After reviewing Chapter 1 from the textbook, post a 700-word synopsis of your understanding of the marketing concepts.Chapter
and the Marketing
The purpose of this introductory chapter is to present the marketing management process
and outline what marketing managers must manage if they are to be effective. In doing so,
it will also present a framework around which the remaining chapters are organized. Our
first task is to review the organizational philosophy known as the marketing concept, since
it underlies much of the thinking presented in this book. The remainder of this chapter will
focus on the process of strategic planning and its relationship to the process of marketing
THE MARKETING CONCEPT
Part A Introduction
Simply stated, the marketing concept means that an organization should seek to make a
profit by serving the needs of customer groups. The concept is very straightforward and
has a great deal of commonsense validity. Perhaps this is why it is often misunderstood,
forgotten, or overlooked.
The purpose of the marketing concept is to rivet the attention of marketing managers on
serving broad classes of customer needs (customer orientation), rather than on the firm’s
current products (production orientation) or on devising methods to attract customers to
current products (selling orientation). Thus, effective marketing starts with the recognition of customer needs and then works backward to devise products and services to satisfy
these needs. In this way, marketing managers can satisfy customers more efficiently in
the present and anticipate changes in customer needs more accurately in the future. This
means that organizations should focus on building long-term customer relationships in
which the initial sale is viewed as a beginning step in the process, not as an end goal. As a
result, the customer will be more satisfied and the firm will be more profitable.
The principal task of the marketing function operating under the marketing concept is
not to manipulate customers to do .what suits the interests of the firm, but rather to find
effective and efficient means of making the business do what suits the interests of customers. This is not to say that all firms practice marketing in this way. Clearly, many firms still
emphasize only production and sales. However, effective marketing, as defined in this text,
requires that consumer needs come first in organizational decision making.
MARKETING INSIGHT Some Guidelines for Implementing the
1. Create customer focus throughout the business.
2. Listen to the customer.
3. Define and nurture your distinctive competence, that is, what your organization does
well, better than competitors.
4. Define marketing as market intelligence.
5. Target customers precisely.
6. Manage for profitability, not sales volume.
7. Make customer value the guiding star.
8. Let customers define quality.
9. Measure and manage customer expectations.
10. Build customer relationships and loyalty.
11. Define the business as a service business.
12. Commit to continuous improvement and innovation.
13. Manage the culture of your organization along with strategy and structure.
14. Grow with strategic partners and alliances.
15. Destroy marketing bureaucracy.
Source: For a very early discussion of the marketing concept, see Robert L. King, “The Marketing Concept:
Fact or Intelligent Platitude,” The Marketing Concept in Action, Proceedings of the 47th National Conference
(Chicago: American Marketing Association, 1964), p. 657. Also see Frederick E. Webster Jr., “Defining the
New Marketing Concept,” Marketing Management 2, no. 4 (1994) pp. 22–31; William O. Bearden,
Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge,
IL: McGraw-Hill/Irwin, 2007), p. 9; and William D. Perreault Jr., Joseph P. Cannon, and E. Jerome McCarthey,
Basic Marketing: A Managerial Approach, 19th ed. (Burr Ridge, IL: McGraw-Hill Education, 2014), pp. 19–26.
One qualification to this statement deals with the question of a conflict between consumer wants and societal needs and wants. For example, if society deems clean air and
water as necessary for survival, this need may well take precedence over a consumer’s
want for goods and services that pollute the environment.
WHAT IS MARKETING?
Everyone reading this book has been a customer for most of his or her life. Last evening you
stopped at a local supermarket to graze at the salad bar, pick up some bottled water and a bag
of Fritos corn chips. While you were there, you snapped a $1.00 coupon for a new flavor salad
dressing out of a dispenser and tasted some new breakfast potatoes being cooked in the back
of the store. As you sat down at home to eat your salad, you answered the phone and someone
suggested that you need to have your carpets cleaned. Later on in the evening you saw TV
commercials for tires, soft drinks, athletic shoes, and the dangers of smoking and drinking
during pregnancy. Today when you enrolled in a marketing course, you found that the instructor has decided that you must purchase this book. A friend has already purchased the book on
the Internet. All of these activities involve marketing. And each of us knows something about
marketing because it has been a part of our life since we had our first dollar to spend.
Since we are all involved in marketing, it may seem strange that one of the persistent
problems in the field has been its definition. The American Marketing Association defines
marketing as “the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and
society at large.”1 This definition takes into account all parties involved in the marketing
effort: members of the producing organization, resellers of goods and services, and customers or clients. While the broadness of the definition allows the inclusion of nonbusiness
6 Part A Introduction
Major Types of
Marketing designed to create exchange
for tangible products.
Marketing designed to create exchanges
for intangible products.
Marketing designed to create favorable
actions toward persons.
Marketing designed to attract people to
Strategies to sell
Strategies by Allstate
to sell insurance.
Strategies to elect
a political candidate.
Strategies to get
people to vacation
in national or state
Strategies to get
pregnant women not
to drink alcohol.
Marketing designed to create support
for ideas, causes, or issues or to get
people to change undesirable
Marketing designed to attract donors,
members, participants, or
Strategies designed to
attract blood donors.
exchange processes, the primary emphasis in this text is on marketing in the business environment. However, this emphasis is not meant to imply that marketing concepts, principles, and
techniques cannot be fruitfully employed in other areas of exchange as is clearly illustrated in
WHAT IS STRATEGIC PLANNING?
Before a production manager, marketing manager, and personnel manager can develop plans
for their individual departments, some larger plan or blueprint for the entire organization
should exist. Otherwise, on what would the individual departmental plans be based?
In other words, there is a larger context for planning activities. Let us assume that we are
dealing with a large business organization that has several business divisions and several
product lines within each division (e.g., General Electric, Altria). Before individual divisions or departments can implement any marketing planning, a plan has to be developed for
the entire organization.2 This means that senior managers must look toward the future and
evaluate their ability to shape their organization’s destiny in the years and decades to come.
The output of this process is objectives and strategies designed to give the organization a
chance to compete effectively in the future. The objectives and strategies established at the
top level provide the context for planning in each of the divisions and departments by divisional and departmental managers.
Strategic Planning and Marketing Management
Some of the most successful business organizations are here today because many years
ago they offered the right product at the right time to a rapidly growing market. The
same can also be said for nonprofit and governmental organizations. Many of the critical decisions of the past were made without the benefit of strategic thinking or planning.
Whether these decisions were based on wisdom or were just luck is not important; they
worked for these organizations. However, a worse fate befell countless other organizations. More than three-quarters of the 100 largest U.S. corporations of 70 years ago have
fallen from the list. These corporations at one time dominated their markets, controlled
vast resources, and had the best-trained workers. In the end, they all made the same critical mistake. Their managements failed to recognize that business strategies need to reflect
The Long-Term Value
of Loyal Customers
It costs a great deal more to acquire a new customer than to keep an old one.
Loyal customers buy more from your firm over time.
The longer you keep a customer, the more profitable they become over time.
It costs less to service loyal customers than new customers.
Loyal customers are often excellent referrals for new business.
Loyal customers are often willing to pay more for the quality and value they desire.
Source: One of the earliest works on the value of the loyal customer was Frederick F. Reichheld, The Loyalty
Effect, BOSTON: HBS Press, 1996. Also see Roland T. Rust, Katherine N. Lemon, and Valerie A. Zeithaml,
“Return on Marketing: Using Customer Equity to Focus Marketing Strategies,“ Journal of Marketing, January
2004, pp. 76–89; William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles
and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 8; and W. D. Perreault Jr., J. P. Cannon,
and E. Jerome McCarthy, Basic Marketing: A Marketing Strategy Planning Approach, 19th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2013), pp. 42–43.
changing environments and emphasis must be placed on developing business systems that
allow for continuous improvement. Instead, they attempted to carry on business as usual.
Present-day managers are increasingly recognizing that wisdom and innovation alone
are no longer sufficient to guide the destinies of organizations, both large and small. These
same managers also realize that the true mission of the organization is to provide value
for three key constituencies: customers, employees, and investors. Without this type of
outlook, no one, including shareholders, will profit in the long run.
Strategic planning includes all the activities that lead to the development of a clear
organizational mission, organizational objectives, and appropriate strategies to achieve
the objectives for the entire organization. The form of the process itself has come under
criticism in some quarters for being too structured; however, strategic planning, if performed successfully, plays a key role in achieving an equilibrium between the short and
the long term by balancing acceptable financial performance with preparation for inevitable changes in markets, technology, and competition, as well as in economic and political arenas. Managing principally for current cash flows, market share gains, and earnings
trends can mortgage the firm’s future. An intense focus on the near term can produce an
aversion to risk that dooms a business to stagnation. Conversely, an overemphasis on the
long run is just as inappropriate. Companies that overextend themselves betting on the
future may penalize short-term profitability and other operating results to such an extent
that the company is vulnerable to takeover and other threatening actions.
The strategic planning process is depicted in Figure 1.2. In the strategic planning process,
the organization gathers information about the changing elements of its environment.
Managers from all functional areas in the organization assist in this information-gathering
process. This information is useful in aiding the organization to adapt better to these changes
through the process of strategic planning. The strategic plan(s)3 and supporting plan are
then implemented in the environment. The end results of this implementation are fed back
as new information so that continuous adaptation and improvement can take place.
The Strategic Planning Process
The output of the strategic planning process is the development of a strategic plan. Figure 1.2
indicates four components of a strategic plan: mission, objectives, strategies, and portfolio
plan. Let us carefully examine each one.
The organization’s environment provides the resources that sustain the organization,
whether it is a business, a college or university, or a government agency. In exchange
8 Part A Introduction
FIGURE 1.2 The Strategic Planning Process
The organization’s strategic plan
for these resources, the organization must supply the environment with quality goods
and services at an acceptable price. In other words, every organization exists to accomplish something in the larger environment and that purpose, vision, or mission usually is
clear at the organization’s inception. As time passes, however, the organization expands,
and the environment and managerial personnel change. As a result, one or more things
are likely to occur. First, the organization’s original purpose may become irrelevant as
the organization expands into new products, new markets, and even new industries. For
example, Levi Strauss began as a manufacturer of work clothes. Second, the original
mission may remain relevant, but managers begin to lose interest in it. Finally, changes
in the environment may make the original mission inappropriate, as occurred with the
March of Dimes when a cure was found for polio. The result of any or all three of these
conditions is a “drifting” organization, without a clear mission, vision, or purpose to guide
critical decisions. When this occurs, management must search for a purpose or emphatically restate and reinforce the original purpose.
The mission statement, or purpose, of an organization is the description of its reason
for existence. It is the long-run vision of what the organization strives to be, the unique
aim that differentiates the organization from similar ones and the means by which this
differentiation will take place. In essence, the mission statement defines the direction in
which the organization is heading and how it will succeed in reaching its desired goal.
While some argue that vision and mission statements differ in their purpose, the perspective we will take is that both reflect the organization’s attempt to guide behavior,
create a culture, and inspire commitment. However, it is more important that the mission statement comes from the heart and is practical, easy to identify with, and easy to
remember so that it will provide direction and significance to all members of the organization regardless of their organizational level.
The basic questions that must be answered when an organization decides to examine and
restate its mission are, What is our business? Who are our customers? What do customers
value? and What is our business? The answers are, in a sense, the assumptions on which the
Some Actual Mission
Large pharmaceutical firm
Skin care products
We will become the world’s most valued company to patients, customers, colleagues, investors, business partners, and the communities
where we work and live.
To help citizens successfully achieve and celebrate important life events
with education, information, products, and services.
We will provide luxury skin-care products with therapeutic qualities that
make them worth their premium price.
Grow a worldwide lodging business using total-quality-management
(TQM) principles to continuously improve preference and profitability.
Our commitment is that every guest leaves satisfied.
We will become the best bank in the state for medium-size businesses
organization is being run and from which future decisions will evolve. While such questions may seem simplistic, they are such difficult and critical ones that the major responsibility for answering them must lie with top management. In fact, the mission statement
remains the most widely used management tool in business today. In developing a statement of mission, management must take into account three key elements: the organization’s history, its distinctive competencies, and its environment.4
1. The organization’s history. Every organization—large or small, profit or nonprofit—
has a history of objectives, accomplishments, mistakes, and policies. In formulating a
mission, the critical characteristics and events of the past must be considered.
2. The organization’s distinctive competencies. While there are many things an
organization may be able to do, it should seek to do what it can do best. Distinctive
competencies are things that an organization does well—so well in fact that they give it an
advantage over similar organizations. For Honeywell, it’s their ability to design, manufacture, and distribute a superior line of thermostats. Similarly, Procter & Gamble’s distinctive
competency is its knowledge of the market for low-priced, repetitively purchased consumer
products. No matter how appealing an opportunity may be, to gain advantage over competitors, the organization must formulate strategy based on distinctive competencies.
3. The organization’s environment. The organization’s environment dictates the opportunities, constraints, and threats that must be identified before a mission statement is
developed. For example, managers in any industry that is affected by Internet technology
breakthroughs should continually be asking, How will the changes in technology affect my
customers’ behavior and the means by which we need to conduct our business?
However, it is extremely difficult to write a useful and effective mission statement. It is
not uncommon for an organization to spend one or two years developing a useful mission
statement. When completed, an effective mission statement will be focused on markets
rather than products, achievable, motivating, and specific.5
Focused on Markets Rather Than Products The customers or clients of an organization are critical in determining its mission. Traditionally, many organizations defined their
business in terms of what they made (“our business is glass”), and in many cases they
named the organization for the product or service (e.g., American Tobacco, Hormel Meats,
National Cash Register, Harbor View Savings and Loan Association). Many of these
organizations have found that, when products and technologies become obsolete, their
mission is no longer relevant and the name of the organization may no longer describe
what it does. Thus, a more enduring way of defining the mission is needed. In recent years,
in Mission Statements
1. Incomplete—not specific as to where the company is headed and what kind of company management is trying to create.
2. Vague—does not provide direction to decision makers when faced with product/market
3. Not motivational—does not provide a sense of purpose or commitment to something
bigger than the numbers.
4. Not distinctive—not specific to our company.
5. Too reliant on superlatives—too many superlatives such as #1, recognized leader, most
6. Too generic—does not specify the business or industry to which it applies.
7. Too broad—does not rule out any opportunity management might wish to pursue.
Source: Adapted from Arthur A. Thompson Jr. Margaret A. Peteraf, John E. Gamble, and A. J. Strickland III,
Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2014), p. 22.
Examine the mission statements in Marketing Insight 1–3. Do any of these shortcomings apply
therefore, a key feature of mission statements has been an external rather than internal
focus. In other words, the mission statement should focus on the broad class of needs
that the organization is seeking to satisfy (external focus), not on the physical product or
service that the organization is offering at present (internal focus). These market-driven
firms stand out in their ability to continuously anticipate market opportunities and respond
before their competitors. Peter Drucker has clearly stated this principle:
A business is not defined by the company’s name, statutes, or articles of incorporation. It is
defined by the want the customer satisfies when he buys a product or service. To satisfy the
customer is the mission and purpose of every business. The question “What is our business?”
can, therefore, be answered only by looking at the business from the outside, from the point
of view of customer and market.6
While Drucker was referring to business organizations, the same necessity exists for
both nonprofit and governmental organizations. That necessity is to state the mission in
terms of serving a particular group of clients or customers and meeting a particular class
Achievable While the mission statement should stretch the organization toward more
effective performance, it should, at the same time, be realistic and achievable. In other
words, it should open a vision of new opportunities but should not lead the organization
into unrealistic ventures far beyond its competencies.
Motivational One of the side (but very important) benefits of a well-defined mission is
the guidance it provides employees and managers working in geographically dispersed
units and on independent tasks. It provides a shared sense of purpose outside the various
activities taking place within the organization. Therefore, such end results as sales, patients
cared for, students graduated, and reduction in violent crimes can then be viewed as the
result of careful pursuit and accomplishment of the mission and not as the mission itself.
Specific As we mentioned earlier, public relations should not be the primary purpose of
a statement of mission. It must be specific to provide direction and guidelines to management when they are choosing between alternative courses of action. In other words, “to
produce the highest-quality products at the lowest possible cost” sounds very good, but it
does not provide direction for management.
Potential Sources of Cross-Functional
Conflict for Marketers
Research and development
What They May
Want to Deliver
What Marketers May
Want Them to Deliver
Basic research projects
Long production runs
No model changes
Long lead times
No new products
Budgets based on return
Low sales commissions
Strict payment terms
Strict credit standards
Products that deliver customer value
Many new products
Short production runs
Frequent model changes
Short lead times
Many new products
Budgets based on need to
High sales commissions
Flexible payment terms
Flexible credit standards
Organizational objectives are the end points of an organization’s mission and are what it
seeks through the ongoing, long-run operations of the organization. The organizational
mission is distilled into a finer set of specific and achievable organizational objectives.
These objectives must be specific, measurable, action commitments by which the mission
of the organization is to be achieved.
As with the statement of mission, organizational objectives are more than good intentions. In fact, if formulated properly, they can accomplish the following:
1. They can be converted into specific action.
2. They will provide direction. That is, they can serve as a starting point for more specific and detailed objectives at lower levels in the organization. Each manager will then
know how his or her objectives relate to those at higher levels.
3. They can establish long-run priorities for the organization.
4. They can facilitate management control because they serve as standards against which
overall organizational performance can be evaluated.
Organizational objectives are necessary in all areas that may influence the performance
and long-run survival of the organization. As shown in Figure 1.3, objectives can be established in and across many areas of the organization. The list provided in Figure 1.3 is by no
means exhaustive. For example, some organizations are specifying the primary objective
as the attainment of a specific level of quality, either in the marketing of a product or the
providing of a service. These organizations believe that objectives should reflect an organization’s commitment to the customer rather than its own finances. Obviously, during the
strategic planning process conflicts are likely to occur between various functional departments in the organization. The important point is that management must translate the
12 Part A Introduction
Area of Performance
1. Market standing
4. Physical and financial resources
6. Manager performance
7. Worker performance and attitude
8. Social responsibility
To make our brands number one in their field in terms of
To be a leader in introducing new products by spending no
less than 7 percent of sales for research and development.
To manufacture all products efficiently as measured by
the productivity of the workforce.
To protect and maintain all resources—equipment, buildings, inventory, and funds.
To achieve an annual rate of return on investment of at
least 15 percent.
To identify critical areas of management depth and
To maintain levels of employee satisfaction consistent with
our own and similar industries.
To respond appropriately whenever possible to societal
expectations and environmental needs.
organizational mission into specific objectives that support the realization of the mission.
The objectives may flow directly from the mission or be considered subordinate necessities for carrying out the mission. As discussed earlier, the objectives are specific, measurable, action commitments on the part of the organization.
Hopefully, when an organization has formulated its mission and developed its objectives, it knows where it wants to go. The next managerial task is to develop a “grand
design” to get there. This grand design constitutes the organizational strategies. Strategy
involves the choice of major directions the organization will take in pursuing its objectives. Toward this end, it is critical that strategies are consistent with goals and objectives and that top management ensures strategies are implemented effectively. As many
as 70 percent of strategic plans fail because the strategies in them are not well defined
and, thus, cannot be implemented effectively. What follows is a discussion of various
strategies organizations can pursue. We discuss three approaches: (1) strategies based on
products and markets, (2) strategies based on competitive advantage, and (3) strategies
based on value.
Organizational Strategies Based on Products and Markets One means to developing
organizational strategies is to focus on the directions the organization can take in order
to grow. Figure 1.4, which presents the available strategic choices, is a product–market
matrix.7 It indicates that an organization can grow by better managing what it is
Three Tests for Organizational
1. The Fit Test: How well does the strategy fit the company’s situation? A strategy must have
good external fit, which means it will be well matched to industry and competitive conditions, the company’s best market opportunities, and other relevant aspects of its business
environment. It also must have a good internal fit, which means it is tailored to the company’s resources and distinctive competencies and be supported by a complementary set
of functional capabilities (sales and marketing, production, etc.).
2. The Competitive Advantage Test: Can the strategy help the company achieve a sustainable
competitive advantage? Strategies that fail this test are unlikely to produce superior
performance for more than a brief period of time. A good strategy should enable the
organization to achieve a long-term competitive advantage.
3. The Performance Test: Is the strategy producing good company performance? Critical
performance indicators are (a) profitability and financial strength and (b) competitive
strength and market standing. Above average performance in these two areas is an indicator of a winning strategy.
Source: Adapted from Arthur A. Thompson Jr. Margaret A. Peteraf, John E. Gamble, and A. J. Strickland III,
Crafting and Executing Strategy, 19th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2014), p. 12.
presently doing or by finding new things to do. In choosing one or both of these paths,
it must also decide whether to concentrate on present customers or to seek new ones.
Thus, according to Figure 1.4, there are only four paths an organization can take in
order to grow.
Market Penetration Strategies These strategies focus primarily on increasing the sale of
present products to present customers. For example:
• Encouraging present customers to use more of the product: “Orange Juice Isn’t Just for
• Encouraging present customers to purchase more of the product: multiple packages of
Pringles, instant winner sweepstakes at a fast-food restaurant.
• Directing programs at current participants: A university directs a fund-raising program
at those graduates who already give the most money.
Tactics used to implement a market penetration strategy might include price reductions,
advertising that stresses the many benefits of the product (e.g., “Milk Is a Natural”), packaging the product in different-sized packages, or making it available at more locations. Other
functional areas of the business could also be involved in implementing the strategy in addition to marketing. A production plan might be developed to produce the product more efficiently. This plan might include increased production runs, the substitution of preassembled
components for individual product parts, or the automation of a process that previously was
Market Development Strategies Pursuing growth through market development, an
organization would seek to find new customers for its present products. For example:
• Arm & Hammer continues to seek new uses for its baking soda.
• McDonald’s continually seeks expansion into overseas markets.
• As the consumption of salt declined, the book 101 Things You Can Do with Salt Besides
Eat It appeared.
14 Part A Introduction
Market development strategies involve much, much more than simply getting the product to a new market. Before deciding on marketing techniques such as advertising and
packaging, companies often find they must establish a clear position in the market, sometimes spending large sums of money simply to educate consumers as to why they should
consider buying the product.
Product Development Strategies Selecting one of the remaining two strategies means
the organization will seek new things to do. With this particular strategy, the new products
developed would be directed primarily to present customers. For example:
• Offering a different version of an existing product: mini-Oreos, Ritz with cheese.
• Offering a new and improved version of their product: Gillette’s latest improvement in
• Offering a new way to use an existing product: Vaseline’s Lip Therapy.
Diversification This strategy can lead the organization into entirely new and even unrelated businesses. It involves seeking new products (often through acquisitions) for customers not currently being served. For example:
• Altria, originally a manufacturer of cigarettes, is widely diversified in financial services, Post cereals, Sealtest dairy, and Kraft cheese, among others.
• Brown Foreman Distillers acquired Hartmann Luggage, and Sara Lee acquired Coach
• Some universities are establishing corporations to find commercial uses for faculty research.
Organizational Strategies Based on Competitive Advantage Michael Porter developed a model for formulating organizational strategy that is applicable across a wide
variety of industries.8 The focus of the model is on devising means to gain competitive
advantage. Competitive advantage is an ability to outperform competitors in providing
something that the market values. Porter suggests that firms should first analyze their
industry and then develop either a cost leadership strategy or a strategy based on differentiation. These general strategies can be used on marketwide bases or in a niche
(segment) within the total market.
Using a cost leadership strategy, a firm would focus on being the low-cost company
in its industry. They would stress efficiency and offer a standard, no-frills product. They
could achieve this through efficiencies in production, product design, manufacturing,
distribution, technology, or some other means. The important point is that to succeed, the
organization must continually strive to be the cost leader in the industry or market segment
it competes in. It must also offer products or services that are acceptable to customers
when compared to the competition. Walmart, Southwest Airlines, and Timex Group Ltd.
are companies that have succeeded in using a cost leadership strategy.
Using a strategy based on differentiation, a firm seeks to be unique in its industry or
market segment along particular dimensions that the customers value. These dimensions
might pertain to design, quality, service, variety of offerings, brand name, or some other
factor. The important point is that because of uniqueness of the product or service along one
or more of these dimensions, the firm can charge a premium price. L.L.Bean, Rolex, CocaCola, and Microsoft are companies that have succeeded using a differentiation strategy.
Organizational Strategies Based on Value As competition increases, the concept of
“customer value” has become critical for marketers as well as customers. It can be thought
of as an extension of the marketing concept philosophy that focuses on developing and
delivering superior value to customers as a way to achieve organizational objectives. Thus,
it focuses not only on customer needs, but also on the question, How can we create value
for them and still achieve our objectives?
Strategic Planning and the Marketing Management Process 15
It has become pretty clear that in today’s competitive environment it is unlikely
that a firm will succeed by trying to be all things to all people.9 Thus, to succeed firms
must seek to build long-term relationships with their customers by offering a unique
value that only they can offer. It seems that many firms have succeeded by choosing
to deliver superior customer value using one of three value strategies—best price, best
product, or best service.
Dell Inc., Costco, and Southwest Airlines are among the success stories in offering customers the best price. Rubbermaid, Nike, Starbucks, and Microsoft believe they offer the
best products on the market. Airborne Express, Roadway, Cott Corporation, and Lands’
End provide superior customer value by providing outstanding service.
Choosing an Appropriate Strategy
On what basis does an organization choose one (or all) of its strategies? Of extreme
importance are the directions set by the mission statement. Management should select those
strategies consistent with its mission and capitalize on the organization’s distinctive competencies that will lead to a sustainable competitive advantage. A sustainable competitive
advantage can be based on either the assets or skills of the organization. Technical superiority, low-cost production, customer service/product support, location, financial resources,
continuing product innovation, and overall marketing skills are all examples of distinctive
competencies that can lead to a sustainable competitive advantage. For example, Honda is
known for providing quality automobiles at a reasonable price. Each succeeding generation of Honda automobiles has shown marked quality improvements over previous generations. Likewise, VF Corporation, manufacturer of Wrangler and Lee jeans, has formed
“quick response” partnerships with both discounters and department stores to ensure the
efficiency of product flow. The key to sustaining a competitive advantage is to continually focus and build on the assets and skills that will lead to long-term performance gains.
Organizational Portfolio Plan
The final phase of the strategic planning process is the formulation of the organizational
portfolio plan. In reality, most organizations at a particular time are a portfolio of businesses, that is, product lines, divisions, and schools. To illustrate, an appliance manufacturer may have several product lines (e.g., televisions, washers and dryers, refrigerators,
stereos) as well as two divisions, consumer appliances and industrial appliances. A college
or university will have numerous schools (e.g., education, business, law, architecture) and
several programs within each school. Some widely diversified organizations such as Altria
are in numerous unrelated businesses, such as cigarettes, food products, land development,
and industrial paper products.
Managing such groups of businesses is made a little easier if resources are plentiful,
cash is plentiful, and each is experiencing growth and profits. Unfortunately, providing
larger and larger budgets each year to all businesses is seldom feasible. Many are not
experiencing growth, and profits and resources (financial and nonfinancial) are becoming more and more scarce. In such a situation, choices must be made, and some method is
necessary to help management make the choices. Management must decide which businesses to build, maintain, or eliminate, or which new businesses to add. Indeed, much of
the recent activity in corporate restructuring has centered on decisions relating to which
groups of businesses management should focus on.
Obviously, the first step in this approach is to identify the various divisions, product
lines, and so on that can be considered a “business.” When identified, these are referred to
as strategic business units (SBUs) and have the following characteristics:
• They have a distinct mission.
• They have their own competitors.
16 Part A Introduction
• They are a single business or collection of related businesses.
• They can be planned independently of the other businesses of the total organization.
Thus, depending on the type of organization, an SBU could be a single product, product
line, or division; a college of business administration; or a state mental health agency.
Once the organization has identified and classified all of its SBUs, some method must
be established to determine how resources should be allocated among the various SBUs.
These methods are known as portfolio models. For those readers interested, the appendix
of this chapter presents two of the most popular portfolio models, the Boston Consulting
Group model and the General Electric model.
The Complete Strategic Plan
Figure 1.2 indicates that at this point the strategic planning process is complete, and the
organization has a time-phased blueprint that outlines its mission, objectives, and strategies. Completion of the strategic plan facilitates the development of marketing plans for
each product, product line, or division of the organization. The marketing plan serves as
a subset of the strategic plan in that it allows for detailed planning at a target market
level. This important relationship between strategic planning and marketing planning is
the subject of the final section of this chapter.
THE MARKETING MANAGEMENT PROCESS
Marketing management can be defined as “the process of planning and executing the
conception, pricing, promotion, and distribution of goods, services, and ideas to create exchanges with target groups that satisfy customer and organizational objectives.”10
It should be noted that this definition is entirely consistent with the marketing concept,
since it emphasizes serving target market needs as the key to achieving organizational
objectives. The remainder of this section will be devoted to a discussion of the marketing
management process according to the model in Figure 1.5.
With a clear understanding of organizational objectives and mission, the marketing
manager must then analyze and monitor the position of the firm and, specifically, the
marketing department, in terms of its past, present, and future situation. Of course, the
future situation is of primary concern. However, analyses of past trends and the current
situation are most useful for predicting the future situation.
The situation analysis can be divided into six major areas of concern: (1) the cooperative environment, (2) the competitive environment, (3) the economic environment, (4) the
social environment, (5) the political environment, and (6) the legal environment. In analyzing each of these environments, the marketing executive must search both for opportunities and for constraints or threats to achieving objectives. Opportunities for profitable
marketing often arise from changes in these environments that bring about new sets of
needs to be satisfied. Constraints on marketing activities, such as limited supplies of scarce
resources, also arise from these environments.
The Cooperative Environment The cooperative environment includes all firms and individuals who have a vested interest in the firm’s accomplishing its objectives. Parties of primary interest to the marketing executive in this environment are (1) suppliers, (2) resellers,
(3) other departments in the firm, and (4) subdepartments and employees of the marketing
department. Opportunities in this environment are primarily related to methods of increasing efficiency. For example, a company might decide to switch from a competitive bid
process of obtaining materials to a single source that is located near the company’s plant.
The strategic plan
Strategic Planning and the Marketing Management Process 17
system and marketing
The marketing plan
Target market selection
Implementation and control
Likewise, members of the marketing, engineering, and manufacturing functions may use a
teamwork approach to developing new products versus a sequential approach. Constraints
consist of such things as unresolved conflicts and shortages of materials. For example, a
company manager may believe that a distributor is doing an insufficient job of promoting
and selling the product, or a marketing manager may feel that manufacturing is not taking
the steps needed to produce a quality product.
The Competitive Environment The competitive environment includes primarily other
firms in the industry that rival the organization for both resources and sales. Opportunities in this environment include such things as (1) acquiring competing firms; (2) offering
demonstrably better value to consumers and attracting them away from competitors; and
(3) in some cases, driving competitors out of the industry. For example, one airline purchases another airline, a bank offers depositors a free checking account with no minimum
balance requirements, or a grocery chain engages in an everyday low-price strategy that
competitors can’t meet. The primary constraints in these environments are the demand
stimulation activities of competing firms and the number of consumers who cannot be
lured away from competition.
The Economic Environment The state of the macroeconomy and changes in it also
bring about marketing opportunities and constraints. For example, such factors as high
inflation and unemployment levels can limit the size of the market that can afford to
purchase a firm’s top-of-the-line product. At the same time, these factors may offer a
profitable opportunity to develop rental services for such products or to develop lessexpensive models of the product. In addition, changes in technology can provide significant threats and opportunities. For example, in the communications industry, when
technology was developed to a level where it was possible to provide cable television
using phone lines, such a system posed a severe threat to the cable industry.
MARKETING INSIGHT Key Issues in the Marketing Planning
Process That Need to Be Addressed 1–7
Speed of the Process. There is the problem of either being so slow that the process seems
to go on forever or so fast that there is an extreme burst of activity to rush out a plan.
Amount of Data Collected. Sufficient data are needed to properly estimate customer
needs and competitive trends. However, the law of diminishing returns quickly sets in
on the data-collection process.
Responsibility for Developing the Plan. If planning is delegated to professional planners,
valuable line management input may be ignored. If the process is left to line managers, planning may be relegated to secondary status.
Structure. Many executives believe the most important part of planning is not the plan
itself but the structure of thought about the strategic issues facing the business. However,
the structure should not take precedence over the content so that planning becomes
merely filling out forms or crunching numbers.
Length of the Plan. The length of a marketing plan must be balanced between being
so long that both staff and line managers ignore it and so brief that it ignores key details.
Frequency of Planning. Too frequent reevaluation of strategies can lead to erratic firm
behavior. However, when plans are not revised frequently enough, the business may
not adapt quickly enough to environmental changes and thus suffer a deterioration in
its competitive position.
Number of Alternative Strategies Considered. Discussing too few alternatives raises the
likelihood of failure, whereas discussing too many increases the time and cost of the
Cross-Functional Acceptance. A common mistake is to view the plan as the proprietary
possession of marketing. Successful implementation requires a broad consensus,
including other functional areas.
Using the Plan as a Sales Document. A major but often overlooked purpose of a plan
and its presentation is to generate funds from either internal or external sources.
Therefore, the better the plan, the better the chance of gaining desired funding.
Senior Management Leadership. Commitment from senior management is essential to
the success of a marketing planning effort.
Tying Compensation to Successful Planning Efforts. Management compensation should
be oriented toward the achievement of objectives stated in the plan.
Source: From Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning 7E, McGraw-Hill/
Irwin, 2008, Chapter 1. Reprinted with permission of McGraw-Hill Education.
The Social Environment This environment includes general cultural and social traditions, norms, and attitudes. While these values change slowly, such changes often bring
about the need for new products and services. For example, a change in values concerning the desirability of large families brought about an opportunity to market better methods of birth control. On the other hand, cultural and social values also place constraints
on marketing activities. As a rule, business practices that are contrary to social values
become political issues, which are often resolved by legal constraints. For example, public
demand for a cleaner environment has caused the government to require that automobile
manufacturers’ products meet certain average gas mileage and emission standards.
The Political Environment The political environment includes the attitudes and reactions of the general public, social and business critics, and other organizations, such as
the Better Business Bureau. Dissatisfaction with such business and marketing practices as
unsafe products, products that waste resources, and unethical sales procedures can have
adverse effects on corporation image and customer loyalty. However, adapting business
Strategic Planning and the Marketing Management Process 19
and marketing practices to these attitudes can be an opportunity. For example, these attitudes have brought about markets for such products as unbreakable children’s toys, highefficiency air conditioners, and more economical automobiles.
The Legal Environment This environment includes a host of federal, state, and local
legislation directed at protecting both business competition and consumer rights. In past
years, legislation reflected social and political attitudes and has been primarily directed at
constraining business practices. Such legislation usually acts as a constraint on business
behavior, but again can be viewed as providing opportunities for marketing safer and more
efficient products. In recent years, there has been less emphasis on creating new laws
for constraining business practices. As an example, deregulation has become more common, as evidenced by events in the airlines, financial services, and telecommunications
The previous sections emphasized that (1) marketing activities must be aligned with
organizational objectives and (2) marketing opportunities are often found by systematically
analyzing situational environments. Once an opportunity is recognized, the marketing executive must then plan an appropriate strategy for taking advantage of the opportunity. This
process can be viewed in terms of three interrelated tasks: (1) establishing marketing objectives, (2) selecting the target market, and (3) developing the marketing mix.
Establishing Objectives Marketing objectives usually are derived from organizational
objectives; in some cases where the firm is totally marketing oriented, the two are identical. In either case, objectives must be specified and performance in achieving them should
be measurable. Marketing objectives are usually stated as standards of performance (e.g.,
a certain percentage of market share or sales volume) or as tasks to be achieved by given
dates. While such objectives are useful, the marketing concept emphasizes that profits
rather than sales should be the overriding objective of the firm and marketing department.
In any case, these objectives provide the framework for the marketing plan.
Selecting the Target Market The success of any marketing plan hinges on how well it
can identify customer needs and organize its resources to satisfy them profitably. Thus,
a crucial element of the marketing plan is selecting the groups or segments of potential
customers the firm is going to serve with each of its products. Four important questions
must be answered:
What do customers want or need?
What must be done to satisfy these wants or needs?
What is the size of the market?
What is its growth profile?
Present target markets and potential target markets are then ranked according to (1)
profitability; (2) present and future sales volume; and (3) the match between what it takes
to appeal successfully to the segment and the organization’s capabilities. Those that appear
to offer the greatest potential are selected. One cautionary note on this process involves the
importance of not neglecting present customers when developing market share and sales
strategies. Chapters 3, 4, and 5 are devoted to discussing consumer behavior, industrial
buyers, and market segmentation.
Developing the Marketing Mix The marketing mix is the set of controllable variables
that must be managed to satisfy the target market and achieve organizational objectives.
These controllable variables are usually classified according to four major decision areas:
product, price, promotion, and place (or channels of distribution). The importance of
Examples of Marketing Objectives
Poorly Stated Objectives
Our objective is to be a leader in the
industry in terms of new product
Our objective is to maximize profits.
Our objective is to better serve
Our objective is to be the best that we
Our objective is to spend 12 percent of sales
revenue between 2013 and 2015 on research and
development in an effort to introduce at least five
new products in 2016.
Our objective is to achieve a 10 percent return on
investment during 2013, with a payback on new
investments of no longer than four years.
Our objective is to obtain customer satisfaction
ratings of at least 90 percent on the 2013 annual
customer satisfaction survey, and to retain at
least 85 percent of our 2013 customers as repeat
purchasers in 2014.
Our objective is to increase market share from
30 percent to 40 percent in 2013 by increasing
promotional expenditures by 14 percent.
Source: From Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning 7E, McGraw-Hill/
Irwin, 2008, Chapter 1. Reprinted with permission of McGraw-Hill Education.
these decision areas cannot be overstated, and in fact, the major portion of this text is
devoted to analyzing them. Chapters 6 and 7 are devoted to product and new product
strategies, Chapters 8 and 9 to promotion strategies in terms of both nonpersonal and
personal selling, Chapter 10 to distribution strategies, and Chapter 11 to pricing strategies. In addition, marketing mix variables are the focus of analysis in two chapters on
marketing in special fields, that is, the marketing of services (Chapter 12) and global
marketing (Chapter 13). Thus, it should be clear that the marketing mix is the core of the
marketing management process.
The output of the foregoing process is the marketing plan. It is a formal statement of
decisions that have been made on marketing activities; it is a blueprint of the objectives,
strategies, and tasks to be performed.
Implementation and Control of the Marketing Plan
Implementing the marketing plan involves putting the plan into action and performing
marketing tasks according to the predefined schedule. Even the most carefully developed plans often cannot be executed with perfect timing. Thus, the marketing executive
must closely monitor and coordinate implementation of the plan. In some cases, adjustments may have to be made in the basic plan because of changes in any of the situational
environments. For example, competitors may introduce a new product. In this event, it
may be desirable to speed up or delay implementation of the plan. In almost all cases,
some minor adjustments or fine tuning will be necessary in implementation.
Controlling the marketing plan involves three basic steps. First, the results of the
implemented marketing plan are measured. Second, these results are compared with
objectives. Third, decisions are made on whether the plan is achieving objectives. If
serious deviations exist between actual and planned results, adjustments may have to be
made to redirect the plan toward achieving objectives.
Strategic Planning and the Marketing Management Process 21
Marketing Information Systems and Marketing Research
Throughout the marketing management process, current, reliable, and valid information is
needed to make effective marketing decisions. Providing this information is the task of the
marketing information system and marketing research. These topics are discussed in detail
in Chapter 2.
THE STRATEGIC PLAN, THE MARKETING PLAN,
AND OTHER FUNCTIONAL AREA PLANS
Strategic planning is clearly a top-management responsibility. In recent years, however,
there has been an increasing shift toward more active participation by marketing managers
in strategic analysis and planning. This is because, in reality, nearly all strategic planning
questions have marketing implications. In fact, the two major strategic planning questions—
What products should we make? and What markets should we serve?—are clearly marketing questions. Thus, marketing executives are involved in the strategic planning process in
at least two important ways: (1) They influence the process by providing important inputs
in the form of information and suggestions relating to customers, products, and middlemen;
and (2) they must always be aware of what the process of stategic planning involves as well
as the results because everything they do—the marketing objectives and strategies they
develop—must be derived from the strategic plan. In fact, the planning done in all functional areas of the organization should be derived from the strategic plan.
Marketing’s Role in Cross-Functional Strategic Planning
More and more organizations are rethinking the traditional role of marketing. Rather
than dividing work according to function (e.g., production, finance, technology, human
resources), they are bringing managers and employees together to participate in crossfunctional teams. These teams might have responsibility for a particular product, line of
products, or group of customers.
Because team members are responsible for all activities involving their products and/or
customers, they are responsible for strategic planning. This means that all personnel working in a cross-functional team will participate in creating a strategic plan to serve customers.
Rather than making decisions independently, marketing managers work closely with
team members from production, finance, human resources, and other areas to devise plans
that address all concerns. Thus, if a team member from production says, “That product will
be too difficult to produce,” or if a team member from finance says, “We’ll never make a
profit at that price,” the team members from marketing must help resolve the problems.
This approach requires a high degree of skill at problem solving and gaining cooperation.
Clearly the greatest advantage of strategic planning with a cross-functional team is
the ability of team members to consider a situation from a number of viewpoints. The
resulting insights can help the team avoid costly mistakes and poor solutions. Japanese
manufacturers are noted for using cross-functional teams to figure out ways to make desirable products at given target costs. In contrast, U.S. manufacturers traditionally have developed products by having one group decide what to make, another calculate production
costs, and yet another predict whether enough of the product will sell at a high enough price.
Thus, in well-managed organizations, a direct relationship exists between strategic
planning and the planning done by managers at all levels. The focus and time perspectives
will, of course, differ. Figure 1.6 illustrates the cross-functional perspective of strategic
planning. It indicates very clearly that all functional area plans should be derived from the
strategic plan while at the same time contributing to the achievement of it.
22 Part A Introduction
FIGURE 1.6 The Cross-Functional Perspective in Planning
The strategic plan
Functional area plans derived from strategic plan
If done properly, strategic planning results in a clearly defined blueprint for management action in all functional areas of the organization. Figure 1.7 clearly illustrates this
blueprint using only one organizational objective and two strategies from the strategic
plan (above the dotted line) and illustrating how these are translated into elements of the
marketing department plan and the production department plan (below the dotted line).
Note that in Figure 1.7, all objectives and strategies are related to other objectives and
strategies at higher and lower levels in the organization: That is, a hierarchy of objectives
and strategies exists. We have illustrated only two possible marketing objectives and two
possible production objectives. Obviously, many others could be developed, but our purpose is to illustrate the cross-functional nature of strategic planning and how objectives
and strategies from the strategic plan must be translated into objectives and strategies for
all functional areas including marketing.
This chapter has described the marketing management process in the context of the
organization’s overall strategic plan. Clearly, marketers must understand their crossfunctional role in joining the marketing vision for the organization with the financial goals
and manufacturing capabilities of the organization. The greater this ability, the better the
likelihood is that the organization will be able to achieve and sustain a competitive advantage, the ultimate purpose of the strategic planning process.
At this point it would be useful to review Figures 1.5, 1.6, and 1.7 as well as the book’s
table of contents. This review will enable you to better relate the content and progression
of the material to follow to the marketing management process.
Strategic Planning and the Marketing Management Process 23
FIGURE 1.7 A Blueprint for Management Action: Relating the Marketing Plan to the Strategic
Plan and the Production Plan
objective (the profitability
objective) from Figure 1.3
matrix, Figure 1.4
Achieve an annual rate of return
on investment of at least 15 percent
1. Market penetration
Improve position of present
products with present customers
2. Market development
Find new customers for present
Increase rate of
purchase by existing
customers by 10
product that will
induce new uses
share by 5 percent
by attracting new
market segments for
existing use by
features into product
that will open
with new uses
action of the
Austin, Robert D., Richard L. Nolan, and Shannon O’Donnell. Harder Than I Thought, Boston:
Harvard Business Review Press, 2013.
Charan, Ram. Leadership in the Era of Economic Uncertainty. New York: McGraw-Hill, 2009.
Christensen, Clayton, M., Scott Cook, and Tandy Hall. “Marketing Malpractice: The Cause and the
Cure.” Harvard Business Review, December 2005, pp. 74–75.
Dixit, Avinash, K., and Barry J. Noblebuff. The Art of Strategy. New York: W.W. Norton and Co., 2009.
Friedman, George. The Next Decade. New York: Doubleday, 2011.
Kaplan, Robert S., and David Norton. “How to Implement a New Strategy Without Disrupting
Your Organization.” Harvard Business Review, March 2006, pp. 100–109.
Levitt, Ted. On Marketing. Boston: HBS Press, 2006.
Markower, Jack. Strategies for the Green Economy. New York: McGraw-Hill, 2009.
O’Sullivan, Don, and Andrew W. Abdela. “Marketing Performance Measurement Ability and
Performance.” Journal of Marketing, April 2007, pp. 79–93.
Silverstein, Michael J., Abheek Singhi, Carol Liao, and David Michael. The $10 Trillion Prize:
Captivating the Newly Affluent in China and India. Boston: Harvard Business Review Press, 2012.
24 Part A Introduction
Distinctive competencies: Distinctive competencies are things that an organization does so well
that they give it an advantage over similar organizations. No matter how appealing an opportunity
may be, to gain advantage over competitors, the organization must formulate strategy based on
Diversification: An organizational strategy that seeks growth through new products (often through
acquisitions) for customers not currently being served.
Market development: An organizational strategy that seeks growth through seeking new customers for present products.
Market penetration: An organizational strategy that seeks growth through increasing the sale of
present products to present customers.
Marketing: The activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.
Marketing concept: The marketing concept means that an organization should seek to make a
profit by serving the needs of customer groups. Its purpose is to rivet the attention of marketing
managers on serving broad classes of customer needs (customer orientation), rather than on the
firm’s products (production orientation) or on devising methods to attract customers to current
products (selling orientation).
Marketing information system: Throughout the marketing management process, current,
reliable, and valid information is needed to make effective marketing decisions. Providing this
information is the task of the marketing information system and marketing research.
Marketing management: Marketing management is the process of planning and executing the
conception, pricing, promotion, and distribution of goods, services, and ideas to create exchanges
with target groups that satisfy customer and organizational objectives.
Marketing mix: The marketing mix is the set of controllable variables that must be managed to
satisfy the target market and achieve organizational objectives. The controllable variables are
usually classified according to four major decision areas: product, price, promotion, and place
(or channels of distribution).
Marketing planning: The marketing planning process produces three outputs: (1) establishing
marketing objectives, (2) selecting the target market, and (3) developing the marketing mix.
Organizational mission: The mission statement, or purpose, of an organization is the description
of its reason for existence. It is the long-run vision of what the organization strives to be, the unique
aim that differentiates the organization from similar ones and the means by which this differentiation will take place. An effective mission statement will be focused on markets rather than products, achievable, motivating, and specific.
Organizational objectives: Organizational objectives are the end points of an organization’s
mission and are what it seeks through the ongoing, long-run operation of the organization. The
organizational mission is distilled into a finer set of specific, measurable, action commitments by
which the mission of the organization is to be achieved.
Organizational portfolio plan: This stage of the strategic plan involves the allocation of
resources across the organization’s product lines, divisions, or businesses. It involves deciding
which ones to build, maintain, or eliminate, or which to add.
Organizational strategies: Organizational strategies are the choice of the major directions the
organization will take in pursuing its objectives. There are three major approaches: (1) strategies
based on products and markets, (2) strategies based on competitive advantage, and (3) strategies
based on value.
Organizational strategies based on competitive advantage: This approach to developing organizational strategy would develop either a cost leadership strategy which focuses on being the lower
cost company in the industry or a differentiation strategy which focuses on being unique in the
industry or market segment along dimensions that customers value.
Organizational strategies based on products and markets: An approach to developing organizational strategies that focuses on the four paths an organization can grow: market penetration strategies, market development strategies, product development strategies, and diversification strategies.
Strategic Planning and the Marketing Management Process 25
Organizational strategies based on value: This approach to developing organizational strategy
seeks to succeed by choosing to deliver superior customer value using one of three value strategies—
best price, best product, or best service.
Product development: An organizational strategy that seeks growth through developing new
products primarily for present customers.
Situation analysis: This stage of the marketing planning process involves the analysis of the past,
present, and likely future in six major areas of concern: (1) the cooperative environment, (2) the
competitive environment, (3) the economic environment, (4) the social environment, (5) the political environment, and (6) the legal environment. Opportunities for and constraints on marketing
activities arise from these environments.
Strategic business units (SBUs): Strategic business units (SBUs) are product lines and divisions
that can be considered a “business” for the purpose of the organizational portfolio plan. An SBU
must have a distinct mission, have its own competitors, be a single business or collection of related
businesses, and be able to be planned independently of the other SBUs.
Strategic planning: Strategic planning provides a blueprint for management actions for the entire
organization. It includes all the activities that lead to the development of a clear organizational
mission, organizational objectives, and appropriate strategies to achieve the objectives for the entire
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The interest in developing aids for managers in the selection of strategy was spurred by an organization known as
the Boston Consulting Group (BCG) more than 25 years
ago. Its ideas, which will be discussed shortly, and many of
those that followed were based on the concept of experience
Experience curves are similar in concept to learning curves.
Learning curves were developed to express the idea that the
number of labor hours it takes to produce one unit of a particular product declines in a predictable manner as the number
of units produced increases. Hence, an accurate estimation of
how long it takes to produce the 100th unit is possible if the
production times for the 1st and 10th units are known. The
concept of experience curves was based on this model.
Experience curves were first widely discussed in the Strategic Planning Institute’s ongoing Profit Impact of Marketing
Strategies (PIMS) study. The PIMS project studies 150 firms
with more than 1,000 individual business units. Its major
focus is on determining which environmental and internal firm
variables influence the firm’s return on investment (ROI) and
cash flow. The researchers have concluded that seven categories of variables appear to influence the return on investment:
(1) competitive position, (2) industry/market environment,
(3) budget allocation, (4) capital structure, (5) production processes, (6) company characteristics, and (7) “change action”
The experience curve includes all costs associated with
a product and implies that the per-unit costs of a product
should fall, due to cumulative experience, as production
volume increases. In a given industry, therefore, the producer with the largest volume and corresponding market
share should have the lowest marginal cost. This leader in
market share should be able to underprice competitors, discourage entry into the market by potential competitors, and,
as a result, achieve an acceptable return on investment. The
linkage of experience to cost to price to market share to ROI
is exhibited in Figure A.1. The BCG’s view of the experience
A REVIEW OF PORTFOLIO THEORY
Portfolio models remain a valuable aid to marketing managers in their efforts to develop effective marketing plans. The
use of these models can aid managers who face situations
that can best be described as “more products, less time, and
less money.” More specifically, (1) as the number of products a firm produces expands, the time available for developing marketing plans for each product decreases; (2) at a
strategic level, management must make resource allocation
decisions across lines of products and, in diversified organizations, across different lines of business; and (3) when
resources are limited (which they usually are), the process of
deciding which strategic business units (SBUs) to emphasize
becomes very complex. In such situations, portfolio models
can be very useful.
Portfolio analysis is not a new idea. Banks manage loan
portfolios seeking to balance risks and yields. Individuals
who are serious investors usually have a portfolio of various
kinds of investments (common stocks, preferred stocks, bank
accounts, and the like), each with different characteristics of
risk, growth, and rate of return. The investor seeks to manage
the portfolio to maximize whatever objectives he or she might
have. Applying this same idea, most organizations have a wide
range of products, product lines, and businesses, each with different growth rates and returns. Similar to the investor, managers should seek a desirable balance among alternative SBUs.
Specifically, management should seek to develop a business
portfolio that will ensure long-run profits and cash flow.
Portfolio models can be used to classify SBUs to determine the future cash contributions that can be expected
from each SBU as well as the future resources that each will
require. Remember, depending on the organization, an SBU
could be a single product, product line, division, or distinct
business. While there are many different types of portfolio
models, they generally examine the competitive position of
the SBU and the chances for improving the SBU’s contribution to profitability and cash flow.
There are several portfolio analysis techniques. Two of
the most widely used are discussed in this appendix. To truly
appreciate the concept of portfolio analysis, however, we
must briefly review the development of portfolio theory.
28 Part A Introduction
FIGURE A.1 Experience Curve and Resulting Profit
Profit curve based
on experience curve
curve led the members to develop what has become known
as the BCG Portfolio Model.
THE BCG MODEL
The BCG model is based on the assumption that profitability
and cash flow will be closely related to sales volume. Thus,
in this model, SBUs are classified according to their relative
market share and the growth rate of the market the SBU is
in. Using these dimensions, products are either classified as
stars, cash cows, dogs, or question marks. The BCG model is
presented in Figure A.2.
• Stars are SBUs with a high share of a high-growth market. Because high-growth markets attract competition,
such SBUs are usually cash users because they are growing
and because the firm needs to protect their market share
• Cash cows are often market leaders, but the market they are
in is not growing rapidly. Because these SBUs have a high
share of a low-growth market, they are cash generators for
• Dogs are SBUs that have a low share of a low-growth
market. If the SBU has a very loyal group of customers, it
may be a source of profits and cash. Usually, dogs are not
large sources of cash.
• Question marks are SBUs with a low share of a highgrowth market. They have great potential but require great
resources if the firm is to successfully build market share.
As you can see, a firm with 10 SBUs will usually have a
portfolio that includes some of each of these groups. Having
Relative Market Share
The Boston Consulting Group Portfolio
developed this analysis, management must determine what
role each SBU should assume. Four basic objectives are
1. Build share. This objective sacrifices immediate earnings
to improve market share. It is appropriate for promising
question marks whose share has to grow if they are ever
to become stars.
2. Hold share. This objective seeks to preserve the SBU’s
market share. It is very appropriate for strong cash cows
to ensure that they can continue to yield a large cash flow.
3. Harvest. Here, the objective seeks to increase the
product’s short-term cash flow without concern for the
long-run impact. It allows market share to decline in order
to maximize earnings and cash flow. It is an appropriate
objective for weak cash cows, weak question marks, and
4. Divest. This objective involves selling or divesting the
SBU because better investment opportunities exist elsewhere. It is very appropriate for dogs and those question
marks the firm cannot afford to finance for growth.
There have been several major criticisms of the BCG
Portfolio Model, revolving around its focus on market
share and market growth as the primary indicators of preference. First, the BCG model assumes market growth is
uncontrollable.12 As a result, managers can become preoccupied with setting market share objectives instead of
trying to grow the market. Second, assumptions regarding
market share as a critical factor affecting firm performance
may not hold true, especially in international markets.13
Third, the BCG model assumes that the major source of
Strategic Planning and the Marketing Management Process 29
SBU financing comes from internal means. Fourth, the
BCG matrix does not take into account any interdependencies that may exist between SBUs, such as shared distribution.14 Fifth, the BCG matrix does not take into account any
measures of profits and customer satisfaction.15 Sixth, and
perhaps most important, the thrust of the BCG matrix is
based on the underlying assumption that corporate strategy
begins with an analysis of competitive position. By its very
nature, a strategy developed entirely on competitive analysis will always be a reactive one.16 While the preceding
criticisms are certainly valid ones, managers (especially of
large firms) across all industries continue to find the BCG
matrix useful in assessing the strategic position of SBUs.17
THE GENERAL ELECTRIC MODEL
Although the BCG model can be useful, it does assume that
market share is the sole determinant of an SBU’s profitability. Also, in projecting market growth rates, a manager
should carefully analyze the factors that influence sales and
any opportunities for influencing industry sales.
Some firms have developed alternative portfolio models
to incorporate more information about market opportunities
and competitive positions. The GE model is one of these. The
GE model emphasizes all the potential sources of strength,
not just market share, and all of the factors that influence the
long-term attractiveness of a market, not just its growth rate.
As Figure A.3 indicates, all SBUs are classified according
to business strength and industry attractiveness. Figure A.4
presents a list of items that can be used to position SBUs in
The General Electric
30 Part A Introduction
Strength at GE
Ability to recover from inflation
Industry attractiveness is a composite index made up
of such factors as those listed in Figure A.4. For example:
market size—the larger the market, the more attractive it will
be; market growth—high-growth markets are more attractive
than low-growth markets; profitability—high-profit-margin
markets are more attractive than low-profit-margin industries.
Business strength is a composite index made up of such
factors as those listed in Figure A.4. Such as market share—
the higher the SBU’s share of market, the greater its business
strength; quality leadership—the higher the SBU’s quality
compared to competitors, the greater its business strength;
share compared with leading competitor—the closer the SBU’s
share to the market leader, the greater its business strength.
Once the SBUs are classified, they are placed on the grid
(Figure A.3). Priority “A” SBUs (often called the green zone)
Domestic market share
World market share
Share compared with leading competitor
are those in the three cells at the upper left, indicating that
these are SBUs high in both industry attractiveness and business strength, and that the firm should “build share.” Priority
“B” SBUs (often called the yellow zone) are those medium in
both industry attractiveness and business strength. The firm
will usually decide to “hold share” on these SBUs. Priority
“C” SBUs are those in the three cells at the lower right (often
called the red zone). These SBUs are low in both industry
attractiveness and business strength. The firm will usually
decide to harvest or divest these SBUs.
Whether the BCG model, the GE model, or a variation
of these models is used, some analyses must be made of the
firm’s current portfolio of SBUs as part of any strategic planning effort. Marketing must get its direction from the organization’s strategic plan.
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