Chapter 2 The Marketing Implications of Corporate and Business Strategies McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Marketing’s Role in Formulating and Implementing Strategies • Marketing managers are not only responsible for developing strategic plans for their own product-market entries, but also are often primary participants and contributors to the planning process at the business and corporate level as well. 2-2 Marketing’s Role in Formulating and Implementing Strategies • Market oriented management – The marketing concept holds that the planning and coordination of all company activities around the primary goal of satisfying customer needs is the most effective means to attain and sustain a competitive advantage and achieve company objectives over time. – Characterized by a consistent focus on customers’ needs and competitive circumstances in the market environment. 2-3 Marketing’s Role in Formulating and Implementing Strategies • Does being market-oriented pay? – Organizations should be able to enhance, accelerate, and reduce the volatility and vulnerability of their cash flows. – And that should enhance their economic performance and shareholder value. – Profitability is the third leg, together with a customer focus and cross-functional coordination, of the three-legged stool known as the marketing concept. 2-4 Marketing’s Role in Formulating and Implementing Strategies • Does being market-oriented pay? – Interpreting the marketing concept as a philosophy of trying to satisfy all customers’ needs regardless of the cost would be a prescription for financial disaster. – Studies indicate that a market orientation has a significant positive effect on return on assets, sales growth, and new product success. 2-5 Marketing’s Role in Formulating and Implementing Strategies • Factors that mediate marketing’s strategic role – Competitive conditions may enable a company to be successful in the short run without being particularly sensitive to customer desires. – Product-orientation or production-orientation – Sales-orientation 2-6 Marketing’s Role in Formulating and Implementing Strategies • Factors that mediate marketing’s strategic role – Different levels of economic development across industries or countries may favor different business philosophies – Firms can suffer from strategic inertia—the automatic continuation of strategies successful in the past, even though current market conditions are changing. 2-7 Three Levels of Strategy: Similar Components, but Different Issues • A strategy is a fundamental pattern of present and planned objectives, resource deployments, and interactions of an organization with markets, competitors, and other environmental factors. • The hierarchy of strategies – Corporate strategy – Business-level strategy – Functional strategies 2-8 Three Levels of Strategy: Similar Components, but Different Issues • The components of strategy: – Scope – Goals and objectives – Resource deployments – Identification of a sustainable competitive advantage – Synergy 2-9 Three Levels of Strategy: Similar Components, but Different Issues • Corporate strategy – Decisions about the firm’s scope and resource deployments across its businesses are the primary focus of corporate strategy. – Essential questions at this level: • What business(es) are we in? • What business(es) should we be in? • What portion of our total resources should we devote to each of these businesses? 2-10 Three Levels of Strategy: Similar Components, but Different Issues • Business-level strategy – A major issue in a business strategy is that of sustainable competitive advantage. – It must address appropriate scope. – Synergy should be sought across productmarkets and across functional departments within the business. 2-11 Three Levels of Strategy: Similar Components, but Different Issues • Marketing strategy – The primary focus is to effectively allocate and coordinate marketing resources and activities to accomplish the firm’s objectives within a specific product-market. – A critical issue is specifying the target market(s) for a particular product or product line. 2-12 The Marketing Implications of Corporate Strategy Decisions • A corporate mission statement should clearly define the organization’s strategic scope. • It should answer the following fundamental questions: – What is our business? – Who are our customers? – What kinds of value can we provide to these customers? – What should our business be in the future? 2-13 The Marketing Implications of Corporate Strategy Decisions • Market influences on the corporate mission. – An organization’s mission should fit both its internal characteristics and the opportunities and threats in its external environment. – It should also focus the firm’s efforts on markets where those resources and competencies will generate value for customers, an advantage over competitors, and synergy across its products. 2-14 The Marketing Implications of Corporate Strategy Decisions • Criteria for defining the corporate mission. – The most useful mission statements focus on the customer need to be satisfied and the functions that must be performed to satisfy that need. – They are specific as to the customer groups and the products or technologies on which to concentrate. 2-15 The Marketing Implications of Corporate Strategy Decisions • Social values and ethical principles – Some firms pursue social programs intertwined with their economic objectives. – Others follow the principles of sustainability. – Ethics is concerned with the development of moral standards by which actions and situations can be judged. – It focuses on those actions that may result in actual or potential harm of someone else. 2-16 The Marketing Implications of Corporate Strategy Decisions • Corporate objectives must be specific and measurable. • Each objective contains four components: – A performance dimension or attribute sought. – A measure or index for evaluating progress. – A target or hurdle level to be achieved. – A time frame within which the target is to be accomplished. 2-17 The Marketing Implications of Corporate Strategy Decisions • The marketing implications of corporate objectives – Trying to achieve many objectives at once leads to conflicts and trade-offs. – Managers can reconcile conflicting goals by prioritizing them. – Another approach is to state one of the conflicting goals as a constraint or hurdle. – A firm attempts to maximize growth subject to meeting some minimum ROI hurdle. 2-18 The Marketing Implications of Corporate Strategy Decisions • Corporate sources of competitive advantage – A sustainable competitive advantage at the corporate level is based on company resources: resources that other firms do not have, that take a long time to develop, and that are hard to acquire. 2-19 The Marketing Implications of Corporate Strategy Decisions • Corporate growth strategies • A firm can go in two major directions in seeking future growth: – Expansion of its current businesses and activities. – Diversification into new businesses, either through internal business development or acquisition. 2-20 The Marketing Implications of Corporate Strategy Decisions • Expansion by increasing penetration of current product-markets • Expansion by developing new products for current customers • Expansion by selling existing products to new segments or countries 2-21 Alternative Corporate Growth Strategies 2-22 The Marketing Implications of Corporate Strategy Decisions • Expansion by diversifying – Vertical integration • Forward vertical integration • Backward integration – Related (or concentric) diversification – Unrelated (or conglomerate) diversification • Expansion by diversifying through organizational relationships or networks 2-23 The Marketing Implications of Corporate Strategy Decisions • Portfolio models – The Boston Consulting Group’s (BCG) growth-share matrix analyzes the impact of investing resources in different businesses on the corporation’s future earnings and cash flows. – Each business is positioned within a matrix. – The vertical axis indicates the industry’s growth rate and the horizontal axis shows the business’s relative market share. 2-24 BCG’s Market Growth Relative Share Matrix 2-25 Cash Flows across Businesses in the BCG Portfolio Model 2-26 The Marketing Implications of Corporate Strategy Decisions • Limitations of the growth-share matrix – Market growth rate is an inadequate descriptor of overall industry attractiveness. – Relative market share is inadequate as a description of overall competitive strength. – The outcomes are highly sensitive to variations in how growth and share are measured. – It provides little guidance on how best to implement investment strategies for each business. – It assumes that all business units are independent of one another except for the flow of cash. 2-27 The Marketing Implications of Corporate Strategy Decisions • Alternative portfolio models – Multifactor models are more detailed and provide more strategic guidance concerning appropriate resource allocation across businesses. – More useful for evaluating potential new product markets. – The multifactor measures in these models can be subjective and ambiguous. – Conclusions drawn still depend on the way industries and product-markets are defined. 2-28 The Industry Attractiveness–Business Position Matrix 2-29 The Marketing Implications of Corporate Strategy Decisions • Value-based planning – A resource allocation tool that attempts to address such questions by assessing the shareholder value a given strategy is likely to create. – The amount of return a strategy or operating program generates in excess of the cost of capital is commonly referred to as its economic value added, or EVA. 2-30 The Marketing Implications of Corporate Strategy Decisions • Discounted cash flow model. – Shareholder value created by a strategy is determined by the cash flow it generates, the business’s cost of capital, and the market value of the debt assigned to the business. 2-31 The Marketing Implications of Corporate Strategy Decisions • Some limitations of value-based planning. – It is not a substitute for strategic planning. – Good forecasts that are difficult to make, are critical to the validity of value-based planning. – Human tendencies to overvalue the financial projections associated with some strategy alternatives and to undervalue others. – Value-based planning can evaluate alternatives, but it cannot create them. 2-32 The Marketing Implications of Corporate Strategy Decisions • Using customer equity to estimate the value of alternative marketing actions. – A variation of value-based planning. – This approach calculates the economic return for a prospective marketing initiative based on its likely impact on the firm’s customer equity, which is the sum of the lifetime values of its current and future customers. 2-33 The Marketing Implications of Corporate Strategy Decisions • Sources of synergy – Knowledge-based synergies • Performance enhancement through transfer of competencies, knowledge, or customer-related intangibles from other units within the firm. – Corporate identity and the corporate brand • Corporate identity flows from the communications, impressions, and personality projected by an organization. 2-34 The Marketing Implications of Business-unit Strategy Decisions • Strategic business units, or SBUs are the components of a firm engaged in multiple industries or businesses. – Deciding how to divide into SBUs. – SBU managers must recommend: • • • • The unit’s objectives. The scope of its target customers and offerings. Which broad competitive strategy to pursue. How resources should be allocated. 2-35 The Marketing Implications of Business-unit Strategy Decisions • Ideally, strategic business units have the following characteristics: – A homogeneous set of markets to serve with a limited number of related technologies. – A unique set of product-markets. – Control over those factors necessary for successful performance. – Responsibility for their own profitability. 2-36 The Marketing Implications of Business-unit Strategy Decisions – The dimensions that define the scope and mission of the entire corporation also define individual SBUs. – Gaining a competitive advantage: To be successful over the long haul, a competitive strategy should have three characteristics. • It should generate customer value. • The superior value must be perceived by the customer. • The advantage should be difficult for competitors to copy. 2-37 The Marketing Implications of Business-unit Strategy Decisions • Strategies for entrepreneurial start-ups – Most successful start-ups have a narrow strategic scope, at least in the beginning. – Successful start-ups tend to concentrate on niche segments that are not being adequately served and/or on finding ways to provide unique benefits and superior value. – The symbiosis between market analysis and customer knowledge, competitive strategy, marketing programs, and successful performance is often stronger in small firms and new start-ups. 2-38 Take-Aways • Marketing perspectives lie at the heart of strategic decision making. • Market-oriented firms tend to outperform other firms. • Unethical behavior by a firm’s employees can damage the trust between a firm and its suppliers and customers. 2-39 Take-Aways • The four major paths to corporate growth imply differences in a firm’s strategic scope, require different competencies and marketing actions, and involve different types and amounts of risk. 2-40 Take-Aways • A strong corporate brand makes sense. • The ultimate goal in formulating businessunit strategies is to establish a basis for a sustainable competitive advantage that provides superior value to customers. 2-41 Take-Aways • Successful new firm formation typically requires a competitive strategy that delivers superior value to a narrowly defined target segment in a way that either avoids direct confrontation with established competitors or is difficult for them to emulate. 2-42