invoNed ~ both formulating and im~emem~g these componems of corpor~e ~mmgy in

e ~llowing sections.

SCOPE~DEF~NING THE FIRMS MISSION

A w~gthough~out mission ~ement guides an organizafion~ managers as to which mar-

ket opportunities to pursue and which fall outside the firm~ s~ategic domNn. A clearly

stated m~Non can help in,ill a shared sense of direction, re,vance, and achievement

among employees, as well as a positive image of the firm among customers, investors, and

other ~akeholders.

To provide a useful sense of dire~ion, a corpor~e mis~on stamment should clearly de-

fine the organization~ s~ateg~ scope. R should answer such fundamental questions as the

following: What is our bu~ness? Wh o are our cu~omers? What ldnds of value can w e pro-

vide to these cu~omers? and What should our business be in the future? For exmnp~, sev-

ern years ago Pep~Co, the manufacturer of Pepsi-Col~ broadened its mission to focus on

marketing superior quality food and beverage products for households and consumers

dining out? That ~early defined mission guided the firm~ managers toward the acquisi-

tion of several related companies, such as Frito-La~ Taco Bell, and Pizza Hut, and the di-

vestiture of operations that no longer fit the company~ primary tluu~.

More recently, in response to a changing global competitive enviromnent, PepsiCo nar-

rowed Rs scope to focus prhnarily onpackage foods (pa~ulafly salty snacks) and beverages

distribu~d through supermark~ and convenience store channels. This new, na~ower mission

~d the fi~n to (1) dive~ N1 of~s fast-food re~aurant chains; (2) acquire complementary bev-

erage bu~nesse~ such as Trop~ana juices and Lipton~ ~ed teas; and (3) develop new brands

mrg~ed at rapidly growing beverage segments, such as Aquafina bo~led w~e~

~

Market Influences on the Corporate Mission

Like any other s~egy component, an orga~zation~ mission should fit both ~s internal

characteristics and the opportunit~s and threes in ~s externN environment. Obously, the

fum~ miss~n should be comp~ with ~s e~aNished va~es, resources, and ~stin~Ne

compemnc~s. But ~ should also focus the firm~ eflbrts on mark, s where those resources

and comp~enc~s will generic va~e for customers, an advamage over competitors, and

synergy acro~ ks produms. Thus, PepsiCo~ new miss~n mfle~s the fum~ package goods

mark~ing sales, and Ostribut~n comp~endes and its pemept~n that substantial syner-

gies can be reafized across snack foods and beverages within supermark~ channels via

shared ~stics, joint disphys and sales promotions, cross-couponing, and the like.

Criteria for Defining the Corporate Mission

Several criteria can be used to define an organization~ s~amgic mis~on. Many fuuls spec-

ify thdr domNn

inpto~al

mrm~ focuhng onpmdgm~ or services or the technology used.

The problem is that such ~atements can lead to slow reactions to mchnological or

cu~ome>demand changes. For examp~, Theodore Levi~ a~gues that Penn Cen~al~ view

of ks mission as being the raikoad business helped cause the fum~ failure. Penn Len-

iN did not respond to m~or changes in ~anspo~ion mchnolog> such as the rapid

growth of ak ~avel and the increased effidency of long-haul ~ucking. Nor did ~ respond

to consumers growing willingness to pay higher prices for the increased speed and


6/51

~6 Se~ion One ~oducfion to St~gy

~Xi iii3i i

~

haracteristics

of

Effective orporate

Mh~on Statements

Based on

cu~omer needs

?hysieal

Based on e~ing

pmdu~s or ~chn~ogy

Broad

Spec#ic

Lon~ance tmnspo~ation Mr

~v~ume pmduce~ ~ low-

value, low-density pmdu~s

R~lroad business

Long-ha~, coal-car~ing mitmad

conveNence of air ~avel. Levi~ argues ~at k is be~er to define a firm~ nfission as wh t

~mm~ needs a~ ~ be satisfied and ~e fimcfi~ ~ for instance, workers counc~s often deal wRh issues

such as sexual equalit> race relation& and workers rights,

s

Ethks is concerned wi~ the devdopment of morn ~andards by which actions and si>

uations can be judged. ~ focuses on those actions th~ may resuh in actuN or p~ential harm

of some ldnd (e.g., economic, mentN, physicaD to an indN idual, group, cr organization.

Particular actions may b e legal but not ethk. For in~ance, extreme and unsub~antb

aed advertising claims, such as Our product is Nr superior to Brand X] might be ewed

as simp~ legal puffery engaged in to make a sale, but many m arkmers (and their cus-

tomerO view such little white lies as unmhic~. Thus, Nhics is morn proactive than the law.


7/51

Strategic Issue

Uuethical pra~es cau

damage the ~u~ be-

tween a firm and ~s

sup~ie~ or cu~omer~

thereby NsmpOng the

devdopment of long-

mrm exchange

relationsNps and result-

ing in the like~ loss of

sales and profits over

time.

CORPORATE O

Chapter Two Corpora~ Stra~gy Dec~ns and The~ Marketing Implicadons ?

Ethical standards a~empt to antidp~e and avoid social proNem s, whereas most laws and

regulations emerge only after the neg~Ne consequences of an action become apparent.

Why A~e Ethics Important? The Marketing Implica~ons

of Ethical Standards

One might ask why a corporation should take responsibi~ty for providing moral guidance

to its managers and employees. While such a question may be a good topic for philosoph-

ical debar, ~ere is a compdl~g practical reason for a firm to impose ethical s~ndards to

guide employees. Un~NcM practices can damage the ~u~ between a firm and i~ suppfi-

ers or customers, thereby dNmpting the deve~pm ent of long-mrm exchange relationships

and resulting in the 1Ne~ loss of sales and profi~ over time. For exam p~, one survey of

135 purchasing managers from a variety of industries found th~ the more unmhical a sup-

p~er~ sales and markm~ g practices were perceNed to be, the less eager were the pur-

chasing managers to buy from th~ suppl~

Unfo~un~ely, not all cu~omers or competing suppfiers adhere to the same mNcM stan-

dards. As a resuR, m arkmers sometimes ~el pressure to engage in actions that are incon-

sistent with what they believe to be right--either in terms of pe~onM values or formal

company standards--in order to close a sale or ~ay even with fl~e competition. This point

was iHus~ed by a survey of 59 top markmMg and sMes executNes concerMng commer-

cial bribery attempts to influence a pomntial customer by gN ing gifts or Mckbacks.

While nearly two-th~ds of fl~e execntNes considered bribes unmNcM and Nd not w ant to

pay them, 88 percent also ~lt th~ not paying bribes might pu t their firms ~ a competitive

disadvantage2 Such Nlemmas are pan~uhfly like~ to arise as a company moves ~to

global marke~ involving ~fferent cOtures and levels of econom~ devdopment ~vhere

economic exigenc~s and ethicM standards may be quire different.

Such inconsi~endes in exmrnal expectations and demands across countries and m a>

kets can lead to job s~ess and inconsi~ent behavior among mark~ing and sales pe~onnel,

wNch in turn can risk damaged long-mrm rel~ionsh~s with suppliem, channd pa~ne~,

and cu~omers. A company can reduce such problems by spdl~g out formal social pofi-

cies and eth~al ~andards ~ i~ corporate mNMon ~aement and con~nunicating and en-

foxing those standards. Unfo~unamly, ~ is not always easy to decide what those policies

and standards should be. There are mO tiple phiMsophical gaNtions or frameworks ~at

managers might use to evaluate the eflfics of a Dven action. Consequentl> Nffemnt firms

or managers can pursue somewh~ Nfferent eth~al standards, pa~uhfly across national

cultmes. EM~it 2.3 Osplays a comparison (across three geographic regionO of the pro-

portion of company e th~al ~ements th~ ad& ess a set of specific issues. Nora th~ a

larger number of compan~s ~ the Unimd Smms and Europe appear to be more concerned

wilh the Ohics of their purchased practices ~an those of the~ mark~ing ac tivities. Com-

paring firms across regions, U.S. compaMes are m ore concerned about proprietary infor-

m~M n. Canadhn firms are more like~ to have explick guidelines concerning envkon-

mentM responsibility, and European compaMes more frequently have ~andards focused on

workphce salty. Since many ethical issues in marking am o pen to interpretation and de-

barn, we will examine such issues and their impl~ations ~dividuM~ as they arise through-

out the remMnder of tiffs book.

JE T~VES

Confucius sai For one who has no o~ective, no~ing is rdevantY FormN o~ectives

provide decision criteria that guide an organization~ business units and employees toward

specific dimens~ns and performance levels. Those same o~ectives provide the bench-

marks again~ which actual performance can be eva~ed.


8/51

38 Section One

~odu don to t~tegy

EXHIBIT 2.3

~sues Addressed by

ompany Ethics

Statements

Fundame~ guM~g

pdnd es d company

Pumha~ng

Pmpd~a~ iN~m~ n

~ce s~y

Envi~nmental

~spon~

MaAeflng

In~l~u~ properly

~e~ ~

em oyee ~co~s

Pmdu~ s~y

Em oyee pdvacy

Drag-related issues

Technob~cal

innovat~n

AiDS

~ UN~d States (N = 157)

(N = 2~

(N = 2~

20

40

60

80 100

Numb~ ~ Compan~s

To be useful as decision criteria and evaluative benchmarks, corporate oNectives must

be specific and measurable. Therefore each oNective contNns four components:

p~fon~moce dim~tsion

or a~ribute sought.

mea~o~

or

index

for evalu~ing progress.

target or htodle

level to be achieved.

tinwfianw

within which the target is to be accomplished.

ExhibR 2.4 lists some common performance dimenNons and measures used in specifying

corporate as well as business-un~ and marketing oNectives.

Enhancing Shareholder Value The Ultimate Objective

In recent years, a growing number of executives of publM y held corpor~ions have con-

cluded that the organization~ ulfim~e objective should be to increase ~s shareholders

econom~ returns as measured by dividends plus appred~ion in the company~ stock

price? To do so management must bNance the interests of various corpor~e constituen-

cies, including employees, cu~omers, supphers, debtholders, and ~ocldaolders. The firmN

continued exigence depends on a financial relationship with each of these pa~s. Em-

ployees want competitive wages. Cu~omers want high quNRy at a competitive price. Sup-

peers mad debtholders have finandN dNm s that mu~ be satisfied with cash when they fall

due. And shareho lders, as residual claimants, look for cash dividends and the prospect of

future dividends reflecmd in the stockg market price.

If a comp any does not satisfy its con~ituents financial claims, it ceases to be viable.

Thus, a going concern must ~rive to enhance ks abiEty to generate cash Dom the oper~ion

of Rs businesses and to obtain any additionN funds needed ~oln debt or equity financing.


9/51

Chapter Two

Co~a~ Stra~gy Dec~s and ~e Ma~edng ~p~atio~

39

t xhibit 2.4 Common P~rmance Cd~Ma and M~s Th~ Speci~ Co~ate,

Business-Unit

and Marketing O~ecfi~s

Performance Cdteria Possible Measures or Indexes

G~wth

$ s les

Unk sales

Percent change in sales

Competitive ~rength

Market share

Brand awa~ness

Brand p~fe~nce

Innovafiveness

Pm~aMl~

U~l~a~on of resou~es

Contdbu~on to owne~

$ sales from new products

Percentage of

sales

from producbmarket entries introduced wkhin p ast five yeaB

Percentage cost savings from new processes

$ profits

Profk as pe~entage of sales

Contdbu~on margin*

Return on inve~ment (ROI)

Return on net a~e~ (RONA)

Return on equ~y (ROE)

e~e~ ~p~ky ~il~ion

Fixed assets as pe~entage of

sales

Earnings per share

PHce/earnings ratio

Contribu~on to custome~

Price relative to competko~

Product qualky

Cu~omer sa~sfac~on

Cu~omer reten~on

Cu~omer loyalty

Cu~omer lifetime value

Con~ibu~on to employees

Contdbu~on to sodety

Wage rate~ benefits

Pe~onnel developmen~ promotions

Em~oyment ~a~ turnover

$ contfibu~ons to chaH~es or communKy institu~ons

Growth in emp~yment

Businesgunit manage~ and marketing managers responsible for a product-m~ket entry often have little control over co~s assod~cd with corpora~ overhea such as the

co~s ofcorpora~ ~affor R D. h can be Off]cuR m a~ocme ~ose co~s m spedfic str~e~c bu~ne~ units (SBUs) or products. Consequentl~ profit o~ectNes ~ the SBU

and prodn~-m arket level are often ~ated as a desired con bu~on m~g~ (the gross profit prior to allocating such overhead costsL

The firm~ ab ihty to a,ain debt financing (hs ability to borrow) depends in turn on pro-

jections of how much cash it can gene rate in the furore. Similarl~ the market value of its

shares, and therefore ks ability to a,ain equity financing, depends on investors expecta-

tions of the firm~ future cash-generating abilities. People williugly invest in a firm on ly

when they expec t a better return on thek funds than they could get ~om other sources

w~hout expo~ng themselves to any greater risks. Thus, management~ primary objective

should be to pursue cap ital inve~ments, acquisitions, and business strategies that will pro-

duce suffic~nt future cash flows to return po~tive value to shareholders. Failure to do so

not only will depress the firm~ stock price and inhibR the firm~ abilky to finance future

operations and gro~vth, but also it could make the organization mo re vulnerable to a

takeover by out~ders who promise to increase its value to shareholders.

Given this rationNe, many firms set exphcR objectives targeted at increa~ng share-

holder value. These are usually stated in terms of a target return on shareholder equity, in-

crease in the stock price, or earnings per share. Recentl5 though, some executives have


10/51

4 Section One

Strategic

ssu

In the long term, cus-

tomer value and

shareholder value con-

verge; a firm can

continue to provide at-

tractive returns to

shareholders only so

long as it satisfies and

retains its customers.

Introduction to Strategy

begun expressing such corporate objectives in terms of

ecotmmic value added

or

market

value added MVA).

A firms MVA is calculated by combining its debt and the market value

of its stock, then subtracting the capital that has been invested in the company. The result,

if positive, shows how much wealth the company has created?

Unfortunately, such broad shareholder-value objectives do not always provide adequate

guidance for a firms lower-level managers or benchmarks for evaluating performance. For

one thing, standard accounting measures, such as earnings per share or return on invest-

ment, are not always reliably linked to the true value of a companys stock.

~

And as ~ve

shall see later in this chapter, tools are available to evaluate the future impact of alternative

strategic actions on shareholder value; but those valuation methods have inherent pitfalls

and can be difficult to apply at lower levels of strategy such as trying to choose the best

marketing strategy for a particular product-market entry.

Finally, there is a danger that a narrow focus on short-term financial, shareholder-value

objectives may lead managers to pay too little attention to actions necessary to provide

value to the firms customers and sustain a competitive advantage.

In the long term, cus-

tomer value and shareholder value converge; a firm ca n continue to provide attractive re-

turns to shareholders only so long as it satisfies and retains its customers. But some m an-

agers may overlook this in the face of pressures to achieve aggressive short-term financial

objectives and take cost-cutting actions that reduce product quality, weaken service, and

lower customer value and satisfaction.

The Marketing Implications of orporate Objectives

Most organizations pursue multiple objectives. This is clearly demonstrated by a study of

the stated objectives of 82 large corporations. The largest percentage of respondents (89

percent) had explicit profitability objectives: 82 percent reported growth objectives; 66

percent had specific market-share goals. More than 60 percent mentioned social responsi-

bility, employee welfare, and customer service objectives, and 54 percent of the companies

had R&D/new product development goals.

~

These percentages add up to more than 100

percent because most firms had several objectives.

Trying to achieve many objectives at once leads to conflicts and tmde-offs. For exam-

ple, the investment and expenditure necessary to pursue growth in the long term is likely

to reduce profitability and ROI in the short term.

~-~

Managers can reconcile conflicting

goals by prioritizing them. Another approach is to state one of the conflicting goals as a

constraint or hurdle. Thus, a firm attempts to maximize growth subject to meeting some

minimum ROI hurdle.

In firms with multiple business units or product lines, however, the most commo n way

to pursue a set of conflicting objectives is to first break them down into subobjectives, then

assign different subobjectives to different business units or products. Thus, subobjectives

often vary across business units and product offerings depending on the attractiveness and

potential of their industries, the strength of their competitive positions, and the resource al-

location decisions made by corporate managers. For example, PepsiCos man agers likely

s t relatively high volume and share-growth objectives but lower ROI goals for the firms

Aquafina brand, which is battling for prominence in the rapidly growing bottled water cat-

egory, than for Lays potato chips, which hold a commanding 40 percent share of a mature

product category. Therefore, two marketing managers responsible for different products

may face very different goals and expectations--requiring different marketing strategies to

accomplish--even though they ~vork for the same organization.

As ilrms emphasize developing an d maintaining long-term customer relationships,

customer-focused objectives--such

as satisfaction, retention, and loyalty--are being given

greater importance. Such market-oriented objectives are more likely to be consistently pur-

sued across business units and product offerings. There are several reasons for this. First,


11/51

Chapter Two

orporate Strategy Decisions and T heir Marketing Implications

given the huge p rofit implications of a customers lifetime value, maxim izing satisfactiou

and loyalty tends to make good sense no matter what other financial objectives are being

pursued in the short term. Seco nd, satisfied, loyal customers of o ne product can be lever-

aged to provide synergies for other company products or services. Finally, customer satis-

faction and loyalty are influenced by factors other than the product itself or the activities

of the marketing department. A study of one industrial paper company, for example, found

that about 80 percent of customers satisfaction scores were accounted for by nonproduct

factors, such as order processing, delivery, and postsale services.

~

Since such factors are

influenced by many functional departments within the corporation, they are likely to have

a similar impact across a firms various businesses and products.

There are many ways a company might attempt to gain a com petitive advantage over com-

petitors within the scope of its competitive domain. In most cases, though, a sustainable

competitive advantage at the corporate level is based on company resources, resources that

other firms do not have, that take a long time to develop, and that are hard to acquire.

7

Many such unique resources are marketing related. For example, some businesses have

highly developed information systems, extensive market research operations, and/or coop-

erative long-term relationships with customers that give them a superior ability to identify

and respond to emerging customer needs and desires. Others have a brand name that cus-

tomers recognize and trust, cooperative alliances with suppliers or distributors that en-

hance efficiency, or a body of satisfied and loyal customers who are predisposed to buy re-

lated products or services.

Is

But the fact that a company possesses resources that its competitors do not have is not

sufficient to guarantee superior performance. The trick is to develop a competitive strategy

for each division or business unit within the firm, and a strategic marketing program for

each of its product-market entries, that convert one or mo re of the companys un ique re-

sources into something of value to customers. The finn must em ploy its resources in such

a way that customers will have a good reason to purchase fronl it instead of its competi-

tors. It needs to provide one or more superior benefits at a price similar to what com peti-

tors charge, or deliver comparable benefits at lower cost. And then it needs to effectively

communicate those benefits or cost savings so they will be accurately perceived by poten-

tial customers. For example, Sam sung--the Korean electronics firm--spent years devel-

oping technical R&D and product design expertise, which it has employed effectively in

recent years to launch a stream of very successful products aimed at upscale, high-margin

market segments. Now the fum has begun m arketing actions aimed

t

building a brand

image that comm unicates and reinforces its technical and design prowess. The firm

launched a $200 million global advertising campaign in

2 2

touting its innovative new

products, and recently it has begun withdrawing its products from discount chains and re-

lying on more upscale specialty retailers like Best Buy.

~

While one can conceive of a nearly infinite assortment of competitive strategies based

on a firms superior resources and capabilities, most can be classified into a few generic

types. We devote Chapter 3 to a detailed discussion of these basic competitive strategies

and their implications for marketing programs. For n ow, the key point is that those strate-

gies are built--at least in part--on the fulnS marketing-related resources and competen-

cies. And to the extent that a single corporate resource--such as a prestigious corporate

brand or an excellent salesforce--might serve as the foundation for effective competitive

and marketing strategies in more than one of a firms business units or product lines, it may

also produce synergy, as we shall see later.


12/51

42

Section One


EXHIBIT 2.5

Alternative

Corporate

Growth

Strategies

Current markets

New markets

Current products

New products

Market penetration strategies

P~oduct development strategies

Increase market share

Product improvements

Increase product usage

Product-line extensions

Increase frequency of use

Increase

quantity used New products for same market

New applications

Ma~ ket development strategies

Diversification strategies

Expand

markets for existing

Vertical integration

products Forward integration

Geographic expansion

Backward integration

Target new segments

Diversification into related

businesses

concentric diversification)

Diversification into unrelated

businesses

(conglomerate

diversification)

CORPORATE GROWTH STRATEGIES

Strategic Issue

A finn can go into

major directions in

seeking future growth:

expansion of its current

businesses and activities

or diversification into

new businesses.

Often, the projected combined future sales and profits of a corporations business units and

product-markets fall short of the firms long-run grow th and profitability objectives. There

is a gap between what the firm expects to become if it continues on its present course and

what it would like to become. This is not surprising because some of its high-growth mar-

kets are likely to slip into maturity over time and some of its high-profit mature businesses

may decline to insignificance as they get older. Thus, to determine where future growth is

coming from, managem ent must decide on a strategy to guide corporate development.

Essentially, a firm can go in two major directions in seeking future growth: xp nsion

of its current businesses and activities or diversification

into new businesses, either

through internal business development or acquisition. Exhibit 2.5 outlines some specific

options a fum might pursue while seeking growth in either of these directions.

Expansion by Increasing Penetration of Current

Product-Markets

One way for a company to expand is by increasing its share of existing markets. This typ-

ically requires actions such as making prod uct or service improvemen ts, cutting costs and

prices, or outspending competitors on advertising or promotions. Amazon.com pursued a

combination of all these actions as well as forming alliances with Web portals, affinity

groups, and the like--to expand its share of Web shoppers, even though the ex pense of

such activities postponed the fums ability to become profitable.

Even when a finn holds a connnanding share of an existing product-market, additional

growth may be possible by encouraging current customers to become more loyal and con-

centrate their purchases, use more of the product or service, use it more often, or use it in

new ways. In addition to its promotional efforts, Amazon.corn spent hundreds of millions


13/51

Chapter Two Corporate Strategy Decisions and Their Marketing Implications

of dollars on warehouses and order fulfillment activities, investments that earned the loy-

alty of its customers. As a result, by the year 2000 more than three-quarters of the firms

sales were coming from repeat customers. And the subsequent addition to the Amazon

Web site of retail partners offering both new and used items in a broader range of product

categories has continued to increase the percentage of repeat business.

-,

Other examples

include museums that sponsor special exhibitions to encourage patrons to make repeat vis-

its and the recipes that Quaker Oats includes on the package to tempt buyers to include

oatmeal as an ingredient in other foods, such as cookies and desserts.

Expansion by Developing New Products for Current Customers

A second avenue to future growth is through a product-development strategy emphasizing

the introduction of product-line extensions or new product or service offerings aimed at

existing customers. For example, Arm & Hmm ner successfully introduced a laundry de-

tergent, an oven cleaner, and a carpet cleaner. Each capitalized on baking sodas image as

an effective deodorizer and on a high level of recognition of the Arm & Hammer brand.

Similarly, RedEnvelopes manag ers are constantly searching for unique new items to add

to its line of gifts.

Expansion by Selling Existing Products to New Segments

or Countries

Perhaps the growth strategy with the greatest potential for many companies is the devel-

opment of new markets for their existing goods or services. This may involve the creation

of marketing programs aimed at nonuser or occasional-user segments of existing markets.

Thus, theaters, orchestras, and other performing arts organizations often sponsor touring

companies to reach audiences outside major metropolitan areas and promote matinee per-

formances with lower prices and fiee public transportation to attract senior citizens and

students.

Expansion into new geographic markets, particularly new countries, is also a primary

growth strategy for many fums. For example, General Electric announced a growth strat-

egy that shifts the firms strategic center of gravity from the industrialized West to Asia and

Latin America?

~

While developing nations represent attractive growth markets for basic industrial and

infrastructure goods and services, growing personal incomes and falling trade barriers are

making them attractive potential markets for many con sumer goods and services as well.

Even developed nations can represent growth opportunities for products or services based

on newly emerging technologies or business m odels. For instance, while the rapid growth

of e-retailers such as Amazon.corn is likely to slow in the United States over the next few

years, growth in the number of online shoppers is expected to expand rapidly in Europe.--

Expansion by Diversifying

Finns also seek growth by diversifying their operations. This is typically riskier than the

various expansion strategies because it often involves learning new operations and dealing

with unfamiliar customer groups. Nevertheless, the majority of large U.S., European, and

Asian firms are diversified to one degree or another.

Vertical integration

is one way for companies to diversify.

Forward vertical integra-

tion occurs when a firm m oves downstream in terms of the product flow, as when a man-

ufacturer integrates by acquiring or launching a wholesale distributor or retail outlet. For

example, IBM recently withdrew its Aptiva desktop PCs from independent computer re-

tailers such as CompUSA and made them available only over the companys own retail

Web site in order to improve customer service and reduce costs.

Backward integration

occurs when a firm moves upstream by acquiring a supplier.


14/51

44

Section One Introduction to Strategy

Integration can give a firm access to scarce or volatile sources of supply or tighter con-

trol over the marketing, distribution, or servicing of its products. But it increases the risks

inherent in committing substantial resources to a single industry. Also, the investment re-

quired to vertically integrate often offsets the additional profitability generated by the in-

tegrated operations, resulting in little improvement in return on investment?

~

Related or concentric) diversification

occurs when a firm internally develops or ac-

quires another business that does not have products or customers in common with its cur-

rent businesses but that might contribute to internal synergy tNough the sharing of pro-

duction facilities, brand names, R&D know-ho~v, or marketing and distribution skills.

Thus, PepsiCo acquired Cracker Jack to complement its salty snack brands and leverage

its distribution strengths in grocery stores.

The m otivations for unrelated or conglomerate) diversification are primarily finan-

cial rather than operational. By definition, an mlrelated diversification involves two busi-

nesses that have no connnonalities in products, customers, production facilities, or func-

tional areas of expertise. Such d iversification mostly occurs w hen a disproportionate

number of a firms current businesses face decline because of decreasing dem and, in-

creased competition, or product obsolescence. The firm must seek new avenues of growth.

Other, more fortunate, firms may move into unrelated businesses because they have more

cash than they need in order to expand their current businesses, or because they wish to

discourage takeover attempts.

Urnelated diversification tends to be the riskiest growth strategy in terms of financial

outcomes. Most empirical studies report that related diversification is more conducive to

capital productivity and other dimensions of performance than is unrelated diversifica-

tion.

24

This suggests that the ultimate goal of a corporations strategy for growth should be

to develop a compatible portfolio of businesses to which the firm can add value through

the application of its unique core competencies. The corporations marketing competen-

cies can be p articularly important in this regard, as evidenced by the success of firms like

PepsiCo.

Expans ion by Diversifying through Organizational

Relationships or Networks

Recently, firms have attempted to gain some benefits of market expansion or diversifica-

tion while simultaneously focusing more intensely on a few core competencies. They try

to accomplish this feat by forming relationships or organizational networks with other

firms instead of acquiring ownership.

2-~

Perhaps the best models of such organizational networks are the Japanese keiretsu

and the Korean chaebol~oalitions of financial institutions, distributors, and manufactur-

ing firms in a variety of industries that are often grouped around a large trading company

that helps coordinate the activities of the various coalition members and markets their

goods and services around the world. As we have seen, many Western firms like IBM and

RedEnvelope are also forming alliances with suppliers, resellers, and even customers to

expand their product and service offerings without making major new investments or ne-

glecting their own core competencies.

Diversified organizations have several advantages over more narrowly focused fu-ms. T hey

have a broader range of areas in w hich they can ka~owledgeably invest, and their growth

and profitability rates may be more stable because they can offset declines in one business

with gains in another. To exploit the advantages of diversification, though, corporate man-


15/51

BCGs Market

Growth Relative

Share Matrix

Sourre. From Long Range

Plamling.

Voluine 10 (February

1977), Bar~, Hedley, "Strategy

and the Business Portfolio,"

Copyright 1977, Elsevier

Science. Reprinted with

permission.

Chapter Two Corporate Strategy Decisions and Their Marketing Implications 45

agers must make intelligent decisions about how to allocate financial and human resources

across the firms various businesses and product-markets. Tw o sets of analytical tools have

proven useful in making such decisions:

portfolio models and value based planning.

Portfolio Models

One of the most significant developments in strategic management during the 1970s and

1980s was the w idespread adoption of portfolio models to help managers allocate corpo-

rate resources across multiple businesses. These models enable managers to classify and

review their current and prospective businesses by viewing them as portfolios of invest-

ment opportunities and then evaluating each businesss competitive strength and the at-

tractiveness of the markets it serves.

The Boston Consulting Groups (BCG) Growth-Share Matt&

One of the firs~and best known--of the portfolio models is the growth-share matrix de-

veloped by the Boston Consulting Group. It analyzes the impact of investing resources in

different businesses on the corporations future earnings and cash flows. Each business is

positioned within a matrix, as shown in Exhibit 2.6. The vertical axis indicates the indus-

trys growth rate and the horizontal axis shows the businesss relative market share.

The growth-share matrix assumes that a firm must generate cash from businesses with

strong competitive positions in mature markets. Then it can fund investments and expen-

ditures in industries that represent attractive future opportunities. Thus, the market growth

rate

on the vertical axis is a proxy measure for the maturity and attractiveness of an in-

dustry. This model represents businesses in rapidly growing industries as more attractive

investment opportunities for future growth and profitability.

Similarly, a businesss

relative market share

is a proxy for its competitive strength

within its industry. It is computed by dividing the businesss absolute market share in dol-

lars or units by that of file leading competitor in the industry. Thus, in Exhibit 2.6 a busi-

ness is in a strong competitive position if its share is equal to, or larger than, that of the

next leading competitor (i.e., a relative share of 1.0 or larger). Finally, in the exhibit, the

size of the circle representing each business is proportional to that units sales volume.

Thus, businesses 7 and 9 are the largest-volume businesses in this hypothetical company,

while business 11 is the smallest.

Market

growth

rate

in

constant

dollars)

High

lO%

Low

Stars

Question marks

5

4 2

6

3

7

Dogs

8

12

9

10

13

10

0 1

Relative market share


16/51

46 Section One


EXHIBIT 2.7

Cash Flows across

Businesses in the

BCG P ortfolio Model

High

low

Stars

Question

marks

Cash

flows

,

Cash cows

Dogs

High

Low

Relative market share

Desired direction of business development

Resource AIlocation and Strategy Implications

Each of the four cells in the growth-share matrix represents a different type of business

with different strategy and resource requirements. The implications of each are discussed

below and summarized in Exhibit 2.7.

Question marks. Businesses in high-growth industries ~vith loxv relative market shares

(those in the upper-right quadrant of Exhibit 2.7) are called question marks or problem

children. Such businesses require large amounts of cash, not only for expansion to keep

up with the rapidly growing market, but also for marketing activities (or reduced mar-

gins) to build market share and catch the industry leader. If management can success-

fully increase the share of a question mark business, it becomes a star. But if managers

fail, it eventually turns into a dog as the industry matures and the m arket growth rate

slows.

Stars. A star

is the market leader in a high-growth industry. Stars are critical to the con-

tinued success of the firm. As their industries mature, they move into the bottom-left

quadrant and become cash cows. Paradoxically, while stars are critically important, they

often are net users rather than suppliers of cash in the short run (as indicated by the pos-

sibility of a negative cash flow shown in Exhibit 2.7). This is because the firm must con-

tinue to invest in such businesses to keep up with rapid market growth and to support

the R&D and marketing activities necessary to maintain a leading market share.

Cash cows.

Businesses with a high relative share of low-growth markets are called

cash

cows because they are the primary generators of profits and cash in a corporation. Such

businesses do not require much additional capital investment. Their markets are stable,

and their share leadership position usually means they enjoy economies of scale and rel-

atively high profit margins. Consequently, the corporation can use the cash from these

businesses to support its question marks and stars (as shown in Exhibit 2.7). However,

this does not mean the firm should necessarily maximize the businesss short-term cash

flow by cutting R&D and marketing expenditures to the bone particularly not in in-

dustries where the business might contim~e to generate substantial future sales.

Dogs. Low-share businesses in low-gro~vth markets are called dogs because although

they may throw off some cash, they typically generate low profits, or losses. Divestiture

is one option for such businesses, although it can be difficult to find an interested buyer.


17/51


Another com mon strategy is to harvest dog businesses. This involves maximizing short-

term cash flow by paring investments and expenditures until the business is gradually

phased out.

Limitations of the Growth-Share Matrix

Because the growth-share matrix uses only two variables as a basis for categorizing and

analyzing a firms businesses, it is relatively easy to understand. But while this simplicity

helps explain its popularity, it also means the model has limitations:

Market growth rate is an inadequate descriptor of overall industo~ attractiveness. Mar-

ket growth is not always directly related to profitability or cash flow. Some high-growth

industries have never been very profitable because low entry barriers and capital inten-

sity have enabled supply to grow even faster, resulting in intense price competition.

Also, rapid growth in one year is no guarantee that growth will continue in the follow-

ing year.

Relative market share is inadequate as a description of overall competitive strength.

Market share is more properly viewed as an outcome of past efforts to formulate and

implement effective business-level and marketing strategies than as an indicator of en-

during competitive strength?

~

If the external environment changes, or the SBUs man-

agers change their strategy, the businesss relative market share can shift dramatically.

The outcomes of a growth-share analysis are highly sensitive to variations in how

growth and share are measured.

-~

Defining the relevant industry and served market (i.e.,

the target-market segments being pursued) also can present problems. For example,

does Pepsi Cola compete only for a share of the cola market, or for a share of the nauch

larger market for nonalcoholic beverages, such as iced tea, bottled water, and fruit

juices?

While the matrix specifies appropriate im estment strategies for each business it pro-

rides little guidance on how best to implement those strategies.

While the model sug-

gests that a finn should invest cash in its question mark businesses, for instance, it does

not consider whether there are any potential sources of competitive advantage that the

business can exploit to successfully increase its share. Simply providing a business with

more money does not guarantee that it will be able to improve its position within the

matrix.

The model implicitly assumes that all business milts are independent qf one another e.v-

ceptfor theflow of cash.

If this assumption is inaccurate, the model can suggest some

inappropriate resource allocation decisions. For instance, if other SBUs depend on a

dog business as a source of supply--or if they share functional activities, such as a com-

mon plant or salesforce, with that business harvesting the dog might increase the costs

or reduce the effectiveness of the other SBUs.

Alternative Portfofio Models

In view of the above limitations, a number of firms have attempted to improve the basic

portfolio model. Such improvements have focused primarily on developing more detailed,

multifactor measures of industry attractiveness and a businesss competitive strength and

on making the analysis more future-oriented. Exhibit 2.8 shows some factors managers

might use to evaluate industry attractiveness and a businesss competitive position. Corpo-

rate managers must first select factors most appropriate for their firm and weight them ac-

cording to their relative importance. They then rate each business and its industry on the

two sets of factors. Next, they combine the weighted evaluations into sunvnary measures

used to place each business within one of the nine boxes in the matrix. Businesses falling

into boxes numbered 1 (where both industry attractiveness and the businesss ability to


18/51

48 Section One

EXHIBIT 2.8

The Industry

Attractiveness-

Business Position

Matrix


o High

.>_

E Medium

O

Low

m

Industry attractiveness

High Medium Low

2

Invest/grow

2

Selective investment/maintain position

3

Harvest/divest

Variables that

might be

used to evaluate:

Businesss competitive position

Industry attractivement

Size Distribution

Size

Profitability

Growth

Technology Growth Technological sophistication

Relative share Marketing skills

Competitive intensity

Government regulations

Customer loyalty Patents

Price levels

Margins

compete are relatively high) are good candidates for further investment for future growth.

Businesses in the 2 boxes should receive only selective investment w ith an objective of

maintaining current position. Finally, businesses in the 3 box es are candidates for harvest-

ing or divestiture.

These multifactor models are more detailed than the simple growth-share model and

consequently provide more strategic guidance concerning the appropriate allocation of re-

sources across businesses. They are also more useful for evaluating potential new product-

markets. However, the multifactor measures in these models can be subjective and am-

biguous, especially when managers must evaluate different industries on the same set of

factors. Also, the conclusions drawn from these models still depend on the way industries

and product-markets are defined.

-~

Value Based Planning

As mentioned, one limitation of portfolio analysis is that it specifies how firms should al-

locate financial resources across their businesses xvithout considering the competitive

strategies those businesses are, or sho uld be, pursuing. P ortfolio analysis provides little

guidance, for instance, in deciding which of two question m ark businesses--each in at-

tractive markets but following different strategies--is worthy of the greater investment or

in choosing which of several competitive strategies a particular business unit should pursue.

Value-based planning is a resource allocation tool that attempts to address such ques-

tions by assessing the shareholder value a given strategy is likely to create. Thus, value-

based planning provides a basis for comparing the econ omic returns to be gained from in-

vesting in different businesses pursuing different strategies or from alternative strategies

that might be adopted by a given business unit.

A number of value-based planning methods are currently in use, but all share three

basic features?

-9

First, they assess the economic value a strategy is likely to produce by ex-

amining the cash flows it will generate, rather than relying on distorted accounting mea-


19/51

,(i ilBIT 2.9

Factors Affecting

the

reation

of

Shareholder Value

Somve:

Adapted with per-

mission of The Free Press, a

Division of Simon & Schu-

ster, Adult Publishing

Group, from (r:ating

SllarHiolder l,alue: .4 Guid~

ibr Managers & Im,estors,

Revised and Updated Edi-

tion by Alfred Rappaport.

Copyright ~ 1986. 1998 by

Alfred Rappaport. All rights

reserved.

Chapter Two

orporate Strategy Decisions and Their Marketing Implications

9

Corporate

objective

Valuation

components

Value

drivers

Management

decisions

Value

growth

duration

Creating

shareholder

value

Cash flow from

operations

Sales growth

Operating

profit margin

Income tax

rate

Shareholder return

Dividends

Capital gains

Discount

rate

t

Working

capital

investment

Fixed

capital

investment

Debt

Cost of

capital

sures, such as return on investment?" Second, they estimate the shareholder value that a

strategy will produce by discounting its forecasted cash flows by the businesss risk-

adjusted cost of capital. Finally, they evaluate strategies based on the likelihood that the in-

vestments required by a strategy will deliver returns greater than the cost of capital. The

amount of return a strategy or operating program generates in excess of the cost of capital

is comm only referred to as its

economic value

added, or EVA? This approach to evalu-

ating alternative strategies is particularly appropriate for use in allocating resources across

business units because most capital investments are made at the business-unit level, and

different business units typically face different risks and therefore h ave different costs of

capital.

Discom~ted Cash Flow Model

Perhaps the best-known and most widely used approach to value-based planning is the dis-

counted cash flow mo del proposed by Alfred Rapp aport and the Alcar Group, Inc. In this

model, as Exhibit 2.9 indicates, shareholder value created by a strategy is determined by

the cash flow it generates, the businesss cost of capital (which is used to discount future

cash flows back to their present value), and the market value of the debt assigned to the

business. The future cash flows generated by the strategy are, in turn, affected by six "value

drivers": the rate of sales growth the strategy will produce, the operating profit margin, the

income tax rate, investment in working capital, fixed capital investment required by the

strategy, and the duration of value growth.

The first five value drivers are self-explanatory, but the sixth requires some elaboration.

The duration of value growth represents managements estimate of the number of years

over which the strategy can be expected to produce rates of return that exceed the cost of

capital. This estimate, in turn, is tied to two other man agement judgments. First, the man-

ager must decide on the length of the planning period (typically three to five years); he or

she mu st then estimate the residual value the strategy will continue to produce after the

planning period is over. Such decisions are tricky, for they involve predictions of what will

happen in the relatively distant future.

3=


20/51

50

Section One Introduction to Strategy

5trai:egic 15s u~ ~

Some kinds of strategy

alternatives are consis-

tently nndervalued.

Particularly worrisome

from a marketing view-

point is the tendency

to underestimate the

value of keeping current

customers.

Some Limitations of Value-Based Planning

~-~

Value-based planning is not a substitute for strategic planning; it is only one tool for eval-

uating strategy alternatives identified and developed through managers judgments. It does

so by relying on forecasts of many kinds to put a financial value on the hopes, fears, and

expectations managers associate with each alternative. Projections of cash inflows rest on

forecasts of sales volume, product mix, unit prices, and competitors actions. Expected

cash outflows depend on projections of various cost elements, working capital, and invest-

ment requirements.

While good forecasts are notoriously difficult to make, they are critical to the validity

of value-based planning. Once someone attaches numbers to judgments about what is

likely to happen, people tend to endow those numbers with the concreteness of hard facts.

Therefore, the numbers derived from value-based planning can sometimes take on a life of

their own, and managers can lose sight of the assumptions underlying them.

Consequently, inaccurate forecasts can create problems in implementing value-based

plmming. For one thing, there are natural human tendencies to overvalue the financial pro-

jections associated with some strategy alternatives and to undervalue others. For instance,

managers are likely to overestimate the future returns from a currently successful strategy.

Evidence of past success tends to carry more weight than qualitative assessments of future

threats. Managers may pay too little attention to how competitive behavior, prices, and re-

turns might change if, for example, the industry were sudde nly beset by a slowdow n in

market growth and the appearance of excess capacity.

On the other hand, some kinds of strategy alternatives are consistently undervalued.

Particularly worrisome from a marketing viewpoint is the tendency to underestimate the

value of keeping current customers. Putting a figure on the damage to a firms competitive

advantage from not

making a strategic investment necessary to maintain the status quo is

harder than docum enting potential cost savings or profit improvements that an investment

might generate. For example, a few years ago Cone Drive O perations, a small manufac-

turer of heavy-duty gears, faced a number of related problems. Profits were declining, in-

ventory costs were climbing, and customers were unhapp y because deliveries were often

late. Cones management thought that a $2 million computer-integrated manufacturing

system might help solve these problems; but a discounted cash flow analysis indicated the

system would be an unwise investment. Because the company had only $26 million in

sales, it was hard to justify the $2 million investment in terms of cost savings. However,

the financial analysis underestimated intangibles such as improved product quality, faster

order processing, and improved customer satisfaction. Managem ent decided to install the

new system anyway, and new business and nonlabor savings paid back the investment in

just one year. More important, Cone retained nearly all of its old customers, many of whom

had been seriously considering switching to other suppliers.

Finally, another kind of problem involved in imp lementing value-based planning occurs

when management fails to consider all the appropriate strategy alternatives. Since it is only

an analytical tool, value-based planning can evaluate alternatives, but it cannot create

them. The best strategy will never emerge from the evaluation process if management fails

to identify it. To realize its full benefits, then, management must link value-based planning

to sound strategic analysis that is rigorous enough to avoid the problems associated with

undervaluing certain strategies, overvaluing others, and failing to consider all the options.

Using Customer EquiO~ to Estimate the Value of Alternative Marketing Actions

A recent variation of value-based planning attempts to overcome some of the above limi-

tations-particularly the inaccuracy of subjective forecasts and managers tendency to

over- or underestinaate the value of particular actions--and is proving useful for evaluat-

ing alternative marketing strategies. This approach calculates the economic return for a


21/51


prospective marketing initiative based on its likely impact on the firms customer equity,

which is the sum of the lifetime values of its current and future customers?

4

Each cus-

tomers lifetime value is estimated from data about the frequency of their purchases in the

category, the average quantity purchased, and historica brand switching patterns, com-

bined with the firms contribution margin. The necessary purchase data can be gotten from

the firms sales records, while brand-switching patterns can be estimated either fiom lon-

gitudinal panel data or survey data similar to that collected in customer satisfaction stud-

ies. Because market and competitive conditions, and therefore customer perceptions and

behaviors, change over time, however, the underlying data needs to be updated on a regu-

lar basis--perhaps once or twice a year.

The impact of a finns or business units past marketing actions on customer equity can be

statistically estimated from historical data. This enables managers to identify the financial

impact of alternative marketing "value drivers" of customer equity, such as brand advertis-

ing, quality or service improvements, loyalty programs, and the like. And once a manager

calculates the implementation costs and capital reqnirements involved, it is then possible to

estimate the financial return for any similar marketing initiative in the near future.

SYNERGY

A final strategic concern at the corporate level is to increase synergy across the firms var-

ious businesses and product-markets. As mentioned, synergy exists when two or more

businesses or product-markets, and their resources and competencies, complement and re-

inforce one another so that the total performance of the related businesses is greater than

it would be othe~vise.

Knowledge Based Synergies

Some potential synergies at the corporate level are knowledge-based. The performance of

one business can be enhan ced by the transfer of competencies, knowledge, or customer-

related intangibles--such as brand-nam e recognition and reputation--from other units

within the firm. For instance, the technical knowledge concerning image processing and

the quality reputation that Canon developed in the cam era business helped ease the firms

entry into the office copier business.

In part, such knowledge-based synergies are a function of the corporations scope and

missioner how its managers answ er the question, What businesses should we be in?

When a firms portfolio of businesses and product-markets reflects a common mission

based on well-defined customer needs, market segmen ts, or technologies, the company is

more likely to develop core competencies, customer knowledge, and strong brand fran-

chises that can be shared across businesses. However, the firms organizational structure

and allocation of resources also may enhance knowledge-based synergy. A centralized cor-

porate R&D department, for example, is often more efficient and effective at discovering

new technologies w ith potential applications across m ultiple businesses than if each busi-

ness unit bore the burden of funding its own R &D efforts. Similarly, some argue that

strong corporate-level coordination and su pport are necessary to maximize the strength of

a firms brand franchise, and to glean full benefit from accumulated market know ledge,

when the firm is competing in global markets.

Corporate Identity and the Corporate Brand as a Source

o Synergy

Corporate identity--together with a strong corporate brand that embodies that identity--

can help a firm stand out from its competitors and give it a sustainable advantage in the

market. Cotporate identiO,

flows from the communications, impressions, and personality


22/51

Section One


projected by an organization. It is shaped by the firms mission and values, its functional

competencies, the quality and design of its goods and services, its lnarketing communica-

tions, the actions of its personnel, the image generated by various corporate activities, and

other factors?

s

In order to p roject a positive, strong, and consistent identity, firms as diverse as Cater-

pillar, Walt D isney, and The Body Shop have established formal policies, criteria, and

guidelines to help ensure that all the messages and sensory images they comm unicate re-

flect their unique values, personality, and com petencies. One rationale for such corporate

identity programs is that they can generate synergies that enhance the effectiveness and ef-

ficiency of the firms marketing efforts for its individual product offerings. By focusing on

a common core of corporate values and competencies, every impression generated by each

products design, packaging, advertising, and promotional materials can help reinforce and

strengthen the impact of all the other impressions the firm communicates to its customers,

employees, shareholders, and other audiences, and thereby generate a bigger bang for its

limited marketing bucks. For example, by consistently focusing on values and competen-

cies associated with providing high-quality family entertainment, Disney has created an

identity that helps stimulate customer demand across a wide range of produ ct offerings--

from movies to TV programs to licensed merchandise to theme parks and cruise ships.

Corporate Branding Strategy When Does a Strong Corporate

Brand Make Sense?

Before a company s reputation and corporate image can have any impact--either positive

or negative--on customers purchase decisions, those customers lnust be aware of which

specific product or service offerings are sponsored by the company. This is where the fums

corporate branding strategy enters the picture. Essentially, a firm might pursue one of three

options concerning the corporate brand:

36

1.

The corporate brand (typically the companys own name and logo) might serve as the

brand name o f all or most of the firms products in markets around the wo rld, as is the

case with many high-tech (e.g., Cisco Systems, Siemens, IBM ) and service (e.g.,

British Airways, Am azon.corn) companies.

2. The firm might adopt a dual branding strategy where each offering carries both a cor-

porate identifier and an individual product brand. Examples include M icrosoft software

products (e.g., Microsoft Windows, Microsoft Word, etc.) and Volkswagen automobiles.

3. Finally, each product offering might be given a unique brand and identity--perhaps

even different brands across d ifferent global markets--while the identity of the source

company is deemphasized or hidden. This is the strategy pursued by Procter and Gam-

ble, Unilever, and many other consumer package goods firms.

The question is, when does it m ake sense to emph asize--and seek to gain synergy

from--a strong corporate identity and brand nalne in a companys brand ing strategy? Sur-

prisingly, this question has not been subjected to much empirical research. However, some

of the conditions favoring a dominant corporate brand are rather obvious. For instance, the

corporate brand will not add much value to the firms offerings unless the comp any has a

strong and favorable image and reputation among potential customers in at least most of

its target markets. Thus, the 3M Company features the 3M logo prominently on virtually

all of its 60,000 products because the firms reputation for innovativeness and reliability is

perceived positively by many of its potential customers regardless of what they are buying.

A related point is that a strong corporate brand makes m ost sense when company-level

competencies or resources are primarily responsible for generating the benefits and value


23/51

Chapter Two Corporate Strategy Decisions and Their Marketing Implications

customers receive fiom its various individual offerings. For example, many service orga-

nizations (e.g., McDonalds, Disney, Marriot, etc.) emphasize their corporate brands. This

is due, in part, to the fact that services are relatively intangible and much of their value is

directly generated by the actions of com pany personnel and facilitated by other firm-

specific resources, such as its physical facilities, employee training and reward programs,

quality control systems, and the like.

Finally, a recent exploratory study based on interviews with ma nagers in 11 Fortune

500 companies suggests that a firm is more likely to emphasize a strong corporate brand

when its various product offerings are closely interrelated, either in terms of having simi-

lar positionings in the market or cross-product elasticities that might be leveraged to en-

courage customers to buy m ultiple products from the firm.

3v

The study also found that

firms with strong corporate brands tended to have more centralized decision-making struc-

tures where top management made more of the m arketing strategy decisions. The obvious

question, of course, is whether a firms decision-making structure influences brand strat-

egy, or vice versa. We will explore such organization design issues and their marketing

strategy implications in more detail later in C hapter 12.

Synergy from Shared Resources

A second potential source of corporate synergy is inherent in sharing operational re-

sources, facilities, and functions across business un its. For instance, two or more busi-

nesses might produce products in a conm 3on plant or use a single salesforce to contact

cormnon customers. When such sharing helps increase economies of scale or experience-

curve effects, it can improve the efficiency of each of the businesses involved. However,

the sharing of operational facilities and functions m ay not produce positive synergies for

all business units. Such sharing can limit a businesss flexibility and reduce its ability to

adapt quickly to changing ma rket conditions and opportunities. Thus, a business whose

competitive strategy is focused on new-produ ct development and the pursuit of rapidly

changing markets may b e hindered more than helped w hen it is forced to share operating

resources with other units.

3*

For instance, when Frito-Lay attempted to enter the packaged

cookie market w ith its Grandmas line of soft cookies, the company relied on its 10,000

salty-snack route salespeople to distribute the new line to grocery stores. The firm thought

its huge and well-established snack salesforce would give its cookies a competitive advan-

tage in gaining shelf space and retailer support. But because those salespeople were paid

a commission on their total sales revenue, they ~vere reluctant to take time from their salty-

snack products to push the new cookies. The resulting lack of a strong sales effort con-

tributed to Grandmas failure to achieve a sustainable market share.

As we shall see in the next chapter, the type of comp etitive strategy a business unit

chooses to pursue can have a number of implications for corporate-level decisions con-

cerning organizational structure and resource allocation as well as for the marketing strate-

gies and programs em ployed within the business.

.i~,larketing

Plan Exercise

Write a draft mission statement for your company.

Identify which (if any) of the growth strategies identified in Exhibit 2.5 your plan will pursue,

based on your still very preliminary thinldng. Determine why that strategy does or does not make

sense, compared to the other alternatives.

Set the objectives that your plan or project is intended to accomplish, measured in terms of sales

and/or market share and profit contribution, over a specified time frame.


24/51

54 Section One

Discussion

Questions

El~dnotes


1.

The Kelly Bottling Company, located in a large metropolitan area of some five million people,

produced and marketed a line of carbonated beverages consisting mainly of flavored soft drinks

no t including colas), soda water, and tonics. They were sold in different types of packages and

sizes to a wide variety of retail accounts. Hmv m ight such a company exp and its revennes by pur-

suing each of tbe different expansion strategies discussed in Exhibit 2.5?

2. Which diversification strategy is illustrated by each of the following acquisitions? W hat synergies

or benefits might each purchase produce?

a. A packaged food companys acquisition of a fast-food company that features hamburgers

and french fries.

b. A large retailers purchase of an interest in a compan y producing small appliances.

c. A tobacco companys acqnisition of a beer company.

d. An oil companys acquisition of an insurance company.

3.

Critics argue that the BCG portfolio model som etimes provides misleading advice concerning

how resources should be allocated across SBUs or product markets. What are some of the possi-

ble limitations of the mod

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