Principles of Marketing PDF

Principles of Marketing Principles of Marketing ANTHONY FRANCESCUCCI; JOANNE MCNEISH; AND NUKHET TAYLOR RYERSON UNIVERSITY Principles of Marketing, 1st Canadian Edition. (hyperlink to the final text) by Anthony Francescucci and Joanne McNeish, Ryerson University, Ontario is licenced und...

Principles of Marketing Principles of Marketing ANTHONY FRANCESCUCCI; JOANNE MCNEISH; AND NUKHET TAYLOR RYERSON UNIVERSITY Principles of Marketing, 1st Canadian Edition. (hyperlink to the final text) by Anthony Francescucci and Joanne McNeish, Ryerson University, Ontario is licenced under a Creative Commons Attribution-NonCommercial- ShareAlike 4.0 International License , except where otherwise noted. This textbook is an adaptation of Principles of Marketing [Author removed at request of original publisher] by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. The CC licence permits you to retain, reuse, copy, redistribute, and revise this book—in whole or in part—for free providing it is not for commercial purposes, any material shared is shared under the same licences, and the authors are attributed as follows: (This textbook can be referenced. In APA citation style, it would appear as follows: we can add later) If you redistribute all or part of this book, it is recommended the following statement be added to the copyright page so readers can access the original book at no cost: CHAPTER 1 - WHAT IS MARKETING? 1.1 Defining Marketing 1.2 Why Study Marketing? 1.3 Themes 1.4 Discussion Questions and Activities Chapter 1 - What is Marketing? | 1 1.1 Defining Marketing LEARNING OBJECTIVE Define marketing and outline its components. Marketing is defined by the American Marketing Association 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” (American Marketing Association, n.d.). If you read the definition closely, you see that there are four activities, or components, of marketing: 1. Creating Value. The process of collaborating with suppliers and customers to create offerings that have value. 2. Communicating Value. Broadly, describing those offerings, as well as learning from customers. 3. Delivering Value. Getting those offerings to the consumer in a way that optimizes value. 4. Exchanging Value. Trading value for those offerings. Value The concept of value is an important one in the study of marketing. Before we begin to understand or define how 1.1 Defining Marketing | 3 marketing is used to build value for customers and the firm, it is important to understand the concept of value. Value is always considered from the customer perspective, i.e. in the eyes of the customer. It is a perception developed by customers from the marketing efforts of the brand or company (more on this in the segmentation, targeting and positioning chapter). Value is defined as everything a customer gets for what they give up. It is the relationship between the benefits a customer gets for what they give up in return for those benefits. In other words, if the customer perceives that they received more from the brand/company in exchange for what they gave up to the brand/company, they perceive to have received value in that exchange. On the other hand, if they feel that they gave up more in exchange for what they received, they do not perceive value in that exchange. ‡ Value is formed by customers based on the expectations that are built up or developed by the brand/company (brand positioning). Customers determine their personal needs and wants and make purchase decisions based on the brand positioning. Once they purchase the product or service, they assess whether the product or service met the expectation developed by the brand through their positioning and their experience with the product or service. If there is a disconnect between the brand positioning and the customers’ expectations, the customer may feel that they did not receive value in the exchange because they did not receive what they were expecting in exchange for what they gave up. ‡ Our goal as marketers is to create a positive exchange with consumers. We can think of this as an equation. The personal value equation is ‡ value = benefits received – [price + non-financial 4 | 1.1 Defining Marketing  costs] ‡ Non-financial costs are the time and effort the consumer puts into the shopping process. The equation is a personal one because how each consumer judges the benefits of a product will vary, as will the time and effort he or she puts into shopping. Value received from the same product, then, varies for each consumer. ‡ One way to think of value is to think of a meal in a restaurant. If you and three friends go to a restaurant and order the same dish, each of you will like it more or less depending on your own personal tastes. Yet the dish was exactly the same, priced the same, and served exactly the same way. Because your tastes varied, the benefits you received varied. Therefore, the value varied for each of you. That’s why we call it a personal value equation. ‡ Value is at the center of everything marketing does (Figure 1.1 “The Concept of Value Creation”). What does value mean? 1.1 Defining Marketing | 5  Figure 1.1 – The Concept of Value Creation This image is from Principles of Marketing by University of Minnesota and is licensed under a Creative Commons Attribution- NonComm ercial-Shar eAlike 4.0 Internation al License. Marketing is composed of four activities centered on customer value: creating, communicating, delivering, and exchanging value. The 4 Ps The traditional way of viewing the components of marketing is via the four Ps: 1. Product/Service. Goods and services (creating offerings). 2. Promotion. Communication. 6 | 1.1 Defining Marketing 3. Place/Distribution. Getting the product to a point at which the customer can purchase it (delivering). 4. Price. The monetary amount charged for the product (exchanging). The four Ps need to be expanded on to capture all the activities of marketing and to capture the concept of value. For example, exchanging requires mechanisms for a transaction, which consist of more than simply a price. Exchanging requires, among other things, the transfer of ownership. For example, when you buy a car, you sign documents that transfer the car’s title from the seller to you. That’s part of the exchange process. As was discussed earlier, all aspects of marketing should be designed to create value in the eyes of the customer. We will use the terms Product/Service Strategy, Pricing Strategy, Place or Distribution Strategy and Promotion Strategy to expand the meaning of each of the four P’s. Product/Service Strategy: Creating Offerings That Have Value Marketing creates goods and services that the company offers to its customers or clients. A tangible good and/or the intangible service is the company’s offering. When you compare one car to another, for example, you can evaluate each of these dimensions, the tangible and the intangible, separately. However, you can’t buy one manufacturer’s car, and another manufacturer’s service when you actually make a choice. Together, the two make up a single firm’s offer. Marketing people do not create the offering alone. For example, when the next generation iPad was created, Apple’s engineers were also involved in its design. Apple’s financial personnel had to review the costs of producing the offering and provide input on how it should be priced to be optimally 1.1 Defining Marketing | 7 profitable. Apple’s operations group needed to evaluate the manufacturing requirements the iPad would need. The company’s logistics managers had to evaluate the cost and timing of getting the offering to retailers and consumers. Along with customer feedback, Apple’s dealers also likely provided input regarding the iPad’s service policies and warranty structure. Marketing, however, has the biggest responsibility because it is marketing’s responsibility to ensure that the new product delivers value to the customer. Price Strategy: Exchanging Offerings In addition to creating an offering, communicating its benefits to consumers, and delivering the offering, there is the actual transaction, or exchange, that has to occur. In many instances, we consider the exchange to be money for products and services. However, today exchange includes non-monetary forms of payment. If you were to fly to Louisville, Kentucky, for the Kentucky Derby, you could “pay” for your airline tickets using frequent-flier miles. You could also use Hilton Honors points to “pay” for your hotel, and cash back points on your Discover card to pay for meals. None of these transactions would actually require cash. Other exchanges, such as Facebook using information about your searches and selling them to advertisers is the payment for being able to use the service for free. Promotion Strategy: Communicating Offerings Communicating is a broad term in marketing that means describing the offering and its value to your potential and 8 | 1.1 Defining Marketing current customers. With the advent of digital communication and social media, it means hearing from customers about what they want and like. Sometimes communicating means educating potential customers about the value of an offering, and sometimes it means simply making customers aware of where they can find a product. Today companies are finding that to be successful, they need a more interactive dialogue with their customers. For example, Comcast customer service representatives monitor Twitter. When they observe consumers tweeting problems with Comcast, the customer service reps will post resolutions to their problems. Similarly, JCPenney has created consumer groups that talk among themselves on JCPenney-monitored Web sites. The company might post questions, send samples, or engage in other activities designed to solicit feedback from customers. Mobile devices, such as iPads, iOS and Android smartphones, make mobile marketing possible too. For example, if consumers check-in at a shopping mall on Foursquare or Facebook, stores in the mall can send coupons and other offers directly to their smartphones. ‡ Companies use many forms of communication, including advertising on the Web or television, on billboards or in magazines, through product placements in movies, and through salespeople. Other forms of communication include attempting to have news media cover the company’s actions (part of public relations [PR]), participating in special events such as the annual International Consumer Electronics Show in which Apple and other companies introduce their newest gadgets, and sponsoring special events such as the Terry Fox Run. 1.1 Defining Marketing | 9 Place (Distribution) Strategy: Delivering Offerings Marketing can’t just promise value, it also has to deliver value. Delivering an offering that has value is much more than simply getting the product into the hands of the user; it is also making sure that the user understands how to get the most out of the product and is taken care of if he or she requires service later. Value is delivered in part through a company’s supply chain. The supply chain includes a number of organizations and functions that mine, make, assemble, or deliver materials and products from a manufacturer to consumers. The actual group of organizations can vary greatly from industry to industry, and include wholesalers, transportation companies, and retailers. Logistics, or the actual transportation and storage of materials and products, is the primary component of supply chain management, but there are other aspects of supply chain management that we will discuss later. Marketing Concept Value varies from customer to customer based on each customer’s needs. The marketing concept, a philosophy underlying all that marketers do, requires that marketers seek to satisfy customer wants and needs. Firms operating with that philosophy are said to be market oriented. At the same time, market-oriented firms recognize that exchange must be profitable for the company to be successful. Firms don’t always embrace the marketing concept and a market orientation. Beginning with the Industrial Revolution in the late 1800s, companies were production oriented. They 10 | 1.1 Defining Marketing believed that the best way to compete was by reducing production costs. In other words, companies thought that good products would sell themselves to customers who wanted them. Perhaps the best example of such a product was Henry Ford’s Model A automobile, the first product of his production line innovation. Ford’s production line made the automobile cheap and affordable for just about everyone. The production era lasted until the 1920s, when production- capacity growth began to outpace demand growth and new strategies were called for. There are, however, companies that still focus on production as the way to compete. From the 1920s until after World War II, companies tended to be selling oriented, meaning they believed it was necessary to push their products by heavily emphasizing aggressive sales techniques. Consumers during the Great Depression and World War II did not have as much money, so the competition for their available dollars was stiff. The result was this push approach during the selling era. Companies like the Fuller Brush Company and Hoover Vacuum began selling door-to- door and the vacuum-cleaner salesperson was created. Just as with production, some companies still operate with a push focus. In the post–World War II environment, demand for goods increased as the economy soared. Some products, limited in supply during World War II, were now plentiful to the point of surplus. Companies believed that a way to compete was to create products different from the competition, so many focused on product innovation. This focus on product innovation is called the product orientation. Companies like Procter & Gamble created many products that served the same basic function but with a slight twist or difference in order to appeal to a different consumer, and as a result products proliferated. But as consumers had many choices available to them, companies had to find new ways to compete. Which products were best to create? Why create them? The answer 1.1 Defining Marketing | 11 was to create what customers wanted, leading to the development of the marketing concept. During this time, the marketing concept was developed, and from about 1950 to 1990, businesses operated in the marketing era, otherwise known as having a market orientation. So what era would you say we’re in now? Some call it the value orientation: a time when companies emphasize creating value for customers. Is that really different from the marketing era, in which the emphasis was on fulfilling the marketing concept? Maybe not. Others call today’s business environment the one-to-one era, meaning that the way to compete is to build relationships with customers one at a time and seek to serve each customer’s needs individually. For example, the longer you are a customer of Amazon, the more detail they gain in your purchasing habits and the better they can target you with offers of new products. With the advent of social media and the empowerment of consumers through ubiquitous information that includes consumer reviews, there is clearly greater emphasis on meeting customer needs. Yet is that substantially different from the marketing concept? Still others argue that this is the time of service-dominant logic and that we are in the service-dominant logic era. Service- dominant logic is an approach to business that recognizes that consumers want value no matter how it is delivered, whether it’s via a product, a service, or a combination of the two. Although there is merit in this belief, there is also merit to the value approach and the one-to-one approach. Some marketers believe that the time after the COVID pandemic will be the start of a new era defined by slower growth, demarketing and anti-consumption as consumers seek to buy and use fewer resources. This will challenge marketers like never before to work to reduce their impact on the planet while at the same time ensuring the financial viability of their organizations. ‡ 12 | 1.1 Defining Marketing Key Aspects of Marketing 1. Marketing helps create value As discussed earlier, value is always considered from the customers’ perspective. Value is the difference between what the customer gets for what they give up. The value equation is shaped by marketing efforts. Marketers develop products and services to offer value to customers. Marketers set prices, which determine part of what customers must give up, thereby influencing the value equation. Similarly, marketers also deliver that value to customer based on place (distribution) decisions. Finally, marketers also communicate the value to customer through their promotion decisions. ‡ 2. Marketing is about satisfying customer needs and wants In order to market effectively, it is important to understand customers’ needs and wants. A customer’s needs are the basic human requirements necessary for survival. They include food, water, clothing and shelter. People also have a need for things like education, recreation, or entertainment. Needs become wants when the need for something is directed towards a particular product or service that may satisfy the need. The difference between a need and a want is that a need is necessary for survival and can be satisfied using a number of products or services, whereas a want is a specific product or service desired by the consumer to satisfy a particular need. A consumer may have a need for communication, but there are a number of services that could satisfy that need. A consumer’s preference for using a video call is a want, which will satisfy that 1.1 Defining Marketing | 13 need for communication. Marketing is about understanding a customer’s needs and developing products or services that they may want to satisfy those needs. ‡ 3. Marketing always entails an exchange between parties Marketing always entails an exchange between two parties, a buyer and a seller. A seller provides goods or services to the buyer in exchange for any combination of money or information. In order for an exchange to occur, there must be two parties (buyer/seller), there must be a transfer between the parties, and each party must receive something of value (money, points, information, product, service, or satisfaction). ‡ 4. Marketing requires marketing mix decisions The marketing mix is the combination of product, price, place and promotion strategy decisions that a marketer may make. As defined above, marketing entails the offering of value, the exchange of value, the delivering of value and the communication of value. This is achieved through a marketing plan which details the approach to each of the strategic decision. ‡ 5. Marketing can be performed by both companies and individuals When one thinks about marketing, one often thinks about 14 | 1.1 Defining Marketing organizations that market to individual consumers. However, marketing is often done by businesses towards other businesses and as well as by consumers toward other consumers. Just like businesses market to consumers, they also market to other businesses as well. Finally, with the introduction of a number of resale sites such as kijiji.ca, ebay.ca or craigslist.ca, many consumers market their goods or services to other consumers who may want to purchase gently used goods. ‡ A classic example of businesses marketing to consumers is when the Dell markets their new laptop to individual consumers. However, there are many businesses that market to other businesses. For example, Source Furniture is an office furniture company that sells office furniture to other businesses. They create, price, distribute and promote their products to other businesses who have a need for office furniture. ‡ 6. Marketing occurs in many situations We often think about marketing in a for-profit setting, that companies marketing their goods and services to generate profit for their company. However, marketing is also done in other settings. Non-profit companies such as the Princess Margaret Cancer Foundation, which operates the “Princess Margaret Home Lottery to Conquer Cancer”, uses marketing to create and promote their lottery. They operate the lottery to generate funds for the foundation. They market to consumers not for the purpose of generating a profit, but rather to collect money to support the work of others such as hospitals and patients. ‡ Marketing may also take place at an industry-wide level. A trade association may market commodity like products to raise awareness or to increase usage on behalf of its member 1.1 Defining Marketing | 15 companies. For example, the Dairy Farmers of Canada (DFC) launched a campaign (“Milk. It’s in the stuff you love”) on behalf of milk producers of Canada, to position milk differently with the next generation of consumers. Similarly, the Canadian Association of Petroleum Producers (CAPP) had a campaign designed to change the perception toward Petroleum Producers. ‡ ‡ signifies new material that Ryerson University authors have added to this adaptation of Principles of Marketing published by University of Minnesota Library Publishing, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. 16 | 1.1 Defining Marketing 1.2 Why Study Marketing? Products don’t, contrary to popular belief, sell themselves. Generally, the “build it and they will come” philosophy doesn’t work. Good marketing educates customers so that they can find the products they want, make better choices about those products, and extract the most value from them. In this way, marketing helps facilitate exchanges between buyers and sellers for the mutual benefit of both parties. Likewise, good social marketing provides people with information and helps them make healthier decisions for themselves and for others. Of course, all business students should understand all functional areas of the firm, including marketing. There is more to marketing, however, than simply understanding its role in the business. Marketing has tremendous impact on society. Marketing Delivers Value Not only does marketing deliver value to customers, but also that value translates into the value of the organization as it develops a reliable customer base and increases its sales and profitability. So when we say that marketing delivers value, marketing delivers value to both the customer and the company. Franklin D. Roosevelt, the U.S. president with perhaps the greatest influence on our economic system, once said: “If I were starting life over again, I am inclined to think 1.2 Why Study Marketing? | 17  that I would go into the advertising business in preference to almost any other. The general raising of the standards of modern civilization among all groups of people during the past half century would have been impossible without the spreading of the knowledge of higher standards by means of advertising” (Famous Quotes and Authors, n.d.). Roosevelt referred to advertising, but advertising alone is insufficient for delivering value. Marketing finishes the job by ensuring that what is delivered is valuable, priced profitably and delivered when the customers want it. 18 | 1.2 Why Study Marketing? 1.3 Themes Marketing’s Role in the Organization We previously discussed marketing as a set of activities that anyone can do. Marketing is also a functional area in companies, just like operations and accounting are. Within a company, marketing might be the title of a department, but some marketing functions, such as sales, might be handled by another department. Marketing activities do not occur separately from the rest of the company, however. As we have explained, pricing an offering, for example, will involve a company’s finance and accounting departments in addition to the marketing department. Similarly, a marketing strategy is not created solely by a firm’s marketing group. Instead, it flows from the company’s overall strategy. We’ll discuss strategy much more completely in Chapter 2 “Strategic Planning”. Everything Starts with Customers Most organizations start with an idea of how to serve customers better. In the 1990s Apple’s engineers began working on the iPod by looking at the available technology and thinking about how customers would like to have their music more available, as well as more affordable, through downloading. Many companies think about potential markets and 1.3 Themes | 19 customers when they start. Here are a few mission statements from other companies. Note that they all refer to their customers, either directly or by making references to relationships with them. Examine how these are written to inspire employees and others who interact with the company and may read the mission statement. IBM (July 2019) IBM’s corporate mission is “to lead in the creation, development and manufacture of the industry’s most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. And our worldwide network of IBM solutions and services professionals translates these advanced technologies into business value for our customers. We translate these advanced technologies into value for our customers through our professional solutions, services and consulting businesses worldwide” (Mission Statement Academy, n.d.).‡ Coca-Cola© (2020) Coca Cola’s “mission declares our purpose as a company and serves as the standard against which we weigh our actions and decisions. To refresh the world…To inspire moments of optimism and happiness…To create value and make a difference” (Coca Cola, 2020). ‡ Pfizer Pharmaceuticals (2020) “We innovate every day to make the world a healthier place. 20 | 1.3 Themes From scientific discovery to breakthrough products to our essential partnerships around the world, we’re committed to quality healthcare for everyone. Because every individual matters”(Pfizer, 2019). ‡ Some companies go beyond their own customers and seek to inspire with a mission that will have impact on a global issues, climate change‡ Interface Carpet and Flooring Products (2020) “Our mission is to overcome the biggest challenge facing humanity and reverse global warming. It’s no longer enough to limit the damage we do, but to think about reversing it. We want to restore our planet and leave a positive impact.” (Interface, n.d.)‡ Not all companies create mission statements that reflect a marketing orientation. Note Apple’s mission statement: “Apple’s corporate mission is “to bring the best personal computing products and support to students, educators, designers, scientists, engineers, businesspersons and consumers in over 140 countries around the world” (Apple, n.d.). This mission statement reflects a product orientation, or an operating philosophy based on the premise that Apple’s success is due to creating the best products and that simply supplying them will lead to demand for them. The challenge is how to create the “best” product without considering the customer’s wants and needs. Apple Watch has struggled to achieve the expected sales results due to limited customer demand. 1.3 Themes | 21 The Changing Marketing Environment Criticisms of Marketing Marketing is not without its critics. One major criticism is that marketing creates wants among consumers for products and services that aren’t always needed. For example, fashion marketing creates demand for high-dollar jeans when much less expensive jeans can fulfill the same basic function. Consumers are encouraged to buy the next generation of phone when their existing phone is still functional, and even if they want to repair an older phone, many companies restrict the availability of parts so that the consumer is unable to do so. The continued pressure on the consumer can lead to other consequences. Individual consumers may take on significant financial debt to satisfy the wants shaped by marketing. Marketers met the need for healthier beverages by selling bottled water but created a global problem of how to dispose of the individual plastic bottles. ‡ Sustainability Sustainability is an example of social responsibility and involves engaging in practices that do not diminish the earth’s resources. Coca-Cola, for example, is working with governments in Africa to ensure clean water availability, not just for manufacturing Coke products but for all consumers in that region. Further, the company seeks to engage American consumers in participating by offering opportunities to contribute to clean water programs. Right now, companies do not have to engage in these practices, but because firms really 22 | 1.3 Themes represent the people behind them (their owners and employees), forward-thinking executives are seeking ways to reduce the impact their companies are having on the planet while ensuring the financial viability of the company. One aspect of sustainability is handling the end of life and disposal of products. Batteries and other components of cell phones, computers, and high-tech appliances are harmful to the environment, and many consumers don’t know how to dispose of these products properly. Other than a few examples, the cost of recycling programs is paid by government and taxpayers and the planet. Companies such as Office Depot have created recycling centers to which customers can take their old electronics, but that is not the end of the process. Recycling is a limited solution to a world-wide garbage crisis. ‡ Companies must undertake the difficult and long-term job of reducing the resources used at every step of the manufacturing and production process. A server farm is a collection of computer servers and is the backbone of Cloud services and the internet. Often consisting of thousands of computers they require a large amount of power to run and to keep cool (Vennam, 2020). ‡ Ethics and social responsibility Businesses exist only because society allows them to. When businesses begin to fail society, society will punish them or revoke their license. In 2008, the crackdown on companies in the subprime mortgage-lending industry is one example. These companies created and sold loans (products) that could only be paid back under ideal circumstances, and when consumers couldn’t pay these loans back, the entire economy suffered greatly. Scandals such as these illustrate how society responds to unethical business practices. However, whereas ethics require that you only do no harm, the concept of social 1.3 Themes | 23 responsibility requires that you must actively seek to improve the lot of others. Today, people are demanding businesses take a proactive stance in terms of social responsibility, and they are being held to ever-higher standards of conduct. ‡ Service-dominant logic You might have noticed that we use the word offering a lot instead of the term product. That’s because of service- dominant logic, the approach to business that recognizes that consumers want value no matter how it is delivered, whether through a tangible product or intangible services. That emphasis on value is what drives the functional approach to value that we’ve taken, that is, creating, communicating, delivering, and exchanging value. Metrics Technology has increased the amount of information available to decision makers. As such, the amount and quality of data for evaluating a firm’s performance is increasing. Earlier in our discussion of the marketing plan, we explained that customers communicate via transactions. Although this sounds both simple and obvious, better information technology has given us a much more complete picture of each exchange. Amazon, for example, combines data from its browsing and streaming activity with purchase history in order to determine what the next best offer is likely to be. In addition, it uses the data to create its own cheaper private label products. Using data from many sources, we have more metrics that can then be used to create better offerings, better communication plans, and to better satisfy customers. 24 | 1.3 Themes A global environment Every business is influenced by global issues. The price of oil, for example, is a global concern that affects everyone’s prices and even the availability of some offerings. We already mentioned Coke’s concern for clean water. But Coke also has to be concerned with distribution systems in areas with poor or nonexistent roads, myriads of government policies and regulations, workforce availability, and so many different issues in trying to sell and deliver Coke around the world. Even companies with smaller markets source some or all their offerings from companies in other countries, face direct competition from companies based in other countries or a different ethical structure from their home country. Every business professional, whether marketing or otherwise, has to have some understanding of the global environment in which they operate and the societal impact they have on the countries in which they operate. The COVID pandemic made citizens of the world aware of how interconnected we are. Product shortages in grocery stores revealed the weaknesses of just-in-time delivery in the supply chains. The unequal distribution of the COVID vaccine to countries who had manufacturing capabilities and/or purchasing power versus those who did not, will cause governments and organizations to consider what to off-shore and what should be produced in country. The rise in ‘made in country’ nationalism will create challenges and opportunities for companies. ‡ signifies new material that Ryerson University authors have added to this adaptation of Principles of Marketing published by University of Minnesota Library Publishing, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. 1.3 Themes | 25 1.4 Discussion Questions and Activities DISCUSSION QUESTIONS 1. Compare and contrast a four Ps approach to marketing versus the value approach (creating, communicating, and delivering value). What would you expect to be the same and what would you expect to be different between two companies that apply one or the other approach? 2. Assume you are about to graduate. How would you apply marketing principles to your job search? In what ways would you be able to create, communicate, and deliver value as a potential employee, and what would that value be, exactly? How would you prove that you can deliver that value? 3. Is marketing always appropriate for political candidates? Why or why not? 4. How do the activities of marketing for value fulfill the marketing concept for the market- oriented organization? 5. This chapter introduces the personal value equation. How does that concept apply to people 26 | 1.4 Discussion Questions and Activities  who buy for the government or for a business or for your university? How does that concept apply when organizations are engaged in social marketing? 6. This chapter addresses several reasons why marketing is an important area of study. Should marketing be required for all college students, no matter their major? Why or why not? 7. Why is service-dominant logic important? 8. What is the difference between a need and a want? How do marketers create wants? Provide several examples. 9. The marketing concept emphasizes satisfying customer needs and wants. How does marketing satisfy your needs as a post-secondary student? Are certain aspects of your life influenced more heavily by marketing than others? Provide examples. 10. A company’s offering represents the bundling of the tangible good and the intangible service. Describe the specific elements of the offering for an airline carrier, a realtor, a restaurant, and an online auction site. 11. The value of a product offering is determined by the customer and varies accordingly. How does a retailer like Walmart deliver value differently than Banana Republic? 12. Explain how Apple employed the marketing concept in designing, promoting, and supplying the iPhone. Identify the key benefit(s) for consumers relative to comparable competitive offerings. 1.4 Discussion Questions and Activities | 27  ACTIVITIES 1. One of your friends is contemplating opening a coffee shop near your university campus. She seeks your advice about size of the prospective customer base and how to market the business according to the four Ps. What strategies can you share with your friend to assist in launching the business? 2. You are considering working for United Way upon graduation. Explain how the marketing goals, strategies, and markets for the nonprofit differ from a for-profit organization. 3. Think about the last time you ate at McDonald’s. Evaluate your experience using the personal value equation. 4. Marketing benefits organizations, customers, and society. Explain how an organization like DuPont benefits the community in which it operates as well as society at large. 28 | 1.4 Discussion Questions and Activities CHAPTER 2 - STRATEGIC PLANNING & THE MARKETING ENVIRONMENT 2.1 Components of the Strategic Planning Process 2.2 Developing Organizational Objectives and Formulating Strategies 2.3 Where Strategic Planning Occurs within companies 2.4 Strategic Portfolio Planning Approaches 2.5 Discussion Questions and Activities Chapter 2 - Strategic Planning & The Marketing Environment | 29 2.1 Components of the Strategic Planning Process LEARNING OBJECTIVES Describe how a company analyzes its internal environment. Describe the external environment a company may face and how it is analyzed. Strategic planning is a process that helps an organization allocate its resources to capitalize on opportunities in the marketplace. Typically, it is a long-term process. The strategic planning process includes conducting a situation analysis and developing the organization’s mission statement, objectives, and strategies. This is then followed by the development of a segmentation, targeting and positioning strategy and the implementation of the marketing mix to support the strategy. Figure 2.1 “The Strategic Planning Process” shows the components of the strategic planning process. Let’s now look at each of these components. 2.1 Components of the Strategic Planning Process | 31  Figure 2.1 – The Strategic Planning Process ‡ Anthony Francescuc ci, Ryerson University CC BY-NC 4.0 Conducting a Situation Analysis As part of the strategic planning process, a situation analysis must be conducted before a company can decide on specific actions. Therefore, before beginning a situation analysis, it is important to understand and keep top of mind the decision, or action being considered. To understand what is relevant for a situation analysis, it is important to know what decision will need to be made or action taken as a result of the situation 32 | 2.1 Components of the Strategic Planning Process analysis. This will help to focus the analysis on relevant aspect for the decision or action to be taken. This is important, because as one embarks on the analysis, there will be lots of data about what is going on in the surrounding business environment. In order to make the best decision or take the appropriate action, it is important to only consider situational analysis factors that are relevant to the decision. ‡ A situation analysis involves analyzing the environment in which the business operates. This includes both the external (macro factors outside the organization) and the internal (micro – company) environments. The company’s internal (micro) environment— such as company resources (financial, technological, etc), capabilities (such as personnel, and processes) and corporate partners (such as distribution and suppliers)—has to be examined. In looking internally at the company aspects, it is important to consider how the company resources and capabilities and the corporate partnerships compare against the competition. Does the company have better or worse resources and capabilities as compared to the competition and does the company have better or worse corporate partnerships? It is also critical to examine the external macro environments the company faces, such as the political/legal/regulatory, economic, socio-cultural, technological, and competitive (PESTC) environments. The external environment significantly affects the decisions a company makes, and thus must be continuously evaluated. For example, during the most recent 2020 economic downturn, businesses found that government regulation had significant impact on their business. Given the COVID-19 pandemic, many governments within Canada and from around the world imposed many operating restrictions, forcing them to close their brick-and-mortar stores and pivot to online only, curbside pickup or take-out only model. While a business cannot control things such as the economy, political, regulatory or legal restrictions, changes in demographic 2.1 Components of the Strategic Planning Process | 33 trends, or what competitors do, it must decide what actions to take to remain competitive—actions that depend in part on their environment. ‡ Figure 2.2 – Elements to consider in a situation analysis ‡ Anthony Francescuc ci, Ryerson University CC BY-NC 4.0 Assessing the Internal Environment The first step in understanding the business situation is to look internally within the company (i.e. the micro environment) and assess the company (resources, capabilities) and its corporate partnerships, in comparison to the competitors. ‡ Figure 2.3 “Analyzing the Micro (Internal) Environment” is an illustrative (not exhaustive) list of the type of things to consider when analyzing the micro environment of the business. The first aspect to consider is to look internally within the company and assess its resources and capabilities. In considering the micro environment of the business, it is necessary to analyze these aspects in comparison to the competition. For each aspect considered, think about whether the company being analyzed is better or worse in comparison to the competition. 34 | 2.1 Components of the Strategic Planning Process For example, when thinking about company brand reputation, does the company being analyzed have a stronger or weaker brand reputation than the competition? Does the company have a better or worse corporate culture in comparison to the competition? Does the company have access to specific assets or patents to which the competition does not (or vice versa)? Does the company have a better manufacturing process that provides an advantage to them over the competition? ‡ Figure 2.3 – Analyzing the Micro (Internal) Environme nt ‡ Anthony Francescuc ci, Ryerson University CC BY-NC 4.0 Similarly, does the company have corporate partnerships that provide an advantage, or does the competition have a partnership that create a weakness for your company? The company may have access to exclusive distribution partnerships, which give it exclusive access to customers to which the competition would not be able to reach. Alternatively, the competition may have an exclusive supplier partnership that gives it access to raw materials which creates an advantage for the competition. ‡ In looking at the internal aspects of the company, and making comparisons to the competition, it is important to 2.1 Components of the Strategic Planning Process | 35 consider the different types of competition. Often when we think about competition, we think about the direct competitors. For example, consider the beverage Canada Dry ginger ale. When thinking about their competition, one would think about Schweppes ginger ale and Seagram’s ginger ale. While these brands are competitors to Canada Dry, they are only the direct competitors. ‡ When looking at micro environment comparisons to the competition, it is also important to consider indirect competitors. If we continue with the Canada Dry ginger ale example, think about the need which is being satisfied with the purchase of a Canada Dry ginger ale. The need to quench one’s thirst can be satisfied with a Canada Dry ginger ale, however, there are other products that can satisfy that same need. For example, one may decide to purchase a diet ginger ale product, or water, or a sports drink or even a beer or wine product. Therefore, it is important to also consider indirect competitors when conducting the analysis. ‡ Assessing the External Environment Analyzing the external environment involves tracking conditions in the macro environment that, although largely uncontrollable, affects the way an organization does business. The macro environment includes political/ legal/regulatory, economic, socio-cultural, technological, and competitive factors (PESTC). Each factor in the macro environment is discussed separately in the next section. When companies globalize, analyzing the environment becomes more complex because they must examine the external environment in each country in which they do business. Regulations, competitors, technological 36 | 2.1 Components of the Strategic Planning Process development, and the economy may be different in each country and will affect how companies do business. To see how factors in the external environment such as technology may change education and lives of people around the world, watch the videos “Did You Know 2021?”. Video Clip Did You Know 2021? (Click to see video) Although the external environment affects all organizations, companies must focus on factors that are relevant for the decision or action to be taken. For example, government regulations on food packaging will affect PepsiCo but not Goodyear. Similarly, students getting a business degree don’t need to focus on job opportunities for registered nurses. The Political and Legal/Regulatory Environment All organizations must comply with government regulations and understand the political and legal environments in which they do business. Different government agencies enforce the numerous regulations that have been established to protect both consumers and businesses. For example, the “Reopening Ontario Act 2020” (Reopening Ontario Act, 2020) is a new piece of legislation that regulates the opening and operating of business during the various phases of the COVID-19 virus. The “Food and Drugs Act 1985” (Food and Drugs Act, 1985) regulates the labeling of consumable products, such as food and 2.1 Components of the Strategic Planning Process | 37 medicine. You can find a number of pieces of legislation, and the names of the agencies that regulate various industries within Canada here. As explained before, when companies conduct business in multiple markets, they must understand that regulations vary across countries and across states. Many states and countries have different laws that affect a company’s strategy. For example, suppose you are opening up a new factory because you cannot keep up with the demand for your products. If you are considering opening the factory in France (perhaps because the demand in Europe for your product is strong), you need to know that it is illegal for employees in that country to work more than thirty-five hours per week. The Economic Environment The economy has a major impact on spending by both consumers and businesses, which, in turn, affects the goals and strategies of organizations. Economic factors include variables such as inflation, unemployment, interest rates, and whether the economy is in a growth period or a recession. Inflation occurs when the cost of living continues to rise, eroding the purchasing power of money. When this happens, you and other consumers and businesses need more money to purchase goods and services. Interest rates often rise when inflation rises. Recessions can also occur when inflation rises because higher prices sometimes cause low or negative growth in the economy. During a recessionary period, it is possible for both high-end and low-end products to sell well. Consumers who can afford luxury goods may continue to buy them, while consumers with lower incomes tend to become more value conscious. Other goods and services, such as products sold in traditional department stores, may suffer. In the face of a severe economic 38 | 2.1 Components of the Strategic Planning Process downturn, even the sales of luxury goods can suffer. The economic downturn that began in 2020 affected consumers and businesses at all levels worldwide. Many consumers reduced their spending, and holiday sales dropped. The Socio-Cultural Environment The demographic, social and cultural environment—including social trends such as people’s attitudes toward fitness and nutrition; demographic characteristics such as people’s age, income, marital status, education, and occupation; and culture, which relates to people’s beliefs and values—are constantly changing in the global marketplace. Fitness, nutrition, and health trends affect the product offerings of many companies. For example, PepsiCo produces vitamin water and sports drinks. More women are working, which has led to a rise in the demand for services such as house cleaning and daycare. Baby boomers are reaching retirement age, sending their children to post-secondary education, and trying to care for their elderly parents all at the same time. Companies are responding to the time constraints their buyers face by creating products that are more convenient, such as frozen meals and nutritious snacks. Let us consider some implications of the changing socio- cultural trends. The example we will consider is the constantly changing composition of the population. Specifically, “the population aged 65 and over will increase by close to 60% over the period 2019-2036 as compared to an increase of under 10% for the younger population. This means that the older households’ share of consumer expenditures will also increase and marketing to the older population will be increasingly important for the bottom line” (Norris, 2020). Similarly, “It is estimated that in 2019 less than 40% of households have children at home. Approximately 28% of households are one- person households and 26% are couples without children. For 2.1 Components of the Strategic Planning Process | 39 the future, there is likely to be little change in the number of households with children, while there should be a considerable increase in the number of empty nest couples and perhaps a modest increase in one-person households. Smaller and older households have implications for packaging size as well as the labelling and design of products” (Norris, 2020). ‡ The Technological Environment The technology available in the world is changing the way people communicate and the way companies do business. Everyone is affected by technological changes. Self-scanners and video displays at stores, Radio Frequency ID (RFID), and Smart devices are a few examples of how technology is affecting businesses and consumers. Many consumers get information, read the news, use text messaging, and shop online. As a result, marketers have begun allocating more of their promotion budgets to online ads and mobile marketing, rather than just to traditional print media such as newspapers and magazines. Applications for telephones and electronic devices are changing the way people obtain information and shop, allowing customers to comparison shop without having to visit multiple stores. Many young people may rely more on electronic books, magazines, and newspapers and depend on mobile devices for most of their information needs. Organizations must adapt to new technologies in order to succeed. The Competitive Environment When analyzing the competitive environment from a macro environment perspective, it is important to understand that 40 | 2.1 Components of the Strategic Planning Process it is about the competitiveness of the industry and not about individual competitors per say. Individual competitors are considered during the micro environment analysis in determining whether individual competitors have company (resources or capabilities) and or corporate partnerships that are better or worse than the company being analyzed. In the macro environment, the competitive environment as a whole is analyzed (not individual competitors). How intense is the competition in a particular industry? Is most of the revenue within the industry concentrated within a small number of competitors who have a stronghold on that market, or is it more distributed amongst a number of small competitors, with no one competitor maintaining a stronghold. ‡ A group of competitors that provide similar products or services form an industry. Michael Porter, a professor at Harvard University and a leading authority on competitive strategy, developed an approach for analyzing industries. Called the five forces model (Porter, 1980) and shown in Figure 2.4 “Five Forces Model”, the framework helps organizations understand their current competitors as well as organizations that could become competitors in the future. As such, companies can find the best way to defend their position in the industry. 2.1 Components of the Strategic Planning Process | 41  Figure 2.4 – Five Forces Model (Porter, 1980) This illustration, from Porter, M. E. (1980). Competitiv e strategy. New York: The Free Press is included on the basis of fair dealing. According to Porter, in addition to their direct competitors (competitive rivals), organizations must consider the strength and impact the following could have (Porter, 1980): Substitute products Potential entrants (new competitors) in the marketplace The bargaining power of suppliers The bargaining power of buyers When any of these factors change, companies may have to respond by changing their strategies. For example, because buyers are consuming fewer soft drinks these days, companies such as Coke and Pepsi developed substitute offerings such as vitamin water and sports drinks. Other companies such as Danone or Nestlé subsequently entered the flavored water market. When you select a hamburger fast-food chain, you also had the option of substitutes such as getting food at the grocery or going to a pizza place. When laptop computers entered the market, they were a substitute for desktop 42 | 2.1 Components of the Strategic Planning Process computers. Most students may not have ever used a desktop computer, but some consumers still use them. Suppliers, the companies that supply ingredients as well as packaging materials to other companies, must also be considered. If a company cannot get the supplies it needs, it’s in trouble. Also, sometimes suppliers see how lucrative their customers’ markets are and decide to enter them. Buyers, who are the focus of marketing and strategic plans, must also be considered because they have bargaining power and must be satisfied. If a buyer is large enough, and doesn’t purchase a product or service, it can affect a selling company’s performance. Walmart, for instance, is a buyer with a great deal of bargaining power. Companies that do business with Walmart must be prepared to make concessions to them if they want their products on the company’s store shelves. Lastly, the world is becoming “smaller” and more of a global marketplace. Companies everywhere are finding that no matter what they make, numerous companies around the world are producing the product or a similar offering (substitute), and are eager to compete with them. Employees are in the same position. The Internet has made it easier than ever for customers to find products and services and for workers to find the best jobs available, even if they are abroad. Companies are also acquiring foreign companies. These factors all have an effect on the strategic decisions companies make. Figure 2.5 “Considerations in the Macro Environment” provides an illustrative (not exhaustive) list of aspects to consider in the various macro environments as a summary. 2.1 Components of the Strategic Planning Process | 43  Figure 2.5 – Considerati ons in the Macro Environme nt ‡ Anthony Francescuc ci, Ryerson University CC BY-NC 4.0 Conducting a SWOT Analysis Now that data has been gathered about both the micro and macro environments, it becomes important to make sense of this information. A common methodology used to make sense of the information gathered about the business environment is called SWOT analysis. SWOT stands for Strengths, Weakness, Opportunities and Threats. It is a strategic planning 44 | 2.1 Components of the Strategic Planning Process methodology developed out of Stanford University in the 1960’s that is still widely taught and used amongst business schools. It helps to organize thoughts to develop goals and strategies. ‡ Before starting the process of evaluating the data collected from the micro and macro environments, it is important to keep the decision or action to be taken top of mind as you conduct your SWOT analysis (more on this to come). With the decision or action required top of mind, it is necessary to consider the data collected and determine if each piece of information or point is considered a strength or weakness of or an opportunity or threat to the business. ‡ In determining whether a data point is a strength, weakness, opportunity or threat, there are a number of criteria to consider. See figure 2.6 “Criteria for Determining SWOT”. Begin by considering each data point collected in the situation analysis. For each point, determine if each of the three criteria from the strength and weakness box in figure 2.6 or the criteria from the opportunities and threats box apply to the point. For example, let’s say the decision to be considered was whether or not Apple should enter the electric car market. One of the data points collected in a situation analysis was that Apple has a strong brand reputation. In considering the three criteria from figure 2.6, this point about brand reputation is 1) about Apple which is the company being analyzed, 2) brand reputation is within the control of Apple and 3) in comparison to the competition, Apple’s brand reputation for quality products is much better than most auto maker competitors. Therefore, because Apple’s brand reputation is better than the competition, we consider it a strength. If the brand reputation was the same as their competitors, this point would not be considered a strength or weakness. This data point could be excluded from further analysis. ‡ Continuing with the same example above, it was determined that many provincial, federal and state governments offer electric car financial incentives or rebates to people who buy 2.1 Components of the Strategic Planning Process | 45 them. This point collected about the political/legal/regulatory environment can be said to 1) be external to Apple, 2) is not within the control of Apple and 3) these incentives would continue to exist even if Apple didn’t exist. Therefore, because this is a favourable point, we consider it to be an opportunity. Figure 2.6 – Criteria for Determinin g SWOT ‡ Anthony Francescuc ci, Ryerson University CC BY-NC 4.0 As was indicated above, when conducting a SWOT analysis, it is important to keep the decision or action top of mind. This is because when determining strengths, weaknesses, opportunities or threats, it is also important to understand the implications (the “so what does this mean”) for the decision or action to be taken. In other words; ‡ How do you capitalize / leverage the strengths in the decision to be made? How do you address / compensate for the weakness in the decision to be made? How do you take advantage of the opportunities in the decision to be made? How do you mitigate / minimize the threats in the decision to be made? 46 | 2.1 Components of the Strategic Planning Process Continuing with the Apple example above, we mentioned that one of Apple’s strength is that they have a strong brand reputation. While that is a strength, the important part is to understand or communicate how Apple can capitalize or leverage the strength as they consider whether to launch an electric vehicle. One implication could be that Apple could leverage the strong brand reputation in building brand awareness for a new Apple electric vehicle. The reputation for quality and/or superior products would be transferred to the new electric vehicle, and help to stimulate sales with loyal Apple customers for the new electric vehicle. ‡ ‡ signifies new material that Ryerson University authors have added to this adaptation of Principles of Marketing published by University of Minnesota Library Publishing, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. 2.1 Components of the Strategic Planning Process | 47 2.2 Developing Organizational Objectives and Formulating Strategies LEARNING OBJECTIVES Explain how companies develop the objectives driving their strategies. Describe the different types of product strategies and market entry strategies that companies pursue. Developing Objectives Objectives are what organizations want to accomplish—the end results they want to achieve—in a given time frame. In addition to being accomplished within a certain time frame, objectives should be realistic (achievable) and measurable, if possible. “To increase sales by 2% by the end of the year” is an example of an objective an organization might develop. 48 | 2.2 Developing Organizational Objectives and Formulating Strategies  Objectives help guide and motivate a company’s employees and give its managers reference points for evaluating the company’s marketing actions. Although many organizations publish their mission statements, most for-profit companies do not publish their objectives. Accomplishments at each level of the organization have helped PepsiCo meet its corporate objectives over the course of the past few years. PepsiCo’s business units (divisions) have increased the number of their facilities to grow their brands and enter new markets. PepsiCo’s beverage and snack units have gained market share by developing healthier products and products that are more convenient to use. A company’s marketing objectives should be consistent with the company’s objectives at other levels, such as the corporate level and business level. An example of a marketing objective for PepsiCo might be “to increase by 4 percent the market share of Gatorade by the end of the year.” The way companies analyze their different divisions or businesses will be discussed later in the chapter. Formulating Strategies Strategies are the means to the ends, the game plan, or what a company is going to do to achieve its objectives. Successful strategies help organizations establish and maintain a competitive advantage that competitors cannot imitate easily. Tactics include specific actions, such as coupons, television commercials, banner ads, and so on, taken to execute the strategy. PepsiCo attempts to sustain its competitive advantage by constantly developing new products and innovations, including “mega brands,” which include nineteen individual brands that generate over $1 billion in sales each. The 2.2 Developing Organizational Objectives and Formulating Strategies | 49 tactics may consist of specific actions (commercials during the Super Bowl; coupons; buy one, get one free, etc.) to advertise each brand. Companies often use multiple strategies to accomplish their objectives and capitalize on marketing opportunities. For example, in addition to pursuing a low cost strategy (selling products inexpensively), Walmart has simultaneously pursued a strategy of opening new stores and its online presence rapidly around the world. Many companies develop marketing strategies as part of their general, overall business plans. Other companies prepare separate marketing plans. A marketing plan is a strategic plan at the functional level that provides a company’s marketing group with direction. It is a road map that improves the company’s understanding of its competitive situation. The marketing plan also helps the company allocate resources and divvy up the tasks that employees need to do for the company to meet its objectives. The different components of marketing plans will be discussed throughout the book. Next, let’s take a look at the different types of basic market strategies companies pursue before they develop their marketing plans. Figure 2.7 – Product and Market Entry Strategies (Ansoff’s Matrix) 50 | 2.2 Developing Organizational Objectives and Formulating Strategies This theory uses a two by two matrix with products on the horizontal axis and markets on the vertical access. When looking at markets, it refers to existing markets (customers which are already targeted) and new markets (customers that are not currently targeted). Let’s look at each of these in some detail. ‡ Market penetration strategies focus on increasing a company’s sales of its existing products to its existing customers. Getting existing customers to buy more, more often or attract target customers who haven’t purchase before. Companies often offer consumers special promotions or low prices to increase their usage and encourage them to buy products. When Frito-Lay distributes money-saving coupons to customers or offers them discounts to buy multiple packages of snacks, the company is utilizing a penetration strategy. For example, many of the consumer-packaged goods companies such as Coke and Pepsi will often feature their beverages in the weekly flyers of various retailers. The thinking is by offering the product on sale, it gets existing customers to buy more of or more often the product that they already purchase. Product development strategies involve creating new products for existing target customers. A new product can be a totally new innovation, an improved product, or a product with enhanced value, such as one with a new feature. Cell phones that allow consumers to charge purchases with the phone or take pictures are examples of a product with enhanced value. A new product can also be one that comes in different variations, such as new flavors, colors, and sizes. Gatorade Zero, introduced by PepsiCo in 2018, is an example (Arthur, 2018). Some of their existing customers want the thirst quenching and replenishing benefits, but didn’t want the calories. Keep in mind, however, that what works for one company might not work for another. For example, just after Starbucks announced it was cutting back on the number of its lunch offerings, Dunkin’ Donuts announced it was adding items to its lunch menu. 2.2 Developing Organizational Objectives and Formulating Strategies | 51  Market development strategies focus on entering new markets with existing products. For example, during the recent economic downturn, manufacturers of high-end coffee makers began targeting customers who go to coffee shops. The manufacturers are hoping to develop the market for their products by making sure consumers know they can brew a great cup of coffee at home for a fraction of what they spend at Starbucks. New markets can include any new groups of customers such as different age groups, new geographic areas, or international markets. Many companies, including PepsiCo and Hyundai, have entered—and been successful in—rapidly emerging markets such as Russia, China, and India. Decisions to enter foreign markets are based on a company’s resources as well as the complexity of factors such as the political environmental, economic conditions, competition, customer knowledge, and probability of success in the desired market. As Figure 2.7 “Product and Market Entry Strategies” shows, there are different ways, or strategies, by which companies can enter international markets. The strategies vary in the amount of risk, control, and investment that companies face. Companies can simply export, or sell their products to buyers abroad, which is the least risky and least expensive method but also offers the least amount of control. Many small companies export their products to foreign markets. Companies can also license, or sell the right to use some aspect of their production processes, trademarks, or patents to individuals or companies in foreign markets. Licensing is a popular strategy, but companies must figure out how to protect their interests if the licensee decides to open its own business and void the license agreement. The French luggage and handbag maker Louis Vuitton faced this problem when it entered China. Competitors started illegally putting the Louis Vuitton logo on different products, which cut into Louis Vuitton’s profits. 52 | 2.2 Developing Organizational Objectives and Formulating Strategies  Diversification strategies involve entering new markets with new products or doing something outside a company’s current businesses. Companies that have little experience with different markets or different products often diversify their product lines by acquiring other companies. Diversification can be profitable, but it can also be risky if a company does not have the expertise or resources it needs to successfully implement the strategy. Googles purchase of Picassa (a photo sharing site) is an example of a diversification attempt that failed. Developing Sustainable Competitive Advantage (SCA) Another way companies develop strategies is by developing a sustainable competitive advantage (SCA). SCA is when a company develops an advantage over the competition that cannot easily be copied and can be maintained over the long term. There are four types of SCA. They include; locational excellence, operational excellence, product excellence and customer excellence. Let’s look at these individually (Treacy and Wiersema, 1995). ‡ Locational Excellence Locational excellence is a form of SCA that is developed by creating an advantage for your company through the number of locations a company has or through their internet presence. This type of SCA is particularly important for retailers and service providers. The reason locational excellence is 2.2 Developing Organizational Objectives and Formulating Strategies | 53 sustainable is because it is not easy for competitors to add locations as they typically require significant capital investments and or franchise partners. An example of a company that has developed sustainable competitive advantage based on location is Tim Hortons. In many markets, the density of their stores makes it difficult for a competitor to copy (Treacy and Wiersema, 1995). ‡ Operational Excellence Developing SCA through operational excellence is often done by focusing on improving your company operations through strong supplier relationships, supply chain management & efficient operation, in order to be able to offer customer better pricing. Efficient operations help to ensure that customers get the product they want to purchase, when they want it, in the quantities they want, at a lower delivered price than the competition. This helps to ensure good value for the customer. An example of a company that has developed SCA based on operational excellence is Walmart. They have strong supplier relationships, significant purchase power and efficient operations which allows them to offer better pricing to customers (Treacy and Wiersema, 1995).‡ Product Excellence SCA through product excellence is developed by having and offering customers products that have a high perceived value and or effective branding & positioning. This can only be achieved if your company’s offering is unique and competitors cannot easily offer a similar product. A customer believes there is high perceived value from a product when they feel like 54 | 2.2 Developing Organizational Objectives and Formulating Strategies they are getting more from the purchase of a product than what they must give up to purchase the product (remember the value equation from Chapter 1). Sometimes, high perceived value can also be achieved through branding and positioning (more on this later). A good example of a company that has developed a sustainable competitive advantage through product excellence is the Brand Supreme. Through their positioning and unique product offering in limited supply, Supreme customers believe that Supreme products have high perceive value (Treacy and Wiersema, 1995). ‡ Figure 2.8 – Supreme Logo Supreme, Public domain, via Wikimedia Commons. https://uplo ad.wikimed ia.org/ wikipedia/ commons/ 2/28/ Supreme_L ogo.svg Customer Excellence Customer excellence is another form of developing SCA. Customer excellence is achieved by developing value-based strategies for retaining loyal customers and providing them excellent customer service. It is about creating strategies that help build customer loyalty. Customer loyalty is not simply preferring one brand over another, but it is more about the reluctance to shop with competitor companies. Customer 2.2 Developing Organizational Objectives and Formulating Strategies | 55 excellence can also be achieved by offering superior customer service. While it is more difficult to develop SCA through offering excellent customer service, because of the variability of humans offering the customer service, once a company develops a reputation for offering good customer service, it makes it difficult for competitors to match. An example of a company that has developed SCA through customer excellence would be Apple or Amazon. Each of these companies has a strong reputation for excellent customer service which has created loyal customers who regularly buy from them (Treacy and Wiersema, 1995). ‡ ‡ signifies new material that Ryerson University authors have added to this adaptation of Principles of Marketing published by University of Minnesota Library Publishing, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. 56 | 2.2 Developing Organizational Objectives and Formulating Strategies 2.3 Where Strategic Planning Occurs within Companies LEARNING OBJECTIVES Identify the different levels at which strategic planning may occur within companies. Understand how strategic planning that occurs at multiple levels in an organization helps a company achieve its overall corporate objectives. As previously mentioned, strategic planning is a long-term process that helps an organization allocate its resources to take advantage of different opportunities. In addition to marketing plans, strategic planning may occur at different levels within an organization. For example, in large organizations top executives will develop strategic plans for the corporation as a whole. These are corporate-level plans. In addition, many large companies have different divisions, or businesses, called strategic business units. A strategic business unit (SBU) is a business or product line within an organization that has its own competitors, customers, and profit center for accounting purposes. A company’s SBUs may also have their own mission statement (purpose) and will generally develop strategic plans for themselves. These are called business-level plans. The 2.3 Where Strategic Planning Occurs within Companies | 57 different departments, or functions (accounting, finance, marketing, and so forth) within a company or SBU, might also develop strategic plans. For example, a company may develop a marketing plan or a financial plan, which are functional-level plans. Figure 2.9 “Strategic Planning Levels in an Organization” shows an example of different strategic planning levels that can exist within an organization’s structure. The number of levels can vary, depending on the size and structure of an organization. Not every organization will have every level or have every type of plan. 58 | 2.3 Where Strategic Planning Occurs within Companies  Figure 2.9 – Strategic Planning Levels in an Organizatio n This image is from Principles of Marketing by University of Minnesota and is licensed under a Creative Commons Attribution- NonComm ercial-Shar eAlike 4.0 Internation al License. The strategies and actions implemented at the functional (department) level must be consistent with and help an organization achieve its objectives at both the business and corporate levels and vice versa. The SBUs at the business level must also be consistent with and help an organization achieve its corporate-level objectives. For example, if a company wants 2.3 Where Strategic Planning Occurs within Companies | 59 to increase its profits at the corporate level and owns multiple business units, each unit might develop strategic plans to increase its own profits and thereby the company’s profits as a whole. At the functional level, a company’s marketing department might develop strategic plans to increase sales and the market share of the company’s most profitable products, which will increase profits at the business level and help the corporation’s profitability. Both business level and functional plans should help the company increase its profits, so that the company’s corporate-level strategic objectives can be met. At the functional (marketing) level, to increase PepsiCo’s profits, employees responsible for different products or product categories such as beverages or foods might focus on developing healthier products and making their packaging more environmentally friendly so the company captures more market share. For example, the new Aquafina bottle uses less plastic and has a smaller label, which helps the environment by reducing the amount of waste. Consumers committed to environmental sustainability are likely to look for and purchase products that use recyclable plastic or lower weight plastics which would result in increase share for PepsiCo. Organizations can utilize multiple methods and strategies at different levels in the corporation to accomplish their various goals just as you may use different strategies to accomplish your goals. However, the basic components of the strategic planning process are the same at each of the different levels. 60 | 2.3 Where Strategic Planning Occurs within Companies 2.4 Strategic Portfolio Planning Approaches LEARNING OBJECTIVE Explain how SBUs are evaluated using the Boston Consulting Group matrix. When a company has multiple strategic business units like PepsiCo does, it must decide what the objectives and strategies for each business are and how to allocate resources among them. A group of businesses can be considered a portfolio, just as a collection of artwork or investments compose a portfolio. In order to evaluate each business, companies sometimes utilize what’s called a portfolio planning approach. A portfolio planning approach involves analyzing a company’s entire collection of businesses relative to one another. One of the many portfolio planning approaches includes the Boston Consulting Group (BCG) matrix. 2.4 Strategic Portfolio Planning Approaches | 61  Figure 2.10 – The Boston Consulting Group (BCG) Matrix ‡ The Boston Consulting Group (BCG) matrix helps companies evaluate each of its strategic business units based on two factors: (1) the SBU’s market growth rate (i.e., how fast the unit is growing compared to the industry in which it competes) and (2) the SBU’s relative market share (i.e., how the unit’s share of the market compares to the market share of its competitors). Because the BCG matrix assumes that profitability and market share are highly related, it is a useful approach for making business and investment decisions. However, the BCG matrix is subjective and managers should also use their judgment and other planning approaches before making decisions. Using the BCG matrix, managers can categorize their SBUs (products) into one of four categories, as shown in Figure 2.10 “The Boston Consulting Group (BCG) Matrix”. In evaluating each of the SBU’s, it is important to look at the market growth rate and relative market share for each business unit and then categorize each of them using the two 62 | 2.4 Strategic Portfolio Planning Approaches by two matrix in figure 2.9. Market growth rate is the rate at which the market (the total revenues for the industry) will grow in the coming fiscal year. Relative Market share is the SBU’s market share divided by the market share of the SBU’s largest competitor. Using these two factors, you can know categorize them using the matrix. ‡ Stars Everyone wants to be a star. A star is a product or SBU with high market growth rate and a high relative market share. For products or SBU’s that are categorized as stars, to maintain the growth of their star products, a company may have to invest money to improve them and how they are distributed as well as promote them. Generally, most companies choose to invest in their star products or SBU’s. The Apple watch is considered a star product because the overall market for smartwatches is expected to grow by 20.1% over the next seven year and Apples overall smartwatch relative market share is also high (they are the largest competitor) (Acumen Research and Consulting, 2021; Vailshery, 2021). Cash Cows A cash cow is a product with low market growth and a high relative market share. Cash cows have a large share of a shrinking market. Although they generate a lot of cash, they may not have a long-term future. For example, iPhones are a cash cow for Apple (Canalys, 2020). iPhones have a high relative market share and the smartphone market has a low overall market growth rate with a 1.1% growth rate recorded in Q4 2020 (IDC, 2021). Companies with cash cows need to manage 2.4 Strategic Portfolio Planning Approaches | 63 them so that they continue to generate revenue to fund star products. Question Marks Question mark products are the hardest ones to determine if they will be successful or not. They often have low relative market share in a high growth rate market. Managers classify these products as question marks or problem children. They must decide whether to invest in them and hope they become stars or gradually eliminate or sell them as they become dogs. For example, the Amazon Fire tablet had a low relative market share (StatCounter, 2021) in a market that had an expected growth rate of 19.3% in 2020 (Vikhyaat, 2021). Dogs In business, it is not good to be considered a dog. A dog is a product with low market growth and low relative market share. Dogs do not make much money and do not have a promising future. Companies often get rid of dogs. However, some companies are hesitant to classify any of their products as dogs. As a result, they keep producing products and services they shouldn’t or invest in dogs in hopes they’ll succeed. In conclusion, the BCG matrix helps managers make resource allocation decisions once different products are classified. Depending on the product, a company might decide on a number of different strategies for it. One strategy is to build market share for a business or product, especially a product that might become a star. Many companies invest in question marks because market share is available for them to 64 | 2.4 Strategic Portfolio Planning Approaches capture. The success sequence is often used as a means to help question marks become stars. With the success sequence, money is taken from cash cows (if available) and invested into question marks in hopes of them becoming stars. Holding market share means the company wants to keep the product’s share at the same level. When a company pursues this strategy, it only invests what it has to in order to maintain the product’s market share. When a company decides to harvest a product, the company lowers its investment in it. The goal is to try to generate short-term profits from the product regardless of the long-term impact on its survival. If a company decides to divest a product, the company drops or sells it. That’s what Procter & Gamble did in 2008 when it sold its Folgers coffee brand to Smuckers. Proctor & Gamble also sold Jif peanut butter brand to Smuckers. Many dogs are divested, but companies may also divest products because they want to focus on other brands they have in their portfolio. As competitors enter the market, technology advances, and consumer preferences change, the position of a company’s products in the BCG matrix is also likely to change. The company has to continually evaluate the situation and adjust its investments and product promotion strategies accordingly. The company must also keep in mind that the BCG matrix is just one planning approach and that other variables can affect the success of products. ‡ signifies new material that Ryerson University authors have added to this adaptation of Principles of Marketing published by University of Minnesota Library Publishing, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. 2.4 Strategic Portfolio Planning Approaches | 65 2.5 Discussion Questions and Activities REVIEW QUESTIONS 1. What factors in the external environment are affecting the “Big Three” U.S. automobile manufacturers? 2. What are some examples of Walmart’s strengths? 3. Suppose you work for a major hotel chain. Using Porter’s five forces model, explain what you need to consider with regard to each force. 4. How do product development strategies differ from market development strategies? 5. Explain why some strategies work for some companies but not others. 6. What factors do companies entering foreign markets need to consider? 7. How do franchising and licensing strategies differ? 8. What different levels of planning can organizations utilize? 9. Give an example and explain how a corporation that wants to help protect the environment can 66 | 2.5 Discussion Questions and Activities  do so at its corporate, business, and functional levels. 10. How would you classify a product that has a low market share in a growing market? 11. What does it mean to hold market share? 12. What factors are used as the basis for analyzing businesses and brands using the BCG approach? DISCUSSION QUESTIONS 1. Explain how a marketing objective differs from a marketing strategy. How are they related? 2. Explain how an organization like McDonald’s can use licensing to create value for the brand. 3. How has PepsiCo employed a product development strategy? 4. Discuss how conducting a SWOT (strengths, weaknesses, opportunities, threats) analysis helps a company (or an individual) develop its strategic plan. 2.5 Discussion Questions and Activities | 67  ACTIVITIES 1. Outline a strategic plan for yourself to begin planning for a job after graduation. Include your value proposition, targeted organizations, objectives, strategies, and the internal and external factors that may affect your plans. 2. A mission statement outlines an organization’s purpose and answers the question of how a company defines its business. Write a mission stat