After reviewing Chapter 2 from the textbook, post a 500-word synopsis of your understanding of the marketing concepts. In your posting, include questions about any marketing concepts that are unclear.

Revised Confirming Pages
A Preface
to Marketing
Management
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Revised Confirming Pages
A Preface
to Marketing
Management
Twelfth Edition
J. Paul Peter
University of Wisconsin–Madison
James H. Donnelly, Jr.
Gatton College of Business and
Economics University of Kentucky
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A PREFACE TO MARKETING MANAGEMENT, TWELFTH EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221
Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc.
All rights reserved. Previous editions © 2008, 2006, and 2003. No part of this publication may be reproduced
or distributed in any form or by any means, or stored in a database or retrieval system, without
the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited
to, in any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available
to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 WDQ/WDQ 1 0 9 8 7 6 5 4 3 2 1 0
ISBN 978-0-07-352996-7
MHID 0-07-352996-6
Vice President & Editor-in-Chief: Brent Gordon
VP EDP/Central Publishing Services: Kimberly Meriwether David
Publisher: Paul Ducham
Executive Editor: Douglas Hughes III
Associate Marketing Manager: Jaime Halteman
Editorial Coordinator: Gabriela Gonzalez
Project Manager: Robin A. Reed
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Cover Designer: Studio Montage, St. Louis, Missouri
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Printer: World Color Press, Inc.
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Peter, J. Paul.
A preface to marketing management / J. Paul Peter, James H. Donnelly, Jr.–Twelfth ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-07-352996-7 (alk. paper)
1. Marketing–Management. I. Donnelly, James H. II. Title.
HF5415.13.P388 2010
658.8–dc22
2009043316
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a Web site
does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the
accuracy of the information presented at these sites.
www.mhhe.com
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To Rose and Angie
J. Paul Peter
To Gayla
Jim Donnelly
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About the Authors
J. Paul Peter
has been a faculty member at the University of Wisconsin since 1981. He was a member
of the faculty at Indiana State, Ohio State, and Washington University before joining the
Wisconsin faculty. While at Ohio State, he was named Outstanding Marketing Professor
by the students and has won the John R. Larson Teaching Award at Wisconsin. He has
taught a variety of courses including Marketing Management, Marketing Strategy, Con-
sumer Behavior, Marketing Research, and Marketing Theory, among others.
Professor Peter’s research has appeared in the Journal of Marketing, the Journal of
Marketing Research, the Journal of Consumer Research, the Journal of Retailing, and the
Academy of Management Journal, among others. His article on construct validity won the
prestigious William O’Dell Award from the Journal of Marketing Research, and he was a
finalist for this award on two other occasions. Recently, he was the recipient of the Churchill
Award for Lifetime Achievement in Marketing Research, given by the American Marketing
Association and the Gaumnitz Distinguished Faculty Award from the School of Business,
University of Wisconsin–Madison. He is an author or editor of over 30 books, including A
Preface to Marketing Management twelfth edition; Marketing Management: Knowledge and
Skills, nineth edition; Consumer Behavior and Marketing Strategy, nineth edition; Strategic
Management: Concepts and Applications, third edition; and Marketing: Creating Value for
Customers, second edition. He is one of the most cited authors in the marketing literature.
Professor Peter has served on the review boards of the Journal of Marketing, Journal of
Marketing Research, Journal of Consumer Research, and Journal of Business Research and
was measurement editor for JMR and professional publications editor for the American
Marketing Association. He has taught in a variety of executive programs and consulted for
several corporations as well as the Federal Trade Commission.
James H. Donnelly, Jr.
has spent his academic career in the Gatton College of Business and Economics at the
University of Kentucky. In 1990 he received the first Chancellor’s Award for Outstanding
Teaching given at the University. Previously, he had twice received the UK Alumni Associa-
tion’s Great Teacher Award, an award one can only be eligible to receive every 10 years. He has
also received two Outstanding Teacher awards from Beta Gamma Sigma, national business
honorary. In 1992 he received an Acorn Award recognizing “those who shape the future” from
the Kentucky Advocates for Higher Education. In 2001 and 2002 he was selected as “Best
University of Kentucky Professor.” In 1995 he became one of six charter members elected to
the American Bankers Association’s Bank Marketing Hall of Fame. He has also received a
“Distinguished Doctoral Graduate Award” from the University of Maryland.
During his career he has published in the Journal of Marketing Research, Journal of
Marketing, Journal of Retailing, Administrative Science Quarterly, Academy of Manage-
ment Journal, Journal of Applied Psychology, Personnel Psychology, Journal of Business
Research, and Operations Research among others. He has served on the editorial review
board of the Journal of Marketing. He is the author of more than a dozen books, which
include widely adopted academic texts as well as professional books.
Professor Donnelly is very active in the banking industry where he has served on the board
of directors of the Institute of Certified Bankers and the ABA’s Marketing Network. He has
also served as academic dean of the ABA’s School of Bank Marketing and Management.
vi
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vii
Preface
NOTE FROM THE AUTHORS
The original purpose of A Preface To Marketing Management—to deliver a clear and con-
cise presentation of the basic principles of marketing—is as relevant today as it was in ear-
lier editions. To us this means emphasizing quality content and avoiding excess verbiage,
pictures, and lists. We think we have succeeded in doing so since a reviewer called our book
“pound for pound the best introductory marketing text available.”
We introduce the 12th edition with a sense of accomplishment knowing that our book
and its eight foreign translations have been used throughout the world whenever courses
require an overview of the critical aspects of marketing management. Consequently, the
book has been used successfully in a wide variety of different course settings and is the
best selling book of its kind. We believe it has endured because we continuously fine tune
and update it to ensure that it meets the current and evolving needs of both students and
instructors. Because marketing is about figuring out how to do a superior job of satisfying
customers, we simply seek to practice what we preach. We refer to out book as the Preface.
Welcome to this edition which is organized into four sections.
Section I. Essentials of Marketing Management
This section consists of 13 chapters that present the essentials of marketing management.
Our objective is to present the “must know” content of the field useful in analyzing mar-
keting problems and cases and developing marketing plans. It is divided into four sections
that emphasize introducing the field, understanding target markets, understanding market-
ing mix variables, and marketing in special fields. Careful study of this section should give
students a clear understanding of the terminology, techniques, tools, and strategies used in
effective marketing management and marketing strategy development.
Section II. Analyzing Marketing Problems and Cases
This section has been widely praised as the best presentation available on the topic. In fact,
it has found its way to other areas of many campuses where it is used by students in fields
where case problems are used but which are unrelated to the field of marketing. It presents
a comprehensive framework for analyzing, preparing, and presenting case analyses.
This section could have been placed at the beginning of the book because it is designed
to be read at the start of a course using cases. However, because it is referred to throughout
the semester, we placed it after the text chapters. Also, for those courses that do not utilize
cases, the book may be used without reference to this section.
Section III. Financial Analysis for Marketing Decisions
It is important for marketing students to appreciate that the ultimate objectives of market-
ing are usually expressed in financial terms. With this in mind, this section presents impor-
tant financial calculations that will be useful in evaluating the financial position of a firm
and the financial impact of various marketing decisions and strategies.
Section IV. Developing Marketing Plans
In keeping with the concept of our book and the needs of its users, this section helps read-
ers develop practical planning skills. It contains an approach to developing a marketing
plan by providing a general format for structuring and presenting one.
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THE 12TH EDITION OF THE PREFACE
The content of this book is continuously revised and updated based on extensive feed-
back from students and faculty members as well as our own intuitions and judgments.
Whether a topic is fundamental or emerging we try to bring innovative content and ele-
ments to the book. For example, in this and the previous edition we have added new or
expanded discussions of the major types of marketing, branding, marketing’s role in
cross-functional strategic planning, the most current psychographic and geodemographic
segmentation approaches, organizing the sales force, relationship marketing in service
organizations, the difference between customers and clients in service organizations,
multichannel marketing, and a new section on Porter’s diamond model of national com-
petitive advantage. We have also changed the title and added content to chapter 6, “Prod-
uct and Brand Strategy” to better reflect current views of these topics.
We have altered two important elements in this edition. “Marketing Insights” replace
our previous “Marketing Highlights” feature. This is more than a simple name change. It
was done to more accurately reflect their purpose of helping students solve marketing
problems, analyze marketing cases, and develop marketing plans. More than 20 Market-
ing Insights have been added to this edition.
We have also added an “Additional Resources” section to the end of each chapter.
Previously, each chapter ended with a selection of additional readings. This change is
designed to highlight our focus on current resources which students can utilize in solv-
ing marketing problems, analyzing marketing cases, and developing marketing plans, as
well as assist in writing projects and case presentations. Each resource has been selected
with prospective students in mind. Our goal is to provide resources accessible to stu-
dents at various stages of marketing education given the wide spectrum of courses in
which the book is utilized.
UTILIZING THE PREFACE
This book has been used successfully in college courses and practical training that
require an overview of the critical aspects of marketing management and marketing strat-
egy development. It has been used:
• As a primary introductory text primarily at the undergraduate level.
• At the undergraduate and MBA level, where several AACSB core curriculum courses
are team-taught as one multidisciplinary 9-to-12 hour course.
• At the advanced undergraduate and MBA level where it is used as the content foun-
dation in courses that utilize marketing cases and problems.
• In short courses and executive development programs.
INSTRUCTIONAL RESOURCES
The Preface is accompanied by two expanded supplements. They were developed in response
to instructors’ requests. We offer a test bank of nearly 1,300 multiple-choice, true-false, and
brief essay questions. It is available in both print and EZ Test Online. We also offer Power-
Point slides that highlight key text material.
viii Preface
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ix
Acknowledgements
Our book is based on the works of many academic researchers and marketing practitioners.
We want to thank those individuals who contributed their ideas to develop the field of mar-
keting throughout the years. Indeed, our book would not be possible without their contri-
butions. We would also like to thank our teachers, colleagues, and students for their many
contributions to our education. We would also like to publicly acknowledge those individ-
uals who served as reviewers of this and previous editions. We appreciate their advice and
counsel and have done our best to reflect their insightful comments.
Roger D. Absmire
Sam Houston State University
Catherine Axinn
Syracuse University
Andrew Bergstein
Pennsylvania State University
Robert Brock Lawes
Chaminade University of Honolulu
Glenn Chappell
Meridith College
Newell Chiesl
Indiana State University
Reid P. Claxton
East Carolina University
Mike Dailey
University of Texas, Arlington
Linda M. Delene
Western Michigan University
James A. Eckert
Western Michigan University
Robert Finney
California State University, Hayward
Stephen Goldberg
Fordham University
Sol Klein
Northeastern University
Franklyn Manu
Morgan State University
Edward J. Mayo
Western Michigan University
Donald J. Messmer
College of William & Mary
Johannah Jones Nolan
University of Alabama, Birmingham
R. Stephen Parker
Southwest Missouri State University
Debu Purohit
Duke University
Gary K. Rhoads
Brigham Young University
Mike Ballif
University of Utah
Donald Brady
Millersville University
Lee Richardson
University of Baltimore
Matthew H. Sauber
Eastern Michigan University
Ronald L. Schill
Brigham Young University
Vernon R. Stauble
California State Polytechnic University
David Griffith
University of Oklahoma
Lawrence Hamer
DePaul University
Jack Healey
Golden State University
Betty Jean Hebel
Madonna University
JoAnne S. Hooper
Western Carolina University
David Horne
Wayne State University
Fred Hughes
Faulkner University
Benoy Joseph
Cleveland State University
Ann Marie Thompson
Northern Illinois University
John R. Thompson
Memphis State University
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x Acknowledgements
Gordon Urquhart
Cornell College
Kevin Webb
Drexel University
Kathleen R. Whitney
Central Michigan University
J. B. Wilkinson
University of Akron
Dale Wilson
Michigan State University
Eunkyu Lee
Syracuse University
Tina Lowrey
University of Texas at San Antonio
Albert Milhomme
Texas State University
Larry Crowson
University of Central Florida
Gerard DiBartolo
Salisbury University
Casey Donoho
Northern Arizona University
R. E. Evans
University of Oklahoma
Lawrence Feick
University of Pittsburgh
David Good
Grand Valley State University
Perry Haan
Tiffin University
Harry Harmon
Central Missouri
Catherine Holderness
University of North Carolina–Greensboro
Nicole Howatt
UCF
Anupam Jaju
GMU
Chris Joiner
George Mason University
Chip Miller
Drake University
David L. Moore
LeMoyne College
Joan Phillips
University of Notre Dame
Thomas Powers
University of Alabama at Birmingham
John Rayburn
University of Tennessee
Martha Reeves
Duke
Henry Rodkin
DePaul University
Alan Sawyer
University of Florida
Mark Spriggs
University of St. Thomas
Sean Valentine
University of Wyoming
Stacy Vollmers
University of St. Thomas
Anna Andriasova
University of Maryland University College
Ritesh Saini
George Mason University
Ana Valenzuela
Baruch College, CUNY
Matthew Elbeck
Troy University Dothan
Edward Bond
Bradley University
Working with professionals makes everything go smoothly. It is why being a McGraw-
Hill/Irwin author is a pleasure. Thank you to Doug Hughes, our editor, and to Gabriela
Gonzalez, editorial assistant, and welcome aboard. Special thanks to Robin Reed, project
manager, for so many contributions to this project. We are very grateful.
We also wish to acknowledge Michael Knetter, Dean of the School of Business at the
University of Wisconsin, and Devanthan Sudharshan, Dean of Gatton College of Business
and Economics at the University of Kentucky who have always supported our efforts.
J. Paul Peter
James H. Donnelly Jr.
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Contents
SECTION I
ESSENTIALS OF MARKETING
MANAGEMENT 1
PART A
INTRODUCTION 1
Chapter 1
Strategic Planning and the Marketing
Management Process 2
The Marketing Concept 2
What Is Marketing? 3
What Is Strategic Planning? 4
Strategic Planning and Marketing Management 4
The Strategic Planning Process 5
The Complete Strategic Plan 14
The Marketing Management Process 14
Situation Analysis 14
Marketing Planning 17
Implementation and Control of the Marketing Plan 18
Marketing Information Systems and Marketing
Research 19
The Strategic Plan, the Marketing Plan, and
Other Functional Area Plans 19
Marketing’s Role in Cross-Functional Strategic
Planning 19
Conclusion 20
Appendix
Portfolio Models 23
PART B
MARKETING INFORMATION,
RESEARCH, AND UNDERSTANDING
THE TARGET MARKET 27
Chapter 2
Marketing Research: Process and Systems
for Decision Making 28
The Role of Marketing Research 28
The Marketing Research Process 29
Purpose of the Research 29
Plan of the Research 30
Performance of the Research 35
Processing of Research Data 35
Preparation of the Research Report 36
Limitations of the Research Process 36
Marketing Information Systems 38
Conclusion 39
Chapter 3
Consumer Behavior 40
Social Influences on Consumer Decision Making 41
Culture and Subculture 41
Social Class 42
Reference Groups and Families 43
Marketing Influences on Consumer Decision
Making 43
Product Influences 43
Price Influences 43
Promotion Influences 44
Place Influences 44
Situational Influences on Consumer Decision
Making 45
Psychological Influences on Consumer Decision
Making 45
Product Knowledge 45
Product Involvement 46
Consumer Decision Making 46
Need Recognition 47
Alternative Search 48
Alternative Evaluation 49
Purchase Decision 49
Postpurchase Evaluation 50
Conclusion 52
Chapter 4
Business, Government, and Institutional
Buying 53
Categories of Organizational Buyers 53
Producers 53
Intermediaries 54
Government Agencies 54
Other Institutions 54
The Organizational Buying Process 54
Purchase-Type Influences on Organizational Buying 55
Straight Rebuy 55
Modified Rebuy 55
New Task Purchase 55
Structural Influences on Organizational
Buying 56
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xii Contents
Purchasing Roles 56
Organization-Specific Factors 57
Purchasing Policies and Procedures 57
Behavioral Influences on Organizational
Buying 58
Personal Motivations 58
Role Perceptions 58
Stages in the Organizational Buying
Process 60
Organizational Need 61
Vendor Analysis 61
Purchase Activities 61
Postpurchase Evaluation 61
Conclusion 63
Chapter 5
Market Segmentation 64
Delineate the Firm’s Current
Situation 64
Determine Consumer Needs
and Wants 65
Divide Markets on Relevant Dimensions 65
A Priori versus Post Hoc Segmentation 66
Relevance of Segmentation Dimensions 66
Bases for Segmentation 67
Develop Product Positioning 73
Decide Segmentation Strategy 74
Design Marketing Mix Strategy 75
Conclusion 76
PART C
THE MARKETING MIX 77
Chapter 6
Product and Brand Strategy 78
Basic Issues in Product Management 78
Product Definition 78
Product Classification 79
Product Quality and Value 80
Product Mix and Product Line 81
Branding and Brand Equity 82
Packaging 86
Product Life Cycle 88
Product Adoption and Diffusion 91
The Product Audit 91
Deletions 91
Product Improvement 93
Organizing for Product Management 93
Conclusion 95
Chapter 7
New Product Planning and
Development 96
New Product Strategy 97
New Product Planning and Development
Process 99
Idea Generation 99
Idea Screening 101
Project Planning 102
Product Development 103
Test Marketing 103
Commercialization 104
The Importance of Time 104
Some Important New Product Decisions 105
Quality Level 105
Product Features 106
Product Design 106
Product Safety 107
Causes of New Product Failure 107
Need for Research 107
Conclusion 109
Chapter 8
Integrated Marketing Communications 110
Strategic Goals of Marketing
Communication 110
Create Awareness 110
Build Positive Images 110
Identify Prospects 110
Build Channel Relationships 111
Retain Customers 111
The Promotion Mix 111
Integrated Marketing Communications 112
Advertising: Planning and Strategy 114
Objectives of Advertising 114
Advertising Decisions 114
The Expenditure Question 115
The Allocation Question 118
Sales Promotion 122
Push versus Pull Marketing 122
Trade Sales Promotions 123
Consumer Promotions 124
What Sales Promotion Can and Can’t Do 124
Public Relations 126
Direct Marketing 126
Conclusion 127
Appendix
Major Federal Agencies Involved in Control
of Advertising 129
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Contents xiii
Chapter 9
Personal Selling, Relationship Building,
and Sales Management 130
Importance of Personal Selling 130
The Sales Process 131
Objectives of the Sales Force 131
The Sales Relationship-Building Process 132
People Who Support the Sales Force 138
Managing the Sales and Relationship-Building
Process 139
The Sales Management Task 139
Controlling the Sales Force 140
Motivating and Compensating Performance 144
Conclusion 144
Chapter 10
Distribution Strategy 146
The Need for Marketing Intermediaries 146
Classification of Marketing Intermediaries and
Functions 146
Channels of Distribution 148
Selecting Channels of Distribution 149
Specific Considerations 149
Managing a Channel of Distribution 152
Relationship Marketing in Channels 152
Vertical Marketing Systems 152
Wholesaling 155
Store and Nonstore Retailing 156
Store Retailing 156
Nonstore Retailing 157
Conclusion 160
Chapter 11
Pricing Strategy 161
Demand Influences on Pricing Decisions 161
Demographic Factors 161
Psychological Factors 161
Price Elasticity 162
Supply Influences on Pricing Decisions 163
Pricing Objectives 163
Cost Considerations in Pricing 163
Product Considerations in Pricing 165
Environmental Influences on Pricing
Decisions 166
Competition 166
Government Regulations 166
A General Pricing Model 167
Set Pricing Objectives 167
Evaluate Product–Price Relationships 167
Estimate Costs and Other Price Limitations 168
Analyze Profit Potential 169
Set Initial Price Structure 169
Change Price as Needed 170
Conclusion 170
PART D
MARKETING IN SPECIAL FIELDS 171
Chapter 12
The Marketing of Services 172
Important Characteristics of Services 174
Intangibility 174
Inseparability 175
Perishability and Fluctuating Demand 176
Client Relationship 176
Customer Effort 177
Uniformity 178
Providing Quality Services 178
Customer Satisfaction Measurement 180
The Importance of Internal Marketing 180
Overcoming the Obstacles in Service Marketing 182
Limited View of Marketing 182
Limited Competition 182
Noncreative Management 183
No Obsolescence 183
The Service Challenge 184
Banking 184
Health Care 184
Insurance 185
Travel 185
Implications for Service Marketers 186
Conclusion 187
Chapter 13
Global Marketing 188
The Competitive Advantage of Nations 189
Organizing for Global Marketing 190
Problems with Entering Foreign Markets 190
Organizing the Multinational Company 193
Programming for Global Marketing 195
Global Marketing Research 195
Global Product Strategy 198
Global Distribution Strategy 198
Global Pricing Strategy 199
Global Advertising and Sales Promotion
Strategy 199
Entry and Growth Strategies for Global Marketing 200
Conclusion 203
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xiv Contents
SECTION II
ANALYZING MARKETING PROBLEMS
AND CASES 205
A Case Analysis Framework 206
1. Analyze and Record the Current Situation 207
2. Analyze and Record Problems and Their Core
Elements 211
3. Formulate, Evaluate, and Record Alternative Courses
of Action 212
4. Select and Record the Chosen Alternative and
Implementation Details 213
Pitfalls to Avoid in Case Analysis 213
Communicating Case Analyses 216
The Written Report 216
The Oral Presentation 218
Conclusion 218
SECTION III
FINANCIAL ANALYSIS FOR
MARKETING DECISIONS 219
Financial Analysis 220
Break-Even Analysis 220
Net Present Value Analysis 222
Ratio Analysis 224
Conclusion 228
SECTION IV
DEVELOPING MARKETING PLANS 229
A Marketing Plan Framework 230
Title Page 231
Executive Summary 231
Table of Contents 232
Introduction 232
Situational Analysis 232
Marketing Planning 232
Implementation and Control of the Marketing Plan 234
Summary 236
Appendix—Financial Analysis 236
References 239
Conclusion 239
Chapter Notes 241
Index 248
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Introduction A
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1 Strategic Planning and the Marketing Management Process
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Part A
Introduction
2
Chapter 1
Strategic Planning
and the Marketing
Management Process
The purpose of this introductory chapter is to present the marketing management process
and outline what marketing managers must manage if they are to be effective. In doing so,
it will also present a framework around which the remaining chapters are organized. Our
first task is to review the organizational philosophy known as the marketing concept, since
it underlies much of the thinking presented in this book. The remainder of this chapter will
focus on the process of strategic planning and its relationship to the process of marketing
planning.
THE MARKETING CONCEPT
Simply stated, the marketing concept means that an organization should seek to make a
profit by serving the needs of customer groups. The concept is very straightforward and has
a great deal of commonsense validity. Perhaps this is why it is often misunderstood,
forgotten, or overlooked.
The purpose of the marketing concept is to rivet the attention of marketing managers on
serving broad classes of customer needs (customer orientation), rather than on the firm’s
current products (production orientation) or on devising methods to attract customers to
current products (selling orientation). Thus, effective marketing starts with the recognition
of customer needs and then works backward to devise products and services to satisfy these
needs. In this way, marketing managers can satisfy customers more efficiently in the
present and anticipate changes in customer needs more accurately in the future. This means
that organizations should focus on building long-term customer relationships in which the
initial sale is viewed as a beginning step in the process, not as an end goal. As a result, the
customer will be more satisfied and the firm will be more profitable.
The principal task of the marketing function operating under the marketing concept is not
to manipulate customers to do what suits the interests of the firm, but rather to find effective
and efficient means of making the business do what suits the interests of customers. This is
not to say that all firms practice marketing in this way. Clearly, many firms still emphasize
only production and sales. However, effective marketing, as defined in this text, requires that
consumer needs come first in organizational decision making.
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One qualification to this statement deals with the question of a conflict between con-
sumer wants and societal needs and wants. For example, if society deems clean air and
water as necessary for survival, this need may well take precedence over a consumer’s want
for goods and services that pollute the environment.
WHAT IS MARKETING?
Everyone reading this book has been a customer for most of his or her life. Last evening you
stopped into a local supermarket to graze at the salad bar, pick up some bottled water and a bag
of Fritos corn chips. While you were there, you snapped a $1.00 coupon for a new flavor salad
dressing out of a dispenser and tasted some new breakfast potatoes being cooked in the back
of the store. As you sat down at home to eat your salad, you answered the phone and someone
suggested that you need to have your carpets cleaned. Later on in the evening you saw TV
commercials for tires, soft drinks, athletic shoes, and the dangers of smoking and drinking dur-
ing pregnancy. Today when you enrolled in a marketing course, you found that the instructor
has decided that you must purchase this book. A friend has already purchased the book on the
Internet. All of these activities involve marketing. And each of us knows something about mar-
keting because it has been a part of our life since we had our first dollar to spend.
Since we are all involved in marketing, it may seem strange that one of the persistent prob-
lems in the field has been its definition.1 The American Marketing Association defines mar-
keting as “an organizational function and a set of processes for creating, communicating, and
delivering value to customers and for managing customer relationships in ways that benefit the
organization and its stakeholders.”2 This definition takes into account all parties involved in the
marketing effort: members of the producing organization, resellers of goods and services, and
customers or clients. While the broadness of the definition allows the inclusion of nonbusiness
1. Create customer focus throughout the business.
2. Listen to the customer.
3. Define and nurture your distinctive competence, that is, what your organization does
well, better than competitors.
4. Define marketing as market intelligence.
5. Target customers precisely.
6. Manage for profitability, not sales volume.
7. Make customer value the guiding star.
8. Let customers define quality.
9. Measure and manage customer expectations.
10. Build customer relationships and loyalty.
11. Define the business as a service business.
12. Commit to continuous improvement and innovation.
13. Manage the culture of your organization along with strategy and structure.
14. Grow with strategic partners and alliances.
15. Destroy marketing bureaucracy.
Source: See Frederick E. Webster, Jr., “Defining the New Marketing Concept,” Marketing Management 2, no. 4
(1994), pp. 22–31. For a classic discussion see Robert L. King, “The Marketing Concept: Fact or Intelligent
Platitude,” The Marketing Concept in Action, Proceedings of the 47th National Conference (Chicago, American
Marketing Association, 1964), p. 657. Adapted from William O. Bearden, Thomas N. Ingram, and Raymond
W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 9.
MARKETING INSIGHT Some Guidelines for Executing a
Marketing Philosophy 1–1
3
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exchange processes, the primary emphasis in this text is on marketing in the business environ-
ment. However, this emphasis is not meant to imply that marketing concepts, principles, and
techniques cannot be fruitfully employed in other areas of exchange as is clearly illustrated in
Figure 1.1.
WHAT IS STRATEGIC PLANNING?
Before a production manager, marketing manager, and personnel manager can develop plans
for their individual departments, some larger plan or blueprint for the entire organization
should exist. Otherwise, on what would the individual departmental plans be based?
In other words, there is a larger context for planning activities. Let us assume that we are
dealing with a large business organization that has several business divisions and several
product lines within each division (e.g., General Electric, Altria). Before individual divisions
or departments can implement any marketing planning, a plan has to be developed for the
entire organization.3 This means that senior managers must look toward the future and eval-
uate their ability to shape their organization’s destiny in the years and decades to come. The
output of this process is objectives and strategies designed to give the organization a chance
to compete effectively in the future. The objectives and strategies established at the top level
provide the context for planning in each of the divisions and departments by divisional and
departmental managers.
Strategic Planning and Marketing Management
Some of the most successful business organizations are here today because many years ago
they offered the right product at the right time to a rapidly growing market. The same can
also be said for nonprofit and governmental organizations. Many of the critical decisions
of the past were made without the benefit of strategic thinking or planning. Whether these
decisions were based on wisdom or were just luck is not important; they worked for these
organizations. However, a worse fate befell countless other organizations. Over three-
quarters of the 100 largest U.S. corporations of 70 years ago have fallen from the list. These
corporations at one time dominated their markets, controlled vast resources, and had the
best-trained workers. In the end, they all made the same critical mistake. Their manage-
ments failed to recognize that business strategies need to reflect changing environments
FIGURE 1.1
Major Types of
Marketing
Type Description Example
Product Marketing designed to create exchange Strategies to sell
for tangible products. Gateway computers.
Service Marketing designed to create exchanges Strategies by Allstate
for intangible products. to sell insurance.
Person Marketing designed to create favorable Strategies to elect
actions toward persons. a political candidate.
Place Marketing designed to attract people to Strategies to get
places. people to vacation
in national or state
parks.
Cause Marketing designed to create support Strategies to get
for ideas, causes, or issues or to get pregnant women not
people to change undesirable to drink alcohol.
behaviors.
Organization Marketing designed to attract donors, Strategies designed to
members, participants, or attract blood donors.
volunteers.
4 Part A Introduction
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and emphasis must be placed on developing business systems that allow for continuous
improvement. Instead, they attempted to carry on business as usual.
Present-day managers are increasingly recognizing that wisdom and innovation alone
are no longer sufficient to guide the destinies of organizations, both large and small. These
same managers also realize that the true mission of the organization is to provide value for
three key constituencies: customers, employees, and investors. Without this type of outlook,
no one, including shareholders, will profit in the long run.
Strategic planning includes all the activities that lead to the development of a clear
organizational mission, organizational objectives, and appropriate strategies to achieve the
objectives for the entire organization. The form of the process itself has come under criti-
cism in some quarters for being too structured; however, strategic planning, if performed
successfully, plays a key role in achieving an equilibrium between the short and the long
term by balancing acceptable financial performance with preparation for inevitable
changes in markets, technology, and competition, as well as in economic and political
arenas. Managing principally for current cash flows, market share gains, and earnings trends
can mortgage the firm’s future. An intense focus on the near term can produce an aversion
to risk that dooms a business to stagnation. Conversely, an overemphasis on the long run
is just as inappropriate. Companies that overextend themselves betting on the future may
penalize short-term profitability and other operating results to such an extent that the
company is vulnerable to takeover and other threatening actions.
The strategic planning process is depicted in Figure 1.2. In the strategic planning process
the organization gathers information about the changing elements of its environment. Man-
agers from all functional areas in the organization assist in this information-gathering
process. This information is useful in aiding the organization to adapt better to these changes
through the process of strategic planning. The strategic plan(s)4 and supporting plan are then
implemented in the environment. The end results of this implementation are fed back as new
information so that continuous adaptation and improvement can take place.
The Strategic Planning Process
The output of the strategic planning process is the development of a strategic plan. Figure 1.2
indicates four components of a strategic plan: mission, objectives, strategies, and portfolio
plan. Let us carefully examine each one.
Organizational Mission
The organization’s environment provides the resources that sustain the organization,
whether it is a business, a college or university, or a government agency. In exchange for
1. It costs a great deal more to acquire a new customer than to keep an old one.
2. Loyal customers buy more from your firm over time.
3. The longer you keep a customer, the more profitable they become over time.
4. It costs less to service loyal customers than new customers.
5. Loyal customers are often excellent referrals for new business.
6. Loyal customers are often willing to pay more for the quality and value they desire.
Source: One of the earliest works on the value of the loyal customer was Frederick F. Reichheld, The Loyalty
Effect, HBS Press, 1996. Also see Roland T. Rust, Katherine N. Lemon, and Valerie A. Zeithamel, “Return on
Marketing: Using Customer Equity to Focus Marketing Strategies,“ Journal of Marketing, January, 2004,
pp. 76–89, William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and
Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 8, and W. D. Perreault Jr., J. P. Cannon, and
E. Jerome McCarthy. Basic Marketing: A Marketing Strategy Planning Approach, 17th ed. (Burr Ridge, IL: McGraw-
Hill/Irwin, 2009, pp. 19–20.
MARKETING INSIGHT The Long-Term Value of Loyal
Customers
5
1–2
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these resources, the organization must supply the environment with quality goods and
services at an acceptable price. In other words, every organization exists to accomplish
something in the larger environment and that purpose, vision, or mission usually is clear
at the organization’s inception. As time passes, however, the organization expands, and
the environment and managerial personnel change. As a result, one or more things are
likely to occur. First, the organization’s original purpose may become irrelevant as the
organization expands into new products, new markets, and even new industries. For
example, Levi Strauss began as a manufacturer of work clothes. Second, the original
mission may remain relevant, but managers begin to lose interest in it. Finally, changes in
the environment may make the original mission inappropriate, as occurred with the March
of Dimes when a cure was found for polio. The result of any or all three of these conditions
is a “drifting” organization, without a clear mission, vision, or purpose to guide critical de-
cisions. When this occurs, management must search for a purpose or emphatically restate
and reinforce the original purpose.
The mission statement, or purpose, of an organization is the description of its reason
for existence. It is the long-run vision of what the organization strives to be, the unique
aim that differentiates the organization from similar ones and the means by which this
differentiation will take place. In essence, the mission statement defines the direction in
which the organization is heading and how it will succeed in reaching its desired goal.
While some argue that vision and mission statements differ in their purpose, the perspec-
tive we will take is that both reflect the organization’s attempt to guide behavior, create
a culture, and inspire commitment.5 However, it is more important that the mission
statement comes from the heart and is practical, easy to identify with, and easy to
remember so that it will provide direction and significance to all members of the organi-
zation regardless of their organizational level.
The basic questions that must be answered when an organization decides to examine and
restate its mission are, What is our business? Who is the customer? What do customers
6 Part A Introduction
FIGURE 1.2 The Strategic Planning Process
Organizational
mission
Organizational
objectives
Organizational
strategies
Organizational
portfolio plan
The organization’s strategic plan
Implementation
Information
The environment
Cooperative
Competitive
Economic
Social
Political
Legal
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Organization Mission
Community bank To help citizens successfully achieve and celebrate important life events with
education, information, products, and services.
Skin care products We will provide luxury skin-care products with therapeutic qualities that make them
worth their premium price.
Hotel chain Grow a worldwide lodging business using total-quality-management (TQM)
principles to continuously improve preference and profitability. Our commitment
is that every guest leaves satisfied.
Mid-size bank We will become the best bank in the state for medium-size businesses by 2015.
value? and What will our business be?6 The answers are, in a sense, the assumptions on
which the organization is being run and from which future decisions will evolve. While
such questions may seem simplistic, they are such difficult and critical ones that the major
responsibility for answering them must lie with top management. In fact, the mission
statement remains the most widely used management tool in business today. In developing
a statement of mission, management must take into account three key elements: the orga-
nization’s history, its distinctive competencies, and its environment.7
1. The organization’s history. Every organization—large or small, profit or nonprofit—
has a history of objectives, accomplishments, mistakes, and policies. In formulating a
mission, the critical characteristics and events of the past must be considered.
2. The organization’s distinctive competencies. While there are many things an
organization may be able to do, it should seek to do what it can do best. Distinctive
competencies are things that an organization does well—so well in fact that they give it an
advantage over similar organizations. For Honeywell, it’s their ability to design, manufac-
ture, and distribute a superior line of thermostats.8 Similarly, Procter & Gamble’s distinctive
competency is its knowledge of the market for low-priced, repetitively purchased consumer
products. No matter how appealing an opportunity may be, to gain advantage over competi-
tors, the organization must formulate strategy based on distinctive competencies.
3. The organization’s environment. The organization’s environment dictates the oppor-
tunities, constraints, and threats that must be identified before a mission statement is
developed. For example, managers in any industry that is affected by Internet technology
breakthroughs should continually be asking, How will the changes in technology affect my
customers’ behavior and the means by which we need to conduct our business?
However, it is extremely difficult to write a useful and effective mission statement. It is
not uncommon for an organization to spend one or two years developing a useful mission
statement. When completed, an effective mission statement will be focused on markets
rather than products, achievable, motivating, and specific.9
Focused on Markets Rather than Products The customers or clients of an organization
are critical in determining its mission. Traditionally, many organizations defined their busi-
ness in terms of what they made (“our business is glass”), and in many cases they named
the organization for the product or service (e.g., American Tobacco, Hormel Meats,
National Cash Register, Harbor View Savings and Loan Association). Many of these
organizations have found that, when products and technologies become obsolete, their mis-
sion is no longer relevant and the name of the organization may no longer describe what it
does. Thus, a more enduring way of defining the mission is needed. In recent years,
MARKETING INSIGHT Some Actual Mission
Statements
7
1–3
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therefore, a key feature of mission statements has been an external rather than internal
focus. In other words, the mission statement should focus on the broad class of needs that
the organization is seeking to satisfy (external focus), not on the physical product or serv-
ice that the organization is offering at present (internal focus). These market-driven firms
stand out in their ability to continuously anticipate market opportunities and respond before
their competitors. Peter Drucker has clearly stated this principle:
A business is not defined by the company’s name, statutes, or articles of incorporation. It is
defined by the want the customer satisfies when he buys a product or service. To satisfy the
customer is the mission and purpose of every business. The question “What is our business?”
can, therefore, be answered only by looking at the business from the outside, from the point
of view of customer and market.10
While Drucker was referring to business organizations, the same necessity exists for both
nonprofit and governmental organizations. That necessity is to state the mission in terms of
serving a particular group of clients or customers and meeting a particular class of need.
Achievable While the mission statement should stretch the organization toward more
effective performance, it should, at the same time, be realistic and achievable. In other
words, it should open a vision of new opportunities but should not lead the organization
into unrealistic ventures far beyond its competencies.
8
Organizational Processes
Southwest pioneered a point-to-point route system contrasting with the hub-and-spoke design
used by many conventional airlines.
The value proposition consists of low fares and limited services (e.g., no in-flight meals).
Major emphasis throughout the organization is on building a loyal customer base.
Operating costs are kept low by using a single aircraft type, minimizing the time between a plane
landing and taking off, no assigned seating, and developing strong customer loyalty (lower selling
costs).
The business model is characterized by “keeping it simple.”
Skills and Accumulated Knowledge
Southwest has developed impressive skills in operating its business model at very low cost.
Accumulated knowledge has guided management in improving its business design over time.
The business model is being leveraged to drive more non-flying revenue, such as hotel booking
from its Web site and charging for a broader array of services.
Additional directions identified include carrying more cargo, international flights and alliances with
other carriers, and in-flight Internet services.
Coordination of Activities
Coordination of activities is facilitated by the point-to-point business model.
High aircraft utilization, simplification of functions, and limited passenger services enable manage-
ment efficiency, and the provision of on-time, point-to-point services offered on a frequent basis.
Assets
Very low operating costs.
Loyal customer base.
High employee esprit de corps.
Source: Wendy Zellner, “Dressed to Kill,” Business Week, February 21, 2005, 58–59. Doug Cameron “South-
west Seeks New Sources of Revenue,” Financial Times, Friday, April 20, 2007, 24. David W. Cravens and Nigel
F. Piercy, Strategic Marketing, 9th ed., (Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 5.
MARKETING INSIGHT The Distinctive Competencies
of Southwest Airlines 1–4
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9
Motivational One of the side (but very important) benefits of a well-defined mission is
the guidance it provides employees and managers working in geographically dispersed
units and on independent tasks. It provides a shared sense of purpose outside the various
activities taking place within the organization. Therefore, such end results as sales, patients
cared for, students graduated, and reduction in violent crimes can then be viewed as the
result of careful pursuit and accomplishment of the mission and not as the mission itself.
Specific As we mentioned earlier, public relations should not be the primary purpose of
a statement of mission. It must be specific to provide direction and guidelines to manage-
ment when they are choosing between alternative courses of action. In other words, “to pro-
duce the highest-quality products at the lowest possible cost” sounds very good, but it does
not provide direction for management.
Organizational Objectives
Organizational objectives are the end points of an organization’s mission and are what it
seeks through the ongoing, long-run operations of the organization. The organizational mis-
sion is distilled into a finer set of specific and achievable organizational objectives. These
objectives must be specific, measurable, action commitments by which the mission of the
organization is to be achieved.
As with the statement of mission, organizational objectives are more than good inten-
tions. In fact, if formulated properly, they can accomplish the following:
1. They can be converted into specific action.
2. They will provide direction. That is, they can serve as a starting point for more specific
and detailed objectives at lower levels in the organization. Each manager will then know
how his or her objectives relate to those at higher levels.
3. They can establish long-run priorities for the organization.
4. They can facilitate management control because they serve as standards against which
overall organizational performance can be evaluated.
Organizational objectives are necessary in all areas that may influence the performance
and long-run survival of the organization. As shown in Figure 1.3 objectives can be estab-
lished in and across many areas of the organization. The list provided in Figure 1.3 is by no
1. Incomplete—not specific as to where the company is headed and what kind of company
management is trying to create.
2. Vague—does not provide direction to decision makers when faced with product/market
choices.
3. Not motivational—does not provide a sense of purpose or commitment to something
bigger than the numbers.
4. Not distinctive—not specific to our company.
5. Too reliant on superlatives—too many superlatives such as #1, recognized leader, most
successful.
6. Too generic—does not specify the business or industry to which it applies.
7. Too broad—does not rule out any opportunity management might wish to pursue.
Source: Adapted from Arthur A. Thomson, Jr., A. J. Strickland III, and John E. Gamble, Crafting and Executing
Strategy, 16th ed. (Burr Ridge, IL: McGraw-Hill/Irwin 2008), p. 21.
Examine, Marketing Insight 1–3. Do any of the above shortcomings apply to the mission statements in
Marketing Highlight 1–3?
MARKETING INSIGHT Common Shortcomings
in Mission Statements 1–5
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means exhaustive. For example, some organizations are specifying the primary objective as
the attainment of a specific level of quality, either in the marketing of a product or the
providing of a service. These organizations believe that objectives should reflect an organi-
zation’s commitment to the customer rather than its own finances. Obviously, during the
strategic planning process conflicts are likely to occur between various functional depart-
ments in the organization. The important point is that management must translate the orga-
nizational mission into specific objectives that support the realization of the mission. The
objectives may flow directly from the mission or be considered subordinate necessities
for carrying out the mission. As discussed earlier, the objectives are specific, measurable,
action commitments on the part of the organization.
What They May What Marketers May
Functions Want to Deliver Want Them to Deliver
Research and development Basic research projects Products that deliver customer value
Product features Customer benefits
Few projects Many new products
Production/operations Long production runs Short production runs
Standardized products Customized products
No model changes Frequent model changes
Long lead times Short lead times
Standard orders Customer orders
No new products Many new products
Finance Rigid budgets Flexible budgets
Budgets based on return Budgets based on need to
on investment increase sales
Low sales commissions High sales commissions
Accounting Standardized billing Custom billing
Strict payment terms Flexible payment terms
Strict credit standards Flexible credit standards
Human resources Trainable employees Skilled employees
Low salaries High salaries
MARKETING INSIGHT Potential Sources of Cross-Functional
Conflict for Marketers
10
1–6
FIGURE 1.3
Sample
Organizational
Objectives
(manufacturing firm)
Area of Performance Possible Objective
1. Market standing To make our brands number one in their field in terms of
market share.
2. Innovations To be a leader in introducing new products by spending no
less than 7 percent of sales for research and development.
3. Productivity To manufacture all products efficiently as measured by the
productivity of the workforce.
4. Physical and financial resources To protect and maintain all resources—equipment, build-
ings, inventory, and funds.
5. Profitability To achieve an annual rate of return on investment of at
least 15 percent.
6. Manager performance To identify critical areas of management depth and
and responsibility succession.
7. Worker performance and attitude To maintain levels of employee satisfaction consistent with
our own and similar industries.
8. Social responsibility To respond appropriately whenever possible to societal
expectations and environmental needs.
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Chapter One Strategic Planning and the Marketing Management Process 11
Organizational Strategies
Hopefully, when an organization has formulated its mission and developed its objectives, it
knows where it wants to go. The next managerial task is to develop a “grand design” to get
there. This grand design constitutes the organizational strategies. Strategy involves the
choice of major directions the organization will take in pursuing its objectives. Toward this
end, it is critical that strategies are consistent with goals and objectives and that top man-
agement ensures strategies are implemented effectively. As many as 60 percent of strategic
plans have failed because the strategies in them were not well defined and, thus, could not
be implemented effectively.11 What follows is a discussion of various strategies organiza-
tions can pursue. We discuss three approaches: (1) strategies based on products and mar-
kets, (2) strategies based on competitive advantage, and (3) strategies based on value.
Organizational Strategies Based on Products and Markets One means to developing
organizational strategies is to focus on the directions the organization can take in order to
grow. Figure 1.4, which presents the available strategic choices, is a product–market
matrix.12 It indicates that an organization can grow by better managing what it is presently
doing or by finding new things to do. In choosing one or both of these paths, it must also
decide whether to concentrate on present customers or to seek new ones. Thus, according
to Figure 1.4, there are only four paths an organization can take in order to grow.
Market Penetration Strategies These strategies focus primarily on increasing the sale of
present products to present customers. For example:
• Encouraging present customers to use more of the product: “Orange Juice Isn’t Just for
Breakfast Anymore.”
• Encouraging present customers to purchase more of the product: multiple packages of
Pringles, instant winner sweepstakes at a fast-food restaurant.
• Directing programs at current participants: A university directs a fund-raising program
at those graduates who already give the most money.
Tactics used to implement a market penetration strategy might include price reductions, ad-
vertising that stresses the many benefits of the product (e.g., “Milk Is a Natural”), packaging the
product in different-sized packages, or making it available at more locations. Other functional
areas of the business could also be involved in implementing the strategy in addition to mar-
keting. A production plan might be developed to produce the product more efficiently. This plan
might include increased production runs, the substitution of preassembled components for in-
dividual product parts, or the automation of a process that previously was performed manually.
Market Development Strategies Pursuing growth through market development, an
organization would seek to find new customers for its present products. For example:
• Arm & Hammer continues to seek new uses for its baking soda.
• McDonald’s continually seeks expansion into overseas markets.
• As the consumption of salt declined, the book 101 Things You Can Do with Salt Besides
Eat It appeared.
Products Present Products New Products
Markets
Present customers Market penetration Product development
New customers Market development Diversification
FIGURE 1.4
Organizational
Growth Strategies
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Market development strategies involve much, much more than simply getting the prod-
uct to a new market. Before deciding on marketing techniques such as advertising and
packaging, companies often find they must establish a clear position in the market, some-
times spending large sums of money simply to educate consumers as to why they should
consider buying the product.
Product Development Strategies Selecting one of the remaining two strategies means the
organization will seek new things to do. With this particular strategy, the new products
developed would be directed primarily to present customers. For example:
• Offering a different version of an existing product: mini-Oreos, Ritz with cheese.
• Offering a new and improved version of their product: Gillette’s latest improvement in
shaving technology.
• Offering a new way to use an existing product: Vaseline’s Lip Therapy.
Diversification This strategy can lead the organization into entirely new and even unre-
lated businesses. It involves seeking new products (often through acquisitions) for cus-
tomers not currently being served. For example:
• Altria, originally a manufacturer of cigarettes, is widely diversified in financial services,
Post cereals, Sealtest dairy, and Kraft cheese, among others.
• Brown Foreman Distillers acquired Hartmann Luggage, and Sara Lee acquired Coach
Leather Products.
• Some universities are establishing corporations to find commercial uses for faculty research.
Organizational Strategies Based on Competitive Advantage Michael Porter developed
a model for formulating organizational strategy that is applicable across a wide variety of
industries.13 The focus of the model is on devising means to gain competitive advantage.
Competitive advantage is an ability to outperform competitors in providing something
that the market values. Porter suggests that firms should first analyze their industry
and then develop either a cost leadership strategy or a strategy based on differentiation.
These general strategies can be used on marketwide bases or in a niche (segment) within
the total market.
Using a cost leadership strategy, a firm would focus on being the low-cost company in
its industry. They would stress efficiency and offer a standard, no-frills product. They could
achieve this through efficiencies in production, product design, manufacturing,
distribution, technology, or some other means. The important point is that to succeed, the
organization must continually strive to be the cost leader in the industry or market segment
it competes in. It must also offer products or services that are acceptable to customers when
compared to the competition. Walmart, Southwest Airlines, and Timex Group Ltd. are com-
panies that have succeeded in using a cost leadership strategy.
Using a strategy based on differentiation, a firm seeks to be unique in its industry or
market segment along particular dimensions that the customers value. These dimensions
might pertain to design, quality, service, variety of offerings, brand name, or some other
factor. The important point is that because of uniqueness of the product or service along one
or more of these dimensions, the firm can charge a premium price. L. L. Bean, Rolex, Coca-
Cola, and Microsoft are companies that have succeeded using a differentiation strategy.
Organizational Strategies Based on Value As competition increases, the concept of
“customer value” has become critical for marketers as well as customers. It can be thought
of as an extension of the marketing concept philosophy that focuses on developing and
delivering superior value to customers as a way to achieve organizational objectives. Thus,
it focuses not only on customer needs, but also on the question, How can we create value
for them and still achieve our objectives?
12 Part A Introduction
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Chapter One Strategic Planning and the Marketing Management Process 13
It has become pretty clear that in today’s competitive environment it is unlikely that
a firm will succeed by trying to be all things to all people.14 Thus, to succeed firms must
seek to build long-term relationships with their customers by offering a unique value
that only they can offer. It seems that many firms have succeeded by choosing to deliver
superior customer value using one of three value strategies—best price, best product, or
best service.
Dell Computers, Costco, and Southwest Airlines are among the success stories in offer-
ing customers the best price. Rubbermaid, Nike, Starbucks, and Microsoft believe they
offer the best products on the market. Airborne Express, Roadway, Cott Corporation, and
Lands’ End provide superior customer value by providing outstanding service.
Choosing an Appropriate Strategy
On what basis does an organization choose one (or all) of its strategies? Of extreme
importance are the directions set by the mission statement. Management should select those
strategies consistent with its mission and capitalize on the organization’s distinctive com-
petencies that will lead to a sustainable competitive advantage. A sustainable competitive
advantage can be based on either the assets or skills of the organization. Technical superi-
ority, low-cost production, customer service/product support, location, financial resources,
continuing product innovation, and overall marketing skills are all examples of distinctive
competencies that can lead to a sustainable competitive advantage. For example, Honda is
known for providing quality automobiles at a reasonable price. Each succeeding generation
of Honda automobiles has shown marked quality improvements over previous generations.
Likewise, VF Corporation, manufacturer of Wrangler and Lee jeans, has formed “quick
response” partnerships with both discounters and department stores to ensure the effi-
ciency of product flow. The key to sustaining a competitive advantage is to continually
focus and build on the assets and skills that will lead to long-term performance gains.
Organizational Portfolio Plan
The final phase of the strategic planning process is the formulation of the organizational
portfolio plan. In reality, most organizations at a particular time are a portfolio of businesses,
that is, product lines, divisions, and schools. To illustrate, an appliance manufacturer may
have several product lines (e.g., televisions, washers and dryers, refrigerators, stereos) as
well as two divisions, consumer appliances and industrial appliances. A college or university
will have numerous schools (e.g., education, business, law, architecture) and several pro-
grams within each school. Some widely diversified organizations such as Altria are in nu-
merous unrelated businesses, such as cigarettes, food products, land development, and
industrial paper products.
Managing such groups of businesses is made a little easier if resources are plentiful,
cash is plentiful, and each is experiencing growth and profits. Unfortunately, providing
larger and larger budgets each year to all businesses is seldom feasible. Many are not
experiencing growth, and profits and resources (financial and nonfinancial) are becoming
more and more scarce. In such a situation, choices must be made, and some method is nec-
essary to help management make the choices. Management must decide which businesses
to build, maintain, or eliminate, or which new businesses to add. Indeed, much of the recent
activity in corporate restructuring has centered on decisions relating to which groups of
businesses management should focus on.
Obviously, the first step in this approach is to identify the various divisions, product
lines, and so on that can be considered a “business.” When identified, these are referred to
as strategic business units (SBUs) and have the following characteristics:
• They have a distinct mission.
• They have their own competitors.
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14 Part A Introduction
• They are a single business or collection of related businesses.
• They can be planned independently of the other businesses of the total organization.
Thus, depending on the type of organization, an SBU could be a single product, product
line, or division; a college of business administration; or a state mental health agency. Once
the organization has identified and classified all of its SBUs, some method must be
established to determine how resources should be allocated among the various SBUs. These
methods are known as portfolio models. For those readers interested, the appendix of this
chapter presents two of the most popular portfolio models, the Boston Consulting Group
model and the General Electric model.
The Complete Strategic Plan
Figure 1.2 indicates that at this point the strategic planning process is complete, and the
organization has a time-phased blueprint that outlines its mission, objectives, and strategies.
Completion of the strategic plan facilitates the development of marketing plans for each
product, product line, or division of the organization. The marketing plan serves as a sub-
set of the strategic plan in that it allows for detailed planning at a target market level. This
important relationship between strategic planning and marketing planning is the subject of
the final section of this chapter.
THE MARKETING MANAGEMENT PROCESS
Marketing management can be defined as “the process of planning and executing the
conception, pricing, promotion, and distribution of goods, services, and ideas to create
exchanges with target groups that satisfy customer and organizational objectives.”15 It
should be noted that this definition is entirely consistent with the marketing concept, since
it emphasizes serving target market needs as the key to achieving organizational objectives.
The remainder of this section will be devoted to a discussion of the marketing management
process according to the model in Figure 1.5.
Situation Analysis
With a clear understanding of organizational objectives and mission, the marketing
manager must then analyze and monitor the position of the firm and, specifically, the
marketing department, in terms of its past, present, and future situation. Of course, the
future situation is of primary concern. However, analyses of past trends and the current
situation are most useful for predicting the future situation.
The situation analysis can be divided into six major areas of concern: (1) the coopera-
tive environment; (2) the competitive environment; (3) the economic environment; (4) the
social environment; (5) the political environment; and (6) the legal environment. In ana-
lyzing each of these environments, the marketing executive must search both for opportu-
nities and for constraints or threats to achieving objectives. Opportunities for profitable
marketing often arise from changes in these environments that bring about new sets of
needs to be satisfied. Constraints on marketing activities, such as limited supplies of scarce
resources, also arise from these environments.
The Cooperative Environment The cooperative environment includes all firms and indi-
viduals who have a vested interest in the firm’s accomplishing its objectives. Parties of pri-
mary interest to the marketing executive in this environment are (1) suppliers, (2) resellers,
(3) other departments in the firm, and (4) subdepartments and employees of the marketing
department. Opportunities in this environment are primarily related to methods of increas-
ing efficiency. For example, a company might decide to switch from a competitive bid
process of obtaining materials to a single source that is located near the company’s plant.
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Likewise, members of the marketing, engineering, and manufacturing functions may use a
teamwork approach to developing new products versus a sequential approach. Constraints
consist of such things as unresolved conflicts and shortages of materials. For example, a
company manager may believe that a distributor is doing an insufficient job of promoting
and selling the product, or a marketing manager may feel that manufacturing is not taking
the steps needed to produce a quality product.
The Competitive Environment The competitive environment includes primarily other
firms in the industry that rival the organization for both resources and sales. Opportunities
in this environment include such things as (1) acquiring competing firms; (2) offering
demonstrably better value to consumers and attracting them away from competitors; and
(3) in some cases, driving competitors out of the industry. For example, one airline pur-
chases another airline, a bank offers depositors a free checking account with no minimum
balance requirements, or a grocery chain engages in an everyday low-price strategy that
competitors can’t meet. The primary constraints in these environments are the demand
stimulation activities of competing firms and the number of consumers who cannot be
lured away from competition.
The Economic Environment The state of the macroeconomy and changes in it also
bring about marketing opportunities and constraints. For example, such factors as high
inflation and unemployment levels can limit the size of the market that can afford to
purchase a firm’s top-of-the-line product. At the same time, these factors may offer a
profitable opportunity to develop rental services for such products or to develop less-
expensive models of the product. In addition, changes in technology can provide signifi-
cant threats and opportunities. For example, in the communications industry, when
technology was developed to a level where it was possible to provide cable television
using phone lines, such a system posed a severe threat to the cable industry.
Chapter One Strategic Planning and the Marketing Management Process 15
The strategic plan
Organizational mission
Organizational objectives
Organizational strategies
Organizational portfolio plan
Implementation and control
Marketing information
system and marketing
research
The marketing plan
Situation analysis
Marketing objectives
Target market selection
Marketing mix
Product strategy
Promotion strategy
Pricing strategy
Distribution strategy
FIGURE 1.5
Strategic Planning
and Marketing
Planning
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The Social Environment This environment includes general cultural and social tradi-
tions, norms, and attitudes. While these values change slowly, such changes often bring
about the need for new products and services. For example, a change in values concerning
the desirability of large families brought about an opportunity to market better methods of
birth control. On the other hand, cultural and social values also place constraints on
marketing activities. As a rule, business practices that are contrary to social values become
political issues, which are often resolved by legal constraints. For example, public demand
for a cleaner environment has caused the government to require that automobile manu-
facturers’ products meet certain average gas mileage and emission standards.
The Political Environment The political environment includes the attitudes and reactions
of the general public, social and business critics, and other organizations, such as the Bet-
ter Business Bureau. Dissatisfaction with such business and marketing practices as unsafe
products, products that waste resources, and unethical sales procedures can have adverse
effects on corporation image and customer loyalty. However, adapting business and mar-
keting practices to these attitudes can be an opportunity. For example, these attitudes have
16
Speed of the Process. There is the problem of either being so slow that the process seems
to go on forever or so fast that there is an extreme burst of activity to rush out a plan.
Amount of Data Collected. Sufficient data are needed to properly estimate customer
needs and competitive trends. However, the law of diminishing returns quickly sets in
on the data-collection process.
Responsibility for Developing the Plan. If planning is delegated to professional planners,
valuable line management input may be ignored. If the process is left to line man-
agers, planning may be relegated to secondary status.
Structure. Many executives believe the most important part of planning is not the plan
itself but the structure of thought about the strategic issues facing the business. However,
the structure should not take precedence over the content so that planning becomes
merely filling out forms or crunching numbers.
Length of the Plan. The length of a marketing plan must be balanced between being
so long that both staff and line managers ignore it and so brief that it ignores key details.
Frequency of Planning. Too frequent reevaluation of strategies can lead to erratic firm
behavior. However, when plans are not revised frequently enough, the business may
not adapt quickly enough to environmental changes and thus suffer a deterioration in
its competitive position.
Number of Alternative Strategies Considered. Discussing too few alternatives raises the
likelihood of failure, whereas discussing too many increases the time and cost of the
planning effort.
Cross-Functional Acceptance. A common mistake is to view the plan as the proprietary
possession of marketing. Successful implementation requires a broad consensus, in-
cluding other functional areas.
Using the Plan as a Sales Document. A major but often overlooked purpose of a plan
and its presentation is to generate funds from either internal or external sources.
Therefore, the better the plan, the better the chance of gaining desired funding.
Senior Management Leadership. Commitment from senior management is essential to
the success of a marketing planning effort.
Tying Compensation to Successful Planning Efforts. Management compensation should
be oriented toward the achievement of objectives stated in the plan.
Source: Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning, 6th ed. (Burr Ridge,
IL: McGraw-Hill//Irwin, 2008), chap. 1.
MARKETING INSIGHT Key Issues in the Marketing Planning
Process That Need to Be Addressed 1–7
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brought about markets for such products as unbreakable children’s toys, high-efficiency air
conditioners, and more economical automobiles.
The Legal Environment This environment includes a host of federal, state, and local
legislation directed at protecting both business competition and consumer rights. In past
years, legislation reflected social and political attitudes and has been primarily directed at
constraining business practices. Such legislation usually acts as a constraint on business
behavior, but again can be viewed as providing opportunities for marketing safer and more
efficient products. In recent years, there has been less emphasis on creating new laws for
constraining business practices. As an example, deregulation has become more common,
as evidenced by events in the airlines, financial services, and telecommunications
industries.
Marketing Planning
The previous sections emphasized that (1) marketing activities must be aligned with
organizational objectives and (2) marketing opportunities are often found by systematically
analyzing situational environments. Once an opportunity is recognized, the marketing execu-
tive must then plan an appropriate strategy for taking advantage of the opportunity. This
process can be viewed in terms of three interrelated tasks: (1) establishing marketing objec-
tives, (2) selecting the target market, and (3) developing the marketing mix.
Establishing Objectives Marketing objectives usually are derived from organizational
objectives; in some cases where the firm is totally marketing oriented, the two are identical.
In either case, objectives must be specified and performance in achieving them should
be measurable. Marketing objectives are usually stated as standards of performance (e.g., a
certain percentage of market share or sales volume) or as tasks to be achieved by given
dates. While such objectives are useful, the marketing concept emphasizes that profits
rather than sales should be the overriding objective of the firm and marketing department.
In any case, these objectives provide the framework for the marketing plan.
Selecting the Target Market The success of any marketing plan hinges on how well it can
identify customer needs and organize its resources to satisfy them profitably. Thus, a
crucial element of the marketing plan is selecting the groups or segments of potential
customers the firm is going to serve with each of its products. Four important questions
must be answered:
1. What do customers want or need?
2. What must be done to satisfy these wants or needs?
3. What is the size of the market?
4. What is its growth profile?
Present target markets and potential target markets are then ranked according to (1) prof-
itability; (2) present and future sales volume; and (3) the match between what it takes to
appeal successfully to the segment and the organization’s capabilities. Those that appear to
offer the greatest potential are selected. One cautionary note on this process involves the
importance of not neglecting present customers when developing market share and sales
strategies. A recent study found that for every 10 companies that develop strategies aimed
at increasing the number of first-time customers, only 4 made any serious effort to develop
strategies geared toward retaining present customers and increasing their purchases.16
Chapters 3, 4, and 5 are devoted to discussing consumer behavior, industrial buyers, and
market segmentation.
Developing the Marketing Mix The marketing mix is the set of controllable variables
that must be managed to satisfy the target market and achieve organizational objectives.
Chapter One Strategic Planning and the Marketing Management Process 17
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These controllable variables are usually classified according to four major decision areas:
product, price, promotion, and place (or channels of distribution). The importance of
these decision areas cannot be overstated, and in fact, the major portion of this text is
devoted to analyzing them. Chapters 6 and 7 are devoted to product and new product
strategies, Chapters 8 and 9 to promotion strategies in terms of both nonpersonal and per-
sonal selling, Chapter 10 to distribution strategies, and Chapter 11 to pricing strategies.
In addition, marketing mix variables are the focus of analysis in two chapters on market-
ing in special fields, that is, the marketing of services (Chapter 12) and international
marketing (Chapter 13). Thus, it should be clear that the marketing mix is the core of the
marketing management process.
The output of the foregoing process is the marketing plan. It is a formal statement of
decisions that have been made on marketing activities; it is a blueprint of the objectives,
strategies, and tasks to be performed.
Implementation and Control of the Marketing Plan
Implementing the marketing plan involves putting the plan into action and performing
marketing tasks according to the predefined schedule. Even the most carefully developed
plans often cannot be executed with perfect timing. Thus, the marketing executive must
closely monitor and coordinate implementation of the plan. In some cases, adjustments
may have to be made in the basic plan because of changes in any of the situational
environments. For example, competitors may introduce a new product. In this event, it may
be desirable to speed up or delay implementation of the plan. In almost all cases, some
minor adjustments or fine tuning will be necessary in implementation.
Controlling the marketing plan involves three basic steps. First, the results of the
implemented marketing plan are measured. Second, these results are compared with
objectives. Third, decisions are made on whether the plan is achieving objectives. If
serious deviations exist between actual and planned results, adjustments may have to be
made to redirect the plan toward achieving objectives.
18
Poorly Stated Objectives Well-Stated Objectives
Our objective is to be a leader in the Our objective is to spend 12 percent of sales
industry in terms of new product revenue between 2010 and 2011 on research and
development. development in an effort to introduce at least five
new products in 2012.
Our objective is to maximize profits. Our objective is to achieve a 10 percent return on
investment during 2010, with a payback on new
investments of no longer than four years.
Our objective is to better serve Our objective is to obtain customer satisfaction
customers. ratings of at least 90 percent on the 2010 annual
customer satisfaction survey, and to retain at
least 85 percent of our 2010 customers as repeat
purchasers in 2011.
Our objective is to be the best that we Our objective is to increase market share from
can be. 30 percent to 40 percent in 2010 by increasing
promotional expenditures by 14 percent.
Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing, 10th ed. (Mason, OH: Thom-
son South-Western Publishing Co., 2008), Chapter 2.
MARKETING INSIGHT Examples of Marketing Objectives
1–8
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Chapter One Strategic Planning and the Marketing Management Process 19
Marketing Information Systems and Marketing Research
Throughout the marketing management process, current, reliable, and valid information is
needed to make effective marketing decisions. Providing this information is the task of the
marketing information system and marketing research. These topics are discussed in detail
in Chapter 2.
THE STRATEGIC PLAN, THE MARKETING PLAN,
AND OTHER FUNCTIONAL AREA PLANS
Strategic planning is clearly a top-management responsibility. In recent years, however, there
has been an increasing shift toward more active participation by marketing managers in
strategic analysis and planning. This is because, in reality, nearly all strategic planning
questions have marketing implications. In fact, the two major strategic planning questions—
What products should we make? and What markets should we serve?—are clearly market-
ing questions. Thus, marketing executives are involved in the strategic planning process in at
least two important ways: (1) They influence the process by providing important inputs in
the form of information and suggestions relating to customers, products, and middlemen;
and (2) they must always be aware of what the process of stategic planning involves as well
as the results because everything they do—the marketing objectives and strategies they
develop—must be derived from the strategic plan. In fact, the planning done in all functional
areas of the organization should be derived from the strategic plan.
Marketing’s Role in Cross-Functional Strategic Planning
More and more organizations are rethinking the traditional role of marketing. Rather than di-
viding work according to function (e.g., production, finance, technology, human resources),
they are bringing managers and employees together to participate in cross-functional teams.
These teams might have responsibility for a particular product, line of products, or group of
customers.
Because team members are responsible for all activities involving their products and/or
customers, they are responsible for strategic planning. This means that all personnel work-
ing in a cross-functional team will participate in creating a strategic plan to serve customers.
Rather than making decisions independently, marketing managers work closely with
team members from production, finance, human resources, and other areas to devise plans
that address all concerns. Thus, if a team member from production says, “That product will
be too difficult to produce,” or if a team member from finance says, “We’ll never make a
profit at that price,” the team members from marketing must help resolve the problems. This
approach requires a high degree of skill at problem solving and gaining cooperation.
Clearly the greatest advantage of strategic planning with a cross-functional team is
the ability of team members to consider a situation from a number of viewpoints. The re-
sulting insights can help the team avoid costly mistakes and poor solutions. Japanese
manufacturers are noted for using cross-functional teams to figure out ways to make desir-
able products at given target costs. In contrast, U.S. manufacturers traditionally have devel-
oped products by having one group decide what to make, another calculate production costs,
and yet another predict whether enough of the product will sell at a high enough price.
Thus, in well-managed organizations, a direct relationship exists between strategic
planning and the planning done by managers at all levels. The focus and time perspectives
will, of course, differ. Figure 1.6 illustrates the cross-functional perspective of strategic
planning. It indicates very clearly that all functional area plans should be derived from the
strategic plan while at the same time contributing to the achievement of it.
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If done properly, strategic planning results in a clearly defined blueprint for management
action in all functional areas of the organization. Figure 1.7 clearly illustrates this blueprint
using only one organizational objective and two strategies from the strategic plan (above
the dotted line) and illustrating how these are translated into elements of the marketing
department plan and the production department plan (below the dotted line). Note that in
Figure 1.7, all objectives and strategies are related to other objectives and strategies at
higher and lower levels in the organization: That is, a hierarchy of objectives and strategies
exists. We have illustrated only two possible marketing objectives and two possible pro-
duction objectives. Obviously, many others could be developed, but our purpose is to illus-
trate the cross-functional nature of strategic planning and how objectives and strategies
from the strategic plan must be translated into objectives and strategies for all functional
areas including marketing.
CONCLUSION
This chapter has described the marketing management process in the context of the
organization’s overall strategic plan. Clearly, marketers must understand their cross-
functional role in joining the marketing vision for the organization with the financial goals
and manufacturing capabilities of the organization. The greater this ability, the better the
likelihood is that the organization will be able to achieve and sustain a competitive advan-
tage, the ultimate purpose of the strategic planning process.
At this point it would be useful to review Figures 1.5, 1.6, and 1.7 as well as the book’s
Table of Contents. This review will enable you to better relate the content and progression
of the material to follow to the marketing management process.
20 Part A Introduction
FIGURE 1.6 The Cross-Functional Perspective in Planning
Production plan
Objectives
Forecast
Budgets
Strategies
and programs
Policies
Marketing plan
Objectives
Forecast
Budgets
Strategies
and programs
Policies
Human resource
plan
Objectives
Forecast
Budgets
Strategies
and programs
Policies
Finance plan
Objectives
Forecast
Budgets
Strategies
and programs
Policies
Technology plan
Objectives
Forecast
Budgets
Strategies
and programs
Policies
Functional area plans derived from strategic plan
The strategic plan
Mission
Objectives
Strategies
Portfolio plan
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Chapter One Strategic Planning and the Marketing Management Process 21
Additional
Resources
Charan, Ram. Leadership in The Era of Economic Uncertainty. NY: McGraw-Hill, 2009.
Christensen, Clayton, M., Scott Cook, and Tandy Hall. “Marketing Malpractice: The Cause and The
Cure.” Harvard Business Review, December 2005, pp. 74–75.
Dixit, Avinash, K., and Barry J. Noblebuff. The Art of Strategy. NY: W.W. Norton and Co., 2009.
Kaplan, Robert S., and David Norton. “How To Implement a New Strategy without Disrupting Your
Organization.” Harvard Business Review, March 2006, pp. 100–109.
Levitt, Ted. On Marketing. Boston: HBS Press, 2006.
Markower, Jack. Strategies For a Green Economy. NY: McGraw-Hill, 2009.
O’Sullivan, Don, and Andrew W. Abdela. “Marketing Performance Measurement Ability and
Performance.” Journal of Marketing, April 2007, pp. 79–93.
Seiders, Kathleen, and Leonard L. Berry. “Should Business Care about Obesity?” Sloan Manage-
ment Review, Winter 2007, pp. 15–17.
FIGURE 1.7 A Blueprint for Management Action: Relating the Marketing Plan to the Strategic
Plan and the Production Plan
1. Market penetration
Achieve an annual rate of return
on investment of at least 15 percent
One organizational
objective (the profitability
objective) from Figure 1.3
Two possible
organizational
strategies from
the product-market
matrix, Figure 1.4
Two
possible
marketing
objectives
and two
possible
production
objectives
derived
from the
strategic
plan
Specific
course of
action of the
marketing and
production
departments
designed to
achieve the
objective
Improve position of present
products with present customers
2. Market development
Find new customers for present
products
1. Marketing
department
objective
Increase rate of
purchase by existing
customers by 10
percent by
year-end
2. Production
department
objective
Design additional
features into
product that will
induce new uses
by existing
buyers.
3. Marketing
department
objective
Increase market
share by 5 percent
by attracting new
market segments for
existing use by
year-end.
4. Production
department
objective
Design additional
features into product
that will open
additional markets
with new uses.
Marketing
strategies and
programs
Production
strategies and
programs
Marketing
strategies and
programs
Production
strategies and
programs
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Portfolio Models
Portfolio models remain a valuable aid to marketing man-
agers in their efforts to develop effective marketing plans. The
use of these models can aid managers who face situations that
can best be described as “more products, less time, and less
money.” More specifically, (1) as the number of products a
firm produces expands, the time available for developing
marketing plans for each product decreases; (2) at a strategic
level, management must make resource allocation decisions
across lines of products and, in diversified organizations,
across different lines of business; and (3) when resources are
limited (which they usually are), the process of deciding
which strategic business units (SBUs) to emphasize becomes
very complex. In such situations, portfolio models can be
very useful.
Portfolio analysis is not a new idea. Banks manage loan
portfolios seeking to balance risks and yields. Individuals who
are serious investors usually have a portfolio of various kinds
of investments (common stocks, preferred stocks, bank ac-
counts, and the like), each with different characteristics of risk,
growth, and rate of return. The investor seeks to manage the
portfolio to maximize whatever objectives he or she might
have. Applying this same idea, most organizations have a wide
range of products, product lines, and businesses, each with dif-
ferent growth rates and returns. Similar to the investor, man-
agers should seek a desirable balance among alternative SBUs.
Specifically, management should seek to develop a business
portfolio that will ensure long-run profits and cash flow.
Portfolio models can be used to classify SBUs to deter-
mine the future cash contributions that can be expected from
each SBU as well as the future resources that each will
require. Remember, depending on the organization, an SBU
could be a single product, product line, division, or distinct
business. While there are many different types of portfolio
models, they generally examine the competitive position of
the SBU and the chances for improving the SBU’s contribu-
tion to profitability and cash flow.
There are several portfolio analysis techniques. Two of the
most widely used are discussed in this appendix. To truly
appreciate the concept of portfolio analysis, however, we
must briefly review the development of portfolio theory.
A REVIEW OF PORTFOLIO THEORY
The interest in developing aids for managers in the selection
of strategy was spurred by an organization known as the
Boston Consulting Group (BCG) over 25 years ago. Its
ideas, which will be discussed shortly, and many of those
that followed were based on the concept of experience
curves.
Experience curves are similar in concept to learning curves.
Learning curves were developed to express the idea that the
number of labor hours it takes to produce one unit of a particu-
lar product declines in a predictable manner as the number of
units produced increases. Hence, an accurate estimation of how
long it takes to produce the 100th unit is possible if the produc-
tion times for the 1st and 10th units are known. The concept of
experience curves was based on this model.
Experience curves were first widely discussed in the Strate-
gic Planning Institute’s ongoing Profit Impact of Marketing
Strategies (PIMS) study. The PIMS project studies 150 firms
with more than 1,000 individual business units. Its major focus
is on determining which environmental and internal firm vari-
ables influence the firm’s return on investment (ROI) and cash
flow. The researchers have concluded that seven categories
of variables appear to influence the return on investment:
(1) competitive position, (2) industry/market environment,
(3) budget allocation, (4) capital structure, (5) production
processes, (6) company characteristics, and (7) “change action”
factors.17
The experience curve includes all costs associated with
a product and implies that the per-unit costs of a product
should fall, due to cumulative experience, as production
volume increases. In a given industry, therefore, the producer
with the largest volume and corresponding market share
should have the lowest marginal cost. This leader in market
share should be able to underprice competitors, discourage
entry into the market by potential competitors, and, as a
result, achieve an acceptable return on investment. The
linkage of experience to cost to price to market share to ROI
is exhibited in Figure A.1. The Boston Consulting Group’s
Appendix
Pa
rt
A
In
tro
du
ct
io
n
23
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24 Part A Introduction
view of the experience curve led the members to develop
what has become known as the BCG Portfolio Model.
THE BCG MODEL
The BCG is based on the assumption that profitability and
cash flow will be closely related to sales volume. Thus, in this
model, SBUs are classified according to their relative market
share and the growth rate of the market the SBU is in. Using
these dimensions, products are either classified as stars, cash
cows, dogs, or question marks. The BCG model is presented
in Figure A.2.
• Stars are SBUs with a high share of a high-growth mar-
ket. Because high-growth markets attract competition,
such SBUs are usually cash users because they are growing
and because the firm needs to protect their market share
position.
• Cash cows are often market leaders, but the market they are
in is not growing rapidly. Because these SBUs have a high
share of a low-growth market, they are cash generators for
the firm.
• Dogs are SBUs that have a low share of a low-growth
market. If the SBU has a very loyal group of customers, it
may be a source of profits and cash. Usually, dogs are not
large sources of cash.
• Question marks are SBUs with a low share of a high-
growth market. They have great potential but require great
resources if the firm is to successfully build market share.
As you can see, a firm with 10 SBUs will usually have a
portfolio that includes some of each of the above. Having
Experience curve
Market share
Cost
Profit curve based
on experience curve
Market share
ROI
FIGURE A.1 Experience Curve and Resulting Profit
Relative Market Share
High Low
Market
Growth
Rate
High
Low
Stars Question
marks
Cash
cows
Dogs
FIGURE A.2
The Boston
Consulting Group
Portfolio Model
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Chapter One Strategic Planning and the Marketing Management Process 25
developed this analysis, management must determine what
role each SBU should assume. Four basic objectives are
possible:
1. Build share. This objective sacrifices immediate earnings
to improve market share. It is appropriate for promising
question marks whose share has to grow if they are ever to
become stars.
2. Hold share. This objective seeks to preserve the SBU’s
market share. It is very appropriate for strong cash cows to
ensure that they can continue to yield a large cash flow.
3. Harvest. Here, the objective seeks to increase the
product’s short-term cash flow without concern for the
long-run impact. It allows market share to decline in order
to maximize earnings and cash flow. It is an appropriate
objective for weak cash cows, weak question marks, and
dogs.
4. Divest. This objective involves selling or divesting the
SBU because better investment opportunities exist else-
where. It is very appropriate for dogs and those question
marks the firm cannot afford to finance for growth.
There have been several major criticisms of the BCG
Portfolio Model, revolving around its focus on market
share and market growth as the primary indicators of pref-
erence. First, the BCG model assumes market growth is
uncontrollable.18 As a result, managers can become preoc-
cupied with setting market share objectives instead of
trying to grow the market. Second, assumptions regarding
market share as a critical factor affecting firm performance
may not hold true, especially in international markets.19
Third, the BCG model assumes that the major source of
SBU f inancing comes from internal means. Fourth, the
BCG matrix does not take into account any interdependen-
cies that may exist between SBUs, such as shared distribu-
tion.20 Fifth, the BCG matrix does not take into account any
measures of profits and customer satisfaction.21 Sixth, and
perhaps most important, the thrust of the BCG matrix is
based on the underlying assumption that corporate strategy
begins with an analysis of competitive position. By its very
nature, a strategy developed entirely on competitive analy-
sis will always be a reactive one.22 While the above criti-
cisms are certainly valid ones, managers (especially of
large firms) across all industries continue to find the BCG
matrix useful in assessing the strategic position of SBUs.23
THE GENERAL ELECTRIC MODEL
Although the BCG model can be useful, it does assume that
market share is the sole determinant of an SBU’s profitability.
Also, in projecting market growth rates, a manager should
carefully analyze the factors that influence sales and any
opportunities for influencing industry sales.
Some firms have developed alternative portfolio models
to incorporate more information about market opportunities
and competitive positions. The GE model is one of these. The
GE model emphasizes all the potential sources of strength,
not just market share, and all of the factors that influence the
long-term attractiveness of a market, not just its growth rate.
As Figure A.3 indicates, all SBUs are classified according to
business strength and industry attractiveness. Figure A.4
presents a list of items that can be used to position SBUs in
the matrix.
Business Strength
Strong Average Weak
Industry
Attractiveness
High
Medium
Low
A A
A
B
B
B
C
CC
FIGURE A.3
The General Electric
Portfolio Model
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Industry attractiveness is a composite index made up of
such factors as those listed in Figure A.4. For example:
market size—the larger the market, the more attractive it will
be; market growth—high-growth markets are more attractive
than low-growth markets; profitability—high-profit-margin
markets are more attractive than low-profit-margin industries.
Business strength is a composite index made up of such fac-
tors as those listed in Figure A.4. Such as market share—the
higher the SBU’s share of market, the greater its business
strength; quality leadership—the higher the SBU’s quality
compared to competitors, the greater its business strength;
share compared with leading competitor—the closer the SBU’s
share to the market leader, the greater its business strength.
Once the SBUs are classified, they are placed on the grid
(Figure A.3). Priority “A” SBUs (often called the green zone)
26 Part A Introduction
are those in the three cells at the upper left, indicating that
these are SBUs high in both industry attractiveness and busi-
ness strength, and that the firm should “build share.” Priority
“B” SBUs (often called the yellow zone) are those medium in
both industry attractiveness and business strength. The firm
will usually decide to “hold share” on these SBUs. Priority
“C” SBUs are those in the three cells at the lower right (often
called the red zone). These SBUs are low in both industry
attractiveness and business strength. The firm will usually
decide to harvest or divest these SBUs.
Whether the BCG model, the GE model, or a variation of
these models is used, some analyses must be made of the
firm’s current portfolio of SBUs as part of any strategic plan-
ning effort. Marketing must get its direction from the organi-
zation’s strategic plan.
FIGURE A.4
Components
of Industry
Attractiveness
and Business
Strength at GE
Industry Attractiveness Business Strength
Market position
Market size Domestic market share
Market growth World market share
Profitability Share growth
Cyclicality Share compared with leading competitor
Ability to recover from inflation
World scope Competitive strengths
Quality leadership
Technology
Marketing
Relative profitability
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Se
ct
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n
I
Es
se
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ia
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f M
ar
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M
an
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t
BMarketing Information, Research, and Understanding the Target Market
Part
2 Marketing Research: Process and Systems for Decision Making
3 Consumer Behavior
4 Business, Government, and Institutional Buying
5 Market Segmentation
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28
Part B
M
arketing Inform
ation,Research,
and Understanding the Target M
arket
Chapter 2
Marketing Research:
Process and Systems
for Decision Making
Marketing managers require current, reliable, useful information to make effective decisions.
In today’s highly competitive global economy, marketers need to exploit opportunities and
avoid mistakes if they are to survive and be profitable. Not only is sound marketing research
needed, but also a system that gets current, valid information to the marketing decision maker
in a timely manner.
This chapter is concerned with the marketing research process and information systems
for decision making. It begins by discussing the marketing research process that is used to
develop useful information for decision making. Then, marketing information systems are
briefly discussed. The chapter is intended to provide a detailed introduction to many of the
important topics in the area, but it does not provide a complete explanation of the plethora
of marketing research topics.
THE ROLE OF MARKETING RESEARCH
Marketing research is the process by which information about the environment is
generated, analyzed, and interpreted for use in marketing decision making.1 It cannot be
overstated that marketing research is an aid to decision making and not a substitute for
it. In other words, marketing research does not make decisions, but it can substantially
increase the chances that good decisions are made. Unfortunately, too many marketing
managers view research reports as the final answer to their problems; whatever the
research indicates is taken as the appropriate course of action. Instead, marketing
managers should recognize that (1) even the most carefully executed research can be
fraught with errors; (2) marketing research does not forecast with certainty what will
happen in the future; and (3) they should make decisions in light of their own knowledge
and experience, since no marketing research study includes all of the factors that could
influence the success of a strategy.
Although marketing research does not make decisions, it can reduce the risks associated
with managing marketing strategies. For example, it can reduce the risk of introducing new
products by evaluating consumer acceptance of them prior to full-scale introduction.
Marketing research is also vital for investigating the effects of various marketing strategies
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after they have been implemented. For example, marketing research can examine the effects
of a change in any element of the marketing mix on customer perception and behavior.
At one time, marketing researchers were primarily engaged in the technical aspects of
research, but were not heavily involved in the strategic use of research findings. Today, how-
ever, many marketing researchers work hand-in-hand with marketing managers throughout
the research process and have responsibility for making strategic recommendations based on
the research.
THE MARKETING RESEARCH PROCESS
Marketing research can be viewed as systematic processes for obtaining information to aid
in decision making. There are many types of marketing research, and the framework illus-
trated in Figure 2.1 represents a general approach to the process. Each element of this
process is discussed next.
Purpose of the Research
The first step in the research process is to determine explicitly why the research is needed
and what it is to accomplish. This may be much more difficult than it sounds. Quite often
a situation or problem is recognized as needing research, yet the nature of the problem is
not clear or well defined nor is the appropriate type of research evident. Thus, managers
and researchers need to discuss and clarify the current situation and develop a clear
understanding of the problem. At the end of this stage, managers and researchers should
agree on (1) the current situation involving the problem to be researched, (2) the nature
of the problem, and (3) the specific question or questions the research is designed to
investigate. This step is crucial since it influences the type of research to be conducted and
the research design.
Chapter Two Marketing Research: Process and Systems for Decision Making 29
Purpose of the research
Plan of the research
Performance of the research
Processing of research data
Preparation of research report
FIGURE 2.1
The Five Ps of the
Research Process
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Plan of the Research
Once the specific research question or questions have been agreed on, a research plan can
be developed. A research plan spells out the nature of the research to be conducted and
includes an explanation of such things as the sample design, measures, and analysis
techniques to be used. Three critical issues that influence the research plan are (1) whether
primary or secondary data are needed, (2) whether qualitative or quantitative research is
needed, and (3) whether the company will do its own research or contract with a marketing
research specialist.
Primary versus Secondary Data
Given the information needed and budget constraints, a decision must be made as to
whether primary data, secondary data, or some combination of the two is needed. Primary
data are data collected specifically for the research problem under investigation; secondary
data are those that have previously been collected for other purposes but can be used for the
problem at hand. For example, if a company wanted to know why users of a competitive
brand didn’t prefer its brand, it may have to collect primary data to find out. On the other
hand, if a company wanted to know the population size of key global markets that it might
enter, it could find this information from secondary sources. Secondary information has the
advantage of usually being cheaper than primary data, although it is not always available
for strategy-specific research questions.
There are many sources of secondary data useful for marketing research. Syndicated
data providers sell a variety of useful data to companies. Figure 2.2 lists a number of data
providers and the type of information they can provide. Government sources, such as the
Statistical Abstracts of the United States or the Survey of Current Business, can provide
insights into the economy and industries within it. Trade groups such as the American
Medical Association or the National Association of Retail Dealers of America can also be
contacted for information relevant to their industries.2
Qualitative versus Quantitative Research
Given a research question, a decision must be made whether qualitative or quantitative
research would be a better approach. Qualitative research typically involves face-to-face
interviews with respondents designed to develop a better understanding of what they think
and feel concerning a research topic, such as a brand name, a product, a package, or an
advertisement. The two most common types of qualitative research in marketing are focus
groups and long interviews. Focus groups involve discussions among a small number of
individuals led by an interviewer; they are designed to generate insights and ideas. Long
interviews are conducted by an interviewer with a single respondent for several hours. They
are designed to find out such things as the meanings various products or brands have for an
individual or how a product influences a person’s life.
Quantitative research involves more systematic procedures designed to obtain and
analyze numerical data. Four common types of quantitative research in marketing are
observation, surveys, experiments, and mathematical modeling.
Observational research involves watching people and recording relevant facts and
behaviors. For example, retail stores may use observational research to determine what
patterns customers use in walking through stores, how much time they spend in various
parts of the store, and how many items of merchandise they examine. This information can
be used to design store layouts more effectively. Similarly, many retail marketers do traffic
counts at various intersections to help determine the best locations for stores.
Survey research involves the collection of data by means of a questionnaire either by
mail, phone, or in person. Surveys are commonly used in marketing research to investigate
30 Part B Marketing Information, Research, and Understanding the Target Market
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Chapter Two Marketing Research: Process and Systems for Decision Making 31
Company Syndicated Service What it Measures
ACNielsen Scantrack Provides sales tracking across grocery, drug, and mass
www.acnielsen.com merchandisers.
Homescan Provides consumer panel service for tracking retail
purchases and motivations.
Yahoo! and ACNielsen Internet Confidence Index Measures (quarterly) the confidence levels in Internet
www.yahoo.com products and services.
Scarborough Research (a service Provides a syndicated study to print and electronic media,
of Arbitron, Inc., and VNU) new media companies, outdoor media, sports teams and
www.scarborough.com leagues, agencies, advertisers, and Yellow Pages on local,
regional, and national levels––including local market
shopping patterns, demographics, media usage, and
lifestyle activities.
Millward Brown IntelliQuest Provides studies enabling clients to understand and
www.millwardbrown.com www.intelliquest.com improve the position of their technology, brands, products,
media, or channels.
Information Resources BehaviourScan Collects store tracking data used with consumer panel
www.infores.com data to track advertising influence in consumer packaged
goods.
Nielsen Media Research National People Meter Provides audience estimates for all national program
www.nielsenmedia.com sources, including broadcast networks, cable networks,
Spanish-language networks, and national syndicators.
NOP World Starch Ad Readership Studies Provides raw readership scores collected via individual
www.nopworld.com depth interview; records the percent of readers who saw
the ad and read the copy. The ad is ranked not only
against other ads in the issue but also against other ads in
its product category over the last two years.
CSA TMO OPERBAC Provides continuous tracking of banking insurance and
www.csa-fr.com credit purchases in European markets.
DoubleClick Diameter Provides online audience measurement services for Web
www.doubleclick.com publishers, advertisers, and agencies.
Nielsen//NetRatings Measures audience data using actual click-by-click Internet
www.nielsen-netratings.com user behavior measured through a comprehensive real-
time meter installed on individual computers worldwide
(home and work).
Taylor Nelson Sofres Intersearch Global eCommerce Measures e-commerce activity in 27 countries, providing
www.tns-i.com insights into 37 marketplaces via interviews.
J.D. Power Associates PowerReport, PowerGram, etc. Publishes in-depth analytical reports on automotive, travel,
www.jdpower.com health, and other industries.
MediaMark Supplies multimedia audience research to magazines.
www.mediamark.com television, radio, Internet, and other media, leading national
advertisers, and over 450 advertising agencies, including
90 of 100 agencies in the U.S.
Simmons (SMRB) National Provides telephone research that covers important markets
www.smrb.com critical to advertisers, agencies and media alike––from Kids
to Teens, Adults and Hispanics, to Households. 20,000
adults 18 and older.
FIGURE 2.2 Some Syndicated Data Providers
Source: Donald R. Cooper and Pamela S. Schindler, Marketing Research (Burr Ridge, IL: McGraw-Hill/Irwin, 2006), p. 43.
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Founded in 1941 in a SoHo loft in New York City, Coach built a reputation for quality
leather purses in classic styles. By 1995, however, sales declines had CEO Lew Frankfurt well
aware that the company was about to hit the wall. Upscale consumers preferred the offer-
ings of companies like Louis Vuitton, Chanel, Gucci, and newcomer Kate Spade. Coach
purses were viewed as conservative, traditional bags, the kind women carried to country
clubs, rather than as fun, exciting, sexy, or modern.
To turn the company around, Coach selected new designs using fabric, nylon, and
lighter-weight leathers to make the bags trendier. Instead of offering a new collection twice
a year, Coach began offering a new collection every month. The company also redesigned
its stores and expanded its distribution. It priced its bags at an average of about $200,
making them an accessible luxury that appeals both to consumers who have to stretch their
budgets to get one and to those who think nothing of spending $700 for Yves Saint
Laurent’s hot Mombasa bag.
Perhaps the most important change the company made was to select styles based on
what consumers thought was cool rather than have designers decide what consumers
should want. The company spends about $2 million a year on consumer surveys alone.
A year before rolling out a product, Coach talks to hundreds of customers, asking for their
opinions on every feature of a purse from comfort and strap length to style and color. It asks
consumers to rank new designs against existing items. Coach test markets new products in
a cross-section of stores around the country. This focus on consumers and understanding
what they want sets the company apart in the fashion industry.
Using marketing research and focusing marketing efforts on what consumers want has
paid off handsomely for Coach. Coach stores have annual sales per square foot that are two
to three times higher than traditional retailers. In fiscal 2008, Coach had $3.18 billion in
sales in its 548 stores in North America and Japan, a 21.8 percent increase over the previ-
ous year. Its net income was $742 million for the year, a 16.6 percent increase over the pre-
vious year. Clearly, consumer research that helps Coach understand its customers and
deliver products they want is a profitable strategy for the company.
Sources: Coach.com, December 14, 2008; Jane Porter, “As Belts Tighten, Coach Feels the Pinch,”
BusinessWeek, June 9, 2008, p. 66; Diane Brady, “Coach’s Split Personality,” BusinessWeek, November 7,
2005, pp. 60–61; LouAnn Lofton, “Coach’s Success Story,” Fool.com, June 12, 2003; Amy Tsao, “It’s in
the Bag for Coach,” BusinessWeek Online, April 23, 2003; Julia Boorstin, “How Coach Got Hot,” Fortune,
October 28, 2002, pp. 131–134.
customer beliefs, attitudes, satisfaction, and many other issues. Mail surveys are useful for
reaching widely dispersed markets but take more time to get responses than telephone sur-
veys; personal surveys involving structured questions are useful but expensive.
Experimental research involves manipulating one variable and examining its impact on
other variables. For example, the price of a product could be changed in one test store,
while left the same in other stores. Comparing sales in the test store with those in other
stores can provide evidence about the likely impact of a price change in the overall market.
Experiments are useful for getting a better idea of the causal relationships among variables,
but they are often difficult to design and administer effectively in natural settings. Thus,
many marketing research experiments are conducted in laboratories or simulated stores to
carefully control other variables that could impact results.
Mathematical modeling research often involves secondary data, such as scanner data
collected and stored in computer files from retail checkout counters. This approach in-
volves the development of equations to model relationships among variables and uses
econometric and statistical techniques to investigate the impact of various strategies and
tactics on sales and brand choices. Math modeling is useful because it provides an efficient
way to study problems with extremely large secondary data sets.
MARKETING INSIGHT Coach: Using Marketing Research to
Turn Around a Business
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Chapter Two Marketing Research: Process and Systems for Decision Making 33
Focus groups
Telephone surveys
Mail surveys
Personal
(in-depth)
interviews
Mall intercepts
Internet surveys
Projective
techniques
Observation
Method Advantages Disadvantages
• Depth of information collected.
• Flexibility in use.
• Relatively low cost.
• Data collected quickly.
• Centralized control of data collection.
• More cost-effective than personal interviews.
• Data collected quickly.
• Cost-effective per completed response.
• Broad geographic dispersion.
• Ease of administration.
• Data collected quickly.
• More depth of response than telephone
interviews.
• Generate substantial number of ideas
compared with group methods.
• Flexibility in collecting data, answering
questions, probing respondents.
• Data collected quickly.
• Excellent for concept tests, copy
evaluations, other visuals.
• Fairly high response rates.
• Inexpensive, quickly executed.
• Visual stimuli can be evaluated.
• Real-time data processing possible.
• Can be answered at convenience of
respondent.
• Useful in word association tests of new
brand names.
• Less threatening to respondents for
sensitive topics.
• Can identify important motives underlying
choices.
• Can collect sensitive data.
• Accuracy of measuring overt behaviors.
• Different perspective than survey self-reports.
• Useful in studies of cross-cultural differences.
• Requires expert moderator.
• Questions of group size and acquaintanceships of
participants.
• Potential for bias from moderator.
• Small sample size.
• Resistance in collecting income, financial data.
• Limited depth of response.
• Disproportionate coverage of low-income segments.
• Abuse of phone by solicitors.
• Perceived intrusiveness.
• Refusal and contact problems with certain segments.
• Limited depth of response.
• Difficult to estimate nonresponse biases.
• Resistance and bias in collecting income, financial
data.
• Lack of control following mailing.
• Easy to transmit biasing cues.
• Not-at-homes.
• Broad coverage often infeasible.
• Cost per contact high.
• Data collection time may be excessive.
• Limited time.
• Sample composition or representativeness is suspect.
• Costs depend on incidence rates.
• Interviewer supervision difficult.
• Responses must be checked for duplication, bogus
responses.
• Respondent self-selection bias.
• Limited ability to qualify respondents and confirm
responses.
• Difficulty in generating sample frames for probability
sampling.
• Require trained interviewers.
• Cost per interview high.
• Appropriate only for frequently occurring behaviors.
• Unable to assess opinions of attitudes causing
behaviors.
• May be expensive in data-collection-time costs.
FIGURE 2.3 A Comparison of Data Collection Methods Used in Marketing Research
Which of these types of research is best for particular research questions requires
considerable knowledge of each of them. Often, qualitative research is used in early stages
of investigating a topic to get more information and insight about it. Then, quantitative
approaches are used to investigate the degree to which the insights hold across a larger
sample or population. Figure 2.3 provides a comparison of a variety of qualitative and
quantitative data collection methods.
Source: William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 134.
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A. Planning
1. Segmentation: What kinds of people buy our products? Where do they live? How
much do they earn? How many of them are there?
2. Demand estimation: Are the markets for our products increasing or decreasing? Are
there promising markets that we have not yet reached?
3. Environmental assessment: Are the channels of distribution for our products changing?
What should our presence on the Internet be?
B. Problem Solving
1. Product
a. In testing new products and product-line extensions, which product design is
likely to be the most successful? What features do consumers value most?
b. What kind of packaging should we use?
c. What are the forecasts for the product? How might we reenergize its life cycle?
2. Price
a. What price should we charge for our products?
b. How sensitive to price changes are our target segments?
c. Given the lifetime value assessments of our segments, should we be discounting or
charging a premium to our most valued customers?
d. As production costs decline, should we lower our prices or try to develop
higher-quality products?
e. Do consumers use price as a cue to value or a cue to quality in our industry?
3. Place
a. Where, and by whom, are our products being sold? Where, and by whom, should
our products be sold?
b. What kinds of incentives should we offer the trade to push our products?
c. Are our relationships with our suppliers and distributors satisfactory and
cooperative?
4. Promotion
a. How much should we spend on promotion? How should it be allocated to
products and to geographic areas?
b. Which ad copy should we run in our markets? With what frequency and media
expenditures?
c. What combination of media—newspapers, radio, television, magazines, Internet
ad banners—should we use?
d. What is our consumer coupon redemption rate?
C. Control
1. What is our market share overall? In each geographic area? By each customer type?
2. Are customers satisfied with our products? How is our record for service? Are there
many returns? Do levels of customer satisfaction vary with market? With segment?
3. Are our employees satisfied? Do they feel well trained and empowered to assist our
customers?
4. How does the public perceive our company? What is our reputation with the trade?
Source: Gilbert A. Churchill, Jr., and Dawn Iacobucci, Marketing Research: Methodological Foundations,
9th ed. (Mason, OH: Thomson South-Western, 2005), p. 9.
MARKETING INSIGHT Kinds of Questions that Marketing
Research Can Help Answer
Company versus Contract Research
Most large consumer goods companies have marketing research departments that can
perform a variety of types of research. In addition many marketing research firms,
advertising agencies, and consulting companies do marketing research on a contract basis.
Some marketing research suppliers have special expertise in a particular type of research
that makes them a better choice than doing the research internally. A decision about
34
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whether the marketing research department has the ability to do a particular type of
research itself or whether all or part of the research should be contracted with a research
supplier must be made. In either case, schedules for task completion, the exact responsibil-
ities of all involved parties, and cost need to be considered.
Performance of the Research
Performance of the research involves preparing for data collection and actually collecting
them. The tasks at this stage obviously depend on the type of research that has been
selected and the type of data needed. If secondary data are to be used, they must be located,
prepared for analysis, and possibly paid for. If primary data are to be collected, then
observational forms, questionnaires, or other types of measures must be designed,
pretested, and validated. Samples must be drawn and interviews must be scheduled or
preparations must be made for mailing or phoning selected individuals.
In terms of actual data collection, a cardinal rule is to obtain and record the maximal
amount of useful information, subject to the constraints of time, money, and respondent
privacy. Failure to obtain and record data clearly can obviously lead to a poor research study,
while failure to consider the rights of respondents raises both practical and ethical problems.
Thus, both the objectives and constraints of data collection must be closely monitored.
Processing of Research Data
Processing research data includes the preparation of data for analysis and the actual analysis of
them. Preparations include such things as editing and structuring data and coding them for
analysis. Data sets should be clearly labeled to ensure they are not misinterpreted or misplaced.
The appropriate analysis techniques for collected data depend on the nature of the
research question and the design of the research. Qualitative research data consist of
interview records that are content analyzed for ideas or themes. Quantitative research data
may be analyzed in a variety of ways depending on the objectives of the research.
35
Traditional marketing research typically involves identifying possible drivers and then col-
lecting data: Increasing couponing (the driver) during spring will increase trial by first-time
buyers (the result). Marketing researchers then try to collect information to attempt to ver-
ify the truth of the relationship.
In contrast, data mining is the extraction of hidden predictive information from large
databases. The focus is on finding statistical links about consumer purchasing patterns that
suggest marketing actions.
Some of these purchase patterns are common sense: You may not need a computer to
suspect that peanut butter and grape jelly purchases are linked and that it might be a good
idea sometime to run a joint promotion between Skippy peanut butter and Welch’s grape
jelly. But would you have expected that men buying diapers in the evening sometimes buy
a six-pack of beer as well? This is exactly what supermarkets discovered when they mined
checkout data from scanners. So they placed diapers and beer near each other, then placed
potato chips between them—and increased sales on all three items! On the near horizon:
radio-frequency identification (RFID) technology using a “smart tag” microchip on the dia-
pers and beer to tell whether they wind up in the same shopping bag—at 10 in the
evening.
Still, the success in data mining ultimately depends on humans—the judgments of the
marketing managers and researchers in how to select, analyze, and interpret the information.
Source: Roger A. Kerin, Steven W. Hartley, and William Rudelius, Marketing, 9th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2009), pp. 217–218.
MARKETING INSIGHT Data Mining for Marketing Insights
2–3
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36 Part B Marketing Information, Research, and Understanding the Target Market
A critical part of this stage is interpreting and assessing the research results. Seldom, if
ever, do marketing research studies obtain findings that are totally unambiguous. Usually,
relationships among variables or differences between groups are small to moderate, and
judgment and insight are needed to draw appropriate inferences and conclusions. Marketing
researchers should always double-check their analysis and avoid overstating the strength of
their findings. The implications for developing or changing a marketing strategy should be
carefully thought out and tempered with judgment about the overall quality of the study.
Preparation of the Research Report
The research report is a complete statement of everything done in a research project and
includes a write-up of each of the previous stages as well as the strategic recommendations
from the research. The limitations of the research should be carefully noted. Figure 2.4
illustrates the types of questions marketing researchers and managers should discuss prior
to submitting the final research report.
Research reports should be clear and unambiguous with respect to what was done and
what recommendations are made. Often research reports must trade off the apparent precision
of scientific jargon for everyday language that managers can understand. Researchers should
work closely with managers to ensure that the study and its limitations are fully understood.
Limitations of the Research Process
Although the foregoing discussion presented the research process as a set of simple stages, this
does not mean that conducting quality marketing research is a simple task. Many problems and
difficulties must be overcome if a research study is to provide valuable information for
decision making.3 For example, consider the difficulties in one type of marketing research,
test marketing.
The major goal of most test marketing is to measure new product sales on a limited basis
where competitive retaliation and other factors are allowed to operate freely. In this way,
future sales potential can often be estimated reasonably well. Listed below are a number of
problems that could invalidate test marketing study results.
1. Test market areas are not representative of the market in general in terms of population
characteristics, competition, and distribution outlets.
2. Sample size and design are incorrectly formulated because of budget constraints.
3. Pretest measurements of competitive brand sales are not made or are inaccurate, limiting
the meaningfulness of market share estimates.
4. Test stores do not give complete support to the study such that certain package sizes may
not be carried or prices may not be held constant during the test period.
FIGURE 2.4
Eight Criteria for
Evaluating Marketing
Research Reports
1. Was the type of research appropriate for the research questions?
2. Was the research well designed?
a. Was the sample studied appropriate for the research questions?
b. Were measures well developed, pretested, and validated?
c. Were the data analysis techniques the best ones for the study?
3. Was there adequate supervision of data collection, editing, and coding?
4. Was the analysis conducted according to standards accepted in the field?
5. Do the findings make sense, given the research question and design, and were they
considered in light of previous knowledge and experience?
6. Are the limitations of the study recognized and explained in detail?
7. Are the conclusions appropriately drawn or are they over- or understated?
8. Are the recommendations for marketing strategy clear and appropriate?
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Marketing researchers have ethical responsibilities to the respondents who provide primary
data, clients for whom they work, and subordinates who work under them. Below are a
number of ethical responsibilities to these groups.
RESPONSIBILITIES TO RESPONDENTS
1. Preserving respondent anonymity. Marketing researchers should ensure that respondents’
identities are safe from invasion of privacy.
2. Avoiding mental stress for respondents. Marketing researchers should minimize the mental
stress placed on respondents.
3. Avoiding questions detrimental to respondents. Marketing researchers should avoid asking
questions for which the answers conflict with the self-interest of the respondents.
4. Avoiding the use of dangerous equipment or techniques. Physical or reputational harm to
respondents based on their participation in marketing research should not occur.
Respondents should be informed of any other than minimal risks involved in the research
and be free to self-determine their participation.
5. Avoiding deception of respondents. Respondents should not be deceived about the
purpose of the study in most cases. Many consider deception acceptable in research
where it is needed to obtain valid results, there is minimal risk to respondents, and
respondents are debriefed explaining the real purpose of the study.
6. Avoiding coercion of respondents. Marketing researchers should avoid coercing or
harassing people to try to get them to agree to be interviewed or fill out questionnaires.
RESPONSIBILITIES TO CLIENTS
1. Providing confidentiality. Marketing researchers are obliged not to reveal information
about a client to competitors and should carefully consider when a company should be
identified as a client.
2. Providing technical integrity. Marketing researchers are obliged to design efficient studies
without undue expense or complexity and accurately report results.
3. Providing administrative integrity. Marketing researchers are obliged to price their work
fairly without hidden charges.
4. Providing guidance on research usage. Marketing researchers are obliged to promote the
correct usage of research and to prevent the misuse of findings.
RESPONSIBILITIES TO SUBORDINATE EMPLOYEES
1. Creating an ethical work environment. Marketing research managers are obliged to create
an ethical work environment where unethical behavior is not encouraged or overlooked.
2. Avoiding opportunities for unethical behavior. Marketing research managers are obliged to
avoid placing subordinates in situations where unethical behavior could be concealed
but rewarded.
37
5. Test-market products are advertised or promoted beyond a profitable level for the
market in general.
6. The effects of factors that influence sales, such as the sales force, season, weather
conditions, competitive retaliation, shelf space, and so forth, are ignored in the research.
7. The test-market period is too short to determine whether the product will be repurchased
by customers.
A list of such problems could be developed for any type of marketing research.
However, careful research planning, coordination, implementation, and control can help
reduce such problems and increase the value of research for decision making.
MARKETING INSIGHT Ethical Responsibilities of Marketing
Researchers 2–4
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38 Part B Marketing Information, Research, and Understanding the Target Market
MARKETING INFORMATION SYSTEMS
Most marketers use computer-based systems to help them gather, sort, store, and distribute in-
formation for marketing decisions.4 A popular form of marketing information system is the mar-
keting decision support system, which is a coordinated collection of data, tools, and techniques
involving both computer hardware and software by which marketers gather and interpret rele-
vant information for decision making. These systems require three types of software:
1. Database management software for sorting and retrieving data from internal and
external sources.
Selected Government Sources
American Factfinder
Economics Statistics Briefing Room
EDGAR Database of Corporate Information (SEC filings)
FedStats
GPO Access
Stat-USA
U.S. Bureau of Labor Statistics
U.S. Bureau of the Census
U.S. Department of Commerce
U.S. Small Business Administration
U.S. Patent and Trademark Office
CBDNet (Commerce Business Daily)—government
procurement, sales, and contract awards
http://factfinder.census.gov/
http://www.whitehouse.gov/fsbr/esbr.html
http://www.sec.gov/edgar.shtml
http://www.fedstats.gov/
http://www.gpoaccess.gov/
http://www.stat-usa.gov/
http://www.bls.gov/
http://www.census.gov/
http://www.commerce.gov/
http://www.sbaonline.sba.gov/
http://www.uspto.gov/
http://www.cbdnet.access.gpo.gov
FIGURE 2.5 Some Information Sources for Marketing Information Systems
Gallup Poll
Harris Poll
The Polling Report
Public Opinion
Public Agenda
Roper Center for Public Opinion Research
Poll Question Database
Forrester Research Reports
Roper Reports
JD Power Satisfaction Studies
Quirk’s Marketing Research Review
Ad Forum
BizMiner
http://www.gallup.com/poll/
http://www.harrisinteractive.com/harris_poll/
http://www.pollingreport.com/
http://europa.eu.int/comm./public_opinion/

Homepage

http://www.repercenter.uconn.edu
http://www.irss.unc.edu/data_archive/pollsearch.html

Forrester

http://www.nopworld.com
http://www.jdpower.com
http://www.quirks.com
http://www.adforum.com

0.0 Homepage

Selected Nonproprietary Sources
Ad* Access
Advertising World (ad industry Portal)
American Demographics
Competia Express (industry portal)
Global Edge
Kerlins.net Qualitative Research Bibliography
KnowThis.com Marketing Virtual Library
Marketing and Research Library
MarketingPower.com
http://scriptorium.lib.duke.edu/adaccess/
http://advertising.utexas.edu/world
http://www.demographics.com
http://www.competia.com/express/
http://www.demographics.com
http://kerlins.net/bobbi/research/qualresearch/bibliography/

KnowThis: Marketing Basics Book

http://www.mrlibrary.com/
http://marketingpower.com
Selected Proprietary Sources (with some free information)
Source: Donald R. Cooper and Pamela S. Schindler, Marketing Research, Burr Ridge, IL: McGraw-Hill/Irwin, 2006, pp. 122–123.
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Chapter Two Marketing Research: Process and Systems for Decision Making 39
2. Model base management software that contains routines for manipulating data in ways
that are useful for marketing decision making.
3. A dialog system that permits marketers to explore databases and use models to produce
information to address their decision-making needs.
Marketing decision support systems are designed to handle information from both internal
and external sources. Internal information includes such things as sales records, which can be
divided by territory, package size, brand, price, order size, or salesperson; inventory data that
can indicate how rapidly various products are selling; or expenditure data on such things as
advertising, personal selling, or packaging. Internal information is particularly important for
investigating the efficiency and effectiveness of various marketing strategies.
External information is gathered from outside the organization and concerns changes
in the environment that could influence marketing strategies. External information is
needed concerning changes in global economies and societies, competitors, customers,
and technology. Figure 2.5 lists a sample of sources of external information that could be
monitored by a marketing information system to help marketers make better decisions. Of
course, information from marketing research studies conducted by an organization is also
put into marketing information systems to improve marketing strategy development.
CONCLUSION
This chapter emphasized the importance of marketing research for making sound marketing
strategy decisions. The chapter discussed marketing research as a process involving several
stages, which include determining the purpose of the research, designing the plan for the
research, performing the research, processing the research data, and preparing the research
report. Then, marketing information systems were discussed and one type, the marketing
decision support system, was explained. Such systems should provide decision makers with
the right information, at the right time in the right way, to make sound marketing decisions.
Churchill, Gilbert A., Jr., and Tom J. Brown. Basic Marketing Research. 7th ed. Mason,
OH: Thomson South-Western, 2010.
Churchill, Gilbert A., Jr., and Dawn Iacobucci. Marketing Research: Methodological Foundations.
9th ed. Mason, OH: Thomson South-Western, 2005.
Cooper, Donald R., and Pamela S. Schindler. Marketing Research. Burr Ridge, IL: McGraw-Hill/
Irwin, 2006.
Hair, Joseph F., Jr., Robert P. Bush, and David J. Ortinau. Marketing Research. 4th ed. Burr Ridge,
IL: McGraw-Hill/Irwin, 2009.
Molhatra, Naresh K. Marketing Research. 5th ed. Upper Saddle River, NJ: Pearson Education, 2007.
Parasuraman, A., Dhruv Grewal, and R. Krishnan. Marketing Research. 2nd ed. Boston:
Houghton Mifflin, 2007.
Zikmund William G., and Barry J. Babin. Exploring Marketing Research. 10th ed. Mason, OH:
Thomson South-Western, 2010.
Zikmund William G., and Barry J. Babin. Essentials of Marketing Research. 4th ed. Mason, OH:
Thomson South-Western, 2010.
Additional
Resources
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40
3
Consumer Behavior
The marketing concept emphasizes that profitable marketing begins with the discovery
and understanding of consumer needs and then develops a marketing mix to satisfy these
needs. Thus, an understanding of consumers and their needs and purchasing behavior is
integral to successful marketing. Unfortunately, there is no single theory of consumer
behavior that can totally explain why consumers behave as they do. Instead, there are
numerous theories, models, and concepts making up the field. In addition, the majority of
these notions have been borrowed from a variety of other disciplines, such as sociology,
psychology, anthropology, and economics, and must be integrated to understand consumer
behavior.
In this chapter, consumer behavior will be examined in terms of the model in Figure 3.1.
The chapter begins by reviewing social, marketing, and situational influences on consumer
decision making. These provide information that can influence consumers’ thoughts and
feelings about purchasing various products and brands. The degree to which this information
influences consumers’ decisions depends on a number of psychological influences. Two of
the most important of these are product knowledge and product involvement, which will
then be discussed. The chapter concludes by discussing the consumer decision-making
process.
Chapter
Psychological influences
Consumer decision making
Social influences Situational influencesMarketing influences
FIGURE 3.1 An Overview of the Buying Process
Part B
M
arketing Inform
ation,Research,
and Understanding the Target M
arket
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41
MARKETING INSIGHT A Summary of American
Cultural Values
Value General Features Relevance to Marketing
Achievement and
success activity
Efficiency and
practicality
Material comfort
Individualism
Freedom
External conformity
Humanitarianism
Youthfulness
Fitness and health
Hard work is good; success flows
from hard work.
Keeping busy is healthy and natural.
Admiration of things that solve
problems (e.g., save time and effort).
People can improve themselves;
tomorrow should be better than
today.
“The good life.”
Being oneself (e.g., self-reliance,
self-interest, self-esteem).
Freedom of choice.
Uniformity of observable behavior;
desire for acceptance.
Caring for others, particularly the
underdog.
A state of mind that stresses being
“young at heart” and having a
youthful appearance.
Caring about one’s body, including
the desire to be physically fit and
healthy.
Acts as a justification for acquisition of
goods (“You deserve it”).
Stimulates interest in products that are
time-savers and enhance leisure time.
Stimulates purchase of products that
function well and save time.
Stimulates desire for new products that
fulfill unsatisfied needs; ready accept-
ance of products that claim to be
“new” or “improved.”
Fosters acceptance of convenience and
luxury products that make life more
enjoyable.
Stimulates acceptance of customized or
unique products that enable a person
to “express his or her own personality.”
Fosters interest in wide product lines
and differentiated products.
Stimulates interest in products that are
used or owned by others in the same
social group.
Stimulates patronage of firms that
compete with market leaders.
Stimulates acceptance of products that
provide the illusion of maintaining or
fostering youthfulness.
Stimulates acceptance of food products,
activities, and equipment perceived to
maintain or increase physical fitness.
Source: Leon G. Schiffman and Leslie Lazar Kanuck, Consumer Behavior, 9th ed., p. 416, 2007. Reprinted by
permission of Pearson Prentice Hall, Inc., Upper Saddle River, NJ.
SOCIAL INFLUENCES ON CONSUMER DECISION MAKING
Behavioral scientists have become increasingly aware of the powerful effects of the social
environment and personal interactions on human behavior. In terms of consumer behavior,
culture, social class, and reference group influences have been related to purchase and
consumption decisions. It should be noted that these influences can have both direct and
indirect effects on the buying process. By direct effects we mean direct communication
between the individual and other members of society concerning a particular decision. By
indirect effects we mean the influence of society on an individual’s basic values and attitudes
as well as the important role that groups play in structuring an individual’s personality.
Culture and Subculture
Culture is one of the most basic influences on an individual’s needs, wants, and behavior,
since all facets of life are carried out against the background of the society in which an
individual lives. Cultural antecedents affect everyday behavior, and there is empirical
support for the notion that culture is a determinant of certain aspects of consumer behavior.
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Cultural values are transmitted through three basic organizations: the family, religious
organizations, and educational institutions; and in today’s society, educational institutions
are playing an increasingly greater role in this regard. Marketing managers should adapt the
marketing mix to cultural values and constantly monitor value changes and differences in
both domestic and global markets. To illustrate, one of the changing values in America is
the increasing emphasis on achievement and career success. This change in values has been
recognized by many business firms that have expanded their emphasis on time-saving,
convenience-oriented products.
In large nations such as the United States, the population is bound to lose a significant
amount of its homogeneity, and thus subcultures arise. In other words, there are subcultures in
the American culture where people have more frequent interactions than with the population at
large and thus tend to think and act alike in some respects. Subcultures are based on such
things as geographic areas, religions, nationalities, ethnic groups, and age. Many subcultural
barriers are decreasing because of mass communication, mass transit, and a decline in the
influence of religious values. However, age groups, such as the teen market, baby boomers, and
the mature market, have become increasingly important for marketing strategy. For example,
since baby boomers (those born between 1946 and 1962) make up about a third of the U.S.
population and soon will account for about half of discretionary spending, many marketers are
repositioning products to serve them. Snickers candy bars, for instance, used to be promoted
to children as a treat but are now promoted to adults as a wholesome between-meals snack.
Social Class
While many people like to think of America as a land of equality, a class structure can be
observed. Social classes develop on the basis of such things as wealth, skill, and power. The
single best indicator of social class is occupation. However, interest at this point is in the influence
of social class on the individual’s behavior. What is important here is that different social classes
tend to have different attitudinal configurations and values that influence the behavior of indi-
vidual members. For marketing purposes, four different social classes have been identified.1
Upper Americans comprise 14 percent of the population and are differentiated mainly
by having high incomes. This class remains the group in which quality merchandise is most
prized and prestige brands are commonly sought. Spending with good taste is a priority as
are products such as theater; books; investments in art; European travel; household help;
club memberships for tennis, golf, and swimming; and prestige schooling for children.
The middle class comprises 34 percent of the population, and these consumers want to do
the right thing and buy what is popular. They are concerned with fashion and buying what
experts in the media recommend. Increased earnings have led to spending on more “worth-
while experiences” for children, including winter ski trips, college education, and shopping
for better brands of clothes at more expensive stores. Appearance of the home is important.
This group emulates the upper Americans, which distinguishes it from the working class.
The working class comprises 38 percent of the population, people who are “family folk”
who depend heavily on relatives for economic and emotional support. The emphasis on
family ties is only one sign of how much more limited and different working-class horizons
are socially, psychologically, and geographically compared to those of the middle class. For
them, “keeping up with the times” focuses on the mechanical and recreational, and thus,
ease of labor and leisure are what they continue to pursue.
Lower Americans comprise 16 percent of the population and are as diverse in values and
consumption goals as are other social levels. Some members of this group are homeless and
penniless although most work part-time or full-time jobs at low wages. Most receive public
housing, food stamps, and Medicare. The primary demands of this group are food, clothing,
and other staples. Given that a number of people in this group have little education or resources,
many people feel it is unethical to try to market alcoholic beverages or tobacco products to it.
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For the marketing manager, social class offers some insights into consumer behavior and is
potentially useful as a market segmentation variable. However, there is considerable controversy
as to whether social class is superior to income for the purpose of market segmentation.
Reference Groups and Families
Groups that an individual looks to (uses as a reference) when forming attitudes and opinions
are described as reference groups.2 Primary reference groups include family and close friends,
while secondary reference groups include fraternal organizations and professional associa-
tions. A buyer may also consult a single individual about decisions, and this individual would
be considered a reference individual.
A person normally has several reference groups or reference individuals for various
subjects or different decisions. For example, a woman may consult one reference group
when she is purchasing a car and a different reference group for lingerie. In other words,
the nature of the product and the role the individual is playing during the purchasing
process influence which reference group will be consulted. Reference group influence is
generally considered to be stronger for products that are “public” or conspicuous—that is,
products that other people see the individual using, such as clothes or automobiles.
As noted, the family is generally recognized to be an important reference group, and it
has been suggested that the household, rather than the individual, is the relevant unit for
studying consumer behavior.3 This is because within a household the purchaser of goods
and services is not always the user of these goods and services. Thus, it is important for
marketing managers to determine not only who makes the actual purchase but also who
makes the decision to purchase. In addition, it has been recognized that the needs, income,
assets, debts, and expenditure patterns change over the course of what is called the family
life cycle. The family life cycle can be divided into a number of stages ranging from single,
to married, to married with children of different age groups, to older couples, to solitary
survivors. It may also include divorced people, both with and without children. Because the
life cycle combines trends in earning power with demands placed on income, it is a useful
way of classifying and segmenting individuals and families.4
MARKETING INFLUENCES ON CONSUMER DECISION MAKING
Marketing strategies are often designed to influence consumer decision making and lead to
profitable exchanges. Each element of the marketing mix (product, price, promotion, place)
can affect consumers in various ways.
Product Influences
Many attributes of a company’s products, including brand name, quality, newness, and
complexity, can affect consumer behavior. The physical appearance of the product, pack-
aging, and labeling information can also influence whether consumers notice a product
in-store, examine it, and purchase it. One of the key tasks of marketers is to differentiate
their products from those of competitors and create consumer perceptions that the product
is worth purchasing.
Price Influences
The price of products and services often influences whether consumers will purchase
them at all and, if so, which competitive offering is selected. Stores, such as Walmart,
which are perceived to charge the lowest prices, attract many consumers based on this
fact alone. For some offerings, higher prices may not deter purchase because consumers
believe that the products or services are higher quality or are more prestigious. However,
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many of today’s value-conscious consumers may buy products more on the basis of price
than other attributes.
Promotion Influences
Advertising, sales promotions, salespeople, and publicity can influence what consumers
think about products, what emotions they experience in purchasing and using them, and
what behaviors they perform, including shopping in particular stores and purchasing
specific brands. Since consumers receive so much information from marketers and screen
out a good deal of it, it is important for marketers to devise communications that (1) offer
consistent messages about their products and (2) are placed in media that consumers in the
target market are likely to use. Marketing communications play a critical role in informing
consumers about products and services, including where they can be purchased, and in
creating favorable images and perceptions.
Place Influences
The marketer’s strategy for distributing products can influence consumers in several ways.
First, products that are convenient to buy in a variety of stores increase the chances of
consumers finding and buying them. When consumers are seeking low-involvement products,
they are unlikely to engage in extensive search, so ready availability is important. Second,
products sold in exclusive outlets such as Nordstrom may be perceived by consumers as having
higher quality. In fact, one of the ways marketers create brand equity—that is, favorable
44
Marketers know that reference groups can influence both product and brand decisions.
They also know that reference group influence varies depending on whether the good is
used publicly (a car) or privately (a toothbrush) and whether it is a necessity (a mattress) or
a luxury (a sailboat). By examining the nature of products and brands on these two dimen-
sions, the matrix below can be constructed. Marketers could use this matrix to judge how
reference group influence should be used in advertising and personal selling efforts. For ex-
ample, public luxuries could benefit from ads showing owners being admired and compli-
mented for their product and brand selection whereas ads for private necessities might
focus more on superior functional performance.
MARKETING INSIGHT Reference Group Influence
on Products and Brands
Necessity Luxury
Public necessities Public luxuries
Reference group influence Reference group influence
Public Product: Weak Product Strong
Brand: Strong Brand: Strong
Examples: Wristwatch, automobile, Examples: Golf clubs, snow skis,
man’s suit sailboat, health club
Private necessities Private luxuries
Reference group influence Reference group influence
Private Product: Weak Product: Strong
Brand: Weak Brand: Weak
Examples: Mattress, floor Examples: Plasma TV, trash
lamp, refrigerator compactor, ice maker
Source: Adapted from William O. Bearden and Michael J. Etzel, “Reference Group Influences on Product
and Brand Purchase Decisions,” Journal of Consumer Research, September 1982, p. 185 as reported in J. Paul
Peter and Jerry C. Olson, Consumer Behavior and Marketing Strategy, 8th ed. (Burr Ridge, IL: McGraw-Hill/
Irwin, 2008), pp. 342–344.
3–2
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consumer perceptions of brands—is by selling them in prestigious outlets. Third, offering
products by nonstore methods, such as on the Internet or in catalogs, can create consumer per-
ceptions that the products are innovative, exclusive, or tailored for specific target markets.
SITUATIONAL INFLUENCES ON CONSUMER DECISION MAKING
Situational influences can be defined as all those factors particular to a time and place of
observation that have a demonstrable and systematic effect on current behavior. In terms
of purchasing situations, five groups of situational influences have been identified.5 These
influences may be perceived either consciously or subconsciously and may have considerable
effect on product and brand choice.
1. Physical features are the most readily apparent features of a situation. These features
include geographical and institutional location, decor, sounds, aromas, lighting, weather, and
visible configurations of merchandise or other material surrounding the stimulus object.
2. Social features provide additional depth to a description of a situation. Other persons
present, their characteristics, their apparent roles and interpersonal interactions are potentially
relevant examples.
3. Time is a dimension of situations that may be specified in units ranging from time of day
to season of the year. Time also may be measured relative to some past or future event for the
situational participant. This allows such conceptions as time since last purchase, time since or
until meals or paydays, and time constraints imposed by prior or standing commitments.
4. Task features of a situation include an intent or requirement to select, shop for, or obtain
information about a general or specific purchase. In addition, task may reflect different
buyer and user roles anticipated by the individual. For instance, a person shopping for a small
appliance as a wedding gift for a friend is in a different situation than when shopping for a
small appliance for personal use.
5. Current conditions make up a final feature that characterizes a situation. These are
momentary moods (such as acute anxiety, pleasantness, hostility, and excitation) or momen-
tary conditions (such as cash on hand, fatigue, and illness) rather than chronic individual
traits. These conditions are considered to be immediately antecedent to the current situation
to distinguish the states the individual brings to the situation from states of the individual
resulting from the situation. For instance, people may select a certain motion picture because
they feel depressed (an antecedent state and a part of the choice situation), but the fact that
the movie causes them to feel happier is a response to the consumption situation. This altered
state then may become antecedent for behavior in the next choice situation encountered,
such as passing a street vendor on the way out of the theater.
PSYCHOLOGICAL INFLUENCES ON CONSUMER DECISION MAKING
Information from group, marketing, and situational influences affects what consumers think
and feel about particular products and brands. However, a number of psychological factors
influence how this information is interpreted and used and how it impacts the consumer
decision-making process. Two of the most important psychological factors are product
knowledge and product involvement.6
Product Knowledge
Product knowledge refers to the amount of information a consumer has stored in her or
his memory about particular product classes, product forms, brands, models, and ways to
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purchase them. For example, a consumer may know a lot about coffee (product class),
ground versus instant coffee (product form), Folgers versus Maxwell House (brand), and
various package sizes (models) and stores that sell it (ways to purchase).
Group, marketing, and situational influences determine the initial level of product
knowledge as well as changes in it. For example, a consumer may hear about a new
Starbucks opening up from a friend (group influence), see an ad for it in the newspaper
(marketing influence), or see the coffee shop on the way to work (situational influence).
Any of these increase the amount of product knowledge, in this case, a new source for
purchasing the product.
The initial level of product knowledge may influence how much information is sought
when deciding to make a purchase. For example, if a consumer already believes that
Folgers is the best-tasting coffee, knows where to buy it, and knows how much it costs,
little additional information may be sought.
Finally, product knowledge influences how quickly a consumer goes through the decision-
making process. For example, when purchasing a new product for which the consumer has
little product knowledge, extensive information may be sought and more time may be devoted
to the decision.
Product Involvement
Product involvement refers to a consumer’s perception of the importance or personal relevance
of an item. For example, Harley-Davidson motorcycle owners are generally highly involved in
the purchase and use of the product, brand, and accessories. However, a consumer buying a
new toothbrush would likely view this as a low-involvement purchase.
Product involvement influences consumer decision making in two ways. First, if the pur-
chase is for a high-involvement product, consumers are likely to develop a high degree of
product knowledge so that they can be confident that the item they purchase is just right for
them. Second, a high degree of product involvement encourages extensive decision making
by consumers, which likely increases the time it takes to go through the decision-making
process.
CONSUMER DECISION MAKING
The process by which consumers make decisions to purchase various products and brands is
shown in Figure 3.2. In general, consumers recognize a need for a product, search for
information about alternatives to meet the need, evaluate the information, make purchases,
and evaluate the decision after the purchase. There are three types of decision making, which
vary in terms of how complex or expensive a product is and how involved a consumer is in
purchasing it.
Extensive decision making requires the most time and effort since the purchase involves
a highly complex or expensive product that is important to the consumer. For example,
the purchase of a car, house, or computer often involves considerable time and effort
comparing alternatives and deciding on the right one. In terms of the number of purchases
a consumer makes, extensive decision making is relatively rare, but it is critical for
marketers of highly complex or expensive products to understand that consumers are
willing to process considerable information to make the best choice. Thus, marketers
should provide consumers with factual information that highlights competitive advantages
for such high-involvement products.
Limited decision making is more moderate but still involves some time and effort
searching for and comparing alternatives. For example, when buying shirts or shorts,
consumers may shop several stores and compare a number of different brands and styles.
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Marketers of products for which consumers usually do limited decision making often use
eye-catching advertising and in-store displays to make consumers aware of their products
and encourage consumers to consider buying them.
Routine decision making is the most common type and the way consumers purchase
most packaged goods. Such products are simple, inexpensive, and familiar; and consumers
often have developed favorite brands that they purchase without much deliberation. For
example, consumers often make habitual purchases of soft drinks, candy bars, or canned
soup without carefully comparing the relative merits of different brands. Marketers of such
products need to have them readily available for purchase in a variety of outlets and price
them competitively if price is an important criterion to consumers. Marketers of these low-
involvement products often use celebrity spokespeople and other non-product-related cues
to encourage purchases.
Need Recognition
The starting point in the buying process is the consumer’s recognition of an unsatisfied
need. Any number of either internal or external stimuli may activate needs or wants and
recognition of them. Internal stimuli are such things as feeling hungry and wanting some
food, feeling a headache coming on and wanting some Excedrin, or feeling bored and look-
ing for a movie to go to. External stimuli are such things as seeing a McDonald’s sign and
then feeling hungry or seeing a sale sign for winter parkas and remembering that last year’s
coat is worn out.
It is the task of marketing managers to find out what needs and wants a particular product
can and does satisfy and what unsatisfied needs and wants consumers have for which a new
product could be developed. In order to do so, marketing managers should understand what
types of needs consumers may have. A well-known classification of needs was developed
many years ago by Abraham Maslow and includes five types.7 Maslow’s view is that lower-
level needs, starting with physiological and safety needs, must be attended to before higher-
level needs can be satisfied. Maslow’s hierarchy is described below.
Physiological needs. This category consists of the primary needs of the human body,
such as food, water, and sex. Physiological needs will dominate when all needs are
unsatisfied. In such a case, none of the other needs will serve as a basis for motivation.
Safety needs. With the physiological needs met, the next higher level assumes impor-
tance. Safety needs consist of such things as protection from physical harm, ill health,
and economic disaster and avoidance of the unexpected.
Belongingness and love needs. These needs are related to the social and gregarious
nature of humans and the need for companionship. This level in the hierarchy is the
Chapter Three Consumer Behavior 47
Postpurchase
evaluation
Purchase
decision
Alternative
evaluation
Alternative
search
Need
recognition
Consumer decision making
FIGURE 3.2 The Consumer Decision-Making Process
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point of departure from the physical or quasi-physical needs of the two previous levels.
Nonsatisfaction of this level of need may affect the mental health of the individual.
Esteem needs. These needs consist of both the need for the self-awareness of importance
to others (self-esteem) and actual esteem from others. Satisfaction of these needs leads to
feelings of self-confidence and prestige.
Self-actualization needs. This area can be defined as the desire to become more and
more what one is, to become everything one is capable of becoming. This means that
the individual will fully realize the potentialities of given talents and capabilities.
Maslow assumed that satisfaction of these needs is only possible after the satisfaction
of all the needs lower in the hierarchy. While the hierarchical arrangement of Maslow
presents a convenient explanation, it is probably more realistic to assume that the various
need categories overlap. Thus, in affluent societies, many products may satisfy more than
one of these needs. For example, gourmet foods may satisfy both the basic physiological
need of hunger as well as esteem and status needs for those who serve gourmet foods to
their guests.
Alternative Search
Once a need is recognized, the individual then searches for alternatives for satisfying the
need. The individual can collect information from f ive basic sources for a particular
purchase decision.
1. Internal sources. In most cases the individual has had some previous experience in
dealing with a particular need. Thus, the individual will usually “search” through whatever
stored information and experience is in his or her mind for dealing with the need. If a
previously acceptable product for satisfying the need is remembered, the individual may
purchase with little or no additional information search or evaluation. This is quite common
for routine or habitual purchases.
2. Group sources. A common source of information for purchase decisions comes from
communication with other people, such as family, friends, neighbors, and acquaintances.
Generally, some of these (i.e., relevant others) are selected that the individual views as having
particular expertise for the purchase decision. Although it may be quite difficult for the
marketing manager to determine the exact nature of this source of information, group sources
of information often are considered to be the most powerful influence on purchase decisions.
3. Marketing sources. Marketing sources of information include such factors as adver-
tising, salespeople, dealers, packaging, and displays. Generally, this is the primary source
of information about a particular product. These sources of information will be discussed
in detail in the promotion chapters of this text.
4. Public sources. Public sources of information include publicity, such as a newspaper
article about the product, and independent ratings of the product, such as Consumer Reports.
Here product quality is a highly important marketing management consideration, since such
articles and reports often discuss such features as dependability and service requirements.
5. Experiential sources. Experiential sources refer to handling, examining, and perhaps
trying the product while shopping. This usually requires an actual shopping trip by the
individual and may be the final source consulted before purchase.
The consumer then processes information collected from these sources.8 However, the
exact nature of how individuals process information to form evaluations of products is not
fully understood. In general, information processing is viewed as a four-step process in
which the individual is (1) exposed to information, (2) becomes attentive to the information,
(3) understands the information, and (4) retains the information.9
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Alternative Evaluation
During the process of collecting information or, in some cases, after information is acquired,
the consumer evaluates alternatives on the basis of what he or she has learned. One approach
to describing the evaluation process is as follows:
1. The consumer has information about a number of brands in a product class.
2. The consumer perceives that at least some of the brands in a product class are viable
alternatives for satisfying a recognized need.
3. Each of these brands has a set of attributes (color, quality, size, and so forth).
4. A set of these attributes is relevant to the consumer, and the consumer perceives that
different brands vary in how much of each attribute they possess.
5. The brand that is perceived as offering the greatest number of desired attributes in the
desired amounts and desired order will be the brand the consumer will like best.
6. The brand the consumer likes best is the brand the consumer will intend to purchase.10
Purchase Decision
If no other factors intervene after the consumer has decided on the brand that is intended for
purchase, the actual purchase is a common result of search and evaluation. Actually, a purchase
MARKETING INSIGHT Ethical Conduct toward Customers
The marketing profession has long recognized the need to uphold its integrity, honor, and
dignity. Part of this obligation is to treat customers fairly and honestly. In the American
Marketing Association Code of Ethics, a number of issues are concerned with this obligation.
Below is a list of some of the Code of Ethics responsibilities that bear directly or indirectly
on exchanges with consumers and organizational buyers.
PRODUCT DEVELOPMENT AND MANAGEMENT AREA
Products and services offered should be safe and fit for their intended use.
All substantial risks associated with product or service usage should be disclosed.
Product component substitutions that might materially change the product or impact
the buyer’s decision should be disclosed.
Extra-cost-added features should be identified.
PROMOTION AREA
Communication about offered products and services should not be deceptive.
False and misleading advertising should be avoided.
High-pressure manipulation or misleading sales tactics should be avoided.
Sales promotions that use deception or manipulation should be avoided.
DISTRIBUTION AREA
The availability of a product should not be manipulated for the purpose of exploitation.
Coercion in the marketing channel should not be used.
Undue influence over the resellers’ choice to handle products should be avoided.
PRICING AREA
Price fixing should not be practiced.
Predatory pricing should not be practiced.
The full price associated with any purchase should be disclosed.
Source: Adapted from the American Marketing Association Code of Ethics.
3–3
49
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involves many decisions, which include product type, brand, model, dealer selection, and
method of payment, among other factors. In addition, rather than purchasing, the consumer
may make a decision to modify, postpone, or avoid purchase based on an inhibitor to purchase
or a perceived risk.
Traditional risk theorists believe that consumers tend to make risk-minimizing decisions
based on their perceived definition of the particular purchase. The perception of risk is
based on the possible consequences and uncertainties involved. Consequences may range
from economic loss, to embarrassment if a new food product does not turn out well, to
actual physical harm. Perceived risk may be either functional (related to financial and
performance considerations) or psychosocial (related to whether the product will further
one’s self- or reference-group image). The amount of risk a consumer perceives in a partic-
ular product depends on such things as the price of the product and whether other people
will see the individual using it.
The perceived risk literature emphasizes that consumers generally try to reduce risk in their
decision making. This can be done by either reducing the possible negative consequences or by
reducing the uncertainty. The possible consequences of a purchase might be minimized by
purchasing in small quantities or by lowering the individual’s aspiration level to expect less in
the way of results from the product. However, this cannot always be done. Thus, reducing risk
by attempting to increase the certainty of the purchase outcome may be the more widely used
strategy. This can be done by seeking additional information regarding the proposed purchase.
In general, the more information the consumer collects prior to purchase, the less likely post-
purchase dissonance is to occur.
Postpurchase Evaluation
In general, if the individual finds that a certain response achieves a desired goal or satisfies
a need, the success of this cue-response pattern will be remembered. The probability of
responding in a like manner to the same or similar situation in the future is increased. In
other words, the response has a higher probability of being repeated when the need and
cue appear together again, and thus it can be said that learning has taken place. Frequent
reinforcement increases the habit potential of the particular response. Likewise, if a response
does not satisfy the need adequately, the probability that the same response will be repeated
is reduced.
For some marketers this means that if an individual finds that a particular product
fulfills the need for which it was purchased, the probability is high that the individual will
repurchase the product the next time the need arises. The firm’s promotional efforts often
act as the cue. If an individual repeatedly purchases a product with favorable results, loyalty
may develop toward the particular product or brand. This loyalty can result in habitual
purchases, and such habits are often extremely difficult for competing firms to alter.
Although many studies in the area of buyer behavior center on the buyer’s attitudes,
motives, and behavior before and during the purchase decision, behavior after the purchase
has also been studied. Specifically, studies have been undertaken to investigate postpur-
chase dissonance, as well as postpurchase satisfaction.
The occurrence of postdecision dissonance is related to the concept of cognitive dissonance.
This theory states that there is often a lack of consistency or harmony among an individual’s
various cognitions, or attitudes and beliefs, after a decision has been made—that is, the
individual has doubts and second thoughts about the choice made. Further, it is more likely that
the intensity of the anxiety will be greater when any of the following conditions exist:
1. The decision is an important one psychologically or financially, or both.
2. There are a number of forgone alternatives.
3. The forgone alternatives have many favorable features.
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Increasing the Influencing Factor
Influencing Factor Causes the Search to:
I. Market characteristics
A. Number of alternatives Increase
B. Price range Increase
C. Store concentration Increase
D. Information availability Increase
1. Advertising
2. Point-of-purchase
3. Sales personnel
4. Packaging
5. Experienced consumers
6. Independent sources
II. Product characteristics
A. Price Increase
B. Differentiation Increase
C. Positive products Increase
III. Consumer characteristics
A. Learning and experience Decrease
B. Shopping orientation Mixed
C. Social status Increase
D. Age and household life cycle Mixed
E. Product involvement Mixed
F. Perceived risk Increase
IV. Situational characteristics
A. Time availability Increase
B. Purchase for self Decrease
C. Pleasant surroundings Increase
D. Social surroundings Mixed
E. Physical/mental energy Increase
Source: Del I. Hawkins, David L. Mothersbaugh, and Roger Best, Consumer Behavior: Building Marketing
Strategy, 10th ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 2007), p. 548.
These factors can relate to many buying decisions. For example, postpurchase dissonance
might be expected to be present among many purchasers of such products as automobiles,
major appliances, and homes. In these cases, the decision to purchase is usually an impor-
tant one both financially and psychologically, and a number of favorable alternatives are
usually available.
These findings have much relevance for marketers. In a buying situation, when a purchaser
becomes dissonant, it is reasonable to predict such a person would be highly receptive to
advertising and sales promotion that support the purchase decision. Such communication
presents favorable aspects of the product and can be useful in reinforcing the buyer’s wish to
believe that a wise purchase decision was made. For example, purchasers of major appliances
or automobiles might be given a phone call or sent a letter reassuring them that they have made
a wise purchase.
As noted, researchers have also studied postpurchase consumer satisfaction. Much
of this work has been based on what is called the disconfirmation paradigm. Basically,
this approach views satisfaction with products and brands as a result of two other variables.
51
MARKETING INSIGHT Factors Affecting Information Search
by Consumers 3–4
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The first variable is the expectations a consumer has about a product before purchase.
These expectations concern the beliefs the consumer has about the product’s performance.
The second variable is the difference between expectations and postpurchase percep-
tions of how the product actually performed. If the product performed as well as expected or
better than expected, the consumer will be satisfied with the product. If the product performed
worse than expected, the consumer will be dissatisfied with it.
One implication of this view for marketers is that care must be taken not to raise
prepurchase expectations to such a level that the product cannot possibly meet them. Rather, it
is important to create positive expectations consistent with the product’s likely performance.11
CONCLUSION
This chapter presented an overview of consumer behavior. Social, marketing, and situational
influences on consumer decision making were discussed first, followed by a discussion of two
important psychological factors: product knowledge and product involvement. Consumer
decision making, which can be extensive, limited, or routine, was viewed as a series of stages:
need recognition, alternative search, alternative evaluation, purchase decision, and postpur-
chase evaluation. Clearly, understanding consumer behavior is a prerequisite for developing
successful marketing strategies.
52 Part B Marketing Information, Research, and Understanding the Target Market
Additional
Resources
Blackwell, Rodger D., Paul W. Miniard, and James F. Engel. Consumer Behavior. 10th ed. Mason,
OH: Thomson South-Western, 2006.
Hawkins, Del I.; David L. Mothersbaugh; and Roger J. Best. Consumer Behavior: Building Market-
ing Strategy, 10th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2007.
Hoyer, Wayne D., and Deborah J. MacInnis. Consumer Behavior. 4th ed. Boston: Houghton Mifflin,
2007.
Peter, J. Paul, and Jerry C. Olson. Consumer Behavior and Marketing Strategy. 8th ed. Burr Ridge,
IL: McGraw-Hill/Irwin, 2008.
Schiffman, Leon G., and Leslie Kanuck. Consumer Behavior. 9th ed. Englewood Cliffs, NJ: Pren-
tice Hall, 2007.
Solomon, Michael R. Consumer Behavior, 7th ed. Boston: Allyn & Bacon, 2007.
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Chapter
Pa
rt
B
M
ar
ke
tin
g
In
fo
rm
at
io
n,
Re
se
ar
ch
,
an
d
Un
de
rs
ta
nd
in
g
th
e
Ta
rg
et
M
ar
ke
t
53
4
Business, Government,
and Institutional Buying
In the previous chapter we discussed consumer behavior and the decision-making process
used to purchase products and services. However, final consumers are not the only
purchasers of products and services. Rather, businesses, government agencies, and other
institutions buy products and services to maintain their organizations and achieve their
organizational objectives. These organizations are major customers for many marketers.
In this chapter we discuss the nature of these organizations and offer a general model of
the buying process for them. The chapter begins by discussing four categories of organi-
zational buyers and then presents an overview of the organizational buying process.
CATEGORIES OF ORGANIZATIONAL BUYERS
Organizational buyers can be classified in many ways. For example, the U.S. government
classifies organizations in similar lines of business in the North American Industry
Classification System (NAICS, pronounced “knacks”). NAICS provides information about
the number of establishments, sales volume, and number of employees in each industry
broken down by geographic area. Information on NAICS codes is available online at
www.naics.com. In addition, a commercial source, Dun’s Business Locator, provides
information on over 10 million U.S. businesses. Both of these can provide useful information
for organizational marketers seeking organizational buyers. However, for the purpose of
this text, it is useful to classify organizational buyers into four categories: These include
producers, intermediaries, government agencies, and other institutions. Taken collectively,
marketing to producers and intermediaries is called business-to-business or b2b marketing.
Business-to-business marketing has become a topic of increasing interest because it is the
major area where Internet marketing has been done profitably.
Producers
These organizational buyers consist of businesses that buy goods and services in order to
produce other goods and services for sale. For example, Dell Computer buys computer chips
from Intel in order to make computers to be sold to consumers and other organizations.
Producers are engaged in many different industries, ranging from agriculture to manufacturing,
from construction to finance. Together they constitute the largest segment of organizational
buyers. Producers of goods tend to be larger and more geographically concentrated than
producers of services.
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54 Part B Marketing Information, Research, and Understanding the Target Market
Intermediaries
Marketing intermediaries or resellers purchase products to resell at a profit. This group
includes a number of types of resellers such as wholesalers (Grainger) and retailers
(Walmart) that buy products from manufacturers and distribute them to consumers
and other organizational buyers. Intermediaries also purchase products and services to
run their own businesses, such as office supplies and maintenance services. Given their
importance to marketing, intermediaries will be discussed in detail in Chapter 10.
Government Agencies
In the United States, government agencies operate at the federal, state, and local levels;
there are over 86,000 governmental agencies in this country that purchase machinery,
equipment, facilities, supplies, and services. Government agencies account for trillions of
dollars worth of buying, and over half of this amount represents purchases by the federal
government, making it the world’s biggest customer. The governments of other countries
also are huge customers for marketers. Marketing to government agencies can be complex
since they often have strict purchasing policies and regulations.
Other Institutions
Besides businesses and government agencies, marketers also sell products and services to
a variety of other institutions, such as hospitals, museums, universities, nursing homes, and
churches. Many of these are nonprofit organizations that purchase products and services to
maintain their operations and serve their clientele.
THE ORGANIZATIONAL BUYING PROCESS
Regardless of the type of organization, a buying process is needed to ensure that products
and services are purchased and received in a timely and efficient manner. In general,
organizations develop a buying process to serve their purchasing needs. Figure 4.1 presents
a model of organizational buying that represents some of the common influences and
stages in the process.
Organizational buying process
Postpurchase
evaluation
Purchase
activities
Vendor
analysis
Behavioral influencesStructural influencesPurchase-type influences
Organizational
need
FIGURE 4.1 A Model of the Organizational Buying Process
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Chapter Four Business, Government, and Institutional Buying 55
PURCHASE-TYPE INFLUENCES ON ORGANIZATIONAL BUYING
A major consideration that affects the organizational buying process is the complexity of
the purchase that is to be made. Three types of organizational purchase based on their de-
gree of complexity include the straight rebuy, modified rebuy, and new task purchase.1
Straight Rebuy
The simplest and most common type of purchase is called a straight rebuy. This type of
purchase involves routinely reordering from the same supplier a product that has been
purchased in the past. Organizations use a straight rebuy when they are experienced at
buying the product, have an ongoing need for it, and have regular suppliers of it. In many
cases, organizations have computer systems that automatically reorder certain commonly
used products. Organizations use this simple approach to purchasing because it is fast and
requires relatively few employees.
Straight rebuys are common among organizations that practice just-in-time inventory,
which is a system of replenishing parts or goods for resale just before they are needed. Such
buyers do not have time to hunt around for potential suppliers and solicit bids. Instead they
regularly place their orders with a supplier whose quality and timely delivery can be counted
on. If a supplier delivers items that are late or of unacceptable quality, these buyers will
not have a reserve in inventory to draw on. Therefore, organizations that use just-in-time
inventory tend to favor suppliers with a strong commitment to quality.
To retain customers who use straight rebuys, the marketer needs to maintain high-
quality products and reliable service so that the customers will continue to be satisfied with
their purchases.
Modified Rebuy
When some aspects of the buying situation are unfamiliar, the organization will use a modified
rebuy. This type of purchase involves considering a limited number of alternatives before
making a selection. Organizational buyers follow this approach rather than a straight rebuy
when a routine purchase changes in some way; for example, a supplier discontinues a product
or stops satisfying the customer, the price of a usual product rises, or a new product becomes
available to meet the same need.
In such situations, the organizational buyer considers the new information and decides what
changes to make. If the change proves satisfactory and the product is one needed routinely, the
buyer may then make it a straight rebuy. Marketers seek to win new organizational customers
by giving them reasons to change from a straight rebuy to a modified rebuy in which the
marketer’s products are considered.
New Task Purchase
Organizations purchase some products only occasionally, especially in the case of large
investments such as machinery, equipment, and real estate. In these cases, the organization may
use a new task purchase. This type of purchase involves an extensive search for information
and a formal decision process.
New task purchases are most often used for big-ticket items, so the cost of a mistake is
great. Therefore, a new task purchase is time consuming and involves a relatively large
number of decision makers, who may consider many alternatives. This is the type of
purchase decision that is most likely to involve joint decision making because many kinds
of expertise are required to make the best decision.
A new task purchase is an opportunity for the marketer to learn about the needs of the
organizations in its target market and to discuss ways to meet organizational needs, such as
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56 Part B Marketing Information, Research, and Understanding the Target Market
through the use of new products and technology. Figure 4.2 summarizes the differences in
the three types of purchases.
STRUCTURAL INFLUENCES ON ORGANIZATIONAL BUYING
The term structural influences refers to the design of the organizational environment and
how it affects the purchasing process. Three important structural influences on organiza-
tional buying are purchasing roles, organization-specific factors, and purchasing policies
and procedures.
Purchasing Roles
It is common in organizational buying for purchases to be made cross-functionally with
representatives from different functional departments playing various roles in the process.
Taken collectively, these are called the buying center and include the following roles:
1. Initiators, who start the purchasing process by recognizing a need or problem in the
organization. For example, an executive might see a need for faster computers.
2. Users, who are the people in the organization who actually use the product, for example,
an assistant who would use a new word processor.
3. Influencers, who affect the buying decision, usually by helping define the specifications for
what is bought. For example, an information systems manager would be a key influencer in
the purchase of a new computer system.
4. Buyers, who have the formal authority and responsibility to select the supplier and
negotiate the terms of the contract. For example, in the purchase of a computer system,
the purchasing agent would likely perform this role.
5. Deciders, who have the formal or informal power to select or approve the supplier that
receives the contract. For important technical purchases, deciders may come from R&D,
engineering, or quality control.
6. Gatekeepers, who control the flow of information in the buying center. Purchasing
personnel, technical experts, and assistants can all keep marketers and their information
from reaching people performing the other four roles.2
When several persons are involved in the organizational purchase decision, marketers
may need to use a variety of means to reach each individual or group. Fortunately, it is often
easy to find which individuals in organizations are involved in a purchase because such
information is provided to suppliers. Organizations do this because it makes suppliers more
knowledgeable about purchasing practices, thus making the purchasing process more effi-
cient.3 Also, a number of firms have developed closer channel relationships that facilitate
these transactions.
FIGURE 4.2 Differences in Types of Organizational Purchases
Purchase Type
Straight rebuy
Modified rebuy
New task
purchase
Complexity
Simple
Moderate
Complex
Time Frame
Short
Medium
Long
Number of
Suppliers
One
Few
Many
Applications
Frequently purchased, routine products, such as
printer paper and toner.
Routine purchase that has changed in some way,
such as air travel (new fares, flights, destinations).
Expensive, seldom-purchased products, such as a
new location for a department store.
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57
How Marketing to
Organizational Buyers Differs
More variation in buyer–seller
relationships
Shorter distribution channels
Greater emphasis on personal selling
Greater Web integration
Unique promotional strategies
Example
Relationships can be deep and involve several layers of
the industry: BASF partners with Gaskell and GM, for
example.
BASF sells fibers directly to DuPont for the manufacture of
carpet; through distributors to smaller companies.
Consumer goods sold through distributors, wholesalers,
and retailers.
BASF salespeople work directly with fire departments to
sell the latest fire-fighting chemicals and ensure that they
are used properly.
BASF uses its cc-markets Web site to create a communication
space with special customers.
BASF exhibits at trade shows such as Powder Coatings
Europe, a show held every January in Amsterdam.
Source: F. Robert Dwyer and John F. Tanner, Business Marketing, 3rd ed. (Burr Ridge, IL: McGraw-Hill/Irwin,
2006), p. 10.
Organization-Specific Factors
Three primary organization-specific factors influence the purchasing process: orientation,
size, and degree of centralization. First, in terms of orientation, the dominant function in an
organization may control purchasing decisions. For example, if the organization is technology
oriented, it is likely to be dominated by engineering personnel, who will make buying
decisions. Similarly, if the organization is production oriented, production personnel may
dominate buying decisions.
Second, the size of the organization may influence the purchasing process. If the organi-
zation is large, it will likely have a high degree of joint decision making for other than
straight rebuys. Smaller organizations are likely to have more autonomous decision making.
Finally, the degree of centralization of an organization influences whether decisions are
made individually or jointly with others. Organizations that are highly centralized are less
likely to have joint decision making. Thus, a privately owned, small company with technol-
ogy or production orientations will tend toward autonomous decision making, while a
large-scale public corporation with considerable decentralization will tend to have greater
joint decision making.
Purchasing Policies and Procedures
Organizations typically develop a number of policies and procedures for various types of
purchases. These policies and procedures are designed to ensure that the appropriate
products and services are purchased efficiently and that responsibility for buying is
assigned appropriately. Often a purchasing department will be assigned the task of
centralized buying for the whole organization, and individuals within this department will
have authority to purchase particular types of products and services in a given price range.
A current trend in many organizations is sole sourcing, in which all of a particular type
of product is purchased from a single supplier. Sole sourcing has become more popular
because organizational buyers have become more concerned with quality and timely deliv-
ery and less likely to purchase only on the basis of price. Sole sourcing is advantageous for
suppliers because it provides them with predictable and profitable demand and allows them
MARKETING INSIGHT Key Differences in Marketing to
Organizational Buyers 4–1
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58 Part B Marketing Information, Research, and Understanding the Target Market
to build long-term relationships with organizational buyers. It is advantageous for organiza-
tional buyers because it not only increases timely delivery and quality of supplies but also
allows the buyers to work more closely with suppliers to develop superior products that meet
their needs and those of their customers. The use of sole sourcing also simplifies the buying
process and can make what were formerly modified rebuys into simpler straight rebuys.
Of course, many organizational purchases are more complicated and require policies
and procedures to direct the buying process. In many cases, organizations will develop a list
of approved vendors from which buyers have authorization to purchase particular products.
The buyer’s responsibility is to select the vendor that will provide the appropriate levels of
quality and service at the lowest cost. These policies and procedures also specify what
positions in the purchasing department or buying center have authority to make purchases
of different types and dollar amounts.
For large one-time projects, such as the construction of a building, organizations may seek
competitive bids for part or all of the project. The development of policies and procedures for
handling such purchases is usually complex and involves a number of criteria and committees.
BEHAVIORAL INFLUENCES ON ORGANIZATIONAL BUYING
Organizational buyers are influenced by a variety of psychological and social factors. We
will discuss two of these, personal motivations and role perceptions.
Personal Motivations
Organizational buyers are, of course, subject to the same personal motives or motivational
forces as other individuals. Although these buyers may emphasize nonpersonal motives in
their buying activities, it has been found that organizational buyers often are influenced by
such personal factors as friendship, professional pride, fear and uncertainty (risk), trust, and
personal ambitions in their buying activities.
For example, professional pride often expresses itself through efforts to attain status in
the firm. One way to achieve this might be to initiate or influence the purchase of goods
that will demonstrate a buyer’s value to the organization. If new materials, equipment, or
components result in cost savings or increased profits, the individuals initiating the
changes have demonstrated their value at the same time. Fear and uncertainty are strong
motivational forces on organizational buyers, and reduction of risk is often important to
them. This can have a strong influence on purchase behavior. Marketers should understand
the relative strength of personal gain versus risk-reducing motives and emphasize the
more important motives when dealing with buyers.
Thus, in examining buyer motivations, it is necessary to consider both personal and
nonpersonal motivational forces and to recognize that the relative importance of each
is not a fixed quantity. It will vary with the nature of the product, the climate within the
organization, and the relative strength of the two forces in the particular buyer.
Role Perceptions
A final factor that influences organizational buyers is their own perception of their role.
The manner in which individuals behave depends on their perception of their role, their
commitment to what they believe is expected of their role, the “maturity” of the role type,
and the extent to which the institution is committed to the role type.
Different buyers will have different degrees of commitment to their buying role, which
will cause variations in role behavior from one buyer to the next. By commitment we mean
willingness to perform their job in the manner expected by the organization. For example,
some buyers seek to take charge in their role as buyer and have little commitment to company
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59
1. Is the need or problem pressing enough that it must be acted on now? If not, how long
can action be deferred?
2. What types of products or services could conceivably be used to solve our need or
problem?
3. Should we make the item ourselves?
4. Must a new product be designed, or has a vendor already developed an acceptable
product?
5. Should a value analysis be performed?
6. What is the highest price we can afford to pay?
7. What trade-offs are we prepared to make between price and other product/vendor
attributes?
8. Which information sources will we rely on?
9. How many vendors should be considered?
10. Which attributes will be stressed in evaluating vendors?
11. Should bids be solicited?
12. Should the item be leased or purchased outright?
13. How far can a given vendor be pushed in negotiations? On what issues will that vendor
bend the most?
14. How much inventory should a vendor be willing to keep on hand?
15. Should we split our order among several vendors?
16. Is a long-term contract in our interest?
17. What contractual guarantees will we require?
18. How shall we establish our order routine?
19. After the purchase, how will vendor performance be evaluated?
20. How will we deal with inadequate product or vendor performance?
Source: Michael H. Morris, Leyland F. Pitt, and Earl D. Honeycutt, Jr., Business-to-Business Marketing, 3rd ed.
(Thousand Oaks, CA: Sage Publications, 2001), p. 74.
MARKETING INSIGHT Twenty Potential Decisions Facing
Organizational Buyers
expectations. The implication for marketers is that such buyers expect, even demand, that they
be kept constantly advised of all new developments to enable them to more effectively shape
their own role. On the other hand, other buyers may have no interest in prescribing their role
activities and accept their role as given to them. Such a buyer is most concerned with merely
implementing prescribed company activities and buying policies with sanctioned products.
Thus, some buyers will be highly committed to play the role the firm dictates (i.e., the formal
organization’s perception of their role), while others might be extremely innovative and
uncommitted to the expected role performance. Obviously, roles may be heavily influenced
by the organizational climate existing in the particular organization.4
Organizations can be divided into three groups based on differences in degree of employee
commitment. These groups include innovative, adaptive, and lethargic firms. In innovative
firms, individuals approach their occupational roles with a weak commitment to expected
norms of behavior. In an adaptive organization, there is a moderate commitment. In a lethar-
gic organization, individuals express a strong commitment to traditionally accepted behav-
ior and behave accordingly. Thus, a buyer in a lethargic firm would probably be less
innovative in order to maintain acceptance and status within the organization and would keep
conflict within the firm to a minimum.
Buyers’ perception of their role may differ from the perception of their role held by others
in the organization. This difference can result in variance in perception of the actual purchase
4–2
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60
responsibility held by the buyer. One study involving purchasing agents revealed that, in
every firm included in the study, the purchasing agents believed they had more responsibility
and control over certain decisions than the other influential purchase decision makers in the
firm perceived them as having. The decisions were (1) designing the product, (2) setting a cost
for the product, (3) determining performance life, (4) naming a specific supplier, (5) assessing
the amount of engineering help available from the supplier, and (6) reducing rejects. This
variance in role perception held true regardless of the size of the firm or the significance of
the item purchased to the overall success of the firm. It is important, therefore, that the
marketer be aware that such perceptual differences may exist and to determine as accurately
as possible the amount of control and responsibility over purchasing decisions held by each
purchase decision influencer in the firm.
STAGES IN THE ORGANIZATIONAL BUYING PROCESS
As with consumer buying, most organizational purchases are made in response to a
particular need or problem. Ideally, the products or services purchased will meet the
organizational need and improve the organization’s efficiency, effectiveness, and prof its.
The organizational buying process can be analyzed as a series of four stages: organiza-
tional need, vendor analysis, purchase activities, and postpurchase evaluation.
1. Avoid the intent and appearance of unethical or compromising practice in relationships,
actions, and communications.
2. Demonstrate loyalty to the employer by diligently following the lawful instructions of
the employer, using reasonable care and only the authority granted.
3. Refrain from any private or professional business activity that would create a conflict
between personal interests and the interests of the employer.
4. Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts and the
acceptance of gifts, entertainment, favors, or services from past or potential suppliers that
might influence or appear to influence purchasing decisions.
5. Handle confidential or proprietary information belonging to employers or suppliers with
due care and proper consideration of ethical and legal ramifications and government
regulations.
6. Promote positive supplier relationships through courtesy and impartiality throughout
all phases of the purchasing cycle.
7. Refrain from reciprocal agreements that restrain competition.
8. Know and obey the letter and spirit of laws governing the purchasing function and
remain alert to the legal ramifications of purchasing decisions.
9. Encourage all segments of society to participate by demonstrating support for small,
disadvantaged, and minority-owned businesses.
10. Discourage purchasing’s involvement in employer-sponsored programs of personal
purchases that are not business related.
11. Enhance the proficiency and stature of the purchasing profession by acquiring and
maintaining current technical knowledge and the highest standards of ethical behavior.
12. Conduct international purchasing in accordance with the laws, customs, and practices
of foreign countries, consistent with U.S. laws, your organization’s policies, and these
Ethical Standards and Guidelines.
Source: Institute for Supply Management as reported in F. Robert Dwyer and John F. Tanner, Business
Marketing, 3rd ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2006), p. 85.
MARKETING INSIGHT Code of Ethics for Organizational
Buyers 4–3
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Chapter Four Business, Government, and Institutional Buying 61
Organizational Need
Organizations have many needs for products and services to help them survive and meet
their objectives. For example, a manufacturer may need to purchase new machinery to
increase its production capacity and meet demand; a retailer may need to purchase services
from a marketing research firm to better understand its market; a government agency may
need to purchase faster computers to keep up with growing demand for its services; a
hospital may need to purchase more comfortable beds for its patients. Recognizing these
needs, and a willingness and ability to meet them, often results in organizational purchases.
For straight rebuys, the purchase process may involve little more than a phone call or a few
clicks on a computer to order products and arrange payment and delivery. For modified
rebuys or new task purchases, the process may be much more complex.
Vendor Analysis
Organizational buyers must search for, locate, and evaluate vendors of products and
services to meet their needs. Searching for and locating vendors is often easy since they
frequently make sales calls on organizations that might need their products. Vendors also
advertise in trade magazines or on the Internet and have displays at industry trade shows to
increase their visibility to organizational buyers. For products and services that the organi-
zation has previously purchased, the organization may already have developed a list of
approved vendors.
Organizational buyers often use a vendor analysis to evaluate possible suppliers. A vendor
analysis is the process by which buyers rate each potential supplier on various performance
measures such as product quality, on-time delivery, price, payment terms, and use of modern
technology. Figure 4.3 presents a sample vendor analysis form that lists a number of purchase
criteria and the weights one organization used to compare potential suppliers.
A formal vendor analysis can be used for at least three purposes. First, it can be used to
develop a list of approved vendors, all of which provide acceptable levels of products
and services. Organizational buyers can then select any company on the list, simplifying
the purchase process. Second, a vendor analysis could be used to compare competing
vendors; the buyers then select the best one on the basis of the ratings. This could help the
organization pare down vendors to a single supplier for which a long-term, sole-sourcing
relationship could be developed. Third, a vendor analysis can be done both before and after
purchases to compare performance on evaluation criteria and evaluate the process of
vendor selection.
Purchase Activities
Straight rebuys may involve a quick order to an approved vendor or sole-source supplier.
However, other types of organizational purchases can involve long time periods with
extensive negotiations on price and terms and formal contracts stating quality, delivery, and
service criteria. The complexity of the product or service, the number of suppliers available,
the importance of the product to the buying organization, and pricing all influence the number
of purchase activities to be performed and their difficulty. For example, an airline buying a
fleet of jumbo jets or a car rental agency buying a fleet of cars may take months or years to
negotiate and make purchases. While such buyers may have considerable leverage in nego-
tiating, it should be remembered that these organizations need the products just as badly as
the sellers need to sell them. Thus, there is often more collaboration among organizational
buyers and sellers than in the consumer market.
Postpurchase Evaluation
Organizational buyers must evaluate both the vendors and the products they purchase to
determine whether the products are acceptable for future purchases or whether other
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62 Part B Marketing Information, Research, and Understanding the Target Market
sources of supply should be found. A comparison of the performance of the vendor and
products with the criteria listed on the prior vendor analysis can be useful for this purpose.
If the purchase process goes smoothly and products meet price and quality criteria, then the
vendor may be put on the approved list or perhaps further negotiations can be made to sole-
source with the supplier.
One problem in judging the acceptability of suppliers and products is that different func-
tional areas may have different evaluation criteria. Figure 4.4 presents several functional
areas of a manufacturing company and their common concerns in purchasing. Clearly,
these concerns should be considered both prior to purchasing from a particular supplier and
after purchasing to ensure that every area’s needs are being met as well as possible.
Supplier Name: __________________________________ Type of Product: _______________________________
Shipping Location: ________________________________ Annual Sales Dollars: ___________________________
5 4 3 2 1 0
Excellent Good Satisfactory Fair Poor N/A
Quality (45%)
Defect rates ___ ___ ___ ___ ___ ___
Quality of sample ___ ___ ___ ___ ___ ___
Conformance with quality program ___ ___ ___ ___ ___ ___
Responsiveness to quality problems ___ ___ ___ ___ ___ ___
Overall quality ___ ___ ___ ___ ___ ___
Delivery (25%)
Avoidance of late shipments ___ ___ ___ ___ ___ ___
Ability to expand production ___ ___ ___ ___ ___ ___
Performance in sample delivery ___ ___ ___ ___ ___ ___
Response to changes in order size ___ ___ ___ ___ ___ ___
Overall delivery ___ ___ ___ ___ ___ ___
Price (20%)
Price competitiveness ___ ___ ___ ___ ___ ___
Payment terms ___ ___ ___ ___ ___ ___
Absorption of costs ___ ___ ___ ___ ___ ___
Submission of cost savings plans ___ ___ ___ ___ ___ ___
Overall price ___ ___ ___ ___ ___ ___
Technology (10%)
State-of-the-art components ___ ___ ___ ___ ___ ___
Sharing research & development capability ___ ___ ___ ___ ___ ___
Ability and willingness to help with design ___ ___ ___ ___ ___ ___
Responsiveness to engineering problems ___ ___ ___ ___ ___ ___
Overall technology ___ ___ ___ ___ ___ ___
Buyer: ________________________ Date: ________________________
Comments: ________________________________________________________________________________________________
FIGURE 4.3 Sample Vendor Analysis Form
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Chapter Four Business, Government, and Institutional Buying 63
CONCLUSION
Organizational buyers include individuals involved in purchasing products and services
for businesses, government agencies, and other institutions and agencies. The organiza-
tional buying process is influenced by whether the purchase is a straight rebuy, modified
rebuy, or new task purchase. It is also influenced by people in various purchasing roles,
the orientation, size, and degree of centralization of the organization, the organization’s
purchasing policies and procedures, and individuals’ motivations and perceived roles. The
organizational buying process can be viewed as a series of four stages ranging from
organizational need, to vendor analysis, to purchase activities, to postpurchase evaluation.
It is important that companies marketing to organizations understand the influences and
process by which organizations buy products and services so their needs can be met fully
and profitably.
FIGURE 4.4
Functional Areas and
Their Key Concerns in
Organizational Buying
Source: Michael H. Morris,
Leyland F. Pitt, and Earl D.
Honeycutt, Jr., Business-
to-Business Marketing, 3rd
ed. (Thousand Oaks, CA:
Sage Publications, 2001),
p. 66.
Functional Areas
Design and development
engineering
Production
Sales/marketing
Maintenance
Finance/accounting
Purchasing
Quality control
Key Concerns
Name reputation of vendor; ability of vendors to meet design
specifications.
Delivery and reliability of purchases such that interruption of
production schedules is minimized.
Impact of purchased items on marketability of the company’s
products.
Degree to which purchased items are compatible with existing
facilities and equipment; maintenance service offered by vendor;
installation arrangements offered by vendor.
Effects of purchases on cash flow, balance sheet, and income
statement positions; variances in costs of materials over estimates;
feasibility of make-or-buy and lease options to purchasing.
Obtaining lowest possible price at acceptable quality levels;
maintaining good relations with vendors.
Assurance that purchased items meet prescribed specifications
and tolerances, governmental regulations, and customer
requirements.
Anderson, James C., and James A. Narus. Business Marketing Management. 2nd ed. Upper Saddle
River, NJ: Prentice Hall, 2004.
Brennan, Ross; Louise E. Canning, and Raymond McDowell. Business-to-Business Marketing.
Thousand Oaks, CA: Sage, 2007.
Dwyer, F. Robert, and John F. Tanner. Business Marketing. 3rd ed. Burr Ridge, IL: McGraw-Hill/
Irwin, 2006.
Hutt, Michael D., and Thomas W. Speh. Business Marketing Management: B2B. 9th ed. Mason,
OH: Thomson South-Western, 2007.
Additional
Resources
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Part B
M
arketing Inform
ation,Research,
and Understanding the Target M
arket
5
Market Segmentation
Market segmentation is one of the most important concepts in marketing. In fact, a primary
reason for studying consumer and organizational buyer behavior is to provide bases for
effective segmentation, and a large portion of marketing research is concerned with
segmentation. From a marketing management point of view, selection of the appropriate
target market is paramount to developing successful marketing programs.
The logic of market segmentation is quite simple and is based on the idea that a single
product item can seldom meet the needs and wants of all consumers. Typically, consumers
vary as to their needs, wants, and preferences for products and services, and successful
marketers adapt their marketing programs to fulfill these preference patterns. For example,
even a simple product like chewing gum has multiple flavors, package sizes, sugar con-
tents, calories, consistencies (e.g., liquid centers), and colors to meet the preferences of
various consumers. While a single product item cannot meet the needs of all consumers, it
can almost always serve more than one consumer. Thus, there are usually groups of
consumers who can be served well by a single item. If a particular group can be served
profitably by a firm, it is a viable market segment. In other words, the firm should develop
a marketing mix to serve the group or market segment.
In this chapter we consider the process of market segmentation. We define market
segmentation as the process of dividing a market into groups of similar consumers and
selecting the most appropriate group(s) for the firm to serve. The group or market seg-
ment that a company selects to focus on is called a target market. We break down
the process of market segmentation into six steps, as shown in Figure 5.1. While we
recognize that the order of these steps may vary, depending on the firm and situation, there
are few if any times when market segmentation analysis can be ignored. In fact, even if the
final decision is to “mass market” and not segment at all, this decision should be reached
only after a market segmentation analysis has been conducted. Thus, market segmentation
analysis is a cornerstone of sound marketing planning and decision making.
DELINEATE THE FIRM’S CURRENT SITUATION
As emphasized in Chapter 1, a firm must do a complete situational analysis when embark-
ing on a new or modified marketing program. At the marketing planning level, such an
analysis aids in determining objectives, opportunities, and constraints to be considered
when selecting target markets and developing marketing mixes. In addition, marketing
managers must have a clear idea of the amount of financial and other resources that will be
available for developing and executing a marketing plan. Thus, the inclusion of this first
step in the market segmentation process is intended to be a reminder of tasks to be
performed prior to marketing planning.
Chapter
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Chapter Five Market Segmentation 65
DETERMINE CONSUMER NEEDS AND WANTS
As emphasized throughout this text, successful marketing strategies depend on discovering and
satisfying consumer needs and wants. In some cases, this idea is quite operational. To illustrate,
suppose a firm has a good deal of venture capital and is seeking to diversify its interest into
new markets. A firm in this situation may seek to discover a broad variety of unsatisfied needs.
However, in most situations, the industry in which the firm operates specifies the boundaries
of a firm’s need satisfaction activities. For example, a firm in the communication industry may
seek more efficient methods for serving consumers’ long-distance telephone needs.
As a practical matter, new technology often brings about an investigation of consumer
needs and wants for new or modified products and services. In these situations, the firm is
seeking the group of consumers whose needs could best be satisfied by the new or modified
product. Further, at a strategic level, consumer needs and wants usually are translated into more
operational concepts. For instance, consumer attitudes, preferences, and benefits sought, which
are determined through marketing research, are commonly used for segmentation purposes.
DIVIDE MARKETS ON RELEVANT DIMENSIONS
In a narrow sense, this step is often considered to be the whole of market segmentation
(i.e., consumers are grouped on the basis of one or more similarities and treated as a
homogeneous segment of a heterogeneous total market). Three important questions should
be considered here:
1. Should the segmentation be a priori or post hoc?
2. How does one determine the relevant dimensions or bases to use for segmentation?
3. What are some bases for segmenting consumer and organizational buyer markets?
Design marketing mix strategy
Develop product positioning
Divide markets on relevant dimensions
Determine consumer needs and wants
Delineate firm’s current situation
Decide segmentation strategy
FIGURE 5.1
A Model of the
Market Segmentation
Process
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66
MARKETING INSIGHT Five Reasons Why Market Segmentation
is Critical in Today’s Markets
A Priori versus Post Hoc Segmentation
Real-world segmentation has followed one of two general patterns. An a priori segmenta-
tion approach is one in which the marketing manager has decided on the appropriate basis
for segmentation in advance of doing any research on a market. For example, a manager
may decide that a market should be divided on the basis of whether people are nonusers,
light users, or heavy users of a particular product. Segmentation research is then conducted
to determine the size of each of these groups and their demographic or psychographic
profiles.
Post hoc segmentation is an approach in which people are grouped into segments on the
basis of research findings. For example, people interviewed concerning their attitudes or
benefits sought in a particular product category are grouped according to their responses.
The size of each of these groups and their demographic and psychographic profiles are
then determined.
Both of these approaches are valuable, and the question of which to use depends in part
on how well the firm knows the market for a particular product class. If through previous
research and experience a marketing manager has successfully isolated a number of key
market dimensions, then an a priori approach based on them may provide more useful
information. In the case of segmentation for entirely new products, a post hoc approach
may be useful for determining key market dimensions. However, even when using a post
hoc approach, some consideration must be given to the variables to be included in the
research design. Thus, some consideration must be given to the relevant segmentation
dimensions regardless of which approach is used.
Relevance of Segmentation Dimensions
Unfortunately, there is no simple solution for determining the relevant dimensions for
segmenting markets. Certainly, managerial expertise and experience are needed for
selecting the appropriate dimensions or bases on which to segment particular markets. In
most cases, however, at least some initial dimensions can be determined from previous
5–1
1. Slower rates of market growth, coupled with increased foreign competition, have fos-
tered more competition, increasing the need to identify target markets with unique
needs.
2. Social and economic forces, including expanding media, increased educational levels,
and general world awareness, have produced customers with more varied and sophisti-
cated needs, tastes, and lifestyles.
3. Technological advances make it possible for marketers to devise marketing programs
that focus efficiently on precisely defined segments of the market.
4. Marketers now find that minority buyers do not necessarily adopt the social and eco-
nomic habits of the mainstream. For example, many Hispanics speak both Spanish and
English and retain much of their culture even as they adapt to U.S. lifestyles, while many
others remain in Spanish-speaking enclaves in Hispanic states like Texas and California.
5. Roughly 4 in 10 residents in the United States identify with some segment or niche
group that does not reflect the white, heterosexual consumer that historically defined
the marketing mainstream.
Source: William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing, Burr Ridge, IL:
McGraw-Hill/Irwin, 2007, p. 155.
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research, purchase trends, and managerial judgment. For instance, suppose we wish to
segment the market for all-terrain vehicles. Clearly, several dimensions come to mind for
initial consideration, including sex (male), age (18 to 35 years), lifestyle (outdoorsman),
and income level (perhaps $30,000 to $80,000). At a minimum, these variables should
be included in subsequent segmentation research. Of course, the most market-oriented
approach to segmentation is on the basis of what benefits the potential consumer is
seeking. Thus, consideration and research of sought benefits are a strongly recommended
approach in the marketing literature. This approach will be considered in some detail in
the following section.
Bases for Segmentation
A number of useful bases for segmenting consumer and organizational markets are
presented in Figure 5.2. This is by no means a complete list of possible segmentation
variables but represents some useful bases and categories. Two commonly used approaches
for segmenting markets include benefit segmentation and psychographic segmentation.
We will discuss these two in some detail. We will also discuss geodemographic segmen-
tation, a recent development with a number of advantages for marketers.
Benefit Segmentation
The belief underlying this segmentation approach is that the benefits people are seeking
in consuming a given product are the basic reasons for the existence of true market seg-
ments.1 Thus, this approach attempts to measure consumer value systems and consumer
perceptions of various brands in a product class. To illustrate, Russell Haley provided
the classic example of a benefit segmentation in terms of the toothpaste market. Haley
identified five basic segments, which are presented in Figure 5.3. Haley argued that this
segmentation could be very useful for selecting advertising copy, media, commercial
length, packaging, and new product design. For example, colorful packages might be
appropriate for the sensory segment, perhaps aqua (to indicate fluoride) for the worrier
group, and gleaming white for the social segment because of this segment’s interest in
white teeth.
Calantone and Sawyer also used a benefit segmentation approach to segment the market
for bank services.2 Their research was concerned with the question of whether benefit
segments remain stable across time. While they found some stability in segments, there
were some differences in attribute importance, size, and demographics at different times.
Thus, they argue for ongoing benefit segmentation research to keep track of any changes in
a market that might affect marketing strategy.
Benefit segmentation is clearly a market-oriented approach to segmentation that seeks
to identify consumer needs and wants and to satisfy them by providing products and ser-
vices with the desired benefits. It is clearly very consistent with the approach to marketing
suggested by the marketing concept.
Psychographic Segmentation
Whereas benefit segmentation focuses on the benefits sought by the consumer, psycho-
graphic segmentation focuses on consumer lifestyles. Consumers are first asked a vari-
ety of questions about their lifestyles and then grouped on the basis of the similarity
of their responses. Lifestyles are measured by asking consumers about their activities
(work, hobbies, vacations), interests (family, job, community), and opinions (about
social issues, politics, business). The activity, interest, and opinion (AIO) questions
are very general in some studies but in others, at least some of the questions relate to
specific products.3
Chapter Five Market Segmentation 67
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Consumer Markets
Segmentation Base Examples of Market Segments
Geographic:
Continents Africa, Asia, Europe, North America, South America
Global regions Southeast Asia, Mediterranean, Caribbean
Countries China, Canada, France, United States, Brazil
Country regions Pacific Northwest, Middle Atlantic, Midwest
City, county, or SMSA size Under 5,000 people; 5,000–19,999, 20,000–49,999, 50,000–99,999; 100,000–249,999;
250,000–499,999; 500,000–999,999; or over a million
Population density Urban, suburban, rural
Climate Tropical, temperate, cold
Demographic:
Age Under 6 years old, 6–12, 13–19, 20–29, 30–39, 40–49, 50–59, 60!
Gender Male, female
Family size 1–2 persons, 3–4 persons, more than 4 persons
Family life cycle Single, young married, married with children, sole survivor
Income Under $10,000 per year, $10,000–$19,999, $20,000–$29,999, $30,000–$39,999,
$40,000–$49,999, $50,000–59,999, 60,000–69,999, 70,000!
Education Grade school or less, some high school, graduated from high school, some college, graduated
from college, some graduate work, graduate degree
Marital status Single, married, divorced, widowed
Social:
Culture American, Hispanic, African, Asian, European
Subculture
Religion Jewish, Catholic, Muslim, Mormon, Buddhist
Race European American, Asian American, African American, Hispanic American
Nationality French, Malaysian, Australian, Canadian, Japanese
Social class Upper class, middle class, working class, lower class
Thoughts and feelings:
Knowledge Expert, novice
Involvement High, medium, low
Attitude Positive, neutral, negative
Benefits sought Convenience, economy, prestige
Innovativeness Innovator, early adopter, early majority, late majority, laggards, nonadopter
Readiness stage Unaware, aware, interested, desirous, plan to purchase
Perceived risk High, moderate, low
Behavior:
Media usage Newspaper, magazine, TV, Internet
Specific media usage Sports Illustrated, Cosmopolitan, Ebony
Payment method Cash, Visa, MasterCard, American Express, check
Loyalty status None, some, total
Usage rate Light, medium, heavy
User status Nonuser, ex-user, current user, potential user
Usage situation Work, home, vacation, commuting
Combined approaches:
Psychographics Achievers, strivers, strugglers
Person/situation College students for lunch, executives for business dinner
Geodemography Money and Brains, American Dreams, Bohemian Mix
Organizational Buyer Markets
Segmentation Base Examples of Market Segments
Company size Small, medium, large relative to industry
Purchase quantity Small, medium, large account
Product application Production, maintenance, product component
Organization type Manufacturer, retailer, government agency, hospital
Location North, south, east, west sales territory
Purchase status New customer, occasional purchaser, frequent purchaser, nonpurchaser
Attribute importance Price, service, reliability of supply
FIGURE 5.2 Useful Segmentation Bases for Consumer and Organizational Buyer Markets
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The best-known psychographic segmentation is called VALS™, which stands for “values
and lifestyles.” Originally developed in the 1970s, it has been redone several times to enhance
its ability to explain changing lifestyles and predict consumer behavior. Segmentation re-
search based on VALS™ is a product of SRI Consulting Business Intelligence.
As shown in Figure 5.4, the VALS™ framework has eight psychographic groups
arranged in a rectangle based on two dimensions. The vertical dimension segments people
Ideals
Innovators
Believers
Survivors
Achievement Self-expression
High resources
High innovation
Primary motivation
Low resources
Low innovation
Strivers Makers
Thinkers Achievers Experiencers
FIGURE 5.4 VALS™ Framework and Segments
Source: www.sric.bi.com, October 18, 2008.
Chapter Five Market Segmentation 69
Independent
Sensory Segment Sociable Segment Worrier Segment Segment
Principal benefit sought Flavor and product appearance Brightness of teeth Decay prevention Price
Demographic strengths Children Teens, young people Large families Men
Special behavioral Users of spearmint-flavored Smokers Heavy users Heavy users
characteristics toothpaste
Brands disproportionately Colgate Macleans, Ultra Brite Crest Cheapest brand
favored
Lifestyle characteristics Hedonistic Active Conservative Value-oriented
FIGURE 5.3 Toothpaste Market Benefit Segments
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70 Part B Marketing Information, Research, and Understanding the Target Market
FIGURE 5.4 (continued)
Innovators. Innovators are successful, sophisticated, take-charge people with high self-esteem. Because they have such
abundant resources, they exhibit all three primary motivations in varying degrees. They are change leaders and are the
most receptive to new ideas and technologies. Innovators are very active consumers, and their purchases reflect cultivated
tastes for upscale, niche products and services. Image is important to Innovators, not as evidence of status or power but as
an expression of their taste, independence, and personality. Innovators are among the established and emerging leaders in
business and government, yet they continue to seek challenges. Their lives are characterized by variety. Their possessions
and recreation reflect a cultivated taste for the finer things in life.
Thinkers. Thinkers are motivated by ideals. They are mature, satisfied, comfortable, and reflective people who value order,
knowledge, and responsibility. They tend to be well educated and actively seek out information in the decision-making
process. They are well-informed about world and national events and are alert to opportunities to broaden their knowledge.
Thinkers have a moderate respect for the status quo institutions of authority and social decorum, but are open to consider
new ideas. Although their incomes allow them many choices, Thinkers are conservative, practical consumers; they look for
durability, functionality, and value in the products they buy.
Achievers. Motivated by the desire for achievement, Achievers have goal-oriented lifestyles and a deep commitment to
career and family. Their social lives reflect this focus and are structured around family, their place of worship, and work.
Achievers live conventional lives, are politically conservative, and respect authority and the status quo. They value consensus,
predictability, and stability over risk, intimacy, and self-discovery. With many wants and needs, Achievers are active in the
consumer marketplace. Image is important to Achievers; they favor established, prestige products and services that demon-
strate success to their peers. Because of their busy lives, they are often interested in a variety of time-saving devices.
Experiencers. Experiencers are motivated by self-expression. As young, enthusiastic, and impulsive consumers, Experiencers
quickly become enthusiastic about new possibilities but are equally quick to cool. They seek variety and excitement, savoring
the new, the offbeat, and the risky. Their energy finds an outlet in exercise, sports, outdoor recreation, and social activities.
Experiencers are avid consumers and spend a comparatively high proportion of their income on fashion, entertainment, and
socializing. Their purchases reflect the emphasis they place on looking good and having “cool” stuff.
Believers. Like Thinkers, Believers are motivated by ideals. They are conservative, conventional people with concrete
beliefs based on traditional, established codes: family, religion, community, and the nation. Many Believers express moral
codes that are deeply rooted and literally interpreted. They follow established routines, organized in large part around
home, family, community, and social or religious organizations to which they belong. As consumers, Believers are pre-
dictable; they choose familiar products and established brands. They favor American products and are generally loyal cus-
tomers.
Strivers. Strivers are trendy and fun loving. Because they are motivated by achievement, Strivers are concerned about the
opinions and approval of others. Money defines success for Strivers, who don’t have enough of it to meet their desires. They
favor stylish products that emulate the purchases of people with greater material wealth. Many see themselves as having a
job rather than a career, and a lack of skills and focus often prevents them from moving ahead. Strivers are active consumers
because shopping is both a social activity and an opportunity to demonstrate to peers their ability to buy. As consumers, they
are as impulsive as their financial circumstance will allow.
Makers. Like Experiencers, Makers are motivated by self-expression. They express themselves and experience the world
by working on it—building a house, raising children, fixing a car, or canning vegetables—and have enough skill and energy
to carry out their projects successfully. Makers are practical people who have constructive skills and value self-sufficiency.
They live within a traditional context of family, practical work, and physical recreation and have little interest in what lies
outside that context. Makers are suspicious of new ideas and large institutions such as big business. They are respectful
of government authority and organized labor, but resentful of government intrusion on individual rights. They are
unimpressed by material possessions other than those with a practical or functional purpose. Because they prefer value to
luxury, they buy basic products.
Survivors. Survivors live narrowly focused lives. With few resources with which to cope, they often believe that the world is
changing too quickly. They are comfortable with the familiar and are primarily concerned with safety and security. Because
they must focus on meeting needs rather than fulfilling desires, Survivors do not show a strong primary motivation. Survivors
are cautious consumers. They represent a very modest market for most products and services. They are loyal to favorite
brands, especially if they can purchase them at a discount.
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based on the degree to which they are innovative and have resources such as income,
education, self-confidence, intelligence, leadership skills, and energy. The horizontal
dimension represents primary motivations for buying and includes three different types.
Consumers driven by knowledge and principles are motivated primarily by ideals. These
consumers include the Thinkers and Believers groups. Consumers driven by a goal of
demonstrating success to their peers are motivated primarily by achievement. These con-
sumers include Achievers and Strivers. Consumers driven by a desire for social or phys-
ical activity, variety, and risk taking are motivated primarily by self-expression. These
consumers include both the Experiencers and Makers. At the top of the rectangle are the
Innovators, who have such high resources that they may express any of the three motiva-
tions. At the bottom of the rectangle are the Survivors, who live complacently and within
their means without a strong primary motivation of the types listed above. Figure 5.4
gives more details about each of the eight groups.4
Marketers can purchase research data that show which VALS™ groups are the primary
buyers of specific products and services. This information can be used to better focus
elements of the marketing mix, such as promotion, on the best target markets.
Geodemographic Segmentation
One problem with many segmentation approaches is that although they identify types or
categories of consumers, they do not identify specific individuals or households within a
market. Geodemographic segmentation identifies specific households in a market by fo-
cusing on local neighborhood geography (such as zip codes) to create classifications of
actual, addressable, mappable neighborhoods where consumers live and shop.5 One geo-
demographic system created by Claritas, Inc., is called PRIZM NE, which stands for con-
sumers “Potential Ranking Index of ZIP Markets—New Evolution.” The system
classifies every U.S. neighborhood into one of 15 groups. Each of these groups is further
divided into 3 to 6 segments, with a total of 66 distinct segments in this system. Each
group and segment is based on zip codes, demographic information from the U.S. Census,
and information on product use, media use, and lifestyle preferences. Figure 5.5 shows a
sample group with five segments. The PRIZM NE system includes maps of different ar-
eas that rank neighborhoods on their potential to purchase specific products and services.
The PRIZM NE segmentation is available on major marketing databases from leading
providers such as ACNielsen, Arbitron, Gallup, IRI, J. D. Powers, Mediamark, and
Nielsen Media Research.
The PRIZM NE system is based on the assumptions that consumers in particular neigh-
borhoods are similar in many respects and that the best prospects are those who actually use
a product or other consumers like them. Marketers use PRIZM NE to better understand
consumers in various markets, what they are like, where they live, and how to reach them.
These data help marketers with target market selection, direct marketing campaigns, site
selection, media selection, and analysis of sales potential in various areas.
5–2
MARKETING INSIGHT Want to Know Your VALS™ Category?
Check It Out on the Internet
71
You can find your VALS classification by filling out a questionnaire on the Internet. The
Web address is www.sric-bi.com/VALS. The questionnaire takes about 10 minutes to complete,
and your lifestyle will take about 10 seconds to compute. You will get a report that includes
both your primary and secondary VALS type. The VALS Web site has a lot of information
describing the program and different types of VALS segments.
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FIGURE 5.5 PRIZM NE Social Group U1—Urban Uptown
Source: www.claritas.com, April 1, 2006.
72 Part B Marketing Information, Research, and Understanding the Target Market
Group U1 – Urban Uptown
The five segments in Urban Uptown are home to the nation’s
wealthiest urban consumers. Members of this social group tend to
be affluent to middle class, college educated and ethnically
diverse, with above-average concentrations of Asian and Hispanic
Americans. Although this group is diverse in terms of housing
styles and family sizes, residents share an upscale urban
perspective that’s reflected in their marketplace choices. Urban
Uptown consumers tend to frequent the arts, shop at exclusive
retailers, drive luxury imports, travel abroad and spend heavily on
computer and wireless technology.
The Urban Uptown group consists of the following segments:
04. Young Digerati
07. Money and Brains
16. Bohemian Mix
26. The Cosmopolitans
29. American Dreams
04. Young Digerati – Young Digerati are
the nation’s tech–savvy singles and couples
living in fashionable neighborhoods on the
urban fringe. Affluent, highly educated and
ethnically mixed, Young Digerati
communities are typically filled with trendy
apartments and condos, fitness clubs and
clothing boutiques, casual restaurants and
all types of bars–from juice to coffee to
microbrew.
07. Money and Brains – The residents of
Money & Brains seem to have it all: high
incomes, advanced degrees and
sophisticated tastes to match their
credentials. Many of these citydwellers–
predominantly white with a high
concentration of Asian Americans–are
married couples with few children who live in
fashionable homes on small, manicured lots.
16. Bohemian Mix – A collection of young,
mobile urbanites, Bohemian Mix represents
the nation’s most liberal lifestyles. Its
residents are a progressive mix of young
singles and couples, students and
professionals, Hispanics, Asians, African–
Americans and whites. In their funky
rowhouses and apartments, Bohemian
Mixers are the early adopters who are quick
to check out the latest movie, nightclub,
laptop and microbrew.

26. The Cosmopolitans – These
immigrants and descendants of multi–
cultural backgrounds in multi-racial, multi-
lingual neighborhoods typify the American
Dream. Married couples, with and without
children, as well as single parents are
affluent from working hard at multiple trades
and public service jobs. They have big
families, which is unusual for social group
U1.

29. American Dreams – American Dreams
is a living example of how ethnically diverse
the nation has become: more than half the
residents are Hispanic, Asian or African-
American. In these multilingual
neighborhoods–one in ten speaks a
language other than English–middle-aged
immigrants and their children live in middle-
class comfort.
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Chapter Five Market Segmentation 73
DEVELOP PRODUCT POSITIONING
By this time, the firm should have a good idea of the basic segments of the market that could
potentially be satisfied with its product. The current step is concerned with positioning the
product favorably in the minds of customers relative to competitive products. Several dif-
ferent positioning strategies can be used. First, products can be positioned by focusing on
their superiority to competitive products based on one or more attributes. For example, a
car could be positioned as less expensive (Hyundai), safer (Volvo), higher quality (Toyota),
or more prestigious (Lexus) than other cars. Second, products can be positioned by use or
application. For example, Campbell’s soup is positioned not only as a lunch item but also
for use as a sauce or dip or as an ingredient in main dishes. Third, products can be posi-
tioned in terms of particular types of product users. For example, sales for Johnson’s Baby
Shampoo increased dramatically after the company positioned the product not only for
babies but also for active adults who need to wash their hair frequently. Fourth, products
can be positioned relative to a product class. For example, Caress soap was positioned
by Lever Brothers as a bath oil product rather than as a soap. Finally, products can be
positioned directly against particular competitors. For example, Coke and Pepsi and
McDonald’s and Burger King commonly position directly against each other on various
criteria, such as taste. The classic example of positioning is of this last type: Seven-Up
positioned itself as a tasty alternative to the dominant soft drink, colas.
One way to investigate how to position a product is by using a positioning map, which
is a visual depiction of customer perceptions of competitive products, brands, or models.
It is constructed by surveying customers about various product attributes and developing
dimensions and a graph indicating the relative position of competitors. Figure 5.6 pres-
ents a sample positioning map for automobiles that offers marketers a way of assessing
whether their brands are positioned appropriately. For example, if Chrysler or Buick
wants to be positioned in the minds of consumers as serious competitors to Lexus, then
their strategies need to be changed to move up on this dimension. After the new strategies
are implemented, a new positioning map could be developed to see if the brands moved
up as desired.
Luxurious
Functional
Traditional Sporty
Mercedes
Lexus
Porsche
BMW
Infiniti
Acura
Nissan
Toyota
VW
Kia
Saturn
Chevrolet
Buick
Chrysler
Cadillac
Lincoln
Mercury Ford
Dodge
FIGURE 5.6
Positioning Map for
Automobiles
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74
Some experts argue that different positioning strategies should be used depending on
whether the firm is a market leader or follower and that followers usually should not
attempt to position directly against the industry leader.6 The main point here is that in
segmenting markets, some segments might have to be forgone because a market-leading
competitive product already dominates in sales and in the minds of customers. Thus, a
smaller or less desirable target market may have to be selected since competing with market
leaders is costly and not often successful.
DECIDE SEGMENTATION STRATEGY
The firm is now ready to select its segmentation strategy. There are four basic alternatives.
First, the firm may decide not to enter the market. For example, analysis to this stage may
reveal there is no viable market niche for the firm’s offering. Second, the firm may decide
not to segment but to be a mass marketer. There are at least three situations when this may
be the appropriate decision for the firm:
1. The market is so small that marketing to a portion of it is not profitable.
2. Heavy users make up such a large proportion of the sales volume that they are the only
relevant target.
3. The brand is the dominant brand in the market, and targeting to a few segments would
not benefit sales and profits.
5–3
MARKETING INSIGHT Can Target Marketing Be Unethical?
Dividing markets into segments and then selecting the best ones to serve is one of the cor-
nerstones of sound marketing practice. However, there are situations when target market-
ing has been criticized as being unethical.
• R. J. Reynolds Tobacco Company planned to target African American consumers with a new
brand of menthol cigarettes, Uptown. This brand was to be advertised with suggestions of
glamour, high fashion, and night life. After criticism for targeting a vulnerable population,
the company canceled plans for the brand.
• RJR planned to target white, 18- to 24-year-old “virile” females with a new cigarette
brand, Dakota. It was criticized for targeting young, poorly educated, blue-collar
women; and although it expanded the market to include males, Dakota failed in test
markets and was withdrawn.
• Heileman Brewing Company planned to market a new brand of malt liquor called Power-
Master. Malt liquor is disproportionately consumed by African Americans and in low-
income neighborhoods. Criticism of this strategy led the brand to be withdrawn.
• The food industry has been criticized for many years for promoting high-fat-content
foods to children.
One study suggests that whether targeting a group of consumers is unethical depends on
two dimensions. The first is the degree to which the product can harm the consumers, and
the second is the vulnerability of the group. Thus, to market harmful products to vulnerable
target markets is likely to be considered unethical and could result in boycotts, negative
word of mouth, and possibly litigation or legislation.
Source: Kevin Freking, “Marketing to Minors,” Wisconsin State Journal, July 31, 2008, p. A7; N. Craig Smith
and Elizabeth Cooper-Martin, “Ethics and Target Marketing: The Role of Product Harm and Consumer
Vulnerability,” Journal of Marketing, July 1997, pp. 1–20.
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Third, the firm may decide to market to one segment. And fourth, the firm may decide
to market to more than one segment and design a separate marketing mix for each. In any
case, the firm must have some criteria on which to base its segmentation strategy decisions.
Three important criteria on which to base such decisions are that a viable segment must be
(1) measurable, (2) meaningful, and (3) marketable.
1. Measurable. For a segment to be selected, the firm must be capable of measuring its size
and characteristics. For instance, one of the difficulties with segmenting on the basis of
social class is that the concept and its divisions are not clearly defined and measured.
Alternatively, income is a much easier concept to measure.
2. Meaningful. A meaningful segment is one that is large enough to have sufficient sales
and growth potential to offer long-run profits for the firm.
3. Marketable. A marketable segment is one that can be reached and served by the firm in
an efficient manner.
Figure 5.7 offers a list of questions marketing managers should answer when deciding whether
a market segment meets these criteria. Segments that do so are viable target markets for the
firm’s offering. The firm must now give further attention to completing its marketing mix.
DESIGN MARKETING MIX STRATEGY
The firm is now in a position to complete its marketing plan by finalizing the marketing
mix or mixes to be used for each segment. Clearly, selection of the target market and
designing the marketing mix go hand in hand, and thus many marketing mix decisions
FIGURE 5.7
Selecting Target
Markets: Some
Questions Marketing
Managers Should
Answer
In order to select the best target markets, marketing managers must evaluate market segments on
a number of dimensions. Below is a list of questions managers should answer before selecting
target markets.
Measurability Questions
1. What are the appropriate bases for segmenting this market and are these bases readily
measurable?
2. Are secondary data available on these bases so that the market segment can be identified and
measured inexpensively?
3. If primary data are needed, is there sufficient return on investment to do the research?
4. Are specific names and addresses of people in this market segment needed; or is general
knowledge of their existence, number, and geographic location sufficient?
5. Can purchases of people in this market segment be readily measured and tracked?
Meaningfulness Questions
1. How many people are in this market segment and how frequently will they purchase our product?
2. What market share can we expect in this segment?
3. What is the growth potential of this segment?
4. How strong is competition for this market segment and how is it likely to change in the future?
5. How satisfied are customers in this market segment with current product offerings?
Marketability Questions
1. Can this market segment be reached with our current channels of distribution?
2. If new channels are needed, can we establish them efficiently?
3. What specific promotion media do these people read, listen to, or watch?
4. Can we afford to promote to these people in the appropriate media to reach them?
5. Are people in this market segment willing to pay a price that is profitable for the company?
6. Can we produce a product for this market segment and do so profitably?
Chapter Five Market Segmentation 75
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76 Part B Marketing Information, Research, and Understanding the Target Market
Additional
Resources
should have already been carefully considered. To illustrate, the target market selected may
be price sensitive, so some consideration has already been given to price levels, and clearly
product positioning has many implications for promotion and channel decisions. Thus,
while we place marketing mix design at the end of the model, many of these decisions are
made in conjunction with target market selection. In the next six chapters of this text,
marketing mix decisions will be discussed in detail.
CONCLUSION
The purpose of this chapter was to provide an overview of market segmentation. Market
segmentation was defined as the process of dividing a market into groups of similar con-
sumers and selecting the most appropriate group(s) for the firm to serve. Market segmen-
tation was analyzed as a six-stage process: (1) to delineate the firm’s current situation,
(2) to determine consumer needs and wants, (3) to divide the market on relevant dimen-
sions, (4) to develop product positioning, (5) to decide segmentation strategy, and (6) to
design marketing mix strategy.
Bolton, Ruth N., and Matthew B. Myers.“Price-Based Global Market Segmentation for Services,”
Journal of Marketing, July 2003, pp. 108–28.
Dickson, Peter R., and James L. Ginter. “Market Segmentation, Product Differentiation, and
Marketing Strategy.” Journal of Marketing, April 1987, pp. 1–10.
Myers, James H. Segmentation and Positioning for Strategic Marketing Decisions. Chicago:
American Marketing Association, 1996.
Yankelovich, Daniel, and David Meer. “Rediscovering Market Segmentation,” Harvard Business
Review, February 2006, pp. 122–31.
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Se
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ls
o
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en
t
The Marketing Mix
6 Product and Brand Strategy
7 New Product Planning and Development
8 Integrated Marketing Communications: Advertising, Sales Promotion, Public
Relations, and Direct Marketing
9 Personal Selling, Relationship Building, and Sales Management
10 Distribution Strategy
11 Pricing Strategy
CPart
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Part C
The M
arketing M
ix
78
6
Product and Brand
Strategy
Product strategy is a critical element of marketing and business strategy, since it is through
the sale of products and services that companies survive and grow. This chapter discusses
four important areas of concern in developing product strategies. First, some basic issues are
discussed, including product definition, product classification, product quality and value,
product mix and product line, branding and brand equity, and packaging. Second, the product
life cycle and its implications for product strategy are explained. Third, the product audit is
reviewed, and finally, three ways to organize for product management are outlined. These
include the marketing manager system, brand manager system, and cross-functional teams.
BASIC ISSUES IN PRODUCT MANAGEMENT
Successful marketing depends on understanding the nature of products and basic decision
areas in product management. In this section, we discuss the definition and classification
of products, the importance of product quality and value, and the nature of a product mix
and product lines. Also considered is the role of branding and packaging.
Product Definition
The way in which the product variable is defined can have important implications for the
survival, profitability, and long-run growth of the firm. For example, the same product can
be viewed at least three different ways. First, it can be viewed in terms of the tangible
product––the physical entity or service that is offered to the buyer. Second, it can be viewed
in terms of the extended product––the tangible product along with the whole cluster of
services that accompany it. For example, a manufacturer of computer software may offer
a 24-hour hotline to answer questions users may have or to offer free or reduced-cost
software updates, free replacement of damaged software, and a subscription to a newsletter
that documents new applications of the software. Third, it can be viewed in terms of the
generic product—the essential benefits the buyer expects to receive from the product. For
example, many personal care products bring to the purchaser feelings of self-enhancement
and security in addition to the tangible benefits they offer.
From the standpoint of the marketing manager, to define the product solely in terms of the
tangible product is to fall into the error of “marketing myopia.” Executives who are guilty of
committing this error define their company’s product too narrowly, since they overemphasize
the physical object itself. The classic example of this mistake can be found in railroad passenger
Chapter
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service. Although no amount of product improvement could have staved off its decline, if the
industry had defined itself as being in the transportation business, rather than the railroad busi-
ness, it might still be profitable today. On the positive side, toothpaste manufacturers have been
willing to exercise flexibility in defining their product. For years toothpaste was an oral hygiene
product in which emphasis was placed solely on fighting tooth decay and bad breath (e.g., Crest
with fluoride). More recently, many manufacturers have recognized the need to market tooth-
paste as a cosmetic item (to clean teeth of stains), as a defense against gum disease (to reduce
the buildup of tartar above the gumline), as an aid for denture wearers, and as a breath freshener.
As a result, special-purpose brands have been designed to serve these particular needs, such as
Ultra Brite, Close-Up, Aqua-Fresh, Aim, Dental Care, and the wide variety of baking soda,
tartar-control formula, and gel toothpastes offered under existing brand names.
In line with the marketing concept philosophy, a reasonable definition of product is that
it is the sum of the physical, psychological, and sociological satisfactions the buyer derives
from purchase, ownership, and consumption. From this standpoint, products are customer-
satisfying objects that include such things as accessories, packaging, and service.
Product Classification
A product classification scheme can be useful to the marketing manager as an analytical
device to assist in planning marketing strategy and programs. A basic assumption underlying
such classifications is that products with common attributes can be marketed in a similar
fashion. In general, products are classed according to two basic criteria: (1) end use or
market, and (2) degree of processing or physical transformation.
1. Agricultural products and raw materials. These are goods grown or extracted from the
land or sea, such as iron ore, wheat, and sand. In general, these products are fairly
homogeneous, sold in large volume, and have low value per unit or in bulk weight.
2. Organizational goods. Such products are purchased by business firms for the purpose of
producing other goods or for running the business. This category includes the following:
a. Raw materials and semifinished goods.
b. Major and minor equipment, such as basic machinery, tools, and other processing
facilities.
3. Approaches to new or potential markets
a. Geographical expansion of domestic sales
b. New socioeconomic or ethnic groups
c. Overseas markets
d. New uses of present products
e. Complementary goods
f. Mergers and acquisitions
4. State of competition
a. New entries into the industry
b. Product imitation
c. Competitive mergers or acquisitions
MARKETING INSIGHT Elements of Product Strategy
79
6–1
1. An audit of the firm’s actual and potential resources
a. Financial strength
b. Access to raw materials
c. Plant and equipment
d. Operating personnel
e. Management
f. Engineering and technical skills
g. Patents and licenses
2. Approaches to current markets
a. More of the same products
b. Variations of present products in terms of grades,
sizes, and packages
c. New products to replace or supplement current
lines
d. Product deletions
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80 Part C The Marketing Mix
c. Parts or components, which become an integral element of some other finished good.
d. Supplies or items used to operate the business but that do not become part of the
final product.
3. Consumer goods. Consumer goods can be divided into three classes:
a. Convenience goods, such as food, which are purchased frequently with minimum
effort. Impulse goods would also fall into this category.
b. Shopping goods, such as appliances, which are purchased after some time and energy
are spent comparing the various offerings.
c. Specialty goods, which are unique in some way so the consumer will make a special
purchase effort to obtain them.
In general, the buying motive, buying habits, and character of the market are different
for organizational goods vis-à-vis consumer goods. A primary purchasing motive for
organizational goods is, of course, profit. As mentioned in a previous chapter, organiza-
tional goods are usually purchased as means to an end and not as an end in themselves. This
is another way of saying that the demand for organizational goods is a derived demand.
Organizational goods are often purchased directly from the original source with few
middlemen, because many of these goods can be bought in large quantities; they have high
unit value; technical advice on installation and use is required; and the product is ordered
according to the user’s specifications. Many organizational goods are subject to multiple-
purchase influence, and a long period of negotiation is often required.
The market for organizational goods has certain attributes that distinguish it from the con-
sumer goods market. Much of the market is concentrated geographically, as in the case of
steel, auto, or shoe manufacturing. Certain products have a limited number of buyers; this is
known as a vertical market, which means that (1) it is narrow, because customers are restricted
to a few industries; and (2) it is deep, in that a large percentage of the producers in the market
use the product. Some products, such as desktop computers, have a horizontal market, which
means that the goods are purchased by all types of firms in many different industries. In
general, buyers of organizational goods are reasonably well informed. As noted previously,
heavy reliance is often placed on price, quality control, and reliability of supply source.
In terms of consumer products, many marketing scholars have found the convenience,
shopping, and specialty classification inadequate and have attempted either to refine it or
to derive an entirely new typology. None of these attempts appears to have met with
complete success. Perhaps there is no best way to deal with this problem. From the stand-
point of the marketing manager, product classification is useful to the extent that it assists
in providing guidelines for developing an appropriate marketing mix. For example,
convenience goods generally require broadcast promotion and long channels of distribution
as opposed to shopping goods, which generally require more targeted promotion and some-
what shorter channels of distribution.
Product Quality and Value
Quality can be defined as the degree of excellence or superiority that an organization’s
product possesses.1 Quality can encompass both the tangible and intangible aspects of a
firm’s products or services. In a technical sense, quality can refer to physical traits such as
features, performance, reliability, durability, aesthetics, serviceability, and conformance to
specifications. Although quality can be evaluated from many perspectives, the customer is
the key perceiver of quality because his or her purchase decision determines the success of
the organization’s product or service and often the fate of the organization itself.
Many organizations have formalized their interest in providing quality products by
undertaking total-quality management (TQM) programs. TQM is an organizationwide
commitment to satisfying customers by continuously improving every business process
involved in delivering products or services. Instead of merely correcting defects when
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Chapter Six Product and Brand Strategy 81
they occur, organizations that practice TQM train and commit employees to continually
look for ways to do things better so defects and problems don’t arise in the first place.
The result of this process is higher-quality products being produced at a lower cost.
Indeed, the emphasis on quality has risen to such a level that over 70 countries have
adopted the ISO 9000 quality system of standards, a standardized approach for evaluat-
ing a supplier’s quality system, which can be applied to virtually any business.2
The term quality is often confused with the concept of value. Value encompasses not
only quality but also price. Value can be defined as what the customer gets in exchange for
what the customer gives. In other words, a customer, in most cases, receives a product in
exchange for having paid the supplier for the product. A customer’s perception of the value
associated with a product is generally based both on the degree to which the product meets
his or her specifications and the price that the customer will have to pay to acquire the
product. Some organizations are beginning to shift their primary focus from one that solely
emphasizes quality to one that also equally encompasses the customer’s viewpoint of
the price/quality trade-off. Organizations that are successful at this process derive their
competitive advantage from the provision of customer value. In other words, they offer
goods and services that meet or exceed customer needs at a fair price. Recall that Chapter 1
described various strategies based on value.
Product Mix and Product Line
A firm’s product mix is the full set of products offered for sale by the organization; A
product mix may consist of several product lines, or groups of products that share common
characteristics, distribution channels, customers, or uses. A firm’s product mix is described
by its width and depth. Width of the product mix refers to the number of product lines
handled by the organization. For example, one division of General Mills has a widespread
mix consisting of five different product lines: ready-to-eat cereals, convenience foods,
snack foods, baking products, and dairy products. Depth refers to the average number of
products in each line. In its ready-to-eat cereals line, General Mills has eight different
products. It has five different products in its line of convenience foods. Thus, the organiza-
tion has a wide product mix and deep product lines.
An integral component of product line planning revolves around the question of how
many product variants should be included in the line.3 Manufacturing costs are usually
minimized through large-volume production runs, and distribution costs tend to be lower if
only one product is sold, stocked, and serviced. At a given level of sales, profits will usually
be highest if those sales have been achieved with a single product. However, many firms
offer many product variants.
Organizations offer varying products within a given product line for three reasons. First,
potential customers rarely agree on a single set of specifications regarding their “ideal
product,” differing greatly in the importance and value they place on specific attributes. For
example, in the laundry detergent market, there is a marked split between preferences for
powder versus liquid detergent. Second, customers prefer variety. For example, a person
may like Italian food but does not want to only eat spaghetti. Therefore, an Italian restau-
rant will offer the customer a wide variety of Italian dishes to choose from. Third, the
dynamics of competition lead to multiproduct lines. As competitors seek to increase market
share, they find it advantageous to introduce new products that subsegment an existing
market segment by offering benefits more precisely tailored to the specific needs of a
portion of that segment. For example, Proctor & Gamble offers Jif peanut butter in a low-
salt version to target a specific subsegment of the peanut butter market.
All too often, organizations pursue product line additions with little regard for conse-
quences.4 However, in reaching a decision on product line additions, organizations need to
evaluate whether (1) total profits will decrease or (2) the quality/value associated with
current products will suffer. If the answer to either of the above is yes, then the organization
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should not proceed with the addition. Closely related to product line additions are issues
associated with branding. These are covered next.
Branding and Brand Equity
For some organizations, the primary focus of strategy development is placed on brand build-
ing, developing, and nurturing activities.5 Factors that serve to increase the strength of a
brand include6 (1) product quality when products do what they do very well (e.g., Windex
and Easy-Off); (2) consistent advertising and other marketing communications in which
brands tell their story often and well (e.g., Pepsi and Visa); (3) distribution intensity whereby
customers see the brand wherever they shop (e.g., Marlboro); and (4) brand personality
where the brand stands for something (e.g., Disney). The strength of the Coca-Cola brand, for
example, is widely attributed to its universal availability, universal awareness, and trademark
protection, which came as a result of strategic actions taken by the parent organization.7
MARKETING INSIGHT
82
6–2
A. CLASSES OF CONSUMER GOODS—SOME CHARACTERISTICS AND MARKETING CONSIDERATIONS
Type of Product
Characteristics and
Marketing Considerations Convenience Shopping Specialty
Characteristics
Time and effort devoted by Very little Considerable Cannot generalize; consumer may go
consumer to shopping to nearby store and buy with minimum
effort or may have to go to distant store
and spend much time and effort
Time spent planning Very little Considerable Considerable
the purchase
How soon want is satisfied Immediately Relatively long Relatively long time
after it arises time
Are price and quality No Yes No
compared?
Price Usually low High High
Frequency of purchase Usually frequent Infrequent Infrequent
Importance Unimportant Often very Cannot generalize
important
Marketing considerations
Length of channel Long Short Short to very short
Importance of retailer Any single store Important Very important
is relatively
unimportant
Number of outlets As many as Few Few; often only one in a market
possible
Stock turnover High Lower Lower
Gross margin Low High High
Responsibility for advertising Producer Retailer Joint responsibility
Importance of Very important Less important Less important
point-of-purchase display
Brand or store name Brand name Store name Both
important
Importance of packaging Very important Less important Less important
Source: Michael J. Etzel, Bruce J. Walker, and William J. Stanton, Fundamentals of Marketing, 13th ed. (Burr Ridge IL: McGraw-Hill/Irwin,
2004), pp. 211, 214.
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MARKETING INSIGHT (continued)
83
6–2
The brand name is perhaps the single most important element on the package, serving
as a unique identifier. Specifically, a brand is a name, term, design, symbol, or any other
feature that identifies one seller’s good or service as distinct from those of other sellers. The
legal term for brand is trademark.8 A good brand name can evoke feelings of trust, confi-
dence, security, strength, and many other desirable characteristics.9 To illustrate, consider
the case of Bayer aspirin. Bayer can be sold at up to two times the price of generic aspirin
due to the strength of its brand image.
B. CLASSES OF ORGANIZATIONAL PRODUCTS—SOME CHARACTERISTICS AND
MARKETING CONSIDERATIONS
Type of Product
Characteristics Fabricating
and Marketing Raw Parts and Accessory Operating
Considerations Materials Materials Installations Equipment Supplies
Example Iron ore Engine blocks Blast furnaces Storage Paper clips
racks
Characteristics
Unit price Very low Low Very high Medium Low
Length of life Very short Depends on Very long Long Short
final product
Quantities Large Large Very small Small Small
purchased
Frequency Frequent Infrequent Very Medium Frequent
of purchase delivery; purchase, but infrequent frequency
long-term frequent delivery
purchase
contract
Standardization Very much; Very much Very little; Little Much
of competitive grading is custom made
products important
Quantity of Limited; Usually no No problem Usually no Usually no
supply supply can problem problem problem
be increased
slowly or not
at all
Marketing
considerations
Nature of Short; no Short; Short; no Middlemen Middlemen
channel middlemen middlemen for middlemen used used
small buyers
Negotiation Hard to Medium Long Medium Short
period generalize
Price Important Important Not Not main Important
competition important factor
Presale/postsale Not important Important Very important Important Very little
service
Promotional Very little Moderate Sales people Important Not too
activity very important important
Brand preference None Generally low High High Low
Advance buying Important; Important; Not usually Not usually Not usually
contract long-term long-term used used used
contracts used contracts used
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Many companies make use of manufacturer branding strategies in carrying out market
and product development strategies. The line extension approach uses a brand name to
facilitate entry into a new market segment (e.g., Diet Coke and Liquid Tide). An alternative
to line extension is brand extension. In brand extension, a current brand name is used to
enter a completely different product class (e.g., Jello pudding pops, Ivory shampoo).10
A third form of branding is franchise extension or family branding, whereby a company
attaches the corporate name to a product to enter either a new market segment or a different
product class (e.g., Honda lawnmower, Toyota Lexus). A final type of branding strategy
that is becoming more and more common is dual branding. A dual branding (also known
as joint or cobranding) strategy is one in which two or more branded products are
integrated (e.g., Bacardi rum and Coca-Cola, Long John Silver’s and A&W Root Beer,
Archway cookies and Kellogg cereal, US Airways and Bank of America Visa). The logic
behind this strategy is that if one brand name on a product gives a certain signal of quality,
then the presence of a second brand name on the product should result in a signal that is at
least as powerful as, if not more powerful than, the signal in the case of the single brand
name. Each of the preceding four approaches is an attempt by companies to gain a com-
petitive advantage by making use of its or others’ established reputation, or both.
Companies may also choose to assign different brand names to each product. This is
known as multibranding strategy. By doing so, the firm makes a conscious decision to allow
the product to succeed or fail on its own merits. Major advantages of using multiple brand
names are that (1) the firm can distance products from other offerings it markets; (2) the
image of one product (or set of products) is not associated with other products the company
markets; (3) the product(s) can be targeted at a specific market segment; and (4) should the
product(s) fail, the probability of failure impacting on other company products is minimized.
For example, many consumers are unaware that Dreft, Tide, Oxydol, Bold, Cheer, and Dash
laundry detergents are all marketed by Procter & Gamble. The major disadvantage of this
strategy is that because new names are assigned, there is no consumer brand awareness and
significant amounts of money must be spent familiarizing customers with new brands.
Increasingly, companies are finding that brand names are one of the most valuable assets
they possess. Successful extensions of an existing brand can lead to additional loyalty and
associated profits. Conversely, a wrong extension can cause damaging associations, as
perceptions linked to the brand name are transferred back from one product to the other.11
Brand equity can be viewed as the set of assets (or liabilities) linked to the brand that
add (or subtract) value.12 The value of these assets is dependent upon the consequences
or results of the marketplace’s relationship with a brand. Figure 6.1 lists the elements of
brand equity. Brand equity is determined by the consumer and is the culmination of the
consumer’s assessment of the product, the company that manufactures and markets the
product, and all other variables that impact on the product between manufacture and
consumer consumption.
Before leaving the topic of manufacturer brands, it is important to note that, as with con-
sumer products, organizational products also can possess brand equity. However, several
differences do exist between the two sectors.13 First, organizational products are usually
84
1. Microsoft 6. Nokia
2. Coca-Cola 7. Walt Disney Co.
3. IBM 8. McDonald’s Corp.
4. GE 9. Toyota Motor Corp.
5. Intel 10. Marlboro
MARKETING INSIGHT The 10 Most Valuable
Brands in the World 6–3
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branded with firm names. As a result, loyalty (or disloyalty) to the brand tends to be of a
more global nature, extending across all the firm’s product lines. Second, because firm
versus brand loyalty exists, attempts to position new products in a manner differing from
existing products may prove to be difficult, if not impossible. Finally, loyalty to organiza-
tional products encompasses not only the firm and its products but also the distribution
channel members employed to distribute the product. Therefore, attempts to establish or
change brand image must also take into account distributor image.
As a related branding strategy, many retail firms produce or market their products under
a so-called private label. For example, Kmart has phased in its own store-brand products to
compete with the national brands. There’s Nature’s Classics, a line of fancy snacks and
cookies; Oral Pure, a line of dental care products; Prevail house cleaners; B.E., a Gap-style
line of weekend wear; and Benchmark, a line of “made in the U.S.A.” tools. Such a strategy
is highly important in industries where middlemen have gained control over distribution to
the consumer. The growth of the large discount and specialty stores, such as Kmart,
Walmart, Target, The Gap, Limited, and others, has accelerated the development of private
brands. If a manufacturer refuses to supply certain middlemen with private branded
merchandise, the alternative is for these middlemen to go into the manufacturing business,
as in the case of Kroger supermarkets.
Private label products differ markedly from so-called generic products that sport labels
such as “beer,” “cigarettes,” and “potato chips.” Today’s house brands are packaged in
distinctively upscale containers. The quality of the products used as house brands equals
and sometimes exceeds those offered by name brands. While generic products were posi-
tioned as a means for consumers to struggle through recessionary times, private label
Chapter Six Product and Brand Strategy 85
Brand
loyalty
Name
awareness
Perceived
quality
Brand
associations
Other
proprietary
brand assets
Brand equity
Name
symbol
Provides value to customer
by enhancing customer’s
• Interpretation/processing
of information
• Confidence in the
purchase decision
• Use satisfaction
Provides value to firm by
enhancing
• Efficiency and
effectiveness of
marketing programs
• Brand loyalty
• Prices/margins
• Brand extensions
• Trade leverage
• Competitive advantage
FIGURE 6.1
Elements of Brand
Equity
Source: David A. Aaker,
Managing Brand Equity.
© 1991, New York, by David
A. Aaker. Reprinted with the
permission of Free Press, a
division of Simon & Schuster.
See David A. Aaker, Building
Strong Brands (New York:
Free Press, 1995), for his
seminal work on branding as
well as David A. Aaker, Brand
Portfolio Strategy: Creating
Relevance, Differentiation,
Energy, Leverage, and Clarity
(New York: Free Press, 2004).
David A. Aaker, Strategic
Market Management (Hobo-
ken, NJ: John Wiley) 2008,
Chapter 9.
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brands are being marketed as value brands, products that are equivalent to national brands
but are priced much lower. Private brands are rapidly growing in popularity. For example,
it only took JCPenney Company, Inc., five years to nurture its private-label jeans, the
Arizona brand, into a powerhouse with annual sales surpassing $500 million.
Consolidation within the supermarket industry, growth of super centers, and heightened
product marketing are poised to strengthen private brands even further.14 However, these
gains will not come without a fight from national manufacturers who are undertaking
aggressive actions to defend their brands’ market share. Some have significantly rolled
back prices, while others have instituted increased promotional campaigns. The ultimate
winner in this ongoing battle between private (store) and manufacturer (national) brands,
not surprisingly, should be the consumer who is able to play off these store brands against
national brands. By shopping at a mass merchandiser like Walmart or Walgreens,
consumers are exposed to and able to choose from a wide array of both national and store
brands, thus giving them the best of both worlds: value and variety.
Packaging
Distinctive or unique packaging is one method of differentiating a relatively homogeneous
product. To illustrate, shelf-stable microwave dinners, pumps rather than tubes of toothpaste
or bars of soap, and different sizes and designs of tissue packages are attempts to differen-
tiate a product through packaging changes and to satisfy consumer needs at the same time.
In other cases, packaging changes have succeeded in creating new attributes of value in
a brand. A growing number of manufacturers are using green labels or packaging their
products totally in green wrap to signify low- or no-fat content.15 Frito-Lay, Quaker Oats,
ConAgra, Keebler, Pepperidge Farm, Nabisco, and Sunshine Biscuits are all examples of
companies involved in this endeavor.
Finally, packaging changes can make products urgently salable to a targeted segment.
For example, the products in the Gillette Series grooming line, including shave cream,
razors, aftershave, and skin conditioner, come in ribbed, rounded, metallic-gray shapes,
looking at once vaguely sexual and like precision engineering.16
Marketing managers must consider both the consumer and costs in making packaging
decisions. On one hand, the package must be capable of protecting the product through
86
MARKETING INSIGHT Qualities of a Good Brand Name
6–4
1. The name should suggest the product benefits. Names such as Easy Off (oven cleaner)
and PowerBook (laptop computer) clearly suggest the benefits of purchasing the product.
2. The name should be memorable, distinctive, and positive. Many automobiles such as
Mustang, Eagle, Firebird, and Bronco have strong names.
3. The name should fit the company or product image. Sharp (audio and video func-
tions), Mustard’s Last Stand (hot dogs), and Paddy O’Furniture (patio furniture) are
some examples.
4. The name should have no legal restrictions. For example, the U.S. Food and Drug
Administration discourages the use of word heart in food brand names. Also since brand
names often need a corresponding address on the Internet, the choice may be compli-
cated because millions of domain names have already been selected.
5. The name should be simple (such as Bold detergent and Sure deodorant), and emotional
(Beautiful, Opium, and Obsession perfumes).
Source: Adapted from Roger A. Kerin, Steven W. Hartley, Eric N. Berkowitz, and William Rudelins, Marketing,
9th ed. (Burr Ridge, IL: McGraw-Hill/Irwin 2009), Chapter 14. Also see Kevin Lane Keller, Strategic Brand
Management, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008), chap. 4.
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MARKETING INSIGHT A Brand Report Card
6–5
the channel of distribution to the consumer. In addition, it is desirable for packages to have a
convenient size and be easy to open for the consumer. For example, single-serving soups and
zip-lock packaging in cereal boxes are attempts by manufacturers to serve consumers better.
87
Many different factors work together to make a strong brand. Brand managers often focus
on only one or two of these factors. Here is a list of several characteristics shared by the
world’s strongest brands that can be used to assess the strengths of a brand and to identify
points of improvement.
Characteristic Examples
Delivers benefits desired by customers. Starbucks offers “coffee house experience,”
not just coffee beans, and monitors bean
selection and roasting to preserve quality.
Stays relevant. Gillette continuously invests in major
product improvements (MACH3), while
using a consistent slogan: “The best a man
can get.”
Prices are based on value. P&G reduced operating costs and passed
on savings as “everyday low pricing,” thus
growing margins.
Well-positioned relative to competitors. Saturn competes on excellent customer
service, Mercedes on product superiority.
Visa stresses being “everywhere you want
to be.”
Is consistent. Michelob tried several different positionings
and campaigns between 1970 and 1995,
while watching sales slip.
The brand portfolio makes sense. The Gap has Gap, Banana Republic, and
Old Navy stores for different market
segments; BMW has the 3-, 5-, and 7-series.
Marketing activities are coordinated. Coca-Cola uses ads, promotions, catalogs,
sponsorships, and interactive media.
What the brand means to customers is Bic couldn’t sell perfume in lighter-shaped
well understood. bottles; Gillette uses different brand names
such as Oral-B for toothbrushes to avoid
this problem.
Is supported over the long run. Coors cut back promotional support in
favor of Coors Light and Zima, and lost
about 50% of its sales over a four-year period.
Sources of brand equity are monitored. Disney studies revealed that its characters
were becoming “overexposed” and some-
times used inappropriately. It cut back on
licensing and other promotional activity as
a result.
Source: Kevin Lane Keller, “The Brand Report Card,” Harvard Business Review, January-February 2000, pp.
147–157. Merle Crawford and Anthony DiBenedetto, New Product Management, 9th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2009), p. 396.
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MARKETING INSIGHT How Packaging Can Benefit Consumers
and Marketers 6–6
88
Hopefully, the package is also attractive and informative, capable of being used as a competitive
weapon to project a product’s image. However, maximizing these objectives may increase
the cost of the product to such an extent that consumers are no longer willing to purchase it.
Thus, the marketing manager must determine the optimal protection, convenience, position-
ing, and promotional strengths of packages, subject to cost constraints.
PRODUCT LIFE CYCLE
A firm’s product strategy must take into account the fact that products have a life cycle.
Figure 6.2 illustrates this life-cycle concept. Products are introduced, grow, mature, and
decline. This cycle varies according to industry, product, technology, and market. Marketing
Opportunity to Add Value Some Decision Factors Examples
Promoting Link product to promotion The bunny on the Energizer
battery package is a reminder
that it “keeps going and
going.”
Branding at point of Coke’s logo greets almost
purchase or consumption everyone each time the
refrigerator is opened.
Product information Nabisco’s nutrition label
helps consumers decide
which cookie to buy, and a
UPC code reduces checkout
time and errors.
Protecting For shipping and storing Sony’s MP3 player is kept
safe by Styrofoam inserts.
From tampering Tylenol’s safety seal prevents
tampering.
From shoplifting Cardboard hang-tag on
Gillette razor blades is too
large to hide in hand.
From spoiling Kraft’s shredded cheese has
a resealable zipper package
to keep it fresh.
Enhancing product The environment Tide detergent bottle can be
recycled.
Convenience in use Squeezable tube of Yoplait
Go-Gurt is easy to eat on the
go and in new situations.
Added product functions Plastic tub is useful for
refrigerator leftovers after the
Cool Whip is gone.
Source: William D. Perreault Jr., Joseph P. Cannon, and E. Jerome McCarthy, Basic Marketing: A Marketing
Strategy Planning Approach, 17th ed. (Burr Ridge, Il: McGraw-Hill/Irwin, 2009), p. 243.
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Chapter Six Product and Brand Strategy 89
executives need to be aware of the life-cycle concept because it can be a valuable aid in
developing marketing strategies.
During the introduction phase of the cycle, there are usually high production and marketing
costs, and since sales are only beginning to materialize, profits are low or nonexistent. Profits
increase and are positively correlated with sales during the growth stage as the market begins
trying and adopting the product. As the product matures, profits for the initiating firm do not
keep pace with sales because of competition. Here the seller may be forced to “remarket” the
product, which may involve making price concessions, increasing product quality, or expand-
ing outlays on advertising and sales promotion just to maintain market share. At some point
sales decline, and the seller must decide whether to (1) drop the product, (2) alter the product,
(3) seek new uses for the product, (4) seek new markets, or (5) continue with more of the same.
The usefulness of the product life-cycle concept is primarily that it forces management
to take a long-range view of marketing planning. In doing so, it should become clear that
shifts in phases of the life cycle correspond to changes in the market situation, competition,
and demand. Thus, the astute marketing manager should recognize the necessity of altering
the marketing mix to meet these changing conditions. It is possible for managers to under-
take strategies that, in effect, can lead to a revitalized product life cycle. For example, past
advancements in technology led to the replacement of rotary dial telephones by touch-tone,
push-button phones. Today, even newer technology has enabled the cordless and cellular
phone to replace the traditional touch-tone, push-button phone. When applied with sound
judgment, the life-cycle concept can aid in forecasting, pricing, advertising, product
planning, and other aspects of marketing management. However, the marketing manager
must also recognize that the life cycle is purely a tool for assisting in strategy development
and not let the life cycle dictate strategy development.17
As useful as the product life cycle can be to managers, it does have limitations that
require it to be used cautiously in developing strategy. For one thing, the length of time a
product will remain in each stage is unknown and can’t be predicted with accuracy. Thus,
while each stage will likely occur for a successful product, marketers can’t forecast when
Total
market
sales
Introduction Growth Maturation Decline
or
continued expansion
Status quo
D
o
lla
rs
Time
New markets
New uses
New product features
Status quo
New markets
New uses
New product features
Total
market
profit
FIGURE 6.2
The Product Life
Cycle
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90
MARKETING INSIGHT Marketing Strategy Implications of the
Product Life Cycle
Life-Cycle Stage
Strategy Dimension Introduction Growth Maturity Decline
Basic objectives
Product
Pricing
Channels
Promotion
Establish a market
for product type;
persuade early
adopters to buy
Provide high quality;
select a good brand;
get patent or
trademark protection
Often high to recover
development costs;
sometimes low to
build demand rapidly
Limited number of
channels
Aimed at early
adopters; messages
designed to educate
about product type;
incentives such as
samples and coupons
to induce trial
Build sales and
market share;
develop
preference for
brand
Provide high
quality; add
services to
enhance value
Somewhat high
because of
heavy demand
Greater number
of channels to
meet demand
Aimed at wider
audience;
messages focus
on brand
benefits; for
consumer
products,
emphasis on
advertising
Defend brand’s
share of market;
seek growth by
luring customers
from competitors
Improve quality;
add features to
distinguish brand
from competitors’
brands
Low, reflecting
heavy
competition
Greater number
of channels and
more incentives
to resellers
Messages focus
on differentiating
brand from its
competitors’
brands; heavy use
of incentives such
as coupons to
induce buyers
to switch brands
Limit costs or
seek ways to
revive sales and
profits
Continue
providing high
quality to maintain
brand’s reputation;
seek ways to make
the product new
again
Low to sell off
remaining
inventory or high
to serve a niche
market
Limited number
of channels
Minimal, to keep
costs down
6-7
one stage will end and another will begin in order to adapt their strategies at the appropri-
ate time. Also, they may misjudge when a stage is ending and implement an inappropriate
strategy. For example, marketers who believe their products are ending the maturity stage
may cut promotion costs and thus push the product into decline, whereas the product might
have continued to sell if promotion had been maintained and altered.
Another limitation is that not all products go through the product life cycle in the same way.
For example, many products are failures and do not have anything approaching a complete life
cycle. Several variations of the life cycle also exist, two of which are fashions and fads.
Fashions are accepted and popular product styles. Their life cycle involves a distinctive-
ness stage in which trendsetters adopt the style, followed by an emulation stage in which
more customers purchase the style to be the trendsetters. Next is the economic stage, in
which the style becomes widely available at mass-market prices. Many fashions, such as
skirt length and designer jeans, lose popularity, then regain it and repeat the fashion of
cycle. The fashion cycle is clearly visible in clothing, cosmetics, tattoos, and body piercing.
Fads are products that experience an intense but brief period of popularity. Their life
cycle resembles the basic product life cycle but in a very compressed form. It is usually so
brief that competitors have no chance to capitalize on the fad. Some fads may repeat their
popularity after long lapses.
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Product Adoption and Diffusion
Obviously not all customers immediately purchase a product in the introductory stage of
the product life cycle. The shape of the life-cycle curve indicates that most sales occur after
the product has been available for awhile. The spread of a product through the population
is known as the diffusion of innovation, as illustrated in Figure 6.3, which presents five
adopter categories.
The first category is innovators, those who are the first to buy a new product. When
innovators are consumers, they tend to be people who are venturesome and willing to take
risks. When innovators are organizational buyers, they tend to be organizations that seek to
remain at the cutting edge through the use of the latest technology and ideas.
If the experience of innovators is favorable, early adopters begin to buy. These buyers,
who are respected social leaders and above average in education, influence the next group.
Influenced by what early adopters have, the rest of the market begins to get interested in the
product. The biggest category of buyers is divided into groups called the early majority and
late majority. Members of the early majority tend to avoid risk and to make purchases care-
fully. They also have many informal contacts. Members of the late majority not only avoid
risks, but are cautious and skeptical about new ideas. Eventually, the product becomes
commonplace, and even laggards are ready to buy. Laggards are reluctant to make changes
and are comfortable with traditional products. They also have a fear of debt, but may even-
tually purchase a well-established brand.
THE PRODUCT AUDIT
The product audit is a marketing management technique whereby the company’s current
product offerings are reviewed to ascertain whether each product should be continued as is,
improved, modified, or deleted. The audit is a task that should be carried out at regular
intervals as a matter of policy. Product audits are the responsibility of the product manager
unless specifically delegated to someone else.
Deletions
In today’s environment, a growing number of products are being introduced each year that
are competing for limited shelf space. This growth is primarily due to (1) new knowledge
being applied faster, and (2) the decrease in time between product introductions (by a given
Laggards
(16%)
Late
Majority
(34%)
Early
Majority
(34%)
Early
Adopters
(13.5%)
Innovators
(2.5%)
FIGURE 6.3
Adopter Categories
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92
MARKETING INSIGHT Advantages of Rejuvenating a Product
6–8
organization).18 In addition, companies are not consistently removing products from the
market at the same time they are introducing new products. The result is a situation in
which too many products are fighting for too little shelf space. One of the main purposes
of the product audit is to detect sick products and then bury them. Rather than let the
retailer or distributor decide which products should remain, organizations themselves
should take the lead in developing criteria for deciding which products should stay and
which should be deleted. Some of the more obvious factors to be considered are
Sales trends. How have sales moved over time? What has happened to market share?
Why have sales declined? What changes in sales have occurred in competitive products
both in our line and in those of other manufacturers?
Profit contribution. What has been the profit contribution of this product to the com-
pany? If profits have declined, how are these tied to price? Have selling, promotion,
and distribution costs risen out of proportion to sales? Does the product require exces-
sive management time and effort?
Product life cycle. Has the product reached a level of maturity and saturation in the
market? Has new technology been developed that poses a threat to the product? Are
more effective substitutes on the market? Has the product outgrown its usefulness?
Can the resources used on this product be put to better use?
Customer migration patterns. If the product is deleted, will customers of this product
switch to other substitute products marketed by our firm? In total, will profits
associated with our line increase due to favorable switching patterns?
The above factors should be used as guidelines for making the final decision to delete a
product. Deletion decisions are very difficult to make because of their potential impact on
customers and the firm. For example, eliminating a product may force a company to lay off
some employees. There are other factors to consider as well, such as keeping consumers
supplied with replacement parts and repair service and maintaining the goodwill of
Instead of abandoning or harvesting an older, mature product, many companies are look-
ing instead to rejuvenate that product and extend its life cycle. The advantages of product
rejuvenation include the following:
Less risk. Past experience in all phases of the product’s life cycle permits the company
to focus on improving business practices instead of formulating completely new,
untested methods.
Lower costs. Most, if not all, of the product’s start-up costs are now avoided. Plus, prior
experience in both marketing and producing the product makes spending more efficient.
Less time. Because the beginning stages of product development have already occurred,
the time involved in rejuvenating a product is significantly less than a new venture.
Cheaper market share. The money new products need to invest to create initial brand
recognition as well as the lower costs mentioned above can be saved, used to enhance
the product offering, or enable the product to be offered at a lower price.
Higher profits. Efficiency, brand recognition, superior product quality, and the ability
to have a narrow focus all contribute to lower costs or increased sales, or both, thus
increasing the potential for higher profits.
Source: Conrad Berenson and Iris Mohr-Jackson, “Product Rejuvenation: A Less Risky Alternative to Product
Innovation,” Business Horizons, November–December 1994, pp. 51–57. © 1994 by the Foundation for the
School of Business at Indiana University. Used with permission. Also see Kevin Lane Keller, Strategic Brand
Management, 3rd ed. (Upper Saddle River, NJ: Prentice-Hall, 2008), pp. 574–577.
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distributors who have an inventory of the product. The deletion plan should also provide for
clearing out of stock in question.
Product Improvement
One of the other important objectives of the audit is to ascertain whether to alter the prod-
uct in some way or to leave things as they are. Altering the product means changing one or
more of its attributes or marketing dimensions. Attributes refer mainly to product features,
design, package, and so forth. Marketing dimensions refer to such things as price, promo-
tion strategy, and channels of distribution.
It is possible to look at the product audit as a management device for controlling the
product strategy. Here, control means feedback on product performance and corrective action
in the form of product improvement. Product improvement is a top-level management deci-
sion, but the information needed to make the improvement decision may come from the
consumer or the middlemen. Advertising agencies or consultants often make sugges-
tions. Reports by the sales force should be structured in a way to provide management
with certain types of product information; in fact, these reports can be the firm’s most
valuable product-improvement tool. Implementing a product improvement decision will
often require the coordinated efforts of several specialists, plus some research. For exam-
ple, product design improvement decisions involve engineering, manufacturing, account-
ing, and marketing. When a firm becomes aware that a product’s design can be improved,
it is not always clear how consumers will react to the various alterations. To illustrate, in
blind taste tests, the Coca-Cola Company found that consumers overwhelmingly preferred
the taste of a reformulated, sweeter new Coke over old Coke. However, when placed on the
market in labeled containers, new Coke turned out to be a failure due to consumers’ emo-
tional attachments to the classic Coke. Consequently, it is advisable to conduct some mar-
ket tests in realistic settings.
A discussion of product improvement would not be complete without taking into
account the benefits associated with benchmarking, especially as they relate to the notion
of the extended product, the tangible product along with the whole cluster of services that
accompany it.19 The formal definition of benchmarking is the continuous process of mea-
suring products, services, and practices against those of the toughest competitors or com-
panies renowned as leaders. In other words, benchmarking involves learning about best
practices from best-performing companies—how they are achieving strong performance. It
is an effective tool organizations use to improve on existing products, activities, functions,
or processes. Major corporations such as IBM, AT&T, DuPont, Ford, Eastman Kodak,
Miliken, Motorola, and Xerox all have numerous benchmarking studies in progress. For
example, IBM has already performed more than 500 benchmarking studies. Benchmarking
can assist companies in many product improvement efforts, including (1) boosting product
quality, (2) developing more user-friendly products, (3) improving customer order-processing
activities, and (4) shortening delivery lead times. In the case of benchmarking, companies
can achieve great success by copying others. Thus, by its very nature, benchmarking becomes
an essential element in the ongoing product auditing process.
ORGANIZING FOR PRODUCT MANAGEMENT
Whether managing existing products or developing new products (the subject of the next
chapter), organizations that are successful have one factor in common: They actively man-
age both types. Obviously, if a firm has only one product, it gets everyone’s attention. But
as the number of products grow and the need to develop new products becomes evident,
some rational management system is necessary.
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Under a marketing-manager system, one person is responsible for overseeing an entire
product line with all of the functional areas of marketing such as research, advertising, sales
promotion, sales, and product planning. This type of system is popular in organizations
with a line or lines of similar products or one dominant product line. Sometimes referred to
as category management, the marketing manager system is seen as being superior to a
brand manager system because one manager oversees all brands within a particular line,
thus avoiding brand competition. Organizations such as PepsiCo, Purex, Eastman Kodak,
and Levi Strauss use some form of marketing-manager system.
Under a brand-manager system, a manager focuses on a single product or a very small
group of new and existing products. Typically, this person is responsible for everything
from marketing research and package design to advertising. Often called a product-
management system, the brand-manager system has been criticized on several dimensions.
First, brand managers often have difficulty because they do not have authority commensu-
rate with their responsibilities. Second, they often pay inadequate attention to new products.
Finally, they are often more concerned with their own brand’s profitability than with the
profitability of all of the organization’s brands. These criticisms are not aimed at people but
at the system itself, which may force brand managers into the above behaviors. Despite its
drawbacks, organizations such as RJR Nabisco and Black & Decker have used this system.
Successful new products often come from organizations that try to bring all the capabili-
ties of the organization to bear on the problems of customers. Obviously, this requires the
cooperation of all the various functional departments in the organization. Thus, the use of
cross-functional teams has become an important way to manage the development of new
products. A venture team is a popular method used in such organizations as Xerox, Polaroid,
Exxon, IBM, Monsanto, and Motorola. A venture team is a cross-functional team responsible
for all the tasks involved in the development of a new product. Once the new product is
already launched, the team may turn over responsibility for managing the product to a brand
manager or product manager or it may manage the new product as a separate business.
The use of cross-functional teams in product management and new product develop-
ment is increasing for a very simple reason: Organizations need the contributions of all
functions and therefore require their cooperation. Cross-functional teams operate inde-
pendently of the organization’s functional departments but include members from each
94 Part C The Marketing Mix
FIGURE 6.4
Some Requirements
for the Effective Use
of Cross-Functional
Teams in Product
Management and
New Product
Development
A growing number of organizations have begun using cross-functional teams for product
management and new product development. Having representatives from various departments
clearly has its advantages, but most important, effective teams must have the nurture and
support of management. Some requirements for effective teams are
1. Commitment of top management and provision of clear goals. Organizations that successfully use
cross-functional teams in product management or development have managers who are deeply
committed to the team concept. As a result, high-performance teams have a clear understand-
ing of the product management and development goals of the organization. The importance of
these goals encourages individuals to defer their own functional or departmental concerns to
team goals.
2. Trust among members. For cross-functional teams to work, a high level of trust must exist
among members. The climate of trust within a team seems to be highly dependent on mem-
bers’ perception of management’s trust of the group as a whole.
3. Cross-functional cooperation. If a team is to take responsibility and assume the risk of product
development, its members will need detailed information about the overall operation of the
organization. It often requires that functional units be willing to share information that previ-
ously was not shared with other departments.
4. Time and training. Effective cross-functional teams need time to mature. They require massive
planning and intense and prompt access to resources, financial and other. Because members have
to put aside functional and departmental loyalties and concerns, training is usually necessary.
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function. A team might include a member from engineering, marketing, finance, service,
and designers. Some organizations even include important outsiders (e.g., parts suppliers)
on cross-functional teams. Figure 6.4 presents some important prerequisites for the use of
cross-functional teams in managing existing products and developing new products.
CONCLUSION
This chapter has been concerned with a central element of marketing management—
product strategy. The first part of the chapter discussed some basic issues in product strat-
egy, including product definition and classification, product quality and value, product mix
and product lines, branding and brand equity, and packaging. The product life cycle was
discussed as well as the product audit. Finally, three methods of organizing for product
management were presented. Although product considerations are extremely important,
remember that the product is only one element of the marketing mix. Focusing on product
decisions alone, without consideration of the other marketing mix variables, would be an
ineffective approach to marketing strategy.
Chapter Six Product and Brand Strategy 95
Additional
Resources
DeLuca, Luigi M., and Kwaku Atuahene. “Market Knowledge Dimensions and Cross Functional
Collaboration: Examining the Different Routes to Product Innovation Performance.” Journal of
Marketing, January 2007, pp. 95–112.
Gladwell, Malcolm. The Tipping Point. NY: Book Bag Books, 2006.
Keough, Donald R. The Ten Commandments of Business Failure. NY: Portfolio Books, 2008.
Knapp, Duane. The Brand Promise. NY: McGraw-Hill, 2008.
Lindstrom, Martin. Brand Sense: Build Powerful Brands Through Touch, Taste, Smell, Sight, and
Sound. NY: Free Press, 2005.
Pullig, Chris, Carolyn J. Simmons, and Richard G. Netemeyer. “Brand Dilution: When Do New
Brands Hurt Existing Brands?” Journal of Marketing, April 2006, pp. 52–64.
Rust, Roland, Debra Viana Thompson, and Rebecca Thompson. “Defeating Feature Fatigue.”
Harvard Business Review, February 2006, pp. 98–109.
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Part C
The M
arketing M
ix
96
Chapter 7
New Product Planning
and Development
New products are a vital part of a firm’s competitive growth strategy. Leaders of successful
firms know that it is not enough to develop new products on a sporadic basis. What counts
is a climate of product development that leads to one triumph after another. It is common-
place for major companies to have 50 percent or more of their current sales in products
introduced within the last 10 years. For example, the 3M Company derives 30 percent of its
revenues from products less than four years old.1
Some additional facts about new products are important to remember:
• Many new products are failures. Estimates of new product failures range from 33 percent
to 90 percent, depending on industry.
• New product sales grow far more rapidly than sales of current products, potentially
providing a surprisingly large boost to a company’s growth rate.
• Companies vary widely in the effectiveness of their new product programs.
• A major obstacle to effectively predicting new product demand is limited vision.
• Common elements appear in the management practices that generally distinguish the
relative degree of efficiency and success between companies.
In one recent year, almost 22,000 products were introduced in supermarkets, drugstores,
mass merchandisers, and health food stores.2 Of these, only a small percentage (less than
20 percent) met sales goals. The cost of introducing a new brand in some consumer mar-
kets can range from $50 million to hundreds of millions of dollars. In addition to the out-
lay cost of product failures, there are also opportunity costs. These opportunity costs refer
not only to the alternative uses of funds spent on product failures but also to the time spent
in unprofitable product development.
Product development can take many years. For example, Hills Brothers (now owned by
Nestlé) spent 22 years in developing its instant coffee, while it took General Foods (now
owned by Altria) 10 years to develop Maxim. However, the success of one new product is no
guarantee that additional low-cost brand extensions will be successful. For example, on the
positive side, Gillette was able to leverage the research and monies spent on the original Sen-
sor to successfully develop and launch the Sensor razor for women and the Sensor Excel razor.
On the negative side, Maxwell House (Altria), Folgers (Procter & Gamble), and Nestlé are still
struggling to develop commercially successful lines of fresh whole bean coffee, having been
beaten to the punch by smaller companies such as Starbucks, Millstone Coffee, Inc., and
Brothers Gourmet Coffees.3
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Good management, with heavy emphasis on planning, organization, and interaction
among the various functional units (e.g., marketing, manufacturing, engineering, R&D),
seems to be the key factor contributing to a firm’s success in launching new products. The
primary reason found for new product failure is an inability on the part of the selling com-
pany to match its offerings to the needs of the customer. This inability to satisfy customer
needs can be attributed to three main sources: inadequacy of upfront intelligence efforts,
failure on the part of the company to stick close to what the company does best, and the
inability to provide better value than competing products and technologies.
NEW PRODUCT STRATEGY
In developing new products, the first question a marketing manager must ask is, In how
many ways can a product be new? C. Merle Crawford and Anthony DiBenedetto developed
a definition of new products based on the following five different categories:4
1. New-to-the-world products. Products that are inventions: for example, Polaroid camera,
the first car, rayon, the laser printer, in-line skates.
2. New category entries. Products that take a firm into a category new to it, but that are not
new to the world: for example, P&G’s first shampoo, Hallmark gift items.
3. Additions to product lines. Products that are line extensions, flankers, and so on, to
the f irm’s current markets, for example, Tide Liquid detergent, Bud Light, Apple’s
Power Mac.
4. Product improvements. Current products made better; virtually every product on the
market has been improved, often many times.
5. Repositionings. Products that are retargeted for a new use or application; a classic case
is Arm & Hammer baking soda, which was repositioned several times as drain deodor-
ant, refrigerator freshener, toothpaste, deodorant, and so on.
The new product categories listed above raise the issue of imitation products, strictly me-too
or improved versions of existing products. If a firm introduces a form of dry beer that is new
to them but is identical or similar to other beers on the market, is it a new product? The answer
is yes, because it is new to the firm. Managers should not get the idea that to imitate is bad and
to innovate is good, for most of the best-selling products on the market today are improvements
over another company’s original invention. The best strategy is the one that will maximize com-
pany goals. It should be noted that Crawford and DiBenedetto’s categories don’t encompass
variations such as new to a country, new channel of distribution, packaging improvement, and
different resources or method of manufacture, which they consider to be variations of the five
categories, especially as these variations relate to additions to product lines.
A second broader approach to the new product question is the one developed by H. Igor
Ansoff in the form of growth vectors.5 This is the matrix first introduced in Chapter 1 that
indicates the direction in which the organization is moving with respect to its current prod-
ucts and markets. It is shown again in Figure 7.1.
Market penetration denotes a growth direction through the increase in market share for
present product markets. Product development refers to creating new products to replace
existing ones. Firms using either market penetration or product development strategies are
attempting to capitalize on existing markets and combat competitive entry and/or further
market incursions. Market development refers to finding new customers for existing prod-
ucts. Diversification refers to developing new products and cultivating new markets. Firms
using market development and diversification strategies are seeking to establish footholds
in new markets or preempt competition in emerging market segments.
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As shown in Figure 7.1, market penetration and market development strategies use pres-
ent products. A goal of these types of strategies is to either increase frequency of consumption
or increase the number of customers using the firm’s product(s). A strategic focus is placed
on altering the breadth and depth of the firm’s existing product lines. Product development
and diversification can be characterized as product mix strategies. New products, as defined
in the growth vector matrix, usually require the firm to make significant investments in
research and development and may require major changes in its organizational structure.
Firms are not confined to pursuing a single direction. For example, Miller Brewing Co. has
decided four key strategies should dictate its activities for the next decade, including
(1) building its premium-brand franchises through investment spending, (2) continuing to
develop value-added new products with clear consumer benefits, (3) leveraging local markets
to build its brand franchise, and (4) building business globally.6 Success for Miller depends
on pursuing strategies that encompass all areas of the growth vector matrix.
It has already been stated that new products are the lifeblood of successful business firms.
Thus, the critical product policy question is not whether to develop new products but in what
direction to move. One way of dealing with this problem is to formulate standards or norms
that new products must meet if they are to be considered candidates for launching. In other
words, as part of its new product policy, management must ask itself the basic question, What
is the potential contribution of each anticipated new product to the company?
Each company must answer this question in accordance with its long-term goals, cor-
porate mission, resources, and so forth. Unfortunately, some of the reasons commonly
given to justify the launching of new products are so general that they become meaningless.
Phrases such as additional profits, increased growth, or cyclical stability must be translated
into more specific objectives. For example, one objective may be to reduce manufacturing
overhead costs by using plant capacity better. This may be accomplished by using the new
product as an off-season filler. Naturally, the new product proposal would also have to
include production and accounting data to back up this cost argument.
In every new product proposal some attention must be given to the ultimate economic
contribution of each new product candidate. If the argument is that a certain type of prod-
uct is needed to keep up with competition or to establish leadership in the market, it is fair
to ask, Why? To put the question another way, top management can ask: What will be the
effect on the firm’s long-run profit picture if we do not develop and launch this or that
new product? Policy-making criteria on new products should specify (1) a working defini-
tion of the profit concept acceptable to top management, (2) a minimum level or floor of
profits, (3) the availability and cost of capital to develop a new product, and (4) a specified
time period in which the new product must recoup its operating costs and begin contribut-
ing to profits.
It is critical that firms not become solely preoccupied with a short-term focus on earn-
ings associated with new products. For example, in some industrial markets, a 20-year
spread has been found between the development and wide-spread adoption of products, on
98 Part C The Marketing Mix
Products Present New
Markets
Present Market penetration Product development
New Market development Diversification
FIGURE 7.1
Organizational
Growth Strategies
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MARKETING INSIGHT Factors Associated with New Product
Success 7–1
average. Indeed, an advantage that some Japanese firms appear to possess is that their
management is free from the pressure of steady improvement in earnings per share that
plagues American managers who emphasize short-term profits. Japanese managers
believe that market share will lead to customer loyalty, which in turn will lead to profits
generated from repeat purchases. Through a continual introduction of new products, firms
will succeed in building share. This share growth will then ultimately result in earnings
growth and profitability that the stock market will support through higher share prices
over the long term.
NEW PRODUCT PLANNING AND DEVELOPMENT PROCESS
Ideally, products that generate a maximum dollar profit with a minimum amount of risk
should be developed and marketed. However, it is very difficult for planners to implement
this idea because of the number and nature of the variables involved. What is needed is a
systematic, formalized process for new product planning. Although such a process does not
provide management with any magic answers, it can increase the probability of new prod-
uct success. Initially, the firm must establish some new product policy guidelines that
include the product fields of primary interest, organizational responsibilities for managing
the various stages in new product development, and criteria for making go-ahead decisions.
After these guidelines are established, a process such as the one shown in Figure 7.2 should
be useful in new product development.
Idea Generation
Every product starts as an idea. But all new product ideas do not have equal merit or
potential for economic or commercial success. Some estimates indicate that as many as
60 or 70 ideas are necessary to yield one successful product. This is an average figure, but
it serves to illustrate that new product ideas have a high mortality rate. In terms of money,
almost three-fourths of all the dollars of new product expense go to unsuccessful products.
The problem at this stage is to ensure that all new product ideas available to the company
at least have a chance to be heard and evaluated. Ideas are the raw materials for product
99
1. A superior differentiated product that is unique by virtue of features, benefits, quality,
and value.
2. A market-driven and customer focused new product development process.
3. Predevelopment work prior to beginning the development process.
4. Clear and early product definition.
5. Appropriate internal organizational structure.
6. A product that is familiar to the company’s current products and markets.
7. A new product development process that uses profiles of previous product successes.
8. Controls on the new product development process that ensure sound execution.
9. Sound execution rather than speed.
10. Support for the new product through friendly, courteous, prompt, and efficient cus-
tomer service.
Source: Based on Robert G. Cooper, “What Distinguishes the Top Performing New Products in Financial
Services,” Journal of Product Innovation Management, September 1994, pp. 281–99; and “The New Product
System: The Industry Experience,” Journal of Product Innovation Management, June 1992, pp. 113–27; and
William O. Beardon, Thomas N, Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives,
5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 219.
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100 Part C The Marketing Mix
development, and the whole planning process depends on the quality of the idea generation
and screening process. Since idea generation is the least costly stage in the new product
development process (in terms of investment in funds, time, personnel, and escalation of
commitment), it makes sense that an emphasis be placed first on recognizing available
sources of new product ideas and then on funneling these ideas to appropriate decision
makers for screening.
Top-management support is critical to providing an atmosphere that stimulates new
product activity. Many times, great ideas come from some very unusual sources. A top-
management structure that is unwilling to take risks will avoid radical new product and
other innovation activities and instead concentrate solely on minor areas of improvement
such as line extensions. To facilitate top-management support, it is essential that new prod-
uct development be focused on meeting market needs.
Both technology push and market pull research activities play an important role in new
product ideas and development. By taking a broad view of customer needs and wants, basic
and applied research (technology push) can lead to ideas that will yield high profits to the
firm. For example, Compaq bet millions (and won) on PC network servers in the early
1990s even though business customers said they would never abandon their mainframes. In
a similar vein, Chrysler forged ahead with the original minivan despite research showing
people disliked the odd-looking vehicle.7 Marketing, on the other hand, is more responsi-
ble for gathering and disseminating information gained from customers and other contacts.
This information relates mainly to specific features and functions of the product that can be
improved upon or market needs that current products are not satisfying (market pull). For
example, product ideas at Rubbermaid often come from employees roaming the aisles at
hardware stores and conversations with family and friends.8 Both technology push and mar-
ket pull approaches are essential to the generation of new product ideas.
Idea generation
Idea screening
Project planning
Product development
Test marketing
Commercialization
FIGURE 7.2
The New Product
Development Process
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Some firms use mechanisms such as “out-rotation,” outsider involvement, and rewards to foster
cooperation between design engineers and marketers.9 Out-rotation involves placing em-
ployees in positions that require direct contact with customers, competitors, and other key out-
side groups. For example, Hewlett-Packard regularly rotates design engineers to retail sales
positions on a temporary basis. Other organizations actively involve “outsiders” in planning or
reward engineers for making external customer contacts. Regardless of method used, the primary
lesson is to keep the communications flow going in all directions throughout the organization.
Idea Screening
The primary function of the idea screening process is twofold: first, to eliminate ideas for
new products that could not be profitably marketed by the firm, and second, to expand
viable ideas into full product concepts. New product ideas may be eliminated either because
they are outside the fields of the firm’s interest or because the firm does not have the nec-
essary resources or technology to produce the product at a profit. Generally speaking, the
organization has to consider three categories of risk (and its associated risk tolerance) in the
idea screening phase prior to reaching a decision:10
101
MARKETING INSIGHT How Google Develops New Ideas
7–2
Marissa Mayer joined Google in early 1999 as a programmer when the workforce totaled 20.
By 2007 Google had 5,700 employees and expected sales of $16 billion.
As Director of Consumer Web Products Marissa is a champion of innovation, and she
favors new product launches that are early and often.
HOW GOOGLE INNOVATES
The search leader has earned a reputation as one of the most innovative companies in the
world of technology. These are illustrative of the ways Google hatches new ideas:
FREE (THINKING) TIME
Google gives all engineers one day a week to develop their own pet projects, no matter
how far these projects are from the company’s central mission. If work gets in the way of
free days for a few weeks, they accumulate. Google News came out of this process.
THE IDEA LIST
Anyone at Google can post thoughts for new technologies of businesses on an ideas
mailing list, available companywide for input and vetting. But beware: Newbies who
suggest familiar or poorly thought-out ideas can face an intellectual pummeling.
OPEN OFFICE HOURS
Think back to your professors’ office hours in college. That’s pretty much what key man-
agers, including Mayer, do two or three times a week, to discuss new ideas. One success
born of this approach was Google’s personalized home page.
BIG BRAINSTORMS
As it has grown, Google has cut back on brainstorming sessions. Mayer still holds them
eight times a year, but limits hers to 100 engineers. Six concepts are pitched and dis-
cussed for ten minutes each. The goal: To build on the initial idea with at least one com-
plementary idea per minute.
ACQUIRE GOOD IDEAS
Although Google strongly prefers to develop technology in-house, it has also been will-
ing to snap up small companies with interesting initiatives. In 2004 it bought Keyhole,
including the technology that let Google offer sophisticated maps with satellite imagery.
Source: “Managing Googles’s Idea Factory,” Business Week, October 3, 2005, pp. 88–90. David Cravens
and Nigel F. Piercy, Strategic Marketing, 9th ed. (Burr Ridge, Il: McGraw-Hill/Irwin, 2009), p. 240.
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1. Strategic risk. Strategic risk involves the risk of not matching the role or purpose of
a new product with a specific strategic need or issue of the organization. If an organization
feels it necessary to develop certain types of radical innovations or products new to the
company in order to carry out long-term strategies, then management must be willing to
dedicate necessary resources and time to pursue these type projects.
2. Market risk. Market risk is the risk that a new product won’t meet a market need in a
value-added, differentiated way. As products are being developed, customer requirements
change and new technologies evolve. Management must be willing and able to shift its new
product efforts to keep pace with change.
3. Internal risk. Internal risk is the risk that a new product won’t be developed within
the desired time and budget. Up front, management must decide the level of commitment
it will extend in terms of time and budgetary expenditures to adequately ensure the com-
pletion of specific projects. Concurrently, progress goals must be established so that “pro-
ceed” or “do not proceed” decisions can be reached regarding continuation of projects.
In evaluating these risks, firms should not act too hastily in discounting new product
ideas solely because of a lack of resources or expertise. Instead, firms should consider
forming joint or strategic alliances with other firms. A strategic alliance is a long-term
partnership between two organizations designed to accomplish the strategic goals of both
parties. Potential benefits to be gained from alliances include (1) increased access to tech-
nology, funding, and information; (2) market expansion and greater penetration of current
markets; and (3) de-escalated competitive rivalries. Motorola is a company that has pros-
pered by forming numerous joint ventures with both American and foreign companies.11
Ideas that appear to have adequate profit potential and offer the firm a competitive
advantage in the market should be accepted for further study.
Project Planning
This stage of the process involves several steps. It is here that the new product pro-
posal is evaluated further and responsibility for the project is assigned to a project team.
The proposal is analyzed in terms of production, marketing, financial, and competitive
factors. A development budget is established, and some preliminary marketing and
technical research is undertaken. The product is actually designed in a rough form.
Alternative product features and component specifications are outlined. Finally, a proj-
ect plan is written up, which includes estimates of future development, production, and
marketing costs along with capital requirements and manpower needs. A schedule or
timetable is also included. Finally, the project proposal is given to top management for
a go or no-go decision.
Various alternatives exist for creating and managing the project teams. Two of the better-
known methods are the establishment of a skunkworks, whereby a project team can work in
relative privacy away from the rest of the organization, and a rugby or relay approach,
whereby groups in different areas of the company are simultaneously working on the proj-
ect.12 The common tie that binds these and other successful approaches together is the
degree of interaction that develops among the marketing, engineering, production, and other
critical staff. The earlier in the process that interactive, cooperative efforts begin, the higher
is the likelihood that development efforts will be successful. A key component contributing
to the success of many companies’ product development efforts relates to the emphasis
placed on creating cross-functional teams early in the development process. Both of the
above methods use cross-functional teams. Members from many different departments come
together to jointly establish new product development goals and priorities and to develop
new product development schedules. Frequently, marketing and/or sales personnel are called
in to lead these teams.13
102 Part C The Marketing Mix
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Product Development
At this juncture, the product idea has been evaluated from the standpoint of engineer-
ing, manufacturing, f inance, and marketing. If it has met all expectations, it is consid-
ered a candidate for further research and testing. In the laboratory, the product is
converted into a f inished good and tested. A development report to management is pre-
pared that spells out in f ine detail: (1) results of the studies by the engineering depart-
ment, (2) required plan design, (3) production facilities design, (4) tooling
requirements, (5) marketing test plan, (6) f inancial program survey, and (7) estimated
release date.14
Test Marketing
Up until now the product has been a company secret. Now management goes outside
the company and submits the product candidate for customer approval. Test-market
programs are conducted in line with the general plans for launching the product. Test
marketing is a controlled experiment in a limited geographical area to test the new
product or in some cases certain aspects of the marketing strategy, such as packaging
or advertising.
The main goal of a test market is to evaluate and adjust, as necessary, the general
marketing strategy to be used and the appropriate marketing mix. Additionally, produc-
ers can use the early interaction with buyers, occurring in test markets, to begin explo-
ration of issues related to the next generation of product development.15 Especially in
cases where new technologies and markets are emerging, firms can benefit greatly from
knowledge gained in test markets. Throughout the test market process, f indings are
being analyzed and forecasts of volume developed. In summary, a well-done test market
procedure can reduce the risks that include not only lost marketing and sales dollars but
also capital—the expense of installing production lines or building a new factory. Upon
completion of a successful test market phase, the marketing plan can be f inalized and
the product prepared for launch.
103
1. Customers
a. Customer requests
b. Customer complaints/compliments
c. Market surveys
d. Focus groups
2. Competitors
a. Monitoring competitors’ developments
b. Monitoring testing of competitors’
products
c. Monitoring industry movements
3. Distribution channels
a. Suppliers
b. Distributors
c. Retailers
d. Trade shows
4. Research and engineering
a. Product testing
b. Product endorsement
c. Brainstorming meetings
d. Accidental discovery
5. Other internal sources
a. Management
b. Sales force
c. Employee suggestions
d. Innovation group meetings
e. Stockholders
6. Other external sources
a. Consultants
b. Academic journals
c. Periodicals and other press
7–3
MARKETING INSIGHT Some Sources of New
Product Ideas
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Commercialization
This is the launching step in which the firm commits to introducing the product into the
marketplace. During this stage, heavy emphasis is placed on the organization structure and
management talent needed to implement the marketing strategy. Emphasis is also given to
following up on such things as bugs in the design, production costs, quality control, and
inventory requirements. Procedures and responsibility for evaluating the success of the new
product by comparison with projections are also finalized.
The Importance of Time
Over the course of the last five years, companies have placed an increasing emphasis on
shortening their products’ time to market. Time to market can be defined as the elapsed
time between product def inition and product availability. It has been well documented
that companies that are f irst in bringing their products to market enjoy a competitive
advantage both in terms of prof its and market share.16 Successful time-based innova-
tions can be attributed to the use of short production runs, whereby products can be
improved on an incremental basis, and the use of cross-functional teams, decentralized
work scheduling and monitoring, and a responsive system for gathering and analyzing
customer feedback.
Several U.S. companies, including Procter & Gamble, have taken steps to speed up the new
product development cycle by giving managers, at the product class and brand family level,
more decision-making power. Increasingly, companies are bypassing time-consuming
regional test markets, when feasible, in favor of national launches. It is becoming impor-
tant, more than ever, that firms do a successful job of developing new products right the
first time. To accomplish this, companies must have the right people with the right skills
and talents in key positions within the new product framework.
104
MARKETING INSIGHT Roles/Participants in the New Product
Development Process 7–4
*The participant role may be either formal or informal.
Source: Merle Crawford and Anthony DiBenedetto, New Products Management, 9th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2008), p. 327.
Participant* Activity Participant* Activity
1. Project Manager Leader 4. Strategist Longer range
Integrator Managerial
Translator Entire program
Mediator
Judge
Arbitrator
Coordinator
2. Product champion Supporter 5. Inventor Creative scientist
Spokesperson Basement inventor
Pusher Idea source
Won’t concede
3. Sponsor Senior manager 6. Rationalist Objectivity
Supporter Reality
Endorses Reason
Assures hearing Financial
Mentor 7. Facilitator Boosts productivity
Increases output
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SOME IMPORTANT NEW PRODUCT DECISIONS
In the development of new products, marketers have several important decisions to make
about the characteristics of the product itself. These include quality level, product features,
product design, and product safety levels.
Quality Level
Both consumers and organizational buyers consider the level of product quality when mak-
ing purchase decisions for both new and existing products. At a minimum, buyers want
products that will perform the functions they are supposed to and do so reasonably well.
Some customers are willing to accept lower quality if product use is not demanding and the
price is lower. Some homeowners might prefer Sears brand hand tools over the higher-quality
Craftsman brand since they are lower priced and may be used only occasionally. Industrial
buyers of nuts and bolts for automobiles seldom use the highest quality used in aircraft
since cars are used in less demanding situations.
In designing new products, marketers must consider what criteria potential customers
use to determine their perceptions of quality. While these will vary by product, Figure 7.3
presents eight general criteria.
An important indicator of a number of the criteria listed in Figure 7.3 is the presence
and extent of a new product warranty. A warranty is the producer’s statement of what
it will do to compensate the buyer if the product is defective or does not work properly.
105
MARKETING INSIGHT Some Measures of New Product
Performance 7–5
FIGURE 7.3
Some Criteria for
Determining
Perceptions of Quality
Source: Adopted from David A.
Garvin, “Competing on the
Eight Dimensions of Quality,”
Harvard Business Review,
November–December 1987.
For a discussion of some
determinants of quality for
service businesses, see
chapter 12, “The Marketing
of Services.”
1. Performance—How well does the product do what it is supposed to do?
2. Features—Does the product have any unique features that are desirable?
3. Reliability—Is the product likely to function well and not break down over a reasonable time
period?
4. Conformance—Does the product conform to established standards for such things as safety?
5. Durability—How long will the product last before it will be worn out and have to be replaced?
6. Serviceability—How quickly and easily can any problems be corrected?
7. Aesthetics—How appealing is the product to the appropriate senses of sight, taste, smell, feel,
and/or sound?
8. Overall Evaluation—Considering everything about the product, including its physical character-
istics, manufacturer, brand image, packaging, and price, how good is this product?
Customer Acceptance Measures Product Level Performance
Customer acceptance (use) Product cost
Customer satisfaction Time to launch
Revenue (dollar sales) Product performance
Market share Quality guidelines
Unit volume
Financial Performance Other
Time to break even Nonfinancial measures peculiar to the
Margins new product being launched.
Profitability (IRR, ROI) Example: competitive effect, image
change, morale change.
Source: Merle Crawford and Anthony DiBenedetto, New Products Management, 9th ed. (Burr Ridge, Il:
McGraw-Hill/Irwin, 2008), p. 375.
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106
MARKETING INSIGHT Why Cross-Functional Product
Development Teams Can Work 7–6
In many instances, the courts also hold that businesses have implied warranties or unstated
promises to compensate buyers if their products fail to perform up to the basic standards
of the industry or to the level promised. Certainly an organization that wants to empha-
size high quality will offer customers more than implied warranties enforced by the
courts.
Finally, many marketers offer a guarantee instead of or in addition to a warranty on new
products. A guarantee is an assurance that the product is as represented and will perform
properly. Typically if the product fails to perform, the organization making the guarantee
replaces the product or refunds the customer’s money. Guarantees imply to some buyers
that the manufacturer is confident of the new products’ quality.
Product Features
A product feature is a fact or particular specification about a product (e.g., “less calories than
all other soft drinks,” “more vitamin C than any other multiple vitamin”). Marketers select
new product features by determining what it is that customers want their products to offer.
Effective marketers attempt not only to ask potential customers what they want, but to learn
what these customers are likely to need. Such marketers may identify a need for new features
that target markets have not yet thought of and may not yet even understand.
Product Design
Many well-designed products are easy to use as intended and pleasing to the senses.
Designing new products with both ease of use and aesthetic appeal can be difficult, but it
can clearly differentiate a new product from competitors. Good design can add great value
When specialized knowledge is needed to satisfy the needs of customers, cross-functional
teams can greatly improve product development success. Such teams bring together com-
plementary skills in one of three areas: technical or functional expertise, problem-solving
and decision-making skills, and interpersonal skills.
1. Technical or functional skills. It would make little sense for a marketer to design technical
specifications for a new type of cellular phone. Likewise, it would make little sense for an
engineer to try to guess what features consumers find most important in choosing what
type of phone to purchase. In this case, a product development group that consists
solely of marketers or engineers would be less likely to succeed than a cross-functional
team using the complementary skills of both.
2. Problem-solving and decision-making skills. Cross-functional teams possess the ability to
identify problems and opportunities the entire organization faces, identify feasible new
product alternatives, and make the necessary choices quicker. Most industrial functional
units are not able to perform all of these tasks effectively. However, it is likely that the
necessary skills are present in a well-chosen cross-functional team and that these skills
can be used in the organization’s best interests.
3. Interpersonal skills. Common understanding and knowledge of problems faced and deci-
sions needed for effective product development cannot arise without effective commu-
nication and constructive conflict. What is needed is risk-taking, helpful criticism,
objectivity, active listening, support, and recognition of the interests and achievements
of others. An effective, cross-functional team is made up of members who, in total, pos-
sess all of these skills. Individual members, at various times, will be called on to use their
interpersonal skill to move the team forward. The use of the complementary interper-
sonal skills of team members can lead to extraordinary results for organizations.
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Chapter Seven New Product Planning and Development 107
to a new product. A well-designed product can please customers without necessarily
costing more to make. This is especially likely to happen when the organization uses
cross-functional teams to develop its products. If employees from engineering, market-
ing, and manufacturing work together on what the product will look like and how it will
operate, they are more likely to create a design that is easy and economical to make as
well as use.
Product Safety
Clearly, new products must have a reasonable level of safety. Safety is both an ethical and
practical issue. Ethically, customers should not be harmed by using a product as intended.
The practical issue is that when users get harmed by a product, they may stop buying, tell
others about their experience, or sue the company that made or sold it.
Some products are inherently dangerous and can result in injury to users. However, it
may be so expensive to make them safer that buyers could not afford to buy them. Such
products include automobiles, farm equipment and other machinery, and guns. Other prod-
ucts such as patented medicines can harm a small portion of users. Hopefully, the benefits
such products offer outweigh their risks.
CAUSES OF NEW PRODUCT FAILURE
Many new products with satisfactory potential have failed to make the grade for reasons
related to execution and control problems. What follows is a brief list of some of the more
important marketing causes of new product failures after the products have been carefully
screened, developed, and marketed.17
1. No competitive point of difference, unexpected reactions from competitors, or both.
2. Poor positioning.
3. Poor quality of product.
4. Nondelivery of promised benefits of product.
5. Too little marketing support.
6. Poor perceived price/quality (value) relationship.
7. Faulty estimates of market potential and other marketing research mistakes.
8. Faulty estimates of production and marketing costs.
9. Improper channels of distribution selected.
10. Rapid change in the market (economy) after the product was introduced.
Some of these problems are beyond the control of management, but it is clear that suc-
cessful new product planning requires large amounts of reliable information in diverse
areas. Each department assigned functional responsibility for product development
automatically becomes an input to the information system that the new product decision
maker needs. For example, when a firm is developing a new product, it is wise for both
engineers and marketers to consider both the kind of market to be entered (e.g., consumer,
organizational, international) and specific target segments. These decisions will be of para-
mount influence on the design and cost of the finished good, which will, of course, directly
influence price, sales, and profits.
Need for Research
In many respects it can be argued that the keystone activity of any new product plan-
ning system is research—not just marketing research, but technical research as well.
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MARKETING INSIGHT Some Organizational Causes of New-
Product Failure 7–7
108
1. Not listening to the “voice of the customer.” Product managers assume they know more
than customers or that doing marketing research will not be worth the cost or time.
2. Skipping steps in the new-product process. (See Figure 7-2.)
3. Trying to generate quick revenue by releasing a poorly conceived product to market.
4. “Groupthink” in product development committees. This popular problem occurs in
groups when members “go along” to “get along” rather than be seen as nay sayers or
non-team players.
5. Not identifying the lessons from previous failures.
Sources: Adapted from Pierre Loewe and Jennifer Domeniquini, “Overcoming the Barriers to Effective
Innovation,” Strategy and Leadership 34, no. 1 (2006), pp. 24–31; Dan P. Lovallo and Oliver Sibony,
“Distortions and Deceptions in Strategic Decisions,” The McKinsey Quarterly, no. 1 (2006), pp. 19–29;
Eyal Biyalogorsky, William Boulding, and Richard Staelin, “Stuck in The Past: Why Managers Persist with
New Product Failures,” Journal of Marketing, April 2006, pp. 108–21; Jena MacGregor, “How Failure
Breeds Success,” Business Week, July 10, 2006, pp. 42–52 and Roger A. Kerin, Steven W. Hartley, and
William Rudelius, Marketing, 9th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 264.
Regardless of the way the new product planning function is organized in the company,
top management’s new product development decisions require data that provide a base
for making more intelligent choices. New product project reports ought to be more
than a collection of “expert” opinions. Top management has a responsibility to ask
certain questions, and the new product planning team has an obligation to generate
answers to these questions based on research that provides marketing, economic,
engineering, and production information. This need will be more clearly understood
if some of the specif ic questions commonly raised in evaluating product ideas are
examined:
1. What is the anticipated market demand over time? Are the potential applications for the
product restricted?
2. Can the item be patented? Are there any antitrust problems?
3. Can the product be sold through present channels and the current sales force? What number
of new salespersons will be needed? What additional sales training will be required?
4. At different volume levels, what will be the unit manufacturing costs?
5. What is the most appropriate package to use in terms of color, material, design, and
so forth?
6. What is the estimated return on investment?
7. What is the appropriate pricing strategy?
While this list is not intended to be exhaustive, it serves to illustrate the serious
need for reliable information. Note also that some of the essential facts required to
answer these questions can be obtained only through time-consuming and expensive
marketing research studies. Other data can be generated in the engineering laboratories
or pulled from accounting records. Certain types of information must be based on
assumptions, which may or may not hold true, and on expectations about what will
happen in the future, as in the case of anticipated competitive reaction or the projected
level of sales.
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CONCLUSION
This chapter has focused on the nature of new product planning and development. Atten-
tion has been given to the management process required to have an effective program for
new product development. It should be obvious that this is one of the most important and
difficult aspects of marketing management. The problem is so complex that, unless man-
agement develops a plan for dealing with the problem, it is likely to operate at a severe
competitive disadvantage in the marketplace.
Chapter Seven New Product Planning and Development 109
Additional
Resources
Biyalogorsky, Eyal, William Boulding, and Richard Staelin. “Stuck In The Past: Why Managers
Persist in New Product Failures.” Journal of Marketing, April 2006, pp. 108–122.
Estrin, Judy. Closing The Innovation Gap. NY: McGraw-Hill, 2009.
Heath, Chip, and Dan Heath. Made To Stick: Why Some Ideas Survive and Others Don’t. NY:
Random House, 2008.
Kerber, Ronald L., and Timothy M. Laster. Strategic Product Creation. NY: McGraw-Hill, 2007.
Mack, Ben. Think Two Products Ahead. NY: John Wiley, 2007.
Moeller, Leslie H., and Edward Landry. The Four Pillars of Profit Driven Marketing. NY: McGraw-
Hill, 2009.
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110
Part C
The M
arketing M
ix
8
Integrated Marketing
Communications
Communicating with customers will be the broad subject of the next two chapters that
focus on various elements of promotion. To simplify our discussion, the topic has been
divided into two basic categories: nonpersonal communication (Chapter 8) and personal
communication (Chapter 9). This chapter also discusses the necessity to integrate the
various elements of marketing communication.
STRATEGIC GOALS OF MARKETING COMMUNICATION
Marketers seek to communicate with target customers for the obvious goal of increased
sales and profits. Accordingly, they seek to accomplish several strategic goals with their
marketing communications efforts.
Create Awareness
Obviously, we cannot purchase a product if we are not aware of it. An important strategic
goal must be to generate awareness of the firm as well as its products. Marketing commu-
nications designed to create awareness are especially important for new products and
brands in order to stimulate trial purchases. As an organization expands globally, creating
awareness must be a critical goal of marketing communications.
Build Positive Images
When products or brands have distinct images in the minds of customers, the customers
better understand the value that is being offered. Positive images can even create value for
customers by adding meaning to products. Retail stores and other organizations also use
communications to build positive images. A major way marketers create positive and dis-
tinct images is through marketing communications.
Identify Prospects
Identifying prospects is becoming an increasingly important goal of marketing communi-
cations because modern technology makes information gathering much more practical,
even in large consumer markets. Marketers can maintain records of consumers who have
Chapter
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expressed an interest in a product, then more efficiently direct future communications.
Technology now enables marketers to stay very close to their customers. Web sites are used
to gather information about prospects, and supermarkets use point-of-sale terminals to
dispense coupons selected on the basis of a customer’s past purchases.
Build Channel Relationships
An important goal of marketing communications is to build a relationship with the organi-
zation’s channel members. When producers use marketing communications to generate
awareness, they are also helping the retailers who carry the product. Producers may also
arrange with retailers to distribute coupons, set up special displays, or hold promotional
events in their stores, all of which benefit retailers and wholesalers. Retailers support man-
ufacturers when they feature brands in their ads to attract buyers. Because of such efforts,
all members of the channel benefit. Cooperating in these marketing communication efforts
can build stronger channel relationships.
Retain Customers
Loyal customers are a major asset for every business. It costs far more to attract a new
customer than to retain an existing customer. Marketing communications can support
efforts to create value for existing customers. Interactive modes of communication—
including salespeople and Web sites—can play an important role in retaining customers.
They can serve as sources of information about product usage and new products being
developed. They can also gather information from customers about what they value, as
well as their experiences using the products. This two-way communication can assist
marketers in increasing the value of what they offer to existing customers, which will
influence retention.
THE PROMOTION MIX
The promotion mix concept refers to the combination and types of nonpersonal and
personal communication the organization puts forth during a specified period.1 There
are five elements of the promotion mix, four of which are nonpersonal forms of com-
munication (advertising, sales promotion, public relations, and direct marketing), and
8–1
MARKETING INSIGHT Popular Web Sites in Three
Countries (visitors per month)
111
France 24.0 million visitors Germany 32.1 visitors Japan 54.1 visitors
1. Google.fr 15.4 Google.de 21.5 Yahoo.jp 42.2
2. MSN.com 12.4 eBay.de 16.9 Rakuten.co.jp 24.9
3. Orange.fr 12.2 Wikipedia.org 11.5 fc2.com 24.8
4. Free.fr 12.2 Google.com 10.5 Nifty.com 23.5
5. PagesJaunes.fr 9.8 MSN.de 10.3 Inforseek.co.jp 22.3
6. Live.com 9.7 Microsoft.com 9.9 goo.ne.jp 21.5
7. Hotmail.com 15.3 Web.de 9.8 Microsoft.com 20.2
8. MSN.co.uk 14.3 Amazon.de 9.7 Google.co.jp 19.9
9. MSN.fr 8.9 T.Online.de 9.6 BIGLOBE.ne.jp 19.8
10. eBay.fr 8.6 MSN.com 9.4 Amazon.co.jp 18.7
Source: Philip R. Cateora, Mary C. Gilly, and John I. Graham, International Marketing, 14th ed. (Burr Ridge, IL.:
McGraw-Hill/Irwin, 2009), p. 492.
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one, personal selling, which is a personal form of communication. Let’s briefly examine
each one.
1. Advertising is a paid form of nonpersonal communications about an organization, its
products, or its activities that is transmitted through a mass medium to a target audience.
The mass medium might be television, radio, newspapers, Internet, magazines, outdoor
displays, car cards, or directories.
2. Sales promotion is an activity or material that offers customers, sales personnel, or
resellers a direct inducement for purchasing a product. This inducement, which adds
value to or incentive for the product, might take the form of a coupon, sweepstakes,
refund, or display.
3. Public relations is a nonpersonal form of communication that seeks to influence the
attitudes, feelings, and opinions of customers, noncustomers, stockholders, suppliers,
employees, and political bodies about the organization. A popular form is publicity,
which is a nonpaid form of nonpersonal communication about the organization and its
products that is transmitted through a mass medium in the form of a news story. Obvi-
ously, marketers seek positive publicity.
4. Direct marketing uses direct forms of communication with customers. It can take the
form of direct mail, online marketing, catalogs, telemarketing, and direct response
advertising. Similar to personal selling, it may consist of an interactive dialog between
the marketer and the customer. Its objective is to generate orders, visits to retail outlets,
or requests for further information. Obviously, personal selling is a form of direct
marketing, but because it is a very personal form of communication, we place it in its
own category.
5. Personal selling is face-to-face communication with potential buyers to inform them
about and persuade them to buy an organization’s product. It will be examined in detail
in the next chapter.
Obviously, marketers strive for the right mix of promotional elements to ensure that their
product is well received. For example, if the product is a new soft drink, promotional effort
is likely to rely more on advertising, sales promotion, and public relations (publicity) in
order to (1) make potential buyers aware of the product, (2) inform these buyers about the
benefits of the product, (3) convince buyers of the product’s value, and (4) entice buyers
to purchase the product. If the product is more established but the objective is to stabilize
sales during a nonpeak season, the promotion mix will likely contain short-run incentives
(sales promotions) for people to buy the product immediately. Finally, if the product is
a new complex technology that requires a great deal of explanation, the promotional mix
will likely focus heavily on personal selling so that potential buyers can have their
questions answered.
As seen by the previous examples, a f irm’s promotion mix is likely to change over
time. The mix must be continually adapted to reflect changes in the market, competi-
tion, the product’s life cycle, and the adoption of new strategies. In essence, the f irm
should take into account three basic factors when devising its promotion mix: (1) the
role of promotion in the overall marketing mix, (2) the nature of the product, and (3) the
nature of the market.
INTEGRATED MARKETING COMMUNICATIONS
In many organizations, elements of the promotion mix are often managed by specialists in
different parts of the organization or, in some cases, outside the organization when an
advertising agency is used. For example, advertising plans might be developed jointly by
112 Part C The Marketing Mix112 Part C The Marketing Mix
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Chapter Eight Integrated Marketing Communications 113
the advertising department and the advertising agency; plans for the sales force might be
developed by managers of the sales force; and sales promotions might be developed
independently of the advertising and sales plans. Thus, it is not surprising that the concept
of integrated marketing communications has evolved in recent years.
The idea of integrated marketing communications is easy to understand and cer-
tainly has a great deal of commonsense validity. But like so many concepts in market-
ing, it is diff icult to implement. The goal of integrated marketing communications is to
develop marketing communications programs that coordinate and integrate all elements
of promotion—advertising, sales promotion, personal selling, and publicity—so that
the organization presents a consistent message. Integrated marketing communication
seeks to manage all sources of brand or company contacts with existing and potential
customers.
The concept of integrated marketing communication is illustrated in Figure 8.1. It is
generally agreed that potential buyers usually go through a process of (1) awareness of the
product or service, (2) comprehension of what it can do and its important features, (3) con-
viction that it has value for them, and (4) ordering. Consequently, the firm’s marketing
communication tools must encourage and allow the potential buyer to experience the vari-
ous stages. Figure 8.1 illustrates the role of various marketing communication tools for a
hypothetical product.
The goal of integrated marketing communication is an important one, and many believe
it is critical for success in today’s crowded marketplace. As with many management con-
cepts, implementation is slower than many would like to see. Internal “turf ” battles within
organizations and the reluctance of some advertising agencies to willingly broaden their
role beyond advertising are two factors that are hindering the successful implementation of
integrated marketing communication.
FIGURE 8.1
How Various
Promotion Tools
Might Contribute to
the Purchase of a
Hypothetical Product
AwarenessTo produce:
Personal
selling
Advertising
Sales
promotion
Public
relations
Comprehension Conviction Ordering
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ADVERTISING: PLANNING AND STRATEGY
Advertising seeks to promote the seller’s product by means of printed and electronic media.
This is justified on the grounds that messages can reach large numbers of people and make
them aware and persuade and remind them about the firm’s offerings.
From a marketing management perspective, advertising is an important strategic device for
maintaining a competitive advantage in the marketplace. Advertising budgets represent a large
and growing element in the cost of goods and services. In a year it is possible for large multi-
product firms to spend $1.5 to $2 billion advertising their products, and it is common to spend
$74 to $100 million on one individual brand. Clearly, advertising must be carefully planned.
Objectives of Advertising
There are at least three different viewpoints about the contribution of advertising to the
economic health of the firm. The generalist viewpoint is primarily concerned with sales,
profits, return on investment, and so forth. At the other extreme, the specialist viewpoint is
represented by advertising experts who are primarily concerned with measuring the effects
of specific ads or campaigns; here primary attention is given to organizations that offer
services that measure different aspects of the effects of advertising such as the Nielsen
Index, Starch Reports, Arbitron Index, and Simmons Reports. A middle view, one that
might be classified as more of a marketing management approach, understands and appre-
ciates the other two viewpoints but, in addition, sees advertising as a competitive weapon.
Emphasis in this approach is given to the strategic aspects of the advertising function.2
Building on what was said earlier, objectives for advertising can be assigned that focus
on creating awareness, aiding comprehension, developing conviction, and encouraging
ordering. Within each category, more specific objectives can be developed that take into
account time and degree of success desired. Obviously, compared to the large number of
people that advertising makes aware of the product or service, the number actually
motivated to purchase is usually quite small.
In the long run and often in the short run, advertising is justified on the basis of the
revenue it produces. Revenue in this case may refer to either sales or profits. Economic
theory assumes that firms are profit maximizers, and the advertising outlays should be
increased in every market and medium up to the point where the additional cost of gaining
more business equals the incremental profits. Since most business firms do not have the data
required to use the marginal analysis approach, they usually employ less-sophisticated
decision-making models. Evidence also shows that many managers advertise to maximize
sales on the assumption that higher sales mean more profits (which may or may not be true).
The point to be made here is that the ultimate objective of the business advertiser is to make
sales and profits. To achieve this objective, customers must purchase and repurchase the adver-
tised product. Toward this end, an approach to advertising is needed that provides for intelligent
decision making. This approach must recognize the need for measuring the results of advertising,
and these measurements must be as valid and reliable as possible. Marketing managers must also
be aware that advertising not only complements other forms of communication but is subject to
the law of diminishing returns. This means that for any advertised product, it can be assumed a
point is eventually reached at which additional advertising produces little or no additional sales.
ADVERTISING DECISIONS
In line with what has just been said, the marketing manager must make two key decisions.
The first decision deals with determining the size of the advertising budget, and the second
deals with how the advertising budget should be allocated. Although these decisions are
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highly interrelated, we deal with them separately to achieve a better understanding of the
problems involved. Today’s most successful brands of consumer goods were built by heavy
advertising and marketing investment long ago. Many marketers have lost sight of the con-
nection between advertising spending and market share. They practice the art of discount-
ing: cutting ad budgets to fund price promotions or fatten quarterly earnings. Companies
employing these tactics may benefit in the short term but may be at a severe competitive
disadvantage in the long term.
Marketers at some companies, however, know that brand equity and consumer pref-
erence for brands drive market share. They understand the balance of advertising and
promotion expenditures needed to build brands and gain share, market by market,
regardless of growth trends in the product categories where they compete. For example,
Procter & Gamble has built its Jif and Folger’s brands from single-digit shares to being
among category leaders. In peanut butter and coffee, P&G invests more in advertising
and less in discounting than its major competitors. What P&G and other smart mar-
keters such as Kellogg, General Mills, Coke, and PepsiCo hold in common is an aware-
ness of a key factor in advertising: consistent investment spending. They do not raid
their ad budgets to increase earnings for a few quarters, nor do they view advertising as
a discretionary cost.
The Expenditure Question
Most firms determine how much to spend on advertising by one of the following methods.
Percent of Sales
This is one of the most popular rule-of-thumb methods, and its appeal is found in its sim-
plicity. The firm simply takes a percentage figure and applies it to either past or future
sales. For example, suppose next year’s sales are estimated to be $1 million. Using the
criterion of 2 percent of sales, the ad budget would be $20,000. This approach is usually
justified by its advocates in terms of the following argument: (1) Advertising is needed to
MARKETING INSIGHT Ethical and Legal Issues in Marketing
Communications 8–2
Element Ethical and Legal Concerns
Advertising • Using deceptive advertising
• Reinforcing unfavorable ethnic/racial/sex stereotypes
• Encouraging materialism and excessive consumption
Public relations • Lack of sincerity (paying lip service to worthwhile causes)
• Using economic power to gain favorable publicity
• Orchestrating news events to present a false appearance of
widespread support for the company position
Sales promotion • Offering misleading consumer promotions
• Paying slotting allowances to gain retail shelf space
• Using unauthorized mailing lists to reach consumers
Personal selling • Using high-pressure selling
• Failing to disclose product limitations/safety concerns
• Misrepresenting product health
Direct marketing communications • Invading privacy with telemarketing
• Using consumer database information without consumers’
authorization
• Creating economic waste with unwanted direct mail
Source: William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and
Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 383.
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8–3
MARKETING INSIGHT Developing Advertising Objectives:
Nine Questions
5. Does the advertising aim at some specific step that
leads to a sale? If so, objectives might be to
• Persuade prospect to write for descriptive litera-
ture, return a coupon, enter a contest.
• Persuade prospect to visit a showroom, ask for a
demonstration.
• Induce prospect to sample the product (trial offer).
6. How important are supplementary benefits of adver-
tising? Objectives would be to
• Help salespeople open new accounts.
• Help salespeople get larger orders from whole-
salers and retailers.
• Help salespeople get preferred display space.
• Give salespeople an entrée.
• Build morale of sales force.
• Impress the trade.
7. Should the advertising impart information needed to
consummate sales and build customer satisfaction?
If so, objectives may be to use
• “Where to buy it” advertising.
• “How to use it” advertising.
• New models, features, package.
• New prices.
• Special terms, trade-in offers, and so forth.
• New policies (such as guarantees).
8. Should advertising build confidence and goodwill
for the corporation? Targets may include
• Customers and potential customers.
• The trade (distributors, dealers, retail people).
• Employees and potential employees.
• The financial community.
• The public at large.
9. What kind of images does the company wish to build?
• Product quality, dependability.
• Service.
• Family resemblance of diversified products.
• Corporate citizenship.
• Growth, progressiveness, technical leadership.
Source: William F. Arens, Michael F. Weigold, and Christian Arens, Contemporary Advertising, 11th ed. (Burr Ridge, IL: McGraw-Hill/Irwin,
2008), pp. 624–27 and RL 8–3.
1. Does the advertising aim at immediate sales? If so,
objectives might be to
• Perform the complete selling function.
• Close sales to prospects already partly sold.
• Announce a special reason for buying now (price,
premium, and so forth).
• Remind people to buy.
• Tie in with special buying event.
• Stimulate impulse sales.
2. Does the advertising aim at near-term sales? If so,
objectives might be to
• Create awareness.
• Enhance brand image.
• Implant information or attitude.
• Combat or offset competitive claims.
• Correct false impressions, misinformation.
• Build familiarity and easy recognition.
3. Does the advertising aim at building a long-range
consumer franchise? If so, objectives might be to
• Build confidence in company and brand.
• Build customer demand.
• Select preferred distributors and dealers.
• Secure universal distribution.
• Establish a “reputation platform” for launching
new brands or product lines.
• Establish brand recognition and acceptance.
4. Does the advertising aim at helping increase sales? If
so, objectives would be to
• Hold present customers.
• Convert other users to advertiser’s brand.
• Cause people to specify advertiser’s brand.
• Convert nonusers to users.
• Make steady customers out of occasional ones.
• Advertise new uses.
• Persuade customers to buy larger sizes or multi-
ple units.
• Remind users to buy.
• Encourage greater frequency or quantity of use.
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generate sales; (2) a number of cents (i.e., the percentage used) out of each dollar of sales
should be devoted to advertising in order to generate needed sales; and (3) the percentage
is easily adjusted and can be readily understood by other executives. The percent-of-sales
approach is popular in retailing.
Per-Unit Expenditure
Closely related to the above technique is one in which a fixed monetary amount is spent on
advertising for each unit of the product expected to be sold. This method is popular with
higher-priced merchandise, such as automobiles or appliances. For instance, if a company is
marketing color televisions priced at $500, it may decide that it should spend $30 per set on
advertising. Since this $30 is a fixed amount for each unit, this method amounts to the same
thing as the percent-of-sales method. The big difference is in the rationale used to justify each
of the methods. The per-unit expenditure method attempts to determine the retail price by
using production costs as a base. Here the seller realizes that a reasonably competitive price
must be established for the product in question and therefore attempts to cost out the gross
margin. All this means is that, if the suggested retail price is to be $500 and manufacturing
costs are $250, a gross margin of $250 is available to cover certain expenses, such as trans-
portation, personal selling, advertising, and dealer profit. Some of these expense items are
flexible, such as advertising, while others are nearly fixed, as in the case of transportation.
The basic problem with this method and the percentage-of-sales method is that they view
advertising as a function of sales, rather than sales as a function of advertising.
All You Can Afford
Here the advertising budget is established as a predetermined share of profits or financial
resources. The availability of current revenues sets the upper limit of the ad budget. The
only advantage to this approach is that it sets reasonable limits on the expenditures for
advertising. However, from the standpoint of sound marketing practice, this method is
undesirable because there is no necessary connection between liquidity and advertising
opportunity. Any firm that limits its advertising outlays to the amount of available funds
will probably miss opportunities for increasing sales and profits.
Competitive Parity
This approach is often used in conjunction with other approaches, such as the percent-of-
sales method. The basic philosophy underlying this approach is that advertising is defen-
sive. Advertising budgets are based on those of competitors or other members of the
industry. From a strategy standpoint, this is a “followership” technique that assumes that
the other firms in the industry know what they are doing and have similar goals. Competi-
tive parity is not a preferred method, although some executives feel it is a safe approach.
This may or may not be true depending in part on the relative market share of competing
firms and their growth objectives.
The Research Approach
Here the advertising budget is argued for and presented on the basis of research findings.
Advertising media are studied in terms of their productivity by the use of media reports
and research studies. Costs are also estimated and compared with study results. A typical
experiment is one in which three or more test markets are selected. The first test market
is used as a control, either with no advertising or with normal levels of advertising.
Advertising with various levels of intensity is used in the other markets, and comparisons
are made to see what effect different levels of intensity have. The marketing manager
then evaluates the costs and benefits of the different approaches and intensity levels to
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118
determine the overall budget. Although the research approach is generally more expen-
sive than some other models, it is a more rational approach to the expenditure decision.
The Task Approach
Well-planned advertising programs usually make use of the task approach, which initially
formulates the advertising goals and defines the tasks to accomplish these goals. Once this
is done, management determines how much it will cost to accomplish each task and adds
up the total. This approach is often in conjunction with the research approach.
The Allocation Question
This question deals with the problem of deciding on the most effective way of spending
advertising dollars. A general answer to the question is that management’s choice of strate-
gies and objectives determines the media and appeals to be used. In other words, the firm’s
or product division’s overall marketing plan will function as a general guideline for answer-
ing the allocation question.
From a practical standpoint, however, the allocation question can be framed in terms of
message and media decisions. A successful ad campaign has two related tasks: (1) say the
right things in the ads themselves, and (2) use the appropriate media in the right amounts
at the right time to reach the target market.
Message Strategy
The advertising process involves creating messages with words, ideas, sounds, and other
forms of audiovisual stimuli that are designed to affect consumer (or distributor) behavior.
It follows that much of advertising is a communication process. To be effective, the adver-
tising message should meet two general criteria: (1) It should take into account the basic
principles of communication, and (2) it should be predicated upon a good theory of
consumer motivation and behavior.
The basic communication process involves three elements: (1) the sender or source of
the communication, (2) the communication or message, and (3) the receiver or audience.
Advertising agencies are considered experts in the communications field and are employed
8–4
MARKETING INSIGHT Preparing the Advertising Campaign:
The Eight-M Formula
Effective advertising should follow a plan. There is no one best way to go about planning an
advertising campaign, but in general, marketers should have good answers to the following
eight questions:
1. The management question: Who will manage the advertising program?
2. The money question: How much should be spent on advertising as opposed to other
forms of communication?
3. The market question: To whom should the advertising be directed?
4. The message question: What should the ads say about the product?
5. The media question: What types and combinations of media should be used?
6. The macroscheduling question: How long should the advertising campaign be in effect
before changing ads or themes?
7. The microscheduling question: At what times and dates would it be best for ads to appear
during the course of the campaign?
8. The measurement question: How will the effectiveness of the advertising campaign be
measured and how will the campaign be evaluated and controlled?
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8–5
MARKETING INSIGHT Some Relative Merits of Major
Advertising Media
Disadvantages
1. Nonselectivity of audience.
2. Fleeting impressions.
3. Short life.
4. Expensive.
Magazines
Advantages
1. High geographic and demographic selectivity.
2. Psychology of attention.
3. Quality of reproduction.
4. Pass-along readership.
Disadvantages
1. Long closing periods (six to eight weeks prior to
publication).
2. Some waste circulation.
3. No guarantee of position (unless premium is paid).
Direct Mail
Advantages
1. Audience selectivity.
2. Flexible.
3. No competition from competing advertisements.
4. Personalized.
Disadvantages
1. Relatively high cost.
2. Consumers often pay little attention and throw it
away.
Internet
Advantages
1. Interactive.
2. Low cost per exposure.
3. Ads can be placed in interest sections.
4. Timely.
5. High information content possible.
6. New favorable medium.
Disadvantages
1. Low attention getting.
2. Short message life.
3. Reader selects exposure.
4. May be perceived as intruding.
5. Subject to download speeds.
119
Newspapers
Advantages
1. Flexible and timely.
2. Intense coverage of local markets.
3. Broad acceptance and use.
4. High believability of printed word.
Disadvantages
1. Short life.
2. Read hastily.
3. Small “pass-along” audience.
Radio
Advantages
1. Mass use (over 25 million radios sold annually).
2. Audience selectivity via station format.
3. Low cost (per unit of time).
4. Geographic flexibility.
Disadvantages
1. Audio presentation only.
2. Less attention than TV.
3. Chaotic buying (nonstandardized rate structures).
4. Short life.
Outdoor
Advantages
1. Flexible.
2. Relative absence of competing advertisements.
3. Repeat exposure.
4. Relatively inexpensive.
Disadvantages
1. Creative limitations.
2. Many distractions for viewer.
3. Public attack (ecological implications).
4. No selectivity of audience.
Television
Advantages
1. Combination of sight, sound, and motion.
2. Appeals to senses.
3. Mass audience coverage.
4. Psychology of attention.
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by most large firms to create meaningful messages and assist in their dissemination. Trans-
lating the product idea or marketing message into an effective ad is termed encoding. In
advertising, the goal of encoding is to generate ads that the audience understands. For this to
occur, the audience must be able to decode the message in the ad so that the perceived con-
tent of the message is the same as the intended content of the message. From a practical
standpoint, all this means is that advertising messages must be sent to consumers in an
understandable and meaningful way.
Advertising messages, of course, must be transmitted and carried by particular communi-
cation channels commonly known as advertising media. These media or channels vary in effi-
ciency, selectivity, and cost. Some channels are preferred to others because they have less
“noise,” and thus messages are more easily received and understood. For example, a particular
newspaper ad must compete with other ads, pictures, or stories on the same page. In the case
of radio or TV, while only one firm’s message is usually broadcast at a time, other distractions
(noise) can hamper clear communications, such as driving while listening to the radio.
The relationship between advertising and consumer behavior is quite obvious. For many
products and services, advertising is an influence that may affect the consumer’s decision
to purchase a particular product or brand. It is clear that consumers are subjected to many
selling influences, and the question arises about how important advertising is or can be. In
this case, the advertising expert must operate on some theory of consumer behavior. The
reader will recall from the discussion of consumer behavior that the buyer was viewed as
progressing through various stages from an unsatisfied need through and beyond a pur-
chase decision. The end goal of an advertisement and its associated campaign is to move
the buyer to a decision to purchase the advertised brand. By doing so, the advertisement
will have succeeded in moving the consumer to the trial and repeat purchase stage of the
consumer behavior process, which is the end goal of advertising strategy.
The planning of an advertising campaign and the creation of persuasive messages require
a mixture of marketing skill and creative know-how. Relative to the dimension of marketing
skills, some important pieces of marketing information are needed before launching an ad
campaign. Most of this information must be generated by the firm and kept up-to-date.
Listed below are some of the critical types of information an advertiser should have.
1. Who the firm’s customers and potential customers are: their demographic, economic, and
psychological characteristics and any other factors affecting their likelihood of buying.
2. How many such customers there are.
3. How much of the firm’s type and brand of product they are currently buying and can
reasonably be expected to buy in the short-term and long-term future.
4. Which individuals, other than customers and potential customers, influence purchasing
decisions.
5. Where they buy the firm’s brand of product.
6. When they buy, and frequency of purchase.
7. Which competitive brands they buy and frequency of purchase.
8. How they use the product.
9. Why they buy particular types and brands of products.
Media Mix
Media selection is no easy task. To start with, there are numerous types and combinations
of media to choose from. Marketing Insight 8–4 presents a brief summary of the advan-
tages and disadvantages of some of the major advertising media.
In the advertising industry, a common measure of efficiency or productivity is cost per thou-
sand, or CPMs. This figure generally refers to the dollar cost of reaching 1,000 prospects,
120 Part C The Marketing Mix
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8–6
MARKETING INSIGHT Some Innovative Non-Traditional Media
Advertising can be found everywhere these
days—even places where we least expect it.
Aerial Banners and Lights
Banners carrying ad messages can be pulled
by low-flying planes. After dark, traveling
aerial lights can display messages of up to
90 characters. Slow-flying helicopters can
carry 40- by 80-foot signs lit by thousands
of bulbs.
Blimps
In addition to Goodyear, blimps now carry
ads for many companies, including Citibank,
Coca-Cola, and Fuji Film, among others.
Computer operated lighting systems allow
the blimps to advertise at night.
In-Flight Ads
Many airlines’ in-flight audio and video en-
tertainment runs ads. The travel industry
and advertisers that want to reach business
fliers are the primary users.
Newspaper Bags
The protective bags of newspapers are used
for full-color advertising and can be en-
hanced by adding product samples. This
method is desirable because it does not
have to compete with other advertisers.
Transit Terminal Domination
The latest version of saturation bombing
has come to large transit hubs around the
country. One advertiser buys up all or most
of the message space in one confined site
banishing all competition. This greatly in-
creases the chances of being seen even by
the most harried passers by.
Electronic Billboards
Most modern sports stadiums and arenas
sell ad space on giant electronic displays.
Inflatables
Giant inflatable beer cans, mascots and
even cereal boxes are used for advertising
purposes.
Painted Vehicles
Buses, trucks, and cars are completely deco-
rated with larger than life illustrations and
messages to attract attention. Some vehicles
are ‘wrapped’ with a material that covers
the entire vehicle to present the greatest
visual impact.
Reactrix Brand Play
In small theaters and other spaces, Reactrix
creates highly entertaining branding displays
that respond to the physical movement of
the audience.
Trash Receptacles
Uniquely designed and decorated trash bins,
boxes, and baskets bear advertising logos
and messages. Some major cities now offer
advertising space on concrete litter recepta-
cles at major commercial intersections.
Kiosks
Stand-alone kiosks can be painted with eye-
catching designs and messages. Unique con-
structions can be attached to the top and
sides to draw attention. Electronic displays
running presentation software can show col-
orful fast-action video clips, slide images, and
interactive text. These systems can also play
synchronized sounds and music.
Lavatory Advertising
Numerous venues allow advertising in lava-
tories. Print ads can be found on the inner
side of stalls and above urinals in some
men’s restrooms.
Gobo/Cookie Advertising
The gobo (or cookie) is a piece of metal
stenciled with a logo through which light is
projected against a wall or other suitable
background. This is ideal for huge outdoor
or indoor events.
Train Cars
Train cars are wrapped with advertisements
instead of graffiti these days. In Chicago an
eight-car commuter train was wrapped with
Illinois lottery ads.
Grocery Receipts
Today most major supermarket chains print
coupons on the back of grocery receipts.
The coupons feature discounts at local re-
tailers.
Source: William F. Arens, Michael F. Weigold, and Christian Arens, Contemporary Advertising, 12th ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 282.
121
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122 Part C The Marketing Mix
and its chief advantage lies in its simplicity and allowance for a common base of comparison
between differing media types. The major disadvantage of the use of CPMs also relates to its
simplicity. For example, the same commercial placed in two different television programs,
having the same viewership and the same audience profile, may very well generate different
responses depending on the level of viewer involvement. This “positive effects” theory states
that the more the viewers are involved in a television program, the stronger they will respond to
commercials. In essence, involving programs produce engaged respondents who demonstrate
more favorable responses to advertising messages.
Generally, such measures as circulation, audience size, and sets in use per commer-
cial minute are used in the calculation. Of course, different relative rankings of media can
occur, depending on the measure used. A related problem deals with what is meant by
“effectively reaching” the prospect.3 Reach, in general, is the number of different targeted
audience members exposed at least once to the advertiser’s message within a predetermined
time frame. Just as important as the number of different people exposed (reach) is the
number of times, on average, that they are exposed to an advertisement within a given
time period. This rate of exposure is called average frequency. Since marketers all have
budget constraints, they must decide whether to increase reach at the expense of average
frequency or average frequency at the expense of reach. In essence, the marketer’s dilemma
is to develop a media schedule that both (1) exposes a sufficient number of targeted
customers (reach) to the firm’s product and (2) exposes them enough times (average
frequency) to the product to produce the desired effect. The desired effect can come in the
form of reaching goals associated with any or all of the categories of advertising objectives
(the prospect becomes aware of the product, takes action, etc.) covered earlier in the chapter.
SALES PROMOTION
Over the past two decades, the popularity of sales promotion has been increasing. Two
reasons for this increased popularity are undoubtedly the increased pressure on management
for short-term results and the emergence of new purchase tracking technology. For example,
many supermarket cash registers are now equipped with a device that dispenses coupons to
a customer at the point of purchase. The type, variety, and cash amount of the coupon will
vary from customer to customer based on their purchases. In essence, it is now possible for
the Coca-Cola Company to dispense coupons only to those customers who purchase Pepsi
Cola, thus avoiding spending promotional dollars on already-loyal Coke drinkers. Figure 8.2
presents some popular targets of sales promotion and the methods used.
Push versus Pull Marketing
Push and pull marketing strategies comprise the two options available to marketers interested
in getting their product into the hands of customers. They are illustrated in Figure 8.3. Push
strategies involve aiming promotional efforts at distributors, retailers, and sales personnel to
gain their cooperation in ordering, stocking, and accelerating the sales of a product. For
example, a local rock band may visit local DJs seeking air play for their record, offer distrib-
utors special prices to carry the CD, and offer retailers special allowances for putting up
posters or special counter displays. These activities, which are usually in the form of price
allowances, distribution allowances, and advertising dollar allowances, are designed to “push”
the CD toward the customer.4
Pull strategies involve aiming promotional efforts directly at customers to encourage
them to ask the retailer for the product. In the past few years drug manufacturers have begun
to advertise prescription drugs directly to consumers. Customers are encouraged to “Ask
Your Doctor” about Viagra or Paxil. These activities, which can include advertising and sales
promotion, are designed to “pull” a product through the channel from manufacturer to buyer.
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Trade Sales Promotions
Trade promotions are those promotions aimed at distributors and retailers of products who make
up the distribution channel. The major objectives of trade promotions are to (1) convince retail-
ers to carry the manufacturer’s products, (2) reduce the manufacturer’s inventories and increase
the distributor’s or retailer’s inventories, (3) support advertising and consumer sales promotions,
(4) encourage retailers either to give the product more favorable shelf space or to place more
emphasis on selling the product, and (5) serve as a reward for past sales efforts.
Promotions built around price discounts and advertising or other allowances are likely
to have higher distributor/retailer participation levels than other type promotions because a
FIGURE 8.2 Example of Sales Promotion Activities
Source: William D. Perreault, Jr. and E. Jerome McCarthy, Basic Marketing: A Marketing Strategy Planning Approach, 17th ed. Irwin/
McGraw-Hill, 2009, chap. 14.
Aimed at final
consumers or users
Contests
Coupons
Aisle displays
Samples
Trade shows
Point-of-purchasing
materials
Banners and streamers
Frequent buyer programs
Sponsored events
Aimed at middlemen
Price deals
Promotion allowances
Sales contests
Calendars
Gifts
Trade shows
Meetings
Catalogs
Merchandising aids
Videos
Aimed at company’s
own sales force
Contests
Bonuses
Meetings
Portfolios
Displays
Sales aids
Training materials
Chapter Eight Integrated Marketing Communications 123
FIGURE 8.3 Push versus Pull Strategies in Marketing Communications
Marketing Communications
Pull Strategy
Producer MarketingCommunications Resellers
End Users
Push Strategy
Marketing
Communications
End UsersResellers
Request
ProductsProducer
Request
Products
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8–7
MARKETING INSIGHT Procedures for Evaluating Advertising
Programs and Some Services
Using the Procedures
Source: Joseph Guiltinan and Gordon Paul, Marketing Management, 6th ed., © 1997, New York, McGraw-Hill,
Inc., p. 274. Reproduced by permission of The McGraw-Hill Companies.
124
direct economic incentive is attached to the promotion.5 The importance attached to
individual types of promotions may vary by the size of distributor/retailer. For example,
small retailers do not consider contests, sweepstakes, and sales quotas as being important
to their decision to participate in promotions; getting the full benefit of such promotions is
difficult due to their size. Marketers must keep in mind that not all distributors or retailers
will have the same reaction to promotions offered. The manufacturer must carefully con-
sider differences in attitudes when designing and implementing trade promotion programs.
Consumer Promotions
Consumer promotions can fulfill several distinct objectives for the manufacturer. Some of
the more commonly sought-after objectives include (1) inducing the consumer to try the
product, (2) rewarding the consumer for brand loyalty, (3) encouraging the consumer to
trade up or purchase larger sizes of a product, (4) stimulating the consumer to make repeat
purchases of the product, (5) reacting to competitor efforts, and (6) reinforcing and serving
as a complement to advertising and personal selling efforts.
Figure 8.4 presents a brief description of some of the most commonly used forms of
consumer promotion activities.
What Sales Promotion Can and Can’t Do
Advocates of sales promotion often point to its growing popularity as a justification for
the argument that we don’t need advertising; sales promotion itself will suffice. Marketers
Procedures for Evaluating Specific Advertisements
1. Recognition tests. Estimate the percentage of people claiming to have read a magazine
who recognize the ad when it is shown to them (e.g., Starch Message Report Service).
2. Recall tests. Estimate the percentage of people claiming to have read a magazine who
can (unaided) recall the ad and its contents (e.g., Gallup and Robinson Impact Service,
various services for TV ads as well).
3. Opinion tests. Potential audience members are asked to rank alternative advertisements
as most interesting, most believable, best liked.
4. Theater tests. Theater audience is asked for brand preferences before and after an ad is
shown in context of a TV show (e.g., Schwerin TV Testing Service).
Procedures for Evaluating Specific Advertising Objectives
1. Awareness. Potential buyers are asked to indicate brands that come to mind in a product
category. A message used in an ad campaign is given and buyers are asked to identify
the brand that was advertised using that message.
2. Attitude. Potential buyers are asked to rate competing or individual brands on determi-
nant attributes, benefits, and characterizations using rating scales.
Procedures for Evaluating Motivational Impact
1. Intention to buy. Potential buyers are asked to indicate the likelihood they will buy a
brand (on a scale from “definitely will not” to “definitely will”).
2. Market test. Sales changes in different markets are monitored to compare the effects of
different messages, budget levels.
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FIGURE 8.4
Some Commonly
Used Forms of
Consumer
Promotions
• Sampling
• Price deals
• Bonus packs
• Rebates and refunds
• Sweepstakes and
contests
• Premiums
• Coupons
Customers are offered regular trial sizes of the product either free
or at a nominal price.
Customers are offered discounts from the product’s regular price.
Additional amounts of the product are given to buyers when they
purchase the product.
Customers are given reimbursements for purchasing the product
either on the spot or through the mail.
Prizes are available either through chance selection or games of
skill.
A reward or gift can come from purchasing a product.
Probably the most familiar and widely used of all consumer pro-
motions, now often available at point of purchase.
Chapter Eight Integrated Marketing Communications 125
should bear in mind that sales promotion is only one part of a well-constructed inte-
grated marketing communications program. While sales promotion is proven to be
effective in achieving the objectives listed in the previous sections, there are several com-
pelling reasons why it should not be used as the sole promotional tool. These reasons
include sales promotion’s inability (1) to generate long-term buyer commitment to a
brand in many cases; (2) to change, except on a temporary basis, declining sales of a
product; (3) to convince buyers to purchase an otherwise unacceptable product; and
(4) to make up for a lack of advertising or sales support for a product. In addition, pro-
motions can often fuel the flames of competitive retaliation far more than other market-
ing activities. When the competition gets drawn into the promotion war, the effect can be
a significant slowing of the sharp sales increases predicted by the initiator of the promo-
tion. Worse yet, promotions can often devalue the image of the promoted brand in the
consumer’s eyes.
The dilemma marketers face is how to cut back on sales promotions without losing
market share to competitors. In an effort to overcome this problem, some consumer prod-
ucts companies are instituting new pricing policies to try to cut back on the amount of
sales promotions used. For example, Procter & Gamble and General Mills have instituted
everyday low-price strategies for many of their products. The intent of this type of policy is
to give retailers a lower list price in exchange for cutting trade promotions. While the net
cost of the product to retailers remains unchanged, retailers are losing promotional dollars
that they controlled. In many situations, although trade allowances are supposed to be used
for encouraging retail sales, it is not uncommon for retailers to take a portion of the trade
allowance money as profit. The rationale behind companies’ (such as Procter & Gamble
and General Mills) efforts to cut back on trade and other promotions is (1) not to force
brand-loyal customers to pay unusually high prices when a product isn’t on special; (2) to
allow consumers to benefit from a lower average shelf price, since retailers will no longer
have discretion over the use of allowance dollars; and (3) to improve efficiencies in
manufacturing and distribution systems because retailers will lose the incentive to do heavy
forward buying of discounted items.
In addition to developing pricing policies to cut back on short-term promotions,
some consumer products companies are starting to institute frequency marketing
programs in which they reward consumers for purchases of products or services over
a sustained period of time.6 These programs are not technically considered sales
promotions due to their ongoing nature. Frequency marketing originated in 1981 when
American Airlines launched its frequent-flyer program with the intention of securing the
loyalty of business travelers.
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PUBLIC RELATIONS
As noted earlier in the chapter, public relations is a nonpersonal form of communication that
tries to influence the overall image of the organization and its products and services among
its various stakeholder groups. Public relations managers prefer to focus on communicating
positive news about the organization, but they must also be available to minimize the nega-
tive impacts of a crisis or problem. We have already noted that the most popular and fre-
quently used public relations tool is publicity. There are several forms of publicity:
1. News release. An announcement regarding changes in the organization or the product
line, sometimes called a press release. The objective is to inform members of the media
of a newsworthy event in the hope that they will convert it into a story.
2. News conference. A meeting held for representatives of the media so that the organiza-
tion can announce major news events such as new products, technologies, mergers,
acquisitions, and special events, or, in the case of a crisis or problem, present its position
and plans for dealing with the situation.
3. Sponsorship. Providing support for and associating the organization’s name with events,
programs, or even people such as amateur athletes or teams. Besides publicity, sponsor-
ship can also include advertising and sales promotion activities. Many organizations
sponsor sporting events, art festivals, and public radio and television programs.
4. Public service announcements. Many nonprofit organizations rely on the media to donate
time for advertising for contributions and donors. Many nonprofit organizations cannot
afford the cost of advertising or in some cases are prohibited from doing so.
DIRECT MARKETING
We already know that with direct marketing the organization communicates directly with
customers either online or through direct mail, catalogs, direct response advertising, or per-
sonal selling (the subject of the next chapter).
8–8
MARKETING INSIGHT Some Objectives of Sales Promotion
When Directed at Consumers
1. To obtain the trial of a product.
2. To introduce a new or improved product.
3. To encourage repeat or greater usage by current users.
4. To bring more customers into retail stores.
5. To increase the total number of users of an established product.
When Directed at Salespeople
1. To motivate the sales force.
2. To educate the sales force about product improvements.
3. To stabilize a fluctuating sales pattern.
When Directed at Resellers
1. To increase reseller inventories.
2. To obtain displays and other support for products.
3. To improve product distribution.
4. To obtain more and better shelf space.
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Direct marketing methods are certainly not new. In fact, several of them will be dis-
cussed later in the book as methods of nonstore retailing. What is new is the ability to
design and use them more efficiently and effectively because of the availability of com-
puters and databases. Technology has clearly been the catalyst in the tremendous growth
in direct marketing activities in the last decade. Because of technology, it is now possible
for marketers to customize communication efforts and literally create one-to-one con-
nections and dialogues with customers. This would be especially true for those organiza-
tions that have successfully implemented an integrated marketing communications
program.
Another obvious catalyst for growth in direct marketing has been consumers’ increased
use of the Internet for purchasing many types of products. The projected growth rates for
online expenditures continue to rise. As growth continues in the number of households with
Internet access and in the number of businesses with Web sites and product or service
offerings via the Internet, it will likely fuel even greater growth in direct marketing.
For the American consumer facing a “poverty of time,” direct marketing offers many
benefits. In addition to saving time, consumers often save money, get better service, and enjoy
increased privacy; many even find it entertaining. For the marketer, sales revenues are the
obvious benefit but not the only one. Direct marketing activities are often very effective in
generating sales leads when a customer asks for more information about a product or serv-
ice and can also increase store traffic when potential buyers are encouraged to visit a deal-
ership or retail store.
CONCLUSION
This chapter has been concerned with integrated marketing communications. Remember
that advertising and sales promotion are only two of the ways by which sellers can affect
the demand for their product. Advertising and sales promotion are only part of the firm’s
promotion mix, and in turn, the promotion mix is only part of the overall marketing mix.
Thus, advertising and sales promotion begin with the marketing plan and not with the ad-
vertising and sales promotion plans. Ignoring this point can produce ineffective and ex-
pensive promotional programs because of a lack of coordination with other elements of the
marketing mix.
Chapter Eight Integrated Marketing Communications 127
Additional
Resources
Biehal, Gabriel, and Daniel A. Shenin. “The Influence of Corporate Messages on Product Portfo-
lio.” Journal of Marketing, April 2007, pp. 12–25.
Luntz, Frank. Words That Work. NY: Hyperion, 2007.
Mullin, Jeanniery, and David Daniels. Email Marketing. Indianapolis: Wiley Publishers, 2009.
Percival, Sean. My Space Marketing: Creating a Social Network to Boom Your Business. Indianapolis:
Que Books, 2009.
Reich, Brian, and Don Soloman. Media Rules: Mastering Today’s Technology to Connect With and
Keep Your Audience. Hoboken NJ: John Wiley and Sons, 2008.
Vollmer, Christopher, and Geoffrey Precourt. Always On: Advertising and Marketing Media in an
Era of Consumer Control. NY: McGraw-Hill, 2008.
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Pa
rt
C
Th
e
M
ar
ke
tin
g
M
ix
Appendix
Major Federal
Agencies Involved in
Control of Advertising
Agency
Federal Trade Commission
Food and Drug Administration
Federal Communications Commission
Postal Service
Alcohol and Tobacco Tax Division
Grain Division
Securities and Exchange Commission
Information Source
Patent Office
Library of Congress
Department of Justice
Function
Regulates commerce between states; controls unfair business practices; takes
action on false and deceptive advertising; most important agency in regulation
of advertising and promotion.
Regulatory division of the Department of Health, Education, and Welfare;
controls marketing of food, drugs, cosmetics, medical devices, and potentially
hazardous consumer products.
Regulates advertising indirectly, primarily through the power to grant or
withdraw broadcasting licenses.
Regulates material that goes through the mails, primarily in areas of obscenity,
lottery, and fraud.
Part of the Treasury Department; has broad powers to regulate deceptive
and misleading advertising of liquor and tobacco.
Unit of the Department of Agriculture responsible for policing seed advertising.
Regulates advertising of securities.
Description
Regulates registration of trademarks.
Controls protection of copyrights.
Enforces all federal laws through prosecuting cases referred to it by other
government agencies.
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9
Personal Selling,
Relationship Building,
and Sales Management
Personal selling, unlike advertising or sales promotion, involves direct relationships
between the seller and the prospect or customer. In a formal sense, personal selling can be
defined as a two-way flow of communication between a potential buyer and a salesperson
that is designed to accomplish at least three tasks: (1) identify the potential buyer’s needs;
(2) match those needs to one or more of the firm’s products or services; and (3) on the basis
of this match, convince the buyer to purchase the product.1 The personal selling element of
the promotion mix can encompass diverse forms of direct interaction between a sales-
person and a potential buyer, including face-to-face, telephone, written, and computer com-
munication. The behavioral scientist would most likely characterize personal selling as a
type of personal influence. Operationally, it is a complex communication process, one still
not fully understood by marketers.
IMPORTANCE OF PERSONAL SELLING
The importance of the personal selling function depends partially on the nature of the product.
As a general rule, goods that are new and different, technically complex, or expensive require
more personal selling effort. The salesperson plays a key role in providing the consumer with
information about such products to reduce the risks involved in purchase and use. Insurance,
for example, is a complex and technical product that often needs significant amounts of
personal selling. In addition, many organizational products cannot be presold, and the sales-
person has a key role to play in finalizing the sale.
It is important to remember that, for many companies, the salesperson represents the
customer’s main link to the firm. In fact, to some, the salesperson is the company. There-
fore, it is imperative that the company take advantage of this unique link. Through the
efforts of the successful salesperson, a company can build relationships with customers that
continue long beyond the initial sale. It is the salesperson who serves as the conduit through
which information regarding product flaws, improvements, applications, or new uses can
pass from the customer to the marketing department. To illustrate the importance of using
salespeople as an information resource, consider this fact: In some industries, customer
information serves as a major source for up to 90 percent of new product and process ideas.
Chapter
130
Part C
The M
arketing M
ix
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Along with techniques described in the previous chapter, personal selling provides the push
needed to get middlemen to carry new products, increase their amount of goods purchased,
and devote more effort in merchandising a product or brand.
In summary, personal selling is an integral part of the marketing system, fulfilling two
vital duties (in addition to the core sales task itself): one for customers and one for compa-
nies.2 First, the salesperson dispenses knowledge to buyers. Lacking relevant information,
customers are likely to make poor buying decisions. For example, computer users would
not learn about new equipment and new programming techniques without the assistance of
computer sales representatives. Doctors would have difficulty finding out about new drugs
and procedures were it not for pharmaceutical salespeople. Second, salespeople act as a
source of marketing intelligence for management. Marketing success depends on satisfy-
ing customer needs. If present products don’t fulfill customer needs, then profitable
opportunities may exist for new or improved products. If problems with a company’s
product exist, then management must be quickly apprised of the fact. In either situation,
salespeople are in the best position to act as the intermediary through which valuable
information can be passed back and forth between product providers and buyers.
THE SALES PROCESS
Personal selling is as much an art as it is a science. The word art is used to describe that por-
tion of the selling process that is highly creative in nature and difficult to explain. This does
not mean there is little control over the personal selling element in the promotion mix. It
does imply that, all other things equal, the trained salesperson can outsell the untrained one.
Before management selects and trains salespeople, it should have an understanding of
the sales process. Obviously, the sales process will differ according to the size of the com-
pany, the nature of the product, the market, and so forth, but some elements are common
to almost all selling situations. For the purposes of this text, the term sales process refers
to two basic factors: (1) the objectives the salesperson is trying to achieve while engaged
in selling activities; and (2) the sequence of stages or steps the salesperson should follow
in trying to achieve the specific objectives (the relationship-building process).
Objectives of the Sales Force
Much like the concepts covered in the previous chapter, personal selling can be viewed as a strate-
gic means to gain competitive advantage in the marketplace. For example, most organizations in-
clude service representatives as part of their sales team to ensure that customer concerns with
present products are addressed and remedied at the same time new business is being solicited.
In a similar manner, marketing management understands that while, ultimately, personal
selling must be justified on the basis of the revenue and profits it produces, other categories
of objectives are generally assigned to the personal selling function as part of the overall
promotion mix.3 These objectives are
1. Information provision. Especially in the case of new products or customers, the sales-
person needs to fully explain all attributes of the product or service, answer any ques-
tions, and probe for additional questions.
2. Persuasion. Once the initial product or service information is provided, the salesperson
needs to focus on the following objectives:
• Clearly distinguish attributes of the firm’s products or services from those of
competitors.
• Maximize the number of sales as a percent of presentations.
• Convert undecided customers into first-time buyers.
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9–1
MARKETING INSIGHT How the Sales Force Spends
Its Time
• Convert first-time customers into repeat purchasers.
• Sell additional or complementary items to repeat customers.
• Tend to the needs of dissatisfied customers.
3. After-sale service. Whether the sale represents a first-time or repeat purchase, the sales-
person needs to ensure the following objectives are met:
• Delivery or installation of the product or service that meets or exceeds customer
expectations.
• Immediate follow-up calls and visits to address unresolved or new concerns.
• Reassurance of product or service superiority through demonstrable actions.
• Build relationships.
The Sales Relationship-Building Process
For many years, the traditional approach to selling emphasized the first-time sale of a prod-
uct or service as the culmination of the sales process. As emphasized in Chapter 1, the
132
Se
lli
ng
ti
m
e
Nonselling tim
e
Administrative
tasks
(10–20%)
Servicing the
account
(10–20%)
Travel time
(15–20%)
On-site
contacts
(33%)
Other
selling
contacts
(22%)
How
salespeople spend
their time each
week
Source: Roger Kerin, Stephen W. Hartley, and William Rudalius, Marketing, 9th ed.; (Burr Ridge, IL.:
McGraw-Hill/Irwin, 2009), p. 526.
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Chapter Nine Personal Selling, Relationship Building, and Sales Management 133
marketing concept and accompanying approach to personal selling view the initial sale as
merely the first step in a long-term relationship-building process, not as the end goal. As we
shall see later in this chapter, long-term relationships between the buyer and seller can be
considered partnerships because the buyer and seller have an ongoing, mutually beneficial
affiliation, with each party having concern for the other party’s well-being.4 The
relationship-building process, which is designed to meet the objectives listed in the previous
section, contains six sequential stages (Figure 9.1). These stages are (1) prospecting,
(2) planning the sales call, (3) presentation, (4) responding to objections, (5) obtaining com-
mitment/closing the sale, and (6) building a long-term relationship. What follows is a brief
description of each of the stages.
Prospecting
The process of locating potential customers is called prospecting. The prospecting activity
is critical to the success of organizations in maintaining or increasing sales volume.
Continual prospecting is necessary for several reasons, including the fact that customers
(1) switch to other suppliers, (2) move out of the organization’s market area, (3) go out of
business because of bankruptcy, (4) are acquired by another firm, or (5) have only a one-
time need for the product or service. In addition, the organization’s buying contracts with
present customers may be replaced and organizations that wish to grow must increase their
customer base. Prospecting in some fields is more important than in others. For example, a
stockbroker, real estate agent, or partner in an accounting firm with no effective prospect-
ing plan usually doesn’t last long in the business. In these positions, it may take as many as
100 contacts to gain 10 prospects who will listen to presentations from which one to two
sales may result. On the other hand, a Procter & Gamble sales representative in a certain
geographic area would likely know all the potential retailers for Crest toothpaste.
FIGURE 9.1
The Sales
Relationship-Building
Process
Source: Adapted from mate-
rial discussed in Barton A.
Weitz, Stephen B. Castle-
berry, and John F. Tanner,
Selling: Building Partnerships,
7th ed. (Burr Ridge, IL: Irwin/
McGraw-Hill, 2009), p. 171.
Planning the sales call
Presenting
Responding to objections
Obtaining commitment
Building a long-term relationship
Prospecting
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9–2
MARKETING INSIGHT Some Common Sources
of Sales Leads
The prospecting process usually involves two major activities that are undertaken on a con-
tinual, concurrent basis. First, prospects must be located. When names and addresses of
prospects are not available, as is usually the case when firms enter new markets or a new sales-
person is hired, they can be generated by randomly calling on businesses or households or by
employing mass appeals (through advertising). This process, called random lead generation,
usually requires a high number of contacts to gain a sale. A lead is a potential prospect that may
or may not have the potential to be a true prospect, a candidate, to whom a sale could be made.
For most professional, experienced salespeople, a more systematic approach to generating
leads from predetermined target markets is used. This approach, aptly named selected-lead
searching, uses existing contacts and knowledge to generate new prospects. In general, the best
source of prospects is referrals from satisfied customers. The more satisfied one’s customers are,
the higher the quality of leads a salesperson will receive from them. Marketing Insight 9–2 lists
some common sources of leads and how they are used to generate new contacts.
The second step in the prospecting process involves screening. Once leads are generated,
the salesperson must determine whether the prospect is a true prospect. This qualifying
process usually entails gathering information, which leads to answering five questions:
1. Does the lead have a want or need that can be satisfied by the purchase of the firm’s
products or services?
2. Does the lead have the ability to pay?
134
Source: Barton A. Weitz, Stephen B. Castleberry, and John F. Tanner Jr., Selling: Building Partnerships, 7th ed.
(Burr Ridge, IL.: McGraw-Hill/Irwin, 2009), p. 174.
Source
Satisfied customers
Endless chain
Networking
Center of influence
The Internet
Ads, direct mail,
catalogs, and publicity
Shows, fairs, and
merchandise markets
Seminars
Lists and directories
Data mining and
CRM systems
Cold calling
Spotters
Telemarketing
Sales letters
Other sources
How Used
Current and previous customers are contacted for additional business and
leads.
Salesperson attempts to secure at least one additional lead from each
person he or she interviews.
Salesperson uses personal relationships with those who are connected and
cooperative to secure leads.
Salesperson cultivates well-known, influential people in the territory who are
willing to supply lead information.
Salesperson uses Web sites, e-mail, Listservs, bulletin boards, forums, round-
tables, and newsgroups to secure leads.
Salespeople use these forms of promotional activities to generate
leads.
Salespeople use trade shows, conventions, fairs, and merchandise markets
for lead generation.
Salespeople use seminars for prospects to generate leads.
Salesperson uses secondary data sources, which can be free or fee-based.
Salespeople use sophisticated data analysis software and the company’s
CRM system to generate leads.
Salesperson tries to generate leads by calling on totally unfamiliar
organizations.
Salesperson pays someone for lead information.
Salesperson uses phone and/or telemarketing staff to generate leads.
Salesperson writes personal letters to potential leads.
Salesperson uses noncompeting salespeople, people in his or her own firm,
friends, and so on, to secure information.
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9–3
MARKETING INSIGHT The Evolution of Personal Selling
3. Does the lead have the authority to pay?
4. Can the lead be approached favorably?
5. Is the lead eligible to buy?
Depending on the analysis of answers to these questions, the determination of whether a
lead is a true prospect can be made. In seeking and qualifying leads, it is important to recog-
nize that responsibility for these activities should not be totally assumed by individual sales-
people. Rather, companies should develop a consistent, organized program, recognizing that
the job of developing prospects belongs to the entire company, not just the sales force.
Planning the Sales Call
Salespeople will readily admit that their number one problem is getting through the door
for an appointment with a prospect. Customers have become sophisticated in their buying
strategies. Consequently, salespeople have to be equally sophisticated in developing their
selling strategies.
While a full discussion on the topic of planning sales calls is beyond the scope of this
text, what follows are brief descriptions of some key areas of knowledge salespeople should
possess prior to embarking on sales calls.
1. They should have thorough knowledge of the company they represent, including its past
history. This includes the philosophy of management as well as the firm’s basic operat-
ing policies.
2. They should have thorough knowledge of their products and/or product lines. This is
particularly true when selling organizational products. When selling very technical
products, many firms require their salespeople to have training as engineers.
Source: Barton A. Weitz, Stephen B. Castleberry, and John F. Tanner, Selling: Building Relationships, 7th ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 31.
Taking orders,
delivering
goods
Provider
Short-term
seller needs
Making
sales
Before
1930
Aggressively
convincing
buyers to
buy products
Matching
available
offerings to
buyer needs
Persuader
Short-term
seller needs
Making
sales
1930 to
1960
Problem
solver
Short-term
customer needs
Satisfying
customer needs
1960 to
1990
Creating new
alternatives,
matching
buyer needs
with seller
capabilities
Value
creator
Long-term
customer and
seller needs
Building
relationships
After
1990
Production Sales Marketing Partnering
Time
Period
Objective
Orientation
Role of
Salesperson
Activities of
Salespeople
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3. They should have good working knowledge of competitors’ products. This is a vital
requirement because the successful salesperson will have to know the strengths and
weaknesses of those products that are in competition for market share.
4. They should have in-depth knowledge of the market for their merchandise. The market
here refers not only to a particular sales territory but also to the general market, includ-
ing the economic factors that affect the demand for their goods.
5. They should have accurate knowledge of the buyer or the prospect to whom they are
selling. Under the marketing concept, knowledge of the customer is a vital requirement.
Presenting
Successful salespeople have learned the importance of making a good impression. One of
the most important ways of improving the buyer’s impression is for the salesperson to be
well prepared in the knowledge areas discussed above. Some salespeople actually develop
a checklist of things to take to the presentation so that nothing is forgotten. Just as impor-
tant is the development of good interpersonal skills; they are a key ingredient of effective
selling. Salespeople who can adapt their selling style to individual buyer needs and styles
have a much stronger overall performance than less-flexible counterparts.
Responding to Objections
To assume the buyer will passively listen and positively respond to a sales presentation by
placing an immediate order would be unrealistic. Salespeople can expect to hear objections
(issues or concerns raised by the buyer) at any time during the presentation and subsequent
relationship. Objections can be raised when the salesperson attempts to secure appoint-
ments, during the presentation, when the salesperson attempts to obtain commitment, or
during the after-sale follow-up.
When sales prospects raise an objection, it is a sign that they are not ready to buy and
need an acceptable response to the objection before the buying decision can be made. In
response to an objection, the salesperson should not challenge the respondent. Rather, the
salesperson’s objective should be to present the necessary information so that the prospect
is able to make intelligent decisions based on that information.
Obtaining Commitment
At some point, if all objections have been resolved, the salesperson must ask for commit-
ment. It’s a rare moment when a customer will ask to buy. Consequently, knowing how and
when to close a sale is one of a salesperson’s most indispensable skills.
It should be noted that not all sales calls end in commitment, a successful closing. If
commitment is not obtained, salespeople should analyze the reasons and determine whether
(1) more sales calls are necessary to obtain commitment; or (2) currently, there just does
not exist a good match between customer needs and seller offerings. If the salesperson
determines that more calls are necessary, then he or she should leave the meeting with a
clear action plan, which is agreeable to the customer, for the next visit.
Building a Long-Term Relationship
Focusing on building and maintaining long-term relationships with customers has become
an important goal for salespeople. As marketers realize that it can cost five times as much
to acquire a new customer than to service an existing one, the importance of customer
retention and relationship building has become very clear.5 Terry Vavra focuses on the value
of current customers to the organization and has developed the concept of aftermarketing,
which focuses the organization’s attention on providing continuing satisfaction and rein-
forcement to individuals or organizations that are past or current customers. The goal of
aftermarketing is to build lasting relationships with customers.6 Successful aftermarketing
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MARKETING INSIGHT Why Cross-Functional Sales Teams
Are Growing in Popularity 9–4
efforts require that many specific activities be undertaken by the salesperson and others in
the organization. These activities include
1. Establishing and maintaining a customer information file.
2. Monitoring order processing.
3. Ensuring initial proper use of the purchased product or service.
4. Providing ongoing guidance and suggestions.
5. Analyzing customer feedback and responding quickly to customer questions and
complaints.
6. Continually conducting customer satisfaction research and responding to it.
As seen by the preceding discussion, there are no magic secrets of successful selling. The
difference between good salespeople and mediocre ones is often the result of training plus
experience. Training is no substitute for experience; the two complement each other. The
difficulty with trying to discuss the selling job in terms of basic principles is that experienced,
successful salespeople will always be able to find exceptions to these principles.
Relationships Can Lead to Partnerships
When the interaction between a salesperson and a customer does not end with the sale, the
beginnings of a relationship are present. Many salespeople are finding that building rela-
tionships and even partnering with customers is becoming increasingly important.
When a buyer and a salesperson have a close personal relationship, they both begin to
rely on each other and communicate honestly. When each has a problem, they work to-
gether to solve it. Such market relationships are known as functional relationships. An
important trust begins to exist between the parties. As with any relationship, each often
gives and takes when the situation calls for it in order to keep the relationship intact. The
reader may have such a relationship with a long-term medical or dental practitioner or
hair cutter.
When organizations move beyond functional relationships, they develop strategic part-
nerships, or strategic alliances. These are long-term, formal relationships in which both
parties make significant commitments and investments in each other in order to pursue
137
1. Improved sales productivity. When the product or system being purchased is for the whole
organization, different specialists handle different parts of the job. This usually results in
a more effective and efficient sales process.
2. More flexibility and quicker decisions. To thrive in today’s increasingly competitive markets,
buying organizations often require selling organizations to produce small runs of tailored
products on a very tight schedule. Cross-functional sales teams enable sellers to be more
flexible because all functional units are involved in the sales process, which also enables
the seller to make quicker decisions in response to buyer demands.
3. Better decisions. In most cases, the use of cross-functional teams composed of individuals
with varied backgrounds in the company will lead to more innovative forms of thought
and superior decisions than would be the case of an individual acting alone. Improved
decisions would benefit both the buyer and the seller.
4. Increased customer satisfaction. The ultimate measure of the success of cross-functional
sales teams comes with increased customer satisfaction, cemented relationships, and
repeat business. The energy, flexibility, and commitment associated with cross-functional
sales teams have led many organizations to adopt the approach.
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MARKETING INSIGHT Ten Traits of Effective Salespeople
9–5
mutual goals and to improve the profitability of each other. While a functional relationship
is based on trust, a strategic partnership or alliance moves beyond trust. The partners in
the relationship actually invest in each other. Obviously, the reasons for forming strategic
partnerships vary. Some do it to create joint opportunities (banks, insurance companies,
and brokerage firms), to gain access to new markets (United Parcel Service of America
(UPS) and Mail Boxes Etc.), to develop new technology or exploit joint opportunities (IBM
and Apple), or to gain a marketing advantage over competitors (United Airlines and
Starbucks Coffee, American Airlines and Career Track).
People Who Support the Sales Force
In many instances, sales personnel will require some assistance at various stages of the
sales process. These support personnel do not seek the order. Their purpose is to focus on
the long-term relationship and increase the likelihood of sales in the long run.
Missionary salespeople are used in certain industries such as pharmaceuticals to focus
solely on promotion of existing products and introduction of new products. They may call
on physicians to convince them to prescribe a new drug or on pharmacies to convince
them to promote a new cold remedy with a large display during the cold and flu season.
A technical sales specialist supports the sales staff by providing training or other
technical assistance to the prospect. This individual may follow up an expression of
interest to the salesperson from a prospect, especially when the product is to be used to
solve certain technical problems of the buyer. Some organizations will provide training
to the front-line staff of the buying organization who will be expected to sell the prod-
uct to their customers.
Finally, when the product is extremely high priced and is being sold to the whole
organization, cross-functional sales teams are often used. Since products increase in
technical complexity, and units of the buying organization require specialized knowledge
before a buying decision can be made, team selling has increased in popularity. For
example, a manufacturer’s sales team might be made up of people from sales, engineer-
ing, customer service, and f inance, depending on the needs of the customer. A bank’s
sales team might consist of people from the commercial lending, investments, small
business, and trust departments.
138
1. Ego strength: A healthy self-esteem that allows one to bounce back from rejection.
2. A sense of urgency: Wanting to get it done now.
3. Ego drive: A combination of competitiveness and self-esteem.
4. Assertiveness: The ability to be firm, lead the sales process, and get one’s point across
confidently.
5. Willingness to take risk: Willingness to innovate and take a chance.
6. Sociable: Outgoing, talkative, friendly, and interested in others.
7. Abstract reasoning: Ability to understand concepts and ideas.
8. Skepticism: A slight lack of trust and suspicion of others.
9. Creativity: The ability to think differently.
10. Empathy: The ability to place oneself in someone else’s shoes.
Source: Research conducted by Sales and Marketing Management involving 209 salespeople representing
189 companies in 37 industries and reported in George E. Belch and Michael A. Belch, Advertising and
Promotion, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 600.
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MANAGING THE SALES AND RELATIONSHIP-BUILDING PROCESS
Every personal sale can be divided into two parts: the part done by the salespeople and the
part done for the salespeople by the company. For example, from the standpoint of the
product, the company should provide the salesperson with a product skillfully designed,
thoroughly tested, attractively packaged, adequately advertised, and priced to compare
favorably with competitive products. Salespeople have the responsibility of being
thoroughly acquainted with the product, its selling features, and points of superiority and
possess a sincere belief in the value of the product. From a sales management standpoint,
the company’s part of the sale involves the following:
1. Efficient and effective sales tools, including continuous sales training, promotional
literature, samples, trade shows, product information, and adequate advertising.
2. An efficient delivery and reorder system to ensure that customers will receive the
merchandise as promised.
3. An equitable compensation plan that rewards performance, motivates the salesperson,
and promotes company loyalty. It should also reimburse the salesperson for all reason-
able expenses incurred while doing the job.
4. Adequate supervision and evaluation of performance as a means of helping salespeople
do a better job not only for the company but for themselves as well.
The Sales Management Task
Marketing managers and sales managers must make some very important decisions
regarding how the sales force should be organized. Most companies organize their sales
efforts either by geography, product, or customer. These are illustrated in Figure 9.2.
In a geographic structure, individual salespeople are assigned geographic territories to
cover. A salesperson calls on all prospects in the territory and usually represents all of the
company’s products. A geographic structure provides the practical benefit of limiting the
distance each salesperson must travel to see customers and prospects.
In a product structure, each salesperson is assigned to prospects and customers for a par-
ticular product or product line. A product structure is useful when the sales force must have
specific technical knowledge about products in order to sell effectively. However, this struc-
ture can result in a duplication of sales efforts because more than one salesperson can call
on the same customer. Consequently, it tends to be expensive.
A customer structure assigns a salesperson or selling team to serve a single customer
or single type of customer. This structure works best when different types of buyers have
large or significantly different needs. When this structure involves devoting all of a sales-
person’s time to a single customer, it is expensive but can result in large sales and satisfied
customers.
In a variation of the customer structure, a company may employ major account man-
agement, or the use of team selling to focus on major customers to establish long-term
relationships.7 Procter & Gamble, whose sales force used to be organized by product, has
shifted to major account management. Assigning resources to particular customers has
proved to be more flexible and customer focused for the company.
The customer-organized structure is well suited for the use of cross-functional teams.
However, geographic and product territories can also be effective. The key is that sales
management and the sales force must concentrate on learning and meeting customers’
wants and needs better than competitors do.
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Controlling the Sales Force
There are two obvious reasons why it is critical that the sales force be properly controlled.
First, personal selling can be the largest marketing expense component in the final price of
the product. Second, unless the sales force is somehow directed, motivated, and audited on a
continual basis, it is likely to be less efficient than it is capable of being. Controlling the sales
force involves four key functions: (1) forecasting sales, (2) establishing sales territories and
quotas, (3) analyzing expenses, and (4) motivating and compensating performance.
Forecasting Sales
Sales planning begins with a forecast of sales for some future period or periods. From a
practical standpoint, these forecasts are made on a short-term basis of a year or less,
although long-range forecasts of one to five years are made for purposes other than man-
aging the sales force, such as financing, production, and development. Generally speaking,
forecasting is the marketing manager’s responsibility. In large firms, because of the com-
plexity of the task, it is usually delegated to a specialized unit, such as the marketing
research department. Forecast data should be integrated into the firm’s marketing informa-
tion system for use by sales managers and other executives. For many companies, the sales
forecast is the key instrument in the planning and control of operations.
The sales forecast is an estimate of how much of the company’s output, either in dollars
or in units, can be sold during a specified future period under a proposed marketing plan
and under an assumed set of economic conditions. A sales forecast has several important
FIGURE 9.2
Organizing the
Sales Force
Worldwide Sales
Asia North America Europe Latin America
Worldwide Sales
Office Furniture Sales Computers Fax Machines
National Sales
Schools Law Firms Hospitals Government
Customer Structure
Product Structure
Geographic Structure
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9–6
MARKETING INSIGHT The Sales Management Challenge
Training sales
personnel to
satisfy customers
• Methods
• Where, when, who
Planning a profitable
customer-oriented sales team
• Objectives, goals
• Forecasts
• Budgets
• Define roles, activities, markets
• Establish design and structure
Staffing the right
people to sell and
lead
• People planning
• Employment
planning
Directing average
people to perform
at above-average
levels
• Motivation
• Compensation
• Leadership
Evaluating the past
to guide the future
• Performance criteria
• Conducting sessions
Source: Charles M. Futrell, Fundamentals of Selling: Customers for Life Through Service, 11th ed. (Burr Ridge,
IL: McGraw-Hill/Irwin, 2009), p. 498.
uses: (1) It is used to establish sales quotas; (2) it is used to plan personal selling efforts as
well as other types of promotional activities in the marketing mix; (3) it is used to budget
selling expenses; and (4) it is used to plan and coordinate production, logistics, inventories,
personnel, and so forth.
Sales forecasting has become very sophisticated in recent years, especially with the
increased availability of computer software. It should be mentioned, however, that a fore-
cast is never a substitute for sound business judgment. At the present time no single method
of sales forecasting gives uniformly accurate results with infallible precision. Outlined next
are some commonly used sales forecasting methods.8
1. Jury of executive opinion method. This combines and averages the views of top man-
agement representing marketing, production, finance, purchasing, and administration.
2. Sales force composite method. This is similar to the first method in that it obtains the
combined views of the sales force about the future outlook for sales. In some companies
all salespeople, or district managers, submit estimates of the future sales in their terri-
tory or district.
3. Customer expectations method. This approach involves asking customers or product
users about the quantity they expect to purchase.
4. Time-series analysis. This approach involves analyzing past sales data and the impact of
factors that influence sales (long-term growth trends, cyclical fluctuations, seasonal
variations).
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5. Correlation analysis. This involves measuring the relationship between the dependent
variable, sales, and one or more independent variables that can explain increases or
decreases in sales volumes.
6. Other quantitative techniques. Numerous statistical and mathematical techniques can be
used to predict or estimate future sales. Two of the more important techniques are (a) growth
functions, which are mathematical expressions specifying the relationship between demand
and time; and (b) simulation models, in which a statistical model of the industry is devel-
oped and programmed to compute values for the key parameters of the model.
Establishing Sales Territories and Quotas
The establishment of sales territories and sales quotas represents management’s need to
match personal selling effort with sales potential (or opportunity). Soundly designed sales
territories can improve how the market is served.9 It is much easier to pinpoint customers
and prospects and to determine who should call on them when the market is geographically
divided than when the market is considered a large aggregate of potential accounts. The
geographic segments should represent small clusters of customers or prospects within some
physical proximity. Implied here is the notion that there are some distinct economic advan-
tages to dividing the market into smaller segments. Salespeople restricted to a geographic
area are likely to get more sales in the territory. Instead of simply servicing the “easy” and
larger accounts, they are prone to develop small accounts. Of course, there are criteria other
than geography for establishing territories. One important criterion is product specialization.
In this case, salespeople are specialists relative to particular product or customer situations.
The question of managing sales territories cannot be discussed meaningfully without
saying something about sales quotas. In general, quotas represent goals assigned to
salespeople. As such, quotas provide three main benefits. First, they provide incentives for
salespeople. For example, the definite objective of selling $500,000 worth of computer
equipment is more motivating to most salespeople than the indefinite charge to go out and
sell computer equipment. Sales bonuses and commissions based on quotas can also be mo-
tivational. Second, quotas provide a quantitative standard against which the performance of
individual sales representatives or other marketing units can be measured. They allow
management to pinpoint individuals and units that are performing above average and those
experiencing difficulty. Third, quotas can be used not only to evaluate salespersons’ per-
formances but also to evaluate and control their efforts. As part of their job, salespeople are
expected to engage in various activities besides calling on established accounts. These
activities might include calling on new accounts, collecting past-due accounts, and plan-
ning and developing sales presentations. Activity quotas allow the company to monitor
whether salespeople are engaging in these activities to the extent desired.
Sales quotas represent specific sales goals assigned to each territory or unit over a des-
ignated time period. The most common method of establishing quotas for territories is to
relate sales to forecasted sales potential. For example, if the Ajax Drug Company’s territory
M has an estimated industry sales potential for a particular product of $400,000 for the
year, the quota might be set at 25 percent of that potential, or $100,000. The 25 percent
figure represents the market share Ajax estimates to be a reasonable target. This $100,000
quota may represent an increase of $20,000 in sales over last year (assuming constant
prices) that is expected from new business.
In establishing sales quotas for its individual territories or sales personnel, management
needs to take into account three key factors. First, all territories will not have equal potential
and, therefore, compensation must be adjusted accordingly. Second, all salespeople will not
have equal ability and assignments may have to be made accordingly. Third, the sales task in
each territory may differ from time period to time period. For instance, the nature of some
territories may require that salespeople spend more time seeking new accounts, rather than
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servicing established accounts, especially in the case of so-called new territories. The point
to be made here is that quotas can vary, not only by territory but also by assigned tasks. The
effective sales manager should assign quotas not only for dollar sales but also for each major
selling function. Figure 9.3 is an example of how this is done for the Medi-test Company,
where each activity is assigned a quota and a weight reflecting its relative importance.
FIGURE 9.3
Medi-test Company
Sales Activity
Evaluation
Territory: Southern
Salesperson: Marsha Smith
Performance index = 175.3
(1) (2) (3) (4) (5)
Percent Score
Functions Quota Actual (2 ! 1) Weight (3 ” 4)
Sales volume
Old business $380,000 $300,000 79 0.7 55.3
New business $ 20,000 $ 20,000 100 0.5 50.0
Calls on prospects
Doctors 20 15 75 0.2 15.0
Druggists 80 60 75 0.2 15.0
Wholesalers 15 15 100 0.2 20.0
Hospitals 10 10 100 0.2 20.0
2.0 175.3
9–7
EFFORT-ORIENTED MEASURES
1. Number of sales calls made.
2. Number of maintenance-repairs-operations (MRO) calls made.
3. Number of complaints handled.
4. Number of checks on reseller stocks.
5. Uncontrollable lost job time.
6. Number of inquiries followed up.
7. Number of demonstrations completed.
RESULTS-ORIENTED MEASURES
1. Sales volume (total or by product or model).
2. Sales volume as a percentage of quota.
3. Sales profitability (dollar gross margin or contribution).
4. Number of new accounts.
5. Number of stockouts.
6. Number of distributors participating in programs.
7. Number of lost accounts.
8. Percentage volume increase in key accounts.
9. Number of customer complaints.
10. Distributor sales-inventory ratios.
Source: Adapted from Thomas N. Ingram, Raymond W. Laforge, and Charles H. Schwepker, Jr., Sales
Management: Analysis and Decision Making, 6th ed. (Mason, OH: Thomson Southwestern, 2009), chap. 15;
and Thayer C. Taylor, “SFA: The Newest Orthodoxy,” Sales and Marketing Management, February 1993,
pp. 26–28.
MARKETING INSIGHT Effort- and Results-Oriented Measures
for Evaluating Salespeople
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Analyzing Expenses
Sales forecasts should include a sales expense budget. In some companies, sales expense
budgets are developed from the bottom up. Each territorial or district manager submits
estimates of expenses and forecasted sales quotas. These estimates are usually prepared for
a period of a year and then broken down into quarters and months. The sales manager then
reviews the budget requests from the field offices and from staff departments.
Motivating and Compensating Performance
An important task for the sales manager is motivating and compensating the sales force.
These two tasks are major determinants of sales force productivity. Managing people is
always a challenge and involves personal interaction with members of the sales force, time
in the field visiting customers, free-flowing communication with the sales force, either by
e-mail or telephone, and providing feedback on a regular basis as well as coaching and
developing incentive programs through which job promotions or increased earnings can be
achieved.10
There are two basic types of compensation: salary and commission. Salary usually
refers to a specific amount of monetary compensation at an agreed rate for definite time
periods. Commission is usually monetary compensation provided for each unit of sales
and expressed as a percentage of sales. The base on which commissions are computed
may be volume of sales in units of product, gross sales in dollars, net sales after returns,
sales volume in excess of a quota, or net profits. Very often, several compensation
approaches are combined. For example, a salesperson might be paid a base salary, a
commission on sales exceeding a volume figure, and a percentage share of the company’s
profits for that year.
In addition to straight dollar compensation, there are numerous other forms of incentives
that can be used to motivate the sales force. Some of these types of incentives and their
potential performance outcomes are listed in Figure 9.4.
CONCLUSION
This chapter has attempted to outline and explain the personal selling aspect of the pro-
motion mix. An emphasis was placed on describing the importance of the relationship-
building aspect of the personal selling process. For organizations that wish to continue to
grow and prosper, personal selling plays an integral part in the marketing of products and
services. As long as production continues to expand through the development of new and
highly technical products, personal selling will continue to be an important part of mar-
keting strategy.
144 Part C The Marketing Mix
FIGURE 9.4
Types of Sales Force
Incentives and Some
Possible Performance
Outcomes
Source: Some of the
material was adapted from
Gilbert A. Churchill Jr., Neil
M. Ford, and Orville C.
Walker, Sales Force
Management, 5th ed. (Burr
Ridge, IL: Irwin/McGraw-Hill,
1997), p. 490.
Types of Incentives Some Possible Outcomes
● Positive evaluation feedback. ● Increase in sales volume.
● Company-wide recognition. ● Sale of more profitable products.
● Bonus. ● Attention on selling new products.
● Salary increases. ● Achieving greater market penetration.
● Pay for new product idea. ● Increased number of sales calls.
● Education allowance. ● Larger average orders.
● Time off. ● Attracting new customers.
● Fringe benefits. ● Improved service of existing customers.
● Stock options. ● Reduction in customer turnover.
● Retirement plan. ● Reduction in selling costs.
● Profit sharing. ● Full-line balanced selling.
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Additional
Resources
Chapter Nine Personal Selling, Relationship Building, and Sales Management 145
Ash, Mary Kay. The Mary Kay Way: Timeless Principles from America’s Greatest Woman Entrepre-
neur. Hoboken NJ: John Wiley and Sons, 2008.
Bartick, G.A., and Paul Bartick. Silver Bullet Selling: Six Critical Steps to Opening More Relation-
ships and Closing More Sales. Hoboken NJ: John Wiley and Sons, 2009.
Deutsch, Donny. The Big Idea. NY: Hyperion, 2009.
Gonzalez, Gabriel R., Douglas Hoffman, and Thomas N. Ingram. “Improving Relationship Selling
through Failure Analysis and Recovery Efforts: A Framework and Call to Action.” Journal of Per-
sonal Selling and Sales Management. Spring 2005, pp. 24–32.
Hunter, Gary K., and William D. Perreault. “Making Sales Technology Effective.” Journal of
Marketing, January 2007, pp. 16–34.
Luntz, Frank. Words That Work. NY: Hyperion, 2007.
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146
10
Distribution Strategy
Channel of distribution decisions involve numerous interrelated variables that must be
integrated into the total marketing mix. Because of the time and money required to set up
an efficient channel, and since channels are often hard to change once they are set up, these
decisions are critical to the success of the firm.
This chapter is concerned with the development and management of channels of distri-
bution and the process of goods distribution in complex, highly competitive, and special-
ized economies. It should be noted at the outset that channels of distribution provide the
ultimate consumer or organizational buyer with time, place, and possession utility. Thus, an
efficient channel is one that delivers the product when and where it is wanted at a minimum
total cost.
THE NEED FOR MARKETING INTERMEDIARIES
A channel of distribution is the combination of institutions through which a seller markets
products to the user or ultimate consumer. The need for other institutions or intermediaries
in the delivery of goods is sometimes questioned, particularly since the profits they make
are viewed as adding to the cost of the product. However, this reasoning is generally falla-
cious, since producers use marketing intermediaries because the intermediary can perform
functions more cheaply and more efficiently than the producer can. This notion of effi-
ciency is critical when the characteristics of advanced economies are considered.
For example, the U.S. economy is characterized by heterogeneity in terms of both supply
and demand. In terms of numbers alone, there are over 7 million establishments with
employees comprising the supply segment of the economy, and there are nearly 110 million
households making up the demand side. Clearly, if each of these units had to deal on a one-
to-one basis to obtain needed goods and services, and there were no intermediaries to
collect and disperse assortments of goods, the system would be totally inefficient. Thus,
the primary role of intermediaries is to bring supply and demand together in an efficient
and orderly fashion.
CLASSIFICATION OF MARKETING INTERMEDIARIES AND FUNCTIONS
There are a great many types of marketing intermediaries, many of which are so special-
ized by function and industry that they need not be discussed here. Figure 10.1 presents
the major types of marketing intermediaries common to many industries. Although there
is some overlap in this classification, these categories are based on the marketing
Chapter
Part C
The M
arketing M
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Chapter Ten Distribution Strategy 147
functions performed; that is, various intermediaries perform different marketing functions and
to different degrees. Figure 10.2 is a listing of the more common marketing functions
performed in the channel.
It should be remembered that whether or not a manufacturer uses intermediaries to per-
form these functions, the functions have to be performed by someone. In other words, the
managerial question is not whether to perform the functions, but who will perform them
and to what degree.
FIGURE 10.2
Major Functions
Performed in
Channels of
Distribution
Source: Roger A. Kerin,
Steven W. Hartley, and
William Rudelius, Marketing,
9th ed. (Burr Ridge, IL:
McGraw-Hill/Irwin, 2009),
p. 391.
Transactional Function
Buying: Purchasing products for resale or as an agent for supply of a product.
Selling: Contacting potential customers, promoting products, and soliciting orders.
Risk taking: Assuming business risks in the ownership of inventory that can become obsolete or
deteriorate.
Logistical Function
Assorting: Creating product assortments from several sources to serve customers.
Storing: Assembling and protecting products at a convenient location to offer better customer
service.
Sorting: Purchasing in large quantities and breaking into smaller amounts desired by customers.
Transporting: Physically moving products to customers.
Facilitating Function
Financing: Extending credit to customers.
Grading: Inspecting, testing, or judging products, and assigning them quality grades.
Marketing information and research: Providing information to customers and suppliers, including
competitive conditions and trends.
Middleman—an independent business concern that operates as a link between producers and
ultimate consumers or organizational buyers.
Merchant middleman—a middleman who buys the goods outright and takes title to them.
Agent—a business unit that negotiates purchases, sales, or both but does not take title to the
goods in which it deals.
Wholesaler—a merchant establishment operated by a concern that is primarily engaged in buying,
taking title to, usually storing and physically handling goods in large quantities, and reselling the
goods (usually in smaller quantities) to retailers or to organizational buyers.
Retailer—a merchant middleman who is engaged primarily in selling to ultimate consumers.
Broker—a middleman who serves as a go-between for the buyer or seller. The broker assumes no
title risks, does not usually have physical custody of products, and is not looked upon as a perma-
nent representative of either the buyer or the seller.
Manufacturers’ agent—an agent who generally operates on an extended contractual basis, often
sells within an exclusive territory, handles noncompeting but related lines of goods, and possesses
limited authority with regard to prices and terms of sale.
Distributor—a wholesale middleman especially in lines where selective or exclusive distribution is
common at the wholesaler level in which the manufacturer expects strong promotional support;
often a synonym for wholesaler.
Jobber—a middleman who buys from manufacturers and sells to retailers; a wholesaler.
Facilitating agent—a business firm that assists in the performance of distribution tasks other than
buying, selling, and transferring title (i.e., transportation companies, warehouses, etc.)
FIGURE 10.1
Major Types
of Marketing
Intermediaries
Source: Based on Peter D.
Bennett, ed., Dictionary of
Marketing Terms, 2d ed.
(Chicago: American Marketing
Association, 1995).
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148 Part C The Marketing Mix
CHANNELS OF DISTRIBUTION
As previously noted, a channel of distribution is the combination of institutions through
which a seller markets products to the user or ultimate consumer. Some of these links
assume the risks of ownership; others do not. The conventional channel of distribution
patterns for consumer goods markets are shown in Figure 10.3.
Some manufacturers use a direct channel, selling directly to a market. For example,
Gateway sold computers through the mail without the use of other intermediaries. Using a
direct channel, called direct marketing, increased in popularity as marketers found that
products could be sold directly using a variety of methods. These include direct mail, tele-
marketing, direct-action advertising, catalog selling, cable selling, online selling, and direct
selling through demonstrations at home or place of work. These will be discussed in more
detail later in this chapter.
In other cases, one or more intermediaries may be used in the distribution process. For
example, Hewlett-Packard sells its computers and printers through retailers such as Best
Buy and Office Max. A common channel for consumer goods is one in which the manu-
facturer sells through wholesalers and retailers. For instance, a cold remedy manufacturer
may sell to drug wholesalers who, in turn, sell a vast array of drug products to various
retail outlets. Small manufacturers may also use agents, since they do not have sufficient
capital for their own sales forces. Agents are commonly used intermediaries in the
jewelry industry. The final channel in Figure 10.3 is used primarily when small whole-
salers and retailers are involved. Channels with one or more intermediaries are referred
to as indirect channels.
In contrast to consumer products, the direct channel is often used in the distribution of
organizational goods. The reason for this stems from the structure of most organizational
markets, which often have relatively few but extremely large customers. Also, many organi-
zational products, such as computer systems, need a great deal of presale and postsale service.
Distributors are used in organizational markets when there is a large number of buyers
but each purchases a small amount of a product. As in the consumer market, agents are used
FIGURE 10.3 Conventional Channels of Distribution of Consumer Goods
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Manufacturer Agent
Wholesaler
Agent
Wholesaler
Retailers
Retailers
Retailers
Retailers
Consumers
Consumers
Consumers
Consumers
Consumers
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Chapter Ten Distribution Strategy 149
in organizational markets in cases where manufacturers do not wish to have their own sales
forces. Such an arrangement may be used by small manufacturers or when the market is
geographically dispersed. The final channel arrangement in Figure 10.4 may also be used by
a small manufacturer or when the market consists of many small customers. Under such
conditions, it may not be economical for sellers to have their own sales organization.
SELECTING CHANNELS OF DISTRIBUTION
Given the numerous types of channel intermediaries and functions that must be performed,
the task of selecting and designing a channel of distribution may at first appear to be over-
whelming. However, in many industries, channels of distribution have developed over many
years and have become somewhat traditional. In such cases, the producer may be limited to
this type of channel to operate in the industry. This is not to say that a traditional channel is
always the most efficient and that there are no opportunities for innovation. But the fact that
such a channel is widely accepted in the industry suggests it is highly efficient. A primary
constraint in these cases and in cases where no traditional channel exists is that of avail-
ability of the various types of middlemen. All too often in the early stages of channel
design, executives map out elaborate channel networks only to find out later that no such
independent intermediaries exist for the firm’s product in selected geographic areas. Even
if they do exist, they may not be willing to accept the seller’s products. In general, there are
six basic considerations in the initial development of channel strategy. These are outlined
in Figure 10.5.
It should be noted that for a particular product any one of these characteristics greatly
influences choice of channels. To illustrate, highly perishable products generally require
direct channels, or a firm with little financial strength may require intermediaries to per-
form almost all of the marketing functions.
Specific Considerations
The above characteristics play an important part in framing the channel selection deci-
sion. Based on them, the choice of channels can be further refined in terms of
FIGURE 10.4 Conventional Channels of Distribution for Organizational Goods
Agents
Organizational
distributors
Agents
Organizational
distributors
Organizational
users
Organizational
users
Organizational
users
Organizational
users
Manufacturer
Manufacturer
Manufacturer
Manufacturer
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150 Part C The Marketing Mix
(1) distribution coverage required, (2) degree of control desired, (3) total distribution
cost, and (4) channel flexibility.
Distribution Coverage Required
Because of the characteristics of the product, the environment needed to sell the product,
and the needs and expectations of the potential buyer, products will vary in the intensity of
distribution coverage they require. Distribution coverage can be viewed along a continuum
ranging from intensive to selective to exclusive distribution.
Intensive Distribution Here the manufacturer attempts to gain exposure through as many
wholesalers and retailers as possible. Most convenience goods require intensive distribution
based on the characteristics of the product (low unit value) and the needs and expectations
of the buyer (high frequency of purchase and convenience).
Selective Distribution Here the manufacturer limits the use of intermediaries to the ones
believed to be the best available in a geographic area. This may be based on the service
organization available, the sales organization, or the reputation of the intermediary. Thus,
appliances, home furnishings, and better clothing are usually distributed selectively. For
appliances, the intermediary’s service organization could be a key factor, while for better cloth-
ing and home furnishings, the intermediary’s reputation would be an important consideration.
Exclusive Distribution Here the manufacturer severely limits distribution, and interme-
diaries are provided exclusive rights within a particular territory. The characteristics of the
product are a determining factor here. Where the product requires certain specialized
selling effort or investment in unique facilities or large inventories, this arrangement is usu-
ally selected. Retail paint stores are an example of such a distribution arrangement.
FIGURE 10.5 General Considerations in Channel Planning
1. Customer characteristics.
a. Number.
b. Geographic dispersion.
c. Preferred channels and outlets for purchase.
d. Purchasing patterns.
e. Use of new channels (e.g., online purchasing).
2. Product characteristics.
a. Unit value.
b. Perishability.
c. Bulkiness.
d. Degree of standardization.
e. Installation and maintenance services required.
3. Intermediary characteristics.
a. Availability.
b. Willingness to accept product or product line.
c. Geographic market served.
d. Marketing functions performed.
e. Potential for conflict.
f. Potential for long-term relationship.
g. Competitive products sold.
h. Financial condition.
i. Other strengths and weaknesses.
4. Competitor characteristics.
a. Number.
b. Relative size and market share.
c. Distribution channels and strategy.
d. Financial condition and estimated marketing budget.
e. Size of product mix and product lines.
f. Overall marketing strategy employed.
g. Other strengths and weaknesses.
5. Company characteristics.
a. Relative size and market share.
b. Financial condition and marketing budget.
c. Size of product mix and product lines.
d. Marketing strategy employed.
e. Marketing objectives.
f. Past channel experience.
g. Marketing functions willing to perform.
h. Other strengths and weaknesses.
6. Environmental characteristics.
a. Economic conditions.
b. Legal regulations and restrictions.
c. Political issues.
d. Global and domestic cultural differences and
changes.
e. Technological changes.
f. Other opportunities and threats.
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MARKETING INSIGHT Manufacturers and Intermediaries:
A Perfect Working Relationship
151
Degree of Control Desired
In selecting channels of distribution, the seller must make decisions concerning the degree
of control desired over the marketing of the firm’s products. Some manufacturers prefer to
keep as much control over their products as possible. Ordinarily, the degree of control
achieved by the seller is proportionate to the directness of the channel. One Eastern brew-
ery, for instance, owns its own fleet of trucks and operates a wholly owned delivery system
direct to grocery and liquor stores. Its market is very concentrated geographically, with
many small buyers, so such a system is economically feasible. However, all other brewers
in the area sell through distributors.
When more indirect channels are used, the manufacturer must surrender some control
over the marketing of the firm’s product. However, attempts are commonly made to main-
tain a degree of control through some other indirect means, such as sharing promotional
expenditures, providing sales training, or other operational aids, such as accounting
systems, inventory systems, or marketing research data on the dealer’s trading area.
Total Distribution Cost
The total distribution cost concept has developed out of the more general topic of systems
theory. The concept suggests that a channel of distribution should be viewed as a total
system composed of interdependent subsystems, and that the objective of the system (channel)
manager should be to optimize total system performance. In terms of distribution costs, it
generally is assumed that the total system should be designed to minimize costs, other
things being equal. The following is a representative list of the major distribution costs to
be minimized:
1. Transportation.
2. Order processing.
THE PERFECT INTERMEDIARY
1. Has access to the market that the manufacturer wants to reach.
2. Carries adequate stocks of the manufacturer’s products and a satisfactory assortment of
other products.
3. Has an effective promotional program—advertising, personal selling, and product
displays. Promotional demands placed on the manufacturer are in line with what the
manufacturer intends to do.
4. Provides services to customers—credit, delivery, installation, and product repair—and
honors the product warranty conditions.
5. Pays its bills on time and has capable management.
THE PERFECT MANUFACTURER
1. Provides a desirable assortment of products—well designed, properly priced, attractively
packaged, and delivered on time and in adequate quantities.
2. Builds product demand for these products by advertising them.
3. Furnishes promotional assistance to its middlemen.
4. Provides managerial assistance for its middlemen.
5. Honors product warranties and provides repair and installation service.
THE PERFECT COMBINATION
1. Probably doesn’t exist.
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152 Part C The Marketing Mix
3. Cost of lost business (an opportunity cost due to inability to meet customer demand).
4. Inventory carrying costs, including:
a. Storage-space charges.
b. Cost of capital invested.
c. Taxes.
d. Insurance.
e. Obsolescence and deterioration.
5. Packaging.
6. Materials handling.
The important qualification to the total-cost concept is the statement “other things be-
ing equal.” The purpose of the total-cost concept is to emphasize total system performance
to avoid suboptimization. However, other important factors must be considered, not the
least of which are level of customer service, sales, profits, and interface with the total
marketing mix.
Channel Flexibility
A final consideration relates to the ability of the manufacturer to adapt to changing condi-
tions. To illustrate, much of the population has moved from inner cities to suburbs, and thus
buyers make most of their purchases in shopping centers and malls. If a manufacturer had
long-term exclusive dealership with retailers in the inner city, the ability to adapt to this
population shift could have been severely limited.
MANAGING A CHANNEL OF DISTRIBUTION
Once the seller has decided on the type of channel structure to use and selected the
individual members, the entire coalition should operate as a total system. From a behavioral
perspective, the system can be viewed as a social system since each member interacts with
the others, each member plays a role vis-à-vis the others, and each has certain expectations
of the other. Thus, the behavioral perspective views a channel of distribution as more than
a series of markets or participants extending from production to consumption.
Relationship Marketing in Channels
For many years in theory and practice, marketing has taken a competitive view of channels
of distribution. In other words, since channel members had different goals and strategies,
it was believed that the major focus should be on concepts such as power and conflict.
Research interests focused on issues concerning bases of power, antecedents and conse-
quences of conflict, and conflict resolution.
More recently, however, a new view of channels has developed. Perhaps because of the
success of Japanese companies in the 1980s, it was recognized that much could be gained
by developing long-term commitments and harmony among channel members. This view
is called relationship marketing, which can be defined as “marketing with the conscious
aim to develop and manage long-term and/or trusting relationships with customers, dis-
tributors, suppliers, or other parties in the marketing environment.”1
It is well documented in the marketing literature that long-term relationships throughout
the channel often lead to higher-quality products with lower costs. These benefits may
account for the increased use of vertical marketing systems.2
Vertical Marketing Systems
To this point in the chapter the discussion has focused primarily on conventional channels
of distribution. In conventional channels, each firm is relatively independent of the other
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Chapter Ten Distribution Strategy 153
members in the channel. However, one of the important developments in channel manage-
ment in recent years is the increasing use of vertical marketing systems.
Vertical marketing systems are channels in which members are more dependent on one
another and develop long-term working relationships in order to improve the efficiency
and effectiveness of the system. Figure 10.6 shows the major types of vertical marketing
systems, which include administered, contractual, and corporate systems.3
Administered Systems
Administered vertical marketing systems are the most similar to conventional channels.
However, in these systems there is a higher degree of interorganizational planning and
management than in a conventional channel. The dependence in these systems can result
from the existence of a strong channel leader such that other channel members work
closely with this company in order to maintain a long-term relationship. While any level
of channel member may be the leader of an administered system, Walmart, Kmart, and
Sears are excellent examples of retailers that have established administered systems with
many of their suppliers.
Contractual Systems
Contractual vertical marketing systems involve independent production and distribution
companies entering into formal contracts to perform designated marketing functions. Three
major types of contractual vertical marketing systems are the retail cooperative organiza-
tion, wholesaler-sponsored voluntary chain, and various franchising programs.
In a retail cooperative organization, a group of independent retailers unite and agree
to pool buying and managerial resources to improve competitive position. In a wholesaler-
sponsored voluntary chain, a wholesaler contracts with a number of retailers and performs
channel functions for them. Usually, retailers agree to concentrate a major portion of
their purchasing with the sponsoring wholesaler and to sell advertised products at the
same price. The most visible type of contractual vertical marketing systems involves a
variety of franchise programs. Franchises involve a parent company (the franchisor) and
an independent firm (the franchisee) entering into a contractual relationship to set up and
operate a business in a particular way. Many products and services reach consumers
through franchise systems, including automobiles (Ford), gasoline (Mobil), hotels and
motels (Holiday Inn), restaurants (McDonald’s), car rentals (Avis), and soft drinks (Pepsi).
In fact, some analysts predict that within the next 10 years, franchises will account for
50 percent of all retail sales.
Corporate Systems
Corporate vertical marketing systems involve single ownership of two or more levels of a
channel. A manufacturer’s purchasing wholesalers or retailers is called forward integration.
FIGURE 10.6
Major Types of
Vertical Marketing
Systems
Administered
systems
Contractual
systems
Vertical marketing systems
Corporate
systems
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MARKETING INSIGHT Franchising: An Alternative to Conventional
Channels of Distribution
154
Source: Partially adapted from Philip D. White and Albert D. Bates, “Franchising Will Remain Retailing Fixture,
but Its Salad Days Have Long Since Gone,” Marketing News, February 17, 1984, p. 14; and Scott Shane and
Chester Spell, “Factors for New Franchise Success,” Sloan Management Review, Spring 1998, pp. 43–50. Also
see Stephen Spinelli, Jr., Robert M. Rosenberg, and Sue Birley, Franchising (Upper Saddle River, NJ: Prentice-
Hall PTR, 2004).
Wholesalers or retailers’ purchasing channel members above them is called backward in-
tegration. Firms may choose to develop corporate vertical marketing systems in order to
compete more effectively with other marketing systems, to obtain scale economies, and to
increase channel cooperation and avoid channel conflict.
INGREDIENTS OF A FRANCHISED BUSINESS
Six key ingredients should be included within a well-balanced franchise offered to a fran-
chisee. These are given in order of importance.
• Technical knowledge in its practical form is supplied through an intensive course of study.
• Managerial techniques based on proven and time-tested programs are imparted to the
franchisee on a continuing basis, even after the business has been started or taken over
by the franchisee.
• Commercial knowledge involving prescribed methods of buying and selling is explained
and codified. Most products to be obtained, processed, and sold to the franchisee are
supplied by the franchisor.
• Financial instruction on managing funds and accounts is given to the franchisee during
the indoctrination period.
• Accounting controls are set up by the franchisor for the franchisee.
• Protective safeguards are included in the intensive training of the franchisee for employ-
ees and customers, including the quality of the product, as well as the safeguards for
assets through adequate insurance controls.
ELEMENTS OF AN IDEAL FRANCHISE PROGRAM
• High gross margin. In order for the franchisee to be able to afford a high franchise fee
(which the franchisor needs), it is necessary to operate on a high gross margin per-
centage. This explains the widespread application of franchising in the food and serv-
ice industries.
• In-store value added. Franchising works best in those product categories in which the
product is at least partially processed in the store. Such environments require constant
on-site supervision—a chronic problem for company-owned stores using a hired man-
ager. Owners simply are willing to work harder over longer hours.
• Secret processes. Concepts, formulas, or products that the franchisee can’t duplicate
without joining the franchise program.
• Real estate profits. The franchisor uses income from ownership of property as a significant
revenue source.
• Simplicity. The most successful franchises have been those that operate on automatic
pilot: All the key decisions have been thought through, and the owner merely implements
the decisions.
A franchise is a means by which a producer of products or services achieves a direct chan-
nel of distribution without wholly owning or managing the physical facilities in the market.
In effect, the franchisor provides the franchisee with the franchisor’s knowledge, manufac-
turing, and marketing techniques for a financial return.
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Chapter Ten Distribution Strategy 155
WHOLESALING
As noted, wholesalers are merchants that are primarily engaged in buying, taking title
to, usually storing and physically handling goods in large quantities, and reselling
the goods (usually in smaller quantities) to retailers or to industrial or business users.4
Wholesalers are also called distributors in some industries, particularly when they have
exclusive distribution rights, such as in the beer industry. Other wholesalers that do not
take title to goods are called agents, brokers, or manufacturers’ representatives in vari-
ous industries. There are over 890,000 wholesalers in the United States.
Wholesalers create value for suppliers, retailers, and users of goods by performing dis-
tribution functions efficiently and effectively. They may transport and warehouse goods,
exhibit them at trade shows, and offer advice to retailers concerning which lines of prod-
ucts are selling best in other areas. Producers use wholesalers to reach large markets and
extend geographic coverage for their goods. Wholesalers may lower the costs for other
channel members by efficiently carrying out such activities as physically moving goods to
convenient locations, assuming the risk of managing large inventories of diverse products,
and delivering products as needed to replenish retail shelves.
While producers may actively seek out wholesalers for their goods, wholesalers also try to
attract producers to use their services. To do so, they may offer to perform all the distribution
functions or tailor their services to include only the functions that producers do not have the
ability to perform effectively. Naturally, wholesalers especially seek producers of major
brands for which sales and profit potential are likely to be the greatest. Wholesalers may com-
pete with other wholesalers to attract producers by offering lower costs for the functions they
perform. Wholesalers with excellent track records that do not carry directly competing prod-
ucts and brands, that have appropriate locations and facilities, and that have relationships with
major retail customers can more easily attract manufacturers of successful products. Also,
wholesalers that serve large markets may be more attractive since producers may be able to
reduce the number of wholesalers they deal with and thereby lower their costs. Long-term
profitable producer–wholesaler relationships are enhanced by trust, doing a good job for one
another, and open communication about problems and opportunities.
Wholesalers also need to attract retailers and organizational customers to buy from
them. In many cases, wholesalers have exclusive contracts to distribute products in a par-
ticular trading area. For popular products and brands with large market shares, the whole-
saler’s task is simplified because retailers want to carry them. For example, distributors of
Coke and Pepsi can attract retailers easily because the products sell so well and consumers
expect to find them in many retail outlets. Retail supermarkets and convenience stores
would be at a competitive disadvantage without these brands.
However, for new or small market-share products and brands, particularly those of
less well-known manufacturers, wholesalers may have to do considerable marketing
to get retailers to stock them. Wholesalers may get placement for such products and
brands in retail stores because they have previously developed strong long-term working
relationships with them. Alternatively, wholesalers may have to carefully explain the
marketing plan for the product, why it should be successful, and why carrying the prod-
uct will benefit the retailer.
While there are still many successful wholesalers, the share of products they sell is likely
to continue to decrease. This is because large retail chains such as Walmart have gained
such market power that they can buy directly from manufacturers and bypass wholesalers
altogether. The survival of wholesalers depends on their ability to meet the needs of both
manufacturers and retailers by performing distribution functions more efficiently and
effectively than a channel designed without them.
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MARKETING INSIGHT Some Benefits of Wholesalers for
Various Channel Members
BENEFITS FOR MANUFACTURERS
• Provide the ability to reach diverse geographic markets cost effectively.
• Provide information about retailers and end users in various markets.
• Reduce costs through greater efficiency and effectiveness in distribution functions
performed.
• Reduce potential losses by assuming risks and offering expertise.
BENEFITS FOR RETAILERS
• Provide potentially profitable products otherwise unavailable for resale in retail area.
• Provide information about industries, manufacturers, and other retailers.
• Reduce costs by providing an assortment of goods from different manufacturers.
• Reduce costs through greater efficiency in distribution functions performed.
BENEFITS FOR END USERS
• Increase the product alternatives available in local markets.
• Reduce retail prices by the efficiency and effectiveness contributed to the channel.
• Improve product selection by providing information to retailers about the best products
to offer end users.
156
STORE AND NONSTORE RETAILING
As noted, retailers are merchants who are primarily engaged in selling to ultimate con-
sumers. The more than 3.2 million retailers in the United States can be classified in many
ways. For example, they are broken down in the North American Industry Classification
System (NAICS) codes into eight general categories and a number of subcategories based
on the types of merchandise they sell.5
Marketers have a number of decisions to make to determine the best way to retail their
products. For example, decisions have to be made about whether to use stores to sell mer-
chandise, and if so, whether to sell through company-owned stores, franchised outlets, or
independent stores or chains. Decisions have to be made about whether to sell through non-
store methods, such as the Internet, and if so, which methods of nonstore retailing should
be used. Each of these decisions brings about a number of others such as what types of
stores to use, how many of them, what locations should be selected, and what specific types
of nonstore retailing to use.
Store Retailing
Over 90 percent of retail purchases are made through stores. This makes them an
appropriate retail method for most types of products and services. Retailers vary not
only in the types of merchandise they carry but also in the breadth and depth of their prod-
uct assortments and the amount of service they provide. In general, mass merchandisers
carry broad product assortments and compete on two bases. Supermarkets (Kroger) and
department stores (Macy’s) compete with other retailers on the basis of offering a good
selection in a number of different categories, whereas supercenters (Walmart Supercenters),
warehouse clubs (Costco), discount stores (Walmart), and off-price retailers (T.J. Maxx)
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Chapter Ten Distribution Strategy 157
compete more on the basis of offering lower prices on products in their large assortments.
Manufacturers of many types of consumer goods must get distribution in one or more types
of mass merchandisers to be successful.
Specialty stores handle deep assortments in a limited number of product categories. Spe-
cialty stores include limited-line stores that offer a large assortment of a few related prod-
uct lines (The Gap), single-line stores that emphasize a single product (Batteries Plus), and
category killers (Best Buy), which are large, low-priced limited-line retail chains that
attempt to dominate a particular product category. If a product type is sold primarily
through specialty stores and sales are concentrated in category killer chains, manufacturers
may have to sell through them to reach customers.
Convenience stores (7-Eleven) are retailers whose primary advantages to consumers are
location convenience, close-in parking, and easy entry and exit. They stock products that
consumers want to buy in a hurry, such as milk or soft drinks, and charge higher prices for
the purchase convenience. They are an important retail outlet for many types of conven-
ience goods.
In selecting the types of stores and specific stores and chains to resell their products,
manufacturers (and wholesalers) have a variety of factors to consider. They want stores
and chains that reach their target market and have good reputations with consumers. They
want stores and chains that handle distribution functions efficiently and effectively, order
large quantities, pay invoices quickly, display their merchandise well, and allow them to
make good profits. Selling products in the right stores and chains increases sales, and sell-
ing in prestigious stores can increase the equity of a brand and the price that can be
charged. The locations of retail stores, the types of people who shop at them, and the pro-
fessionalism of the salespeople and clerks who work in them all affect the success of the
stores and the products they sell. In addition to the merchandise offered, store advertising,
and price levels, the characteristics of the store itself—including layout, colors, smells,
noises, lights, signs, and shelf space and displays—influence the success of both the stores
and the products they offer.
Nonstore Retailing
Although stores dominate sales for most products, there are still opportunities to market
products successfully in other ways. Five nonstore methods of retailing include catalogs
and direct mail, vending machines, television home shopping, direct sales, and elec-
tronic exchanges.6
Catalogs and Direct Mail
Catalogs and direct mail dominate nonstore retailing. The advantages of this type of
nonstore retailing for marketers are that consumers can be targeted effectively and
reached in their homes or at work, overhead costs are decreased, and assortments of
specialty merchandise can be presented with attractive pictures and in-depth descrip-
tions of features and benef its. Catalogs can also remain in homes or off ices for a
lengthy time period, making available potential sales. Catalogs can offer specialty prod-
ucts for unique markets that are geographically dispersed in a cost-effective manner.
Although consumers cannot experience products directly as they can in stores, catalog
retailers with reputations for quality and generous return policies can reduce con-
sumers’ risks. For example, Levenger, which sells pens, desks, and “other tools for serious
readers,” sends consumers a postage-paid label to return unwanted merchandise. Many
consumers enjoy the time savings of catalog shopping and are willing to pay higher
prices to use it.
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158 Part C The Marketing Mix
Vending Machines
Vending machines are a relatively limited method of retail merchandising, and most vend-
ing machine sales are for beverages, food, and candy. The advantages for marketers include
the following: They are available for sales 24 hours a day, they can be placed in a variety of
high-traffic locations, and marketers can charge higher prices. While uses of vending
machines for such things as airline insurance and concert and game tickets are not unusual,
this method has limited potential for most products.
Television Home Shopping
Television home shopping includes cable channels dedicated to shopping, infomercials,
and direct-response advertising shown on cable and broadcast networks. Home Shopping
Network and QVC are the leaders in this market, and the major products sold are inex-
pensive jewelry, apparel, cosmetics, and exercise equipment. While this method allows
better visual display than catalogs, potential customers must be watching at the time
the merchandise is offered; if not, they have no way of knowing about the product or
purchasing it.
Direct Sales
Direct sales are made by salespeople to consumers in their homes or offices or by telephone.
The most common products purchased this way are cosmetics, fragrances, decorative
accessories, vacuum cleaners, home appliances, cooking utensils, kitchenware, jewelry, food
and nutritional products, and educational materials. Avon, Mary Kay, and Tupperware are
probably the best-known retail users of this channel. Salespeople can demonstrate products
effectively and provide detailed feature and benefit information. A limitation of this method
is that consumers are often too busy to spend their time this way and do not want to pay the
higher prices needed to cover the high costs of this method of retailing.
Electronic Exchanges and Multichannel Marketing
Electronic exchanges or sales made online are the fastest growing method of retailing and
in some years, sales have grown 20 to 25 percent per year. Some analysts suggest that in
a few years, over 12 percent of all retail sales will be online. Companies like
Amazon.com and Priceline.com have created profitable businesses by selling online and
both business-to-business and business-to-consumer sales have grown to be profitable for
a number of companies.
While the growth of electronic exchanges is partly due to the success of new, entrepre-
neurial companies, much of the growth can be attributed to large, established companies
using a multichannel marketing strategy. Multichannel marketing involves the use of both
traditional channels and electronic exchanges to better serve customers and build relation-
ships with them. For example, JCPenney offers merchandise and information about it in its
brick-and-mortar stores, in its mailed paper catalogs, and online to better serve its cus-
tomers. In fact, its best customers purchase from all three. Similarly, other companies like
Eddie Bauer, Bass Pro Shop, and Cabela’s offer customers the opportunity to purchase
from its stores, its catalogs, and online.
Figure 10.7 lists some of the advantages and disadvantages of electronic exchanges for
marketers. In examining this figure, it is important to recognize that there are some differ-
ences in the advantages and disadvantages depending on whether the marketer is a small,
entrepreneurial venture or a large, established company. Since electronic exchange offers
low-entry barriers, this is an advantage for a small company that wants to get into a market
and compete for business with less capital. However, for large, established companies, this
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MARKETING INSIGHT Questions to Ask When Developing
Successful Commercial Web Sites
159
is less of an advantage since they have the capital to invest; low-entry barriers create more
competition for them from smaller companies.
Similarly, large companies with established names and brand equity can more easily mar-
ket products that customers would ordinarily want to examine before purchase (touch-and-
feel products) than can smaller companies with less brand equity. For example, companies
like Lands’ End, J.C. Penney, and Walmart are more successful in attracting customers elec-
tronically because customers know the companies and their offerings better and perceive less
risk in purchasing from them than from a new or unknown electronic marketer. This does not
mean that newer companies that sell only by electronic means cannot compete for business.
Companies such as Amazon.com and Priceline.com have created well-known Web sites and
have generated considerable sales and profits.
In sum, electronic exchanges are an established alternative for marketing products
and services. They do provide customers with a wealth of product information and large
product assortments that are readily available. Many electronic marketers have found
ways to deliver superior customer value and become prof itable and many others are
close to doing so.7
When developing commercial Web sites, it is important to consider what customers experi-
ence when searching for information, evaluating alternative products, and purchasing
them. Below are some basic questions that Web site designers should consider.
INFORMATION SEARCH
1. Ease of navigation—is it easy to move throughout the Web site?
2. Speed of page downloads—does each page load quickly enough?
3. Effectiveness of search features—are search features returning the information users are
looking for?
4. Frequency of product updates—is product information updated often enough to meet
user needs?
EVALUATION OF ALTERNATIVES
1. Ease of product comparisons—is it easy to compare different products offered on the
Web site?
2. Product descriptions—are product descriptions accurate, clear, and comprehensive
enough to allow customers to make informed decisions?
3. Contacting customer service representatives—are customer service phone numbers easy
to locate?
4. In-stock status—are out-of-stock products flagged before the customer proceeds to the
checkout process?
PURCHASE
1. Security and privacy issues—do users feel comfortable transmitting personal information?
2. Checkout process—are users able to move through the checkout process in a reasonable
amount of time?
3. Payment options—are payment options offered that nonbuyers desire?
4. Delivery options—are delivery options offered that nonbuyers desire?
5. Ordering instructions—are ordering instructions easy to understand?
Source: Based on Douglas K. Hoffman and John E. G. Bateson, Services Marketing: Concepts, Strategies, and
Cases. 3rd ed. (Mason, OH: Thomson South Western, 2006), p. 86.
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160 Part C The Marketing Mix
FIGURE 10.7
Electronic
Commerce:
Advantages and
Disadvantages for
Marketers
Advantages for Marketers
Reduces the need for stores, paper catalogs, and salespeople; can be cost efficient.
Allows good visual presentation and full description of product features and benefits.
Allows vast assortments of products to be offered efficiently.
Allows strategic elements, such as product offerings, prices, and promotion appeals, to be changed
quickly.
Allows products to be offered globally in an efficient manner.
Allows products to be offered 24 hours a day, 365 days a year.
Fosters the development of one-on-one, interactive relationships with customers.
Provides an efficient means for developing a customer database and doing online marketing research.
Disadvantages for Marketers
Strong price competition online often squeezes profit margins.
Low entry barriers lead some e-marketers to overemphasize order-taking and not develop sufficient
infrastructure for order fulfillment.
Customers must go to the Web site rather than having marketers seek them out via salespeople
and advertising; advertising their Web sites is prohibitively expensive for many small e-marketers.
Limits the market to customers who are willing and able to purchase electronically; many countries
still have a small population of computer-literate people.
Not as good for selling touch-and-feel products as opposed to look-and-buy products unless there
is strong brand/store/site equity (Dell computers/Walmart/Amazon.com) or the products are
homogeneous (books, CDs, plane tickets, etc.).
Often less effective and efficient in business-to-consumer markets than in business-to-business
markets.
Additional
Resources
CONCLUSION
This chapter introduced the distribution of goods and services in a complex, highly com-
petitive, highly specialized economy. It emphasized the vital need for marketing
intermediaries to bring about exchanges between buyers and sellers in a reasonably
efficient manner. The chapter examined various types of intermediaries and the distribution
functions they perform as well as topics in the selection and management of distribution
channels. Finally, both wholesaling and store and nonstore retailing were discussed.
Chopra, Sunil, and Peter Meindl. Supply Chain Management. 3rd ed. Upper River Saddle, NJ:
Prentice Hall, 2007.
Coughlin, Anne T.; Erin Anderson; Louis W. Stern; and Adel I. El-Ansary. Marketing Channels.
7th ed. Upper Saddle River, NJ: Prentice Hall, 2006.
Levy, Michael, and Burton A. Weitz. Retailing Management. 7th ed. Burr Ridge, IL: Irwin/
McGraw-Hill, 2009.
Rosenbloom, Bert. Marketing Channels: A Management View. 7th ed. Mason, OH: Tomson South-
Western, 2004.
Simchi-Levi, David; Philip Kaminsky, and Edith Simchi-Levi. Designing and Managing the Supply
Chain. 3rd ed. Burr Ridge, IL: McGraw-Hill, 2008.
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161
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Chapter11
Pricing Strategy
One of the most important and complex decisions a firm has to make relates to pricing its
products or services. If consumers or organizational buyers perceive a price to be too high,
they may purchase competitive brands or substitute products, leading to a loss of sales and
profits for the firm. If the price is too low, sales might increase, but profitability may suffer.
Thus, pricing decisions must be given careful consideration when a firm is introducing a
new product or planning a short- or long-term price change.
This chapter discusses demand, supply, and environmental influences that affect pricing
decisions and emphasizes that all three must be considered for effective pricing. However,
as will be discussed in the chapter, many firms price their products without explicitly con-
sidering all of these influences.
DEMAND INFLUENCES ON PRICING DECISIONS
Demand influences on pricing decisions concern primarily the nature of the target market and
expected reactions of consumers to a given price or change in price. There are three primary
considerations here: demographic factors, psychological factors, and price elasticity.
Demographic Factors
In the initial selection of the target market that a firm intends to serve, a number of demo-
graphic factors are usually considered. Demographic factors that are particularly important
for pricing decisions include the following:
1. Number of potential buyers.
2. Location of potential buyers.
3. Position of potential buyers (organizational buyers or final consumers).
4. Expected consumption rates of potential buyers.
5. Economic strength of potential buyers.
These factors help determine market potential and are useful for estimating expected
sales at various price levels.
Psychological Factors
Psychological factors related to pricing concern primarily how consumers will perceive
various prices or price changes. For example, marketing managers should be concerned
with such questions as these:
1. Will potential buyers use price as an indicator of product quality?
2. Will potential buyers be favorably attracted by odd pricing (e.g. 99¢, $3,999)?
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11–1
MARKETING INSIGHT Effects on Profitability for Small
Changes in Price
162
3. Will potential buyers perceive the price as too high relative to the service the product
gives them or relative to competition?
4. Are potential buyers prestige oriented and therefore willing to pay higher prices to fulfill
this need?
5. How much will potential buyers be willing to pay for the product?
While psychological factors have a significant effect on the success of a pricing strategy
and ultimately on marketing strategy, answers to the above questions may require consid-
erable marketing research. In fact, a review of buyers’ subjective perceptions of price con-
cluded that very little is known about how price affects buyers’ perceptions of alternative
purchase offers and how these perceptions affect purchase response.1 However, some ten-
tative generalizations about how buyers perceive price have been formulated. For example,
research has found that persons who choose high-priced items usually perceive large
quality variations within product categories and see the consequences of a poor choice as
being undesirable. They believe that quality is related to price and see themselves as good
judges of product quality. In general, the reverse is true for persons who select low-priced
items in the same product categories. Thus, although information on psychological factors
involved in purchasing may be difficult to obtain, marketing managers must at least con-
sider the effects of such factors on their desired target market and marketing strategy.2
There are three types of psychological pricing strategies. First there is prestige pricing,
in which a high price is charged to create a signal that the product is exceptionally fine.
Prestige pricing is commonly used for some brands of cars, clothing, perfume, jewelry,
cosmetics, wine and liquor, and crystal and china. Second, there is odd pricing, or odd-even
pricing, in which prices are set a few dollars or a few cents below a round number. For
example, Frito-Lay’s potato chips are priced at 69 cents a bag rather than 70 cents to encour-
age consumers to think of them as less expensive (60 some-odd cents rather than 70 cents).
Hertz economy cars are rented for $129 rather than $130 to appear less expensive. Third,
there is bundle pricing, in which several products are sold together at a single price to
suggest a good value. For example, travel agencies offer vacation packages that include
travel, accommodations, and entertainment at a single price to connote value and conven-
ience for customers.
Price Elasticity
Both demographic and psychological factors affect price elasticity. Price elasticity is a
measure of consumers’ price sensitivity, which is estimated by dividing relative changes in
Small changes in price can lead to large differences in net income. For example, at Coca-
Cola, a 1 percent improvement in the price received for its products would result in a net
income boost of 6.4 percent; at Fuji Photo, 16.7 percent; at Nestlé, 17.5 percent; at Ford,
26 percent; and at Philips, 28.7 percent. In some companies, a 1 percent improvement in
the price received would be the difference between a profit and a significant loss. Given the
cost structure of large corporations, a 1 percent boost in realized price yields an average net
income gain of 12 percent. In short, when setting pricing objectives and developing pricing
strategies, it’s worth the effort to do pricing research to see what prices consumers are
willing to pay and still feel they are receiving good value.
Source: Based on Robert J. Dolan and Hermann Simon, Power Pricing: How Managing Price Transforms the
Bottom Line (New York: Free Press, 1996), p. 4. Also see Kent B. Monroe, Pricing: Making Profitable Decisions,
3rd ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2003), Chapter 12.
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Chapter Eleven Pricing Strategy 163
the quantity sold by the relative changes in price:
e !
Although price elasticity is difficult to measure, two basic methods are commonly used
to estimate it. First, price elasticity can be estimated from historical data or from price/-
quantity data across different sales districts. Second, price elasticity can be estimated by
sampling a group of consumers from the target market and polling them concerning various
price/quantity relationships. Both of these approaches provide estimates of price elasticity;
but the former approach is limited to the consideration of price changes, whereas the latter
is often expensive and there is some question as to the validity of subjects’ responses.
However, even a crude estimate of price elasticity is a useful input to pricing decisions.3
SUPPLY INFLUENCES ON PRICING DECISIONS
For the purpose of this text, supply influences on pricing decisions can be discussed in
terms of three basic factors. These factors relate to the objectives, costs, and nature of the
product.
Pricing Objectives
Pricing objectives should be derived from overall marketing objectives, which in turn
should be derived from corporate objectives. Since it is traditionally assumed that business
firms operate to maximize profits in the long run, it is often thought that the basic pricing
objective is solely concerned with long-run profits. However, the profit maximization norm
does not provide the operating marketing manager with a single, unequivocal guideline for
selecting prices. In addition, the marketing manager does not have perfect cost, revenue,
and market information to be able to evaluate whether or not this objective is being reached.
In practice, then, many other objectives are employed as guidelines for pricing decisions.
In some cases, these objectives may be considered as operational approaches to achieve
long-run profit maximization.
Research has found that the most common pricing objectives are (1) pricing to achieve
a target return on investment, (2) stabilization of price and margin, (3) pricing to achieve a
target market share, and (4) pricing to meet or prevent competition.
Cost Considerations in Pricing
The price of a product usually must cover costs of production, promotion, and distribution,
plus a profit, for the offering to be of value to the firm. In addition, when products are
priced on the basis of costs plus a fair profit, there is an implicit assumption that this sum
represents the economic value of the product in the marketplace.
Cost-oriented pricing is the most common approach in practice, and there are at least
three basic variations: markup pricing, cost-plus pricing, and rate-of-return pricing. Markup
pricing is commonly used in retailing: A percentage is added to the retailer’s invoice price
to determine the final selling price. Closely related to markup pricing is cost-plus pricing,
in which the costs of producing a product or completing a project are totaled and a profit
amount or percentage is added on. Cost-plus pricing is most often used to describe the pric-
ing of jobs that are nonroutine and difficult to “cost” in advance, such as construction and
military weapon development.
Rate-of-return or target pricing is commonly used by manufacturers. With this method,
price is determined by adding a desired rate of return on investment to total costs. Gener-
ally, a break-even analysis is performed for expected production and sales levels and a rate
Percent change in quantity demanded
“”””
Percent change in price
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11–2
MARKETING INSIGHT Retail Pricing Strategies: EDLP or
High/Low?
There are two common pricing strategies at the retail level: EDLP, which stands for
“everyday low pricing,” and high/low, which means that the retailer charges prices that are
sometimes above competitors’ but promotes frequent sales that lower prices below them.
Four successful U.S. retailers—Home Depot, Walmart, Office Depot, and Toys ‘R’ Us—have
adopted EDLP, while many fashion, grocery, and drug stores use high/low. Below is a list of
the advantages of each of these pricing strategies.
ADVANTAGES OF EDLP
• Assures customers of low prices. Many customers are skeptical about initial retail prices.
They have become conditioned to buying only on sale—the main characteristic of a
high/low pricing strategy. The EDLP strategy lets customers know that they will get the
same low prices every time they patronize the EDLP retailer. Customers don’t have to
read the ads and wait for items they want to go on sale.
• Reduces advertising and operating expenses. The stable prices caused by EDLP limit the
need for the weekly sale advertising used in the high/low strategy. In addition, EDLP re-
tailers do not have to incur the labor costs of changing price tags and signs and putting
up sales signs.
• Reduces stockouts and improves inventory management. The EDLP approach reduces the
large variations in demand caused by frequent sales with large markdowns. As a result,
retailers can manage their inventories with more certainty. Fewer stockouts mean more
satisfied customers, higher sales, and fewer rain checks.
ADVANTAGES OF HIGH/LOW
• Increases profits through price discrimination. High/low pricing allows retailers to charge
higher prices to customers who are not price sensitive and are willing to pay the “high”
price and lower prices to price-sensitive customers who will wait for the “low” sale price.
• Sales create excitement. A “get them while they last” atmosphere often occurs during a
sale. Sales draw a lot of customers, and a lot of customers create excitement. Some
retailers augment low prices and advertising with special in-store activities like product
demonstrations, giveaways, and celebrity appearances.
• Sells merchandise. Sales allow retailers to get rid of slow-selling merchandise.
Source: Based on Michael Levy and Barton A. Weitz, Retailing Management, 7th ed. (Burr Ridge, IL: McGraw-
Hill/Irwin, 2010), p. 432–33.
164
of return is added on. For example, suppose a firm estimated production and sales to be
75,000 units at a total cost of $300,000. If the firm desired a before-tax return of 20 per-
cent, the selling price would be (300,000 # 0.20 $ 300,000) % 75,000 ! $4.80.
Cost-oriented approaches to pricing have the advantage of simplicity, and many practi-
tioners believe that they generally yield a good price decision. However, such approaches
have been criticized for two basic reasons. First, cost approaches give little or no consider-
ation to demand factors. For example, the price determined by markup or cost-plus methods
has no necessary relationship to what people will be willing to pay for the product. In
the case of rate-of-return pricing, little emphasis is placed on estimating sales volume. Even
if it were, rate-of-return pricing involves circular reasoning, since unit cost depends on
sales volume but sales volume depends on selling price. Second, cost approaches fail to
reflect competition adequately. Only in industries where all firms use this approach and
have similar costs and markups can this approach yield similar prices and minimize price
competition. Thus, in many industries, cost-oriented pricing could lead to severe price
competition, which could eliminate smaller firms. Therefore, although costs are a highly
important consideration in price decisions, numerous other factors need to be examined.
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MARKETING INSIGHT Basic Break-Even Formulas
11–3
Product Considerations in Pricing
Although numerous product characteristics can affect pricing, three of the most important
are (1) perishability, (2) distinctiveness, and (3) stage in the product life cycle.
Perishability
Some products, such as fresh meat, bakery goods, and some raw materials are physically
perishable and must be priced to sell before they spoil. Typically, this involves discounting
the products as they approach being no longer fit for sale. Products can also be perishable
in the sense that demand for them is confined to a specific time period. For example, high
fashion and fad products lose most of their value when they go out of style and marketers
have the difficult task of forecasting demand at specific prices and judging the time period
of customer interest. While the time period of interest for other seasonal products, such as
winter coats or Christmas trees, is easier to estimate, marketers must still determine the ap-
propriate price and discount structure to maximize profits and avoid inventory losses or
carrying costs.
Distinctiveness
Marketers try to distinguish their products from those of competitors and if successful, can
often charge higher prices for them. While such things as styling, features, ingredients, and
service can be used to try to make a product distinctive, competitors can copy such physi-
cal changes. Thus, it is through branding and brand equity that products are commonly
made distinctive in customers’ minds. For example, prestigious brands like Rolex, Tiffany’s,
and Lexus can be priced higher in large measure because of brand equity. Of course, higher
prices also help create and reinforce the brand equity of prestigious products.
Life Cycle
The stage of the life cycle that a product is in can have important pricing implications. With
regard to the life cycle, two approaches to pricing are skimming and penetration price poli-
cies. A skimming policy is one in which the seller charges a relatively high price on a new
product. Generally, this policy is used when the firm has a temporary monopoly and when
demand for the product is price inelastic. In later stages of the life cycle, as competition
165
The following formulas are used to calculate break-even points in units and in dollars:
BEP(in units) !
BEP(in dollars) !
where
FC ! Fixed cost
VC ! Variable cost
SP ! Selling price
If, as is generally the case, a firm wants to know how many units or sales dollars are nec-
essary to generate a given amount of profit, profit (P) is simply added to fixed costs in the
formulas. In addition, if the firm has estimates of expected sales and fixed and variable
costs, the selling price can be solved for. (A more detailed discussion of break-even analysis
is provided in the financial analysis section of this book.)
FC
“”
1 & (VC!SP)
FC
“”
(SP & VC )
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166 Part C The Marketing Mix
moves in and other market factors change, the price may then be lowered. Flat screen TV’s
and cell phones are examples of this. A penetration policy is one in which the seller charges
a relatively low price on a new product. Generally, this policy is used when the firm expects
competition to move in rapidly and when demand for the product is, at least in the short
run, price elastic. This policy is also used to obtain large economies of scale and as a major
instrument for rapid creation of a mass market. A low price and profit margin may also dis-
courage competition. In later stages of the life cycle, the price may have to be altered to
meet changes in the market.
ENVIRONMENTAL INFLUENCES ON PRICING DECISIONS
Environmental influences on pricing include variables that the marketing manager cannot
control. Two of the most important of these are competition and government regulation.
Competition
In setting or changing prices, the firm must consider its competition and how compe-
tition will react to the price of the product. Initially, consideration must be given to such
factors as
1. Number of competitors.
2. Market shares, growth, and profitability of competitors.
3. Strengths and weaknesses of competitors.
4. Likely entry of new firms into the industry.
5. Degree of vertical integration of competitors.
6. Number of products sold by competitors.
7. Cost structure of competitors.
8. Historical reaction of competitors to price changes.
These factors help determine whether the firm’s selling price should be at, below, or
above competition. Pricing a product at competition (i.e., the average price charged by the
industry) is called going-rate pricing and is popular for homogeneous products, since this
approach represents the collective wisdom of the industry and is not disruptive of industry
harmony. An example of pricing below competition can be found in sealed-bid pricing, in
which the firm is bidding directly against competition for project contracts. Although cost
and profits are initially calculated, the firm attempts to bid below competitors to obtain the
job contract. A firm may price above competition because it has a superior product or
because the firm is the price leader in the industry.
Government Regulations
Prices of certain goods and services are regulated by state and federal governments. Public
utilities are examples of state regulation of prices. However, for most marketing managers,
federal laws that make certain pricing practices illegal are of primary consideration in pric-
ing decisions. The list below is a summary of some of the more important legal constraints
on pricing. Of course, since most marketing managers are not trained as lawyers, they usu-
ally seek legal counsel when developing pricing strategies to ensure conformity to state and
federal legislation.
1. Price fixing is illegal per se. Sellers must not make any agreements with competitors or
distributors concerning the final price of the goods. The Sherman Antitrust Act is the
primary device used to outlaw horizontal price fixing. Section 5 of the Federal Trade
Commission Act has been used to outlaw price fixing as an unfair business practice.
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Chapter Eleven Pricing Strategy 167
2. Deceptive pricing practices are outlawed under Section 5 of the Federal Trade Commis-
sion Act. An example of deceptive pricing would be to mark merchandise with an
exceptionally high price and then claim that the lower selling price actually used repre-
sents a legitimate price reduction.
3. Price discrimination that lessens competition or is deemed injurious to it is outlawed by
the Robinson-Patman Act (which amends Section 2 of the Clayton Act). Price discrimi-
nation is not illegal per se, but sellers cannot charge competing buyers different prices
for essentially the same products if the effect of such sales is injurious to competition.
Price differentials can be legally justified on certain grounds, especially if the price dif-
ferences reflect cost differences. This is particularly true of quantity discounts.
4. Promotional pricing, such as cooperative advertising, and price deals are not illegal per
se; but if a seller grants advertising allowances, merchandising service, free goods, or
special promotional discounts to customers, it must do so on proportionately equal
terms. Sections 2(d) and 2(e) of the Robinson-Patman Act are designed to regulate such
practices so that price reductions cannot be granted to some customers under the guise
of promotional allowances.4
A GENERAL PRICING MODEL
It should be clear that effective pricing decisions involve considerations of many factors,
and different industries may have different pricing practices. Although no single model will
fit all pricing decisions, Figure 11.1 presents a general model for developing prices for
products and services.5 While all pricing decisions cannot be made strictly on the basis of
this model, it does break pricing strategy into a set of manageable stages that are integrated
into the overall marketing strategy.
Set Pricing Objectives
Given a product or service designed for a specific target market, the pricing process begins
with a clear statement of the pricing objectives. These objectives guide the pricing strategy
and should be designed to support the overall marketing strategy. Because pricing strategy
has a direct bearing on demand for a product and the profit obtained, efforts to set prices
must be coordinated with other functional areas. For example, production will have to be
able to meet demand at a given price, and finance will have to manage funds flowing in and
out of the organization at predicted levels of production.
Evaluate Product–Price Relationships
As noted, the distinctiveness, perishability, and stage of the life cycle a product is in all
affect pricing. In addition, marketers need to consider what value the product has for
customers and how price will influence product positioning. There are three basic value
positions. First, a product could be priced relatively high for a product class because it offers
value in the form of high quality, special features, or prestige. Second, a product could be
priced at about average for the product class because it offers value in the form of good
quality for a reasonable price. Third, a product could be priced relatively low for a product
class because it offers value in the form of acceptable quality at a low price. A Porsche or
Nike Air Jordans are examples of the first type of value; a Honda Accord or Keds tennis
shoes are examples of the second; and Hyundai cars and private label canvas shoes are
examples of the third. Setting prices so that targeted customers will perceive products to
offer greater value than competitive offerings is called value pricing.
In addition, research is needed to estimate how much of a particular product the target
market will purchase at various price levels—price elasticity. This estimate provides
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valuable information about what the target market thinks about the product and what it is
worth to them.
Estimate Costs and Other Price Limitations
The costs to produce and market products provide a lower bound for pricing decisions and
a baseline from which to compute profit potential. If a product cannot be produced and
marketed at a price to cover its costs and provide reasonable profits in the long run, then it
should not be produced in its designed form. One possibility is to redesign the product so
that its costs are lower. In fact, some companies first determine the price customers are
willing to pay for a product and then design it so that it can be produced and marketed at a
cost that allows targeted profits.
Other price limitations that need to be considered are government regulations and the
prices that competitors charge for similar and substitute products. Also, likely competitive
168 Part C The Marketing Mix
Change price as needed
Evaluate product–price relationships
Set pricing objectives
Estimate costs and other price limitations
Analyze profit potential
Set initial price structure
FIGURE 11.1
A General Pricing
Model
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MARKETING INSIGHT Eight Tips for Improving a Company’s
Pricing Strategy 11–4
reactions that could influence the price of a new product or a price change in an existing
one need to be considered.
Analyze Profit Potential
Analysis in the preceding stages should result in a range of prices that could be charged.
Marketers must then estimate the likely profit in pricing at levels in this range. At this stage,
it is important to recognize that it may be necessary to offer channel members quantity
discounts, promotional allowances, and slotting allowances to encourage them to actively
market the product. Quantity discounts are discounts for purchasing a large number of
units. Promotional allowances are often in the form of price reductions in exchange for the
channel member performing various promotional activities, such as featuring the product
in store advertising or on in-store displays. Slotting allowances are payments to retailers to
get them to stock items on their shelves. All of these can increase sales but also add
marketing cost to the manufacturer and affect profits.
Set Initial Price Structure
Since all of the supply, demand, and environmental factors have been considered, a mar-
keter can now set the initial price structure. The price structure takes into account the price
to various channel members, such as wholesalers and retailers, as well as the recommended
price to final consumers or organizational buyers.
169
1. Base pricing strategies on sound research. Although a recent study found that few compa-
nies do serious pricing research, it is a must for sound pricing strategies. Research is
needed to understand the factors that influence supply and demand.
2. Continuously monitor pricing decisions. Pricing should be treated as a process of develop-
ing prices and changing them as needed rather than an annual budgeting exercise. Price
decisions define an organization’s value image in the eyes of customers and competitors.
3. Recognize that buyers may have difficulty in computing price differences. Buyers do not con-
stantly monitor the prices of many products and will not necessarily quickly recognize
the value in a price deal.
4. Recognize that customers evaluate prices comparatively. Behavioral pricing research sug-
gests that customers compare prices and price deals relative to internal or external ref-
erence prices rather than just evaluating them in an absolute sense. An internal reference
price is the price a customer has in mind for a product and an external reference price is
one the customer has seen in advertisting, a catalog, or on a store sign or price tag.
5. Recognize that buyers typically have a range of acceptable prices. Buyers often have an up-
per and lower threshold or range of acceptable prices rather than only one acceptable
price they are willing to pay.
6. Understand the importance of relative price to buyers. The relative price of a product com-
pared to competitive offerings or to what a buyer previously paid for it may be more im-
portant than the absolute price asked.
7. Understand the importance of price information. Price information can affect preferences
and choices for different models in a product line or for competitive offerings, particu-
larly when buyers cannot easily evaluate product quality.
8. Recognize that price elasticities vary. Price elasticities vary according to the direction of a
price change, and buyers are generally more sensitive to price increases than to price de-
creases. Thus, it is easier to lose sales to current customers by increasing prices than it is
to gain sales from new buyers by reducing them.
Source: Based on Kent B. Monroe and Jennifer L. Cox, “Pricing Practices That Endanger Profits,” Marketing
Management, September/October 2001, pp. 42–46.
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Change Price as Needed
There are many reasons why an initial price structure may need to be changed. Channel
members may bargain for greater margins, competitors may lower their prices, or costs may
increase with inflation. In the short term, discounts and allowances may have to be larger
or more frequent than planned to get greater marketing effort to increase demand to prof-
itable levels. In the long term, price structures tend to increase for most products as
production and marketing costs increase.
CONCLUSION
Pricing decisions that integrate the firm’s costs with marketing strategy, business condi-
tions, competition, demand, product variables, channels of distribution, and general
resources can determine the success or failure of a business. This places a very heavy
burden on the price maker. Modern-day marketing managers cannot ignore the complexity
or the importance of price management. Pricing strategies must be continually reviewed
and must take into account that the firm is a dynamic entity operating in a very competi-
tive environment. There are many ways for money to flow out of a firm in the form of
costs, but often there is only one way to bring in revenues and that is by the price-product
mechanism.
170 Part C The Marketing Mix
Additional
Resources
Mazumdar, Tridib; S. P. Raj, and Indrajit Sinha. “Reference Price Research: Review and Proposi-
tions.” Journal of Marketing, October 2005, pp. 84–102.
Monroe, Kent B. Pricing: Making Profitable Decisions. 3d ed. New York: McGraw-Hill, 2003.
Nagle, Thomas T., and John Hogan. The Strategy and Tactics of Pricing. 4th ed. Englewood Cliffs,
NJ: Prentice Hall, 2006.
Winer, Russell S. Pricing. Cambridge, MA: Marketing Science Institute, 2005.
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13 Global Marketing
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Chapter
172
12
The Marketing
of Services
Over the course of the past 40 years, the fastest-growing segment of the American economy
has not been the production of tangibles but the performance of services. Spending on
services has increased to such an extent that today it captures more than 50 cents of the con-
sumer’s dollar. In addition, the service sector in the United States produces a balance-of-
trade surplus and is expected to be responsible for all net job growth in the forseeable
future.1 The dominance of the service sector is not limited to the United States. The service
sector accounts for more than half the GNP and employs more than half the labor force in
most Latin American and Caribbean countries. Over the course of the next decade, the
service sector will spawn whole new legions of doctors, nurses, medical technologists, phys-
ical therapists, home health aids, and social workers to administer to the needs of an aging
population, along with armies of food servers, child care providers, and cleaning people to
cater to the wants of two-income families. Also rising to the forefront will be a swelling class
of technical workers, including computer engineers, systems analysts, and paralegals.
Many marketing textbooks still devote little attention to program development for the
marketing of services, especially those in the rapidly changing areas of health care, finance,
and travel. This omission is usually based on the assumption that the marketing of products
and services is basically the same, and, therefore, the techniques discussed under products
apply as well to the marketing of services. Basically, this assumption is true. Whether sell-
ing goods or services, the marketer must be concerned with developing a marketing strategy
centered on the four controllable decision variables that comprise the marketing mix: the
product (or service), the price, the distribution system, and promotion. In addition, the use
of marketing research is as valuable to service marketers as it is to product marketers. How-
ever, because services possess certain distinguishing characteristics, the task of determin-
ing the marketing mix ingredients for a service marketing strategy may raise different and
more difficult problems than those encountered in marketing products.
The purpose of this chapter is fourfold. First, the reader will become acquainted with the
special characteristics of services and their strategy implications. Second, key concepts
associated with providing quality services will be discussed. Third, obstacles will be
described that in the past impeded and still continue to impede development of services
marketing. Finally, current trends and strategies of innovation in services marketing will be
explored. With this approach, the material in the other chapters of the book can be inte-
grated to give a better understanding of the marketing of services.
Before proceeding, some attention must be given to what we refer to when using the
term services. Probably the most frustrating aspect of the available literature on services is
Part D
M
arketing Special Fields
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that the definition of what constitutes a service remains unclear. The fact is that no com-
mon definition and boundaries have been developed to delimit the field of services. The
American Marketing Association has defined services as follows:2
1. Service products, such as a bank loan or home security, that are intangible, or at least
substantially so. If totally intangible, they are exchanged directly from producer to user,
cannot be transported or stored, and are almost instantly perishable. Service products are
often difficult to identify, since they come into existence at the same time they are
bought and consumed. They are composed of intangible elements that are inseparable;
they usually involve customer participation in some important way, cannot be sold in the
sense of ownership transfer, and have no title. Today, however, most products are partly
tangible and partly intangible, and the dominant form is used to classify them as either
goods or services (all are products). These common, hybrid forms, whatever they are
called, may or may not have the attributes just given for totally intangible services.
2. Services, as a term, is also used to describe activities performed by sellers and others
that accompany the sale of a product and that aid in its exchange or its utilization (e.g.,
shoe fitting, financing, an 800 number). Such services are either presale or postsale and
supplement the product but do not comprise it.
The first definition includes what can be considered almost pure services, such as
insurance, banking, entertainment, airlines, health care, telecommunications, and hotels;
the second definition includes such services as wrapping, financing an automobile, pro-
viding warranties on computer equipment, and the like because these services exist in con-
nection with the sale of a product or another service. This suggests that marketers of goods
are also marketers of services. For example, one could argue that McDonald’s is not in the
hamburger business. Its hamburgers are actually not very different from those of the
competition. McDonald’s is in the service business.
More and more manufacturers are also exploiting their service capabilities as stand-
alone revenue producers. For example, General Motors, Ford, and Chrysler all offer
financing services. Ford and General Motors have extended their financial services offerings
to include a MasterCard, which offers discounts on purchases of their automobiles.
The reader can imagine from his or her own experience that some purchases are very
tangible (a coffeemaker) while others are very much intangible (a course in marketing).
Others have elements of both (lunch on a flight from New York to Chicago). In other words,
in reality there is a goods–service continuum, with many purchases including both tangible
goods and intangible services. Figure 12.1 illustrates such a continuum. On the goods side
of the continuum, the buyer owns an object after the purchase. On the services side of the
continuum, when the transaction is over, the buyer leaves with an experience and a feeling.
When the course in marketing is over or the flight from New York to Chicago is completed,
the student or passenger leaves with a feeling.
The examples of services on the right side of Figure 12.1 are mostly or entirely intangi-
ble. They do not exist in the physical realm. They cannot appeal to the five senses.
Chapter Twelve The Marketing of Services 173
Golf clubs
Car
Suit
Airplane
Green fees with sleeve of balls included
Oil change
Suit with alterations
Air flight with lunch
Tangible
Green fees
Taxi ride
Alterations
Air flight
IntangibleMixed
FIGURE 12.1
The Goods–Service
Continuum
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IMPORTANT CHARACTERISTICS OF SERVICES
Services possess several unique characteristics that often have a significant impact on
marketing program development. These special features of services may cause unique
problems and often result in marketing mix decisions that are substantially different
from those found in connection with the marketing of goods. Some of the more impor-
tant of these characteristics are intangibility, inseparability, perishability and fluctuating
demand, a client relationship, customer effort, and uniformity. They are presented in
Figure 12.2.
Intangibility
The obvious basic difference between goods and services is the intangibility of services,
and many of the problems encountered in the marketing of services are due to intangibility.
To illustrate, how does an airline make tangible a trip from Philadelphia to San Francisco?
These problems are unique to service marketing.
The fact that many services cannot appeal to a buyer’s sense of touch, taste, smell, sight,
or hearing before purchase places a burden on the marketing organization. For example,
hotels that promise a good night’s sleep to their customers cannot actually show this service
in a tangible way. Obviously, this burden is most heavily felt in a firm’s promotional
program, but, as will be discussed later, it may affect other areas. Depending on the type of
service, the intangibility factor may dictate use of direct channels because of the need for
personal contact between the buyer and seller. Since a service firm is actually selling an
idea or experience, not a product, it must tell the buyer what the service will do because it
is often difficult to illustrate, demonstrate, or display the service in use. For example, the
hotel must somehow describe to the consumer how a stay at the hotel will leave the cus-
tomer feeling well rested and ready to begin a new day.
The above discussion alludes to two strategy elements firms should employ when trying
to overcome the problems associated with service intangibility. First, tangible aspects asso-
ciated with the service should be stressed. For example, advertisements for airlines should
emphasize (through text and visuals) the newness of the aircraft, the roominess of the
174 Part D Marketing in Special Fields
Intangibility
Inseparability
Perishability
Client Relationship
Customer Effort
Uniformity
Characteristic Services Goods
The customer owns only memories, out-
comes, or feelings such as an airline flight,
greater knowledge or styled hair.
Services often cannot be separated from the
person providing them. They are often pro-
duced and consumed at the same time.
Services can be used only at the time they are
offered. They cannot be inventoried, stored,
or transported.
Services often involve a long-term personal
relationship between buyer and seller.
Customers are often heavily involved in the
production.
Because of inseparability and high involve-
ment on the part of the buyer, each service
may be unique, with the quality likely to vary.
The customer owns objects that can be used, resold,
or given to others.
Goods are usually produced and sold by different
people.
Goods can be placed in inventory for use at another
time.
Goods often involve an impersonal short-term relation-
ship although in many instances relationship strength
and duration are increasing.
Customer’s involvement may be limited to buying the
completed product and using it.
Variations in quality and variance from standards can
be corrected before customers purchase products.
FIGURE 12.2 Unique Characteristics Distinguishing Services from Goods
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cabin, and the friendliness of the flight attendants. Second, end benefits resulting from
completion of the service encounter should be accentuated. In the case of air travel, an
individual’s ability to make an important meeting or arrive home in time for a special
occasion could be the derived benefit.
Inseparability
In many cases, a service cannot be separated from the person of the seller. In other words,
the service must often be produced and marketed simultaneously. Because of the simultane-
ous production and marketing of most services, the main concern of the marketer is usually
the creation of time and place utility. For example, the bank teller produces the service of
receiving a deposit and markets other appropriate bank services at the same time. Many
services, therefore, are tailored and not mass produced. Often, because a company’s
employees are “the company” at the point of contact, they must be given wide latitude and
assistance in determining how best to tailor a specific service to meet customer needs.
The implication of inseparability on issues dealing with the selection of channels of distri-
bution and service quality is quite important. Inseparable services cannot be inventoried, and
thus direct sale is the only feasible channel of distribution. Service quality cannot sometimes
be completely standardized due to the inability to completely mechanize the service encounter.
However, some industries, through innovative uses of technology, have been able to overcome
or, at least, alleviate challenges associated with the inseparability characteristic.
For example, in the financial services industry, automated teller machines (ATMs) and
home banking, through use of computers and telephones, have contributed greatly to elim-
inating the need for the customer to directly interact with a bank teller. Further, many banks
are developing computer applications to allow tellers and other service representatives to
think like expert problem solvers. These applications allow for platform banking, a means
of enabling bank representatives in any location to bring up on a screen all the information
the bank has about the customer. Every face-to-face contact with a customer can mean an
opportunity to make a sale and, more importantly, further the relationship with the cus-
tomer. Of course, the bank representative is still of critical importance as the one who might
recognize by the customer’s expression or words that this visit is not the appropriate time to
be marketing additional services.
175
MARKETING INSIGHT What Is an E-Service?
12–1
Source: Copyright © Hewlett Packard Company. All rights reserved.
Service
Application
Business
process
Application
is a
(an)
available
via
and is
hosted bythatThe Net Completes
tasks
ISPs/ASPs
Solves
problems
Conducts
transactions Telcos
CompaniesInformation technology
resource
An e-service
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In addition to technology, tangible representations of the service can serve to overcome
the inseparability problem. For example, in the insurance industry, a contract serves as the
tangible representation of the service. The service itself remains inseparable from the seller
(insurance provider), but the buyer has a tangible representation of the service in the form
of a policy. This enables the use of intermediaries (agents) in the marketing of insurance.
Another example is in the use of a credit card—the card itself is a tangible representation
of the service that is being produced and consumed each time the card is being used.
Perishability and Fluctuating Demand
Services are perishable and markets for most services fluctuate either by season (tourism), days
(airlines), or time of day (movie theaters). Unused telephone capacity and electrical power;
vacant seats on planes, trains, buses, and in stadiums; and time spent by catalog service
representatives waiting for customers to reach them all represent business that is lost forever.
The combination of perishability and fluctuating demand has created many problems for
marketers of services. Specifically, in the areas of staffing and distribution, avenues must be
found to have the services available for peak periods, and new strategies need to be developed
to make use of the service during slack periods. Some organizations are attempting to cope
with these problems through the use of pricing strategy. Off-peak pricing consists of charging
different prices during different times or days in order to stimulate demand during slow
periods. Discounts given for weekend calling, Saturday night stay-overs, early-bird dinners,
or winter cruises are all examples of efforts service providers make to redistribute demand.
Other organizations are dealing with issues related to peak period demand through the
use of technology. To illustrate, a well-designed voice mail system allows companies and
callers to cut down on missed phone calls, eliminates long waits on hold, and delivers clear,
consistent messages. In the catalog industry, automated call routing (ACR) is used to route
incoming calls to available service representatives in the order in which they were received.
Finally, in the utilities industry, many electric utilities no longer have to generate capacity
that will meet peak electrical demand. Instead, they rely on buying unused power from
other utilities in other regions of the country.
Client Relationship
In the marketing of a great many services, a client relationship, as opposed to a customer rela-
tionship, exists between the buyer and the seller. In other words, the buyer views the seller as
someone who has knowledge that is of value. Examples of this type of relationship are the
physician-patient, college professor–student, accountant–small business owner, and broker-
investor. The buyer, many times, abides by the advice offered or suggestions provided by the
seller, and these relationships may be of an ongoing nature. Also, since many service firms are
client-serving organizations, they may approach the marketing function in a more professional
manner, as seen in health care, finance, and legal, governmental, and educational services.
Professionals face at least two marketing challenges. First, in many cases, fear or hostility
is brought to the transaction because the customer is uncertain about how genuine the pro-
fessional’s concern for his or her satisfaction is. For example, many unpleasant reasons ex-
ist for consulting doctors, lawyers, bankers, or even visiting a college professor. These
could include having surgery, being sued, having to take out a loan, or doing poorly on an
exam. Second, even high-quality service delivery by the professional can lead to dissatis-
fied customers. For a physician, the ability to provide high-quality medical care may be
overshadowed by a brusque, unfriendly personality. For a college professor, the demand on
students to contact or visit him or her only during office hours, coupled with students’ own
hectic work schedules, can diminish the impact of the professor’s classroom presentations.
It is vitally important that the professional service provider strive to build long-term posi-
tive relationships with clients.
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MARKETING INSIGHT Expectations of Service Customers
in Selected Industries 12–2
Type of Service Type of Customer Principal Expectations
Consumers
Consumers
Consumers
Business customers
Business customers
Business customers
Source: A. Parasuraman, Leonard L. Berry, and Valarie A. Zeithaml, “Understanding Customer Expectations
of Service,” Sloan Management Review, Spring 1991, pp. 39–48.
177
Customer Effort
Customers are often involved to a relatively great degree in the production of many types
of service. In some restaurants you clean your table. You may carry your luggage to a cart
parked next to a baggage compartment of the plane. If you wish to enjoy an exhibit at a
local art museum, you must walk around the facility and pay careful attention to what is on
Automobile repair
Automobile insurance
Hotel
Property and casualty
insurance
Equipment repair
Truck and tractor
rental/leasing
Be competent. Fix it right the first time.
Explain things. Explain why the customer needs the
suggested repairs—provide an itemized list.
Be respectful. “Don’t treat me like an idiot.”
Keep me informed. “I shouldn’t have to learn about
insurance law changes from the newspaper.”
Be on my side. “I don’t want them to treat me like I
am a criminal just because I have a claim.”
Play fair. “Don’t drop me when something goes
wrong.”
Protect me from catastrophe. “Make sure my estate
is covered in the event of a major accident.”
Provide prompt service. “I want a fast settlement of
my claims.”
Provide a clean room. “Don’t have a deep-pile car-
pet that can’t be completely cleaned . . . You can
literally see germs down there.”
Provide a secure room. Good deadbolts and a peep-
hole on the door.
Treat me like a guest. “It is almost like they’re looking
you over to decide whether or not they’re going
to let you have a room.”
Keep your promise. “They said the room would be
ready at the promised time, but it wasn’t.”
Fulfill obligations. Pay up.
Learn my business and work with me. “I expect
them to know me and my company.”
Protect me from catastrophe. Cover risk exposure so
there is no single big loss.
Provide prompt service. Fast claim service.
Share my sense of urgency. Speed of response. “One
time I had to buy a second piece of equipment
because of the huge downtime with the first piece.”
Be prepared. Have all the parts ready.
Keep the equipment running. Have equipment
working all the time—that is the key.
Be flexible. “The leasing company should have the
leasing flexibility to rent us equipment when we
need it.”
Provide full service. Get rid of all the paperwork and
headaches.
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display. If an organization purchases the services of an advertising agency, employees will
have to work with the agency, review its ideas, and make the final selections.
Obviously, not every service requires the same degree of customer effort. Your effort
with a credit card service may be little beyond taking it from your wallet to make a pur-
chase and writing a check once a month to pay the bill.
Uniformity
The quality of services can vary more than the quality of goods. Producers of goods have pro-
cedures to prevent, identify, and correct defects. If these procedures are working, customers
are unlikely to purchase defective products. This is not the case with most services. Because
they are often human performances and often customized to the needs of the buyer, quality
can vary. Each trip to the bank or airline flight or university course can be a different experi-
ence. Many service jobs such as nursing, teaching, and career counseling require a positive
attitude; how employees feel influences their performance.
PROVIDING QUALITY SERVICES
In today’s increasingly competitive environment, quality service is critical to organiza-
tional success. Unlike products in which quality is often measured against standards, ser-
vice quality is measured against performance.3 Since services are frequently produced in the
presence of a customer, are labor intensive, and are not able to be stored or objectively
examined, the definition of what constitutes good service quality can be difficult and, in
fact, continually changes in the face of choices.4 Customers determine the value of service
quality in relation to available alternatives and their particular needs. In general, problems
in the determination of good service quality are attributable to differences in the expecta-
tions, perceptions, and experiences regarding the encounter between the service provider
and consumer. These gaps can be classified as follows:
1. The gap between consumer expectations and management perceptions of consumer
expectations.
2. The gap between management perceptions of consumer expectations and the firm’s
service quality specifications.
3. The gap between service quality specifications and actual service quality.
4. The gap between actual service delivery and external communications about the service.
In essence, the customer perceives the level of service quality as being a function of the
magnitude and direction of the gap between expected service and perceived service. Man-
agement of a company may not even realize that they are delivering poor-quality service
due to differences in the way managers and consumers view acceptable quality levels. To
overcome this problem and to avoid losing customers, firms must be aware of the determi-
nants of service quality. A brief description of these determinants follows.
1. Tangibles include the physical evidence of the service. For example, employees are always
visible in a hotel lobby dusting, emptying ash trays, or otherwise cleaning up. Likewise,
clean, shiny, up-to-date medical equipment or aircraft are examples of tangible elements.
2. Reliability involves the consistency and dependability of the service performance. For
example, does a bank or phone company always send out accurate customer statements?
Likewise, does the plumber always fix the problem on his or her first visit?
3. Responsiveness concerns the willingness or readiness of employees or professionals to
provide service. For example, will a physician see patients on the same day they call in
to say they are ill? Will a college professor return a student’s call the same day?
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179
MARKETING INSIGHT Relationship Marketing in Service
Organizations 12–3
4. Assurance refers to the knowledge and competence of service providers and the ability
to convey trust and confidence. This determinant encompasses the provider’s name and
reputation; possession of necessary skills; and trustworthiness, believability, and hon-
esty. For example, a bank will guarantee same-day loan processing; a doctor is highly
trained in a particular specialty.
5. Empathy refers to the service provider’s efforts to understand the customer’s needs and
then to provide, as best as possible, individualized service delivery. For example, flight
attendants on a customer’s regular route learn what type of beverages the customer
drinks and what magazines the customer reads.
Each of these determinants plays an important role in how the customer views the service
quality of a firm. Turning service quality into a powerful competitive weapon requires con-
tinuously striving for service superiority—consistently performing above the adequate serv-
ice level and capitalizing on opportunities for exceeding the desired service level. Relentless
efforts to continually improve service performance may well be rewarded by improvements
in customer attitudes toward the firm: from customer frustration to customer preference to
customer loyalty. What should be obvious is that to be successful, a service firm must have
both an effective means to measure customer satisfaction and dedicated employees to provide
high-quality service.
Throughout this book we have stressed the importance of building long-term relationships in which
the initial sale is viewed as a beginning step in a process, not an end or goal. For marketers of serv-
ices, relationship marketing can present a special set of challenges which require a different new view
of the business and a change in strategy.
For decades, most service marketers were concerned with attracting new customers. Promotion
programs and convenient locations focused on the acquisition of new customers. During the last two
decades, however, service marketers are beginning to think about marketing in a fundamentally new
way. The idea is that marketing is about having customers, not merely acquiring customers. Service
marketers now understand that attracting new customers is only the first step in the process, that
making existing customers better customers is marketing too. In other words, service marketers un-
derstand the importance of relationship marketing. It is fundamentally different from the traditional
view of marketing in service organizations.
Traditional Service Marketing Relationship Service Marketing
1. Marketing focuses on attracting 1. Marketing focuses on “clients.” Customer
new “customers.” attraction is a beginning step.
2. Emphasis on selling the service 2. Emphasis on establishing and building a
the customer requests. long-term relationship.
3. Need satisfaction is approached from 3. Need satisfaction is approached from the
the standpoint of the “part.” For example, standpoint of the “whole.” For example, total
haircut, checking account, airline ticket. hair care, day spa, personal banker, travel
management.
4. Primary sales contact is through process 4. Primary sales contact is through a trained
driven providers. For example, airline ticket marketing professional.
agent, bank teller. For example, travel agent, personal banker.
5. Profitability is assessed on individual services. 5. Profitability is assessed on the total
For example, individual haircut. relationship. For example, haircut plus shampoos,
conditioners, brushes, combs,
dryers, etc.
Source: Based on the work of James H. Donnelly Jr., Leonard L. Berry, and Thomas W. Thompson.
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Customer Satisfaction Measurement
As mentioned above, satisfied customers can become loyal customers. Service quality and
customer satisfaction are of growing concern to business organizations throughout the
world, and research on these topics generally focuses on two key issues: (1) understanding
the expectations and requirements of the customer, and (2) determining how well a company
and its major competitors are succeeding in satisfying these expectations and requirements.5
As such, an organization’s approach to measuring service quality through customer sat-
isfaction measurement (CSM) and effectively implementing programs derived from results
of such studies can spell the difference between success and failure. Research on market
leaders’ CSMs found they had the following aspects in common:
1. Marketing and sales employees were primarily responsible (with customer input) for
designing CSM programs and questionnaires.
2. Top management and the marketing function championed the programs.
3. Measurement involved a combination of qualitative and quantitative research methods
that primarily included mail questionnaires, telephone surveys, and focus groups.
4. Evaluations included both the company’s and competitors’ satisfaction performance.
5. Results of all research were made available to employees, but not necessarily to customers.
6. Research was performed on a continual basis.
7. Customer satisfaction was incorporated into the strategic focus of the company via the
mission statement.
8. There was a commitment to increasing service quality and customer satisfaction from
employees at all levels within the organization.
The Importance of Internal Marketing
Properly performed customer satisfaction research can yield a wealth of strategic informa-
tion about customers, the sponsoring company, and competitors. However, service quality
goes beyond the relationship between a customer and a company. Rather, as shown by the
last aspect listed, it is the personal relationship between a customer and the particular em-
ployee that the customer happens to be dealing with at the time of the service encounter that
ultimately determines service quality. The importance of having customer-oriented, front-
line people cannot be overstated.6 If frontline service personnel are unfriendly, unhelpful,
uncooperative, or uninterested in the customer, the customer will tend to project that same
attitude to the company as a whole. The character and personality of an organization re-
flects the character and personality of its top management. Management must develop pro-
grams that will stimulate employee commitment to customer service. To be successful,
these programs must contain five critical components:
1. A careful selection process in hiring frontline employees. To do this, management has to
clearly define the skills the service person must bring to the job.7 For example, Fairfield Inn
often considers as many as 25 candidates for each housekeeping or front-desk position.8
2. A clear, concrete message that conveys a particular service strategy that frontline
people can begin to act on. People delivering service need to know how their work
fits in the broader scheme of business operations.9 They need to have a cause because
servicing others is just too demanding and frustrating to be done well each day with-
out one.10
3. Significant modeling by managers, that is, managers demonstrating the behavior that
they intend to reward employees for performing. For example, some airline executives
regularly travel economy class to talk to customers and solicit ideas for improvement.11
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4. An energetic follow-through process, in which managers provide the training, support,
and incentives necessary to give the employees the capability and willingness to provide
quality service.12
5. An emphasis on teaching employees to have good attitudes. This type of training usually
focuses on specific social techniques, such as eye contact, smiling, tone of voice, and
standards of dress.
However, organizing and implementing such programs will only lead to temporary results
unless managers practice a strategy of internal marketing. We define internal marketing as
the continual process by which managers actively encourage, stimulate, and support
employee commitment to the company, the company’s goods and services, and the company’s
customers. Emphasis should be placed on the word continual. Managers who consistently
pitch in to help when needed, constantly provide encouragement and words of praise to
employees, strive to help employees understand the benefits of performing their jobs well,
and emphasize the importance of employee actions on both company and employee results
are practitioners of internal marketing. In service marketing, successful internal marketing
efforts, leading to employee commitment to service quality, are a key to success.
Federal Express serves as a prime example of the benefits accruing to a company that
successfully practices internal marketing.13 Federal Express is the first service organization
to win the Malcolm Baldrige National Quality Award. The company’s motto is “people,
service, and profits.” Behind its purple, white, and orange planes and uniforms are self-
managing work teams, gainsharing plans, and empowered employees seemingly consumed
with providing flexible and creative services to customers with varying needs. Federal
181
12–4
MARKETING INSIGHT Customers or Clients, Which One
Will It Be?
Practicing relationship marketing is a challenge for service organizations because there are
important differences between “customers” and “clients.” The notion of “client” is critical
for relationship marketing to succeed in a service organization.
Customers Clients
1. Customers may be nameless. 1. Clients must have names.
2. Customers are served as part of 2. Clients are served on an individual basis.
a large mass of people.
3. Customers are statistics; their needs 3. Clients are individual entities. Specific
are reflected in market summaries. information about them is stored in a
For example, the most popular ice database. For example, Mr. Smith wants
cream for people over 50 in 2008 only morning flights, first class seats,
was vanilla. vegetarian meals, aisle seats, airport
motels, and mid-size rental cars.
4. Customers are served by the first 4. Clients are served by a trained professional
available person. For example, who has been assigned to them.
airline ticket agent, bank teller. For example, travel agent, personal banker.
5. Customers have no strong reason to 5. Clients often have a strong relationship
feel any loyalty or allegience with the service provider.
to the service provider.
Source: Based on the work of James H. Donnelly Jr, Leonard L. Berry, and Thomas W. Thompson.
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Express is a high-involvement, horizontally coordinated organization that encourages
employees to use their judgment above and beyond the rulebook.
OVERCOMING THE OBSTACLES IN SERVICE MARKETING
The factors of intangibility and inseparability, as well as difficulties in coming up with
objective definitions of acceptable service quality, make comprehension of service marketing
difficult. However, in view of the size and importance of services in our economy, consid-
erable innovation and ingenuity are needed to make high-quality services available at
convenient locations for consumers as well as businesspeople. In fact, the area of service
marketing probably offers more opportunities for imagination and creative innovation than
does goods marketing. Unfortunately, many service firms still lag in the area of creative
marketing. Even today, those service firms that have done a relatively good job have been
slow in recognizing opportunities in all aspects of their marketing programs. Four reasons,
connected to past practices, can be given for the lack of innovative marketing on the part of
service marketers: (1) a limited view of marketing, (2) a lack of strong competition, (3) a
lack of creative management, and (4) no obsolescence.
Limited View of Marketing
Because of the nature of their service, many firms depended to a great degree on popula-
tion growth to expand sales. A popular example here is the telephone company, which did
not establish a marketing department until 1955. It was then that the company realized it
had to be concerned not only with population growth but also with meeting the needs of a
growing population. Increases in educational levels and the standard of living also bring
about the need for new and diversified services.
Service firms must meet these changing needs by developing new services and new
channels and altering existing channels to meet the changing composition and needs of the
population. For many service industries, growth has come as a result of finding new chan-
nels of distribution. For example, some banks and other financial service companies were
able to grow and tap into new markets by establishing limited-service kiosks in malls and
supermarkets. Airlines have successfully brought in a whole new class of travelers by
offering advance-purchase discounted fares. Traditionally, users of these fares either drove
or used other means of transportation to reach their destination.
While many service f irms have succeeded in adopting a marketing perspective,
others have been slow to respond. It was not until deregulation of the telecommunications
industry took place in 1984 that the telephone companies began taking a broadened
view of marketing. Even today, critics point to the obsession with inventing new tech-
nology versus using current technology in meeting customer needs as a weakness of
these companies.
Limited Competition
A second major cause of the lack of innovative marketing in many service industries was
the lack of competition. Many service industries such as banking, railroads, and public
utilities have, throughout most of their histories, faced very little competition; some have
even been regulated monopolies. Obviously, in an environment characterized by little
competition, there was not likely to be a great deal of innovative marketing. However, two
major forces have changed this situation. First, in the past two decades the banking,
financial services, railroad, cable, airline, telecommunications industries, and utilities
have all been deregulated in varying degrees. With deregulation has come a need to be
able to compete effectively. Second, service marketing has taken on an international focus.
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Today, many foreign companies are competing in domestic service markets. Foreign
interests own several banks, many hotels (including Holiday Inn), and shares in major airlines
(including Northwest and US Airways). Likewise, American companies are expanding
overseas as markets open up. For example, Merrill Lynch & Co. purchased Smith New
Court PLC, a large British security firm, to become the world’s largest brokerage firm.
Noncreative Management
For many years, the managements of service industries have been criticized for not being
progressive and creative. Railroad management has long been criticized for being slow
to innovate. More recently, however, railroads have become leading innovators in the field of
freight transportation, introducing such innovations as piggyback service and containeriza-
tion, and in passenger service, introducing luxury overnight accommodations on trains with
exotic names such as the Zephyr. Some other service industries, however, have been slow to
develop new services or to innovate in the marketing of their existing services. In fact, as a
whole, U.S. firms lag behind their Japanese and German competitors not only in collecting
customer satisfaction data but also in designing services that address customers’ needs.14
No Obsolescence
A great advantage for many service industries is the fact that many services, because of
their intangibility, are less subject to obsolescence than goods. While this is an obvious
advantage, it has also led some service firms to be sluggish in their approach to marketing.
Manufacturers of goods may constantly change their marketing plans and seek new and
more efficient ways to produce and distribute their products. Since service firms are often
not faced with obsolescence, they often failed to recognize the need for change. This fail-
ure has led to wholesale changes in many industries as new operators who possessed mar-
keting skills revolutionized the manner in which the service is performed and provided.
Many barbershops and hair dressers have gone out of business due to an inability to com-
pete against hairstyling salons. Many accountants have lost clients to tax preparation ser-
vices, such as H&R Block, that specialize in doing one task well and have used technology,
183
12–5
MARKETING INSIGHT Quality Service on the Internet
On the Internet, you cannot have a more convenient location than your competition. Every-
one is just a click away. It is critical that it is easy to do business with your company in order
to attract and retain customers. Following are some ways to improve e-service.
1. A customer should be able to buy something in seven clicks or less beginning from the
home page. Many experts believe the ideal should be four clicks.
2. Images should load quickly. Research shows that eight seconds is the longest people will
wait before they move on to another site.
3. From a product section of your site, customers should be able to get from your home
page to a product page in that section in one click.
4. Shopping should be easy. Searching, browsing, checking out, returning items, and get-
ting assistance from a live person must be simple.
5. Customers should have the choice to register their personal information (e.g., address
and credit card information) or to enter this information each time they purchase.
6. A customer should be able to check out in no more than three steps.
7. Delivery should be on time.
Source: Ron Zemke, E-Service: 24 Ways to Keep Your Customers—When the Competition Is Just a Click Away
(New York: Amazon, 2001).
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including Internet filing services, to their advantage. Likewise, the old, big movie house
has become a relic of the past as entrepreneurs realized the advantages to be gained from
building and operating theater complexes that contain several minitheaters in or near sub-
urban malls.
THE SERVICE CHALLENGE
Despite traditional thinking and practices on the part of many marketing managers and
writers concerning the similarities between the operation of manufacturing and services
organizations, the past decade has seen the growth of many innovative ways of meeting the
service challenge. The service challenge is the quest to (1) constantly develop new services
that will better meet customer needs, (2) improve on the quality and variety of existing
services, and (3) provide and distribute these services in a manner that best serves the cus-
tomer. This next section illustrates the challenges facing companies in various service
industries and examples of marketing strategies they employ to meet the service challenge.
Banking
“Banking is vital to a healthy economy. Banks are not.” This is the message that a banking
expert delivered to a group of his peers.15 Needless to say, the days when banking was con-
sidered a dead-end career, but one that offered stable employment for marketers, are long
gone. Perhaps banking best exemplifies the changes that are taking place as service organ-
izations strive to become practitioners of the “marketing concept.” Buy or be bought is the
new watchword in the banking industry, which is experiencing the biggest wave of consol-
idation in its history.
Banking is becoming an increasingly technology-driven business. The main reason is that
more and more financial services, from loans to credit cards, are being marketed through
computers and telephones instead of through branches. Banks large enough to afford big
technology investments can reach customers nationwide even though their physical fran-
chise may be limited. For example, most consumers possess credit cards from banks they
have never physically visited. Further, the advent of new electronic delivery systems (via
computer) for consumer and small-business banking could, within the next decade, greatly
reduce the number of branch banks needed. To prevent a loss of a large portion of their cus-
tomer base, many of the leading banks, such as Chase Manhattan and Citibank, are aligning
themselves with software and hardware manufacturers to develop home banking systems.
Banks have also learned the value of bundling services. Many now offer an account that
combines checking, savings, credit card, and auto loan features. Benefits to the customer
include free ATM transactions, interest-bearing checking accounts, no-fee credit cards, and
the convenience of one-stop banking. In addition, they offer preapproved auto loans and
cash-flow statements. Most banks also target some marketing activities toward senior citi-
zens, which may include discount coupons for entertainment, travel newsletters, and lower
monthly minimum required balances.
Competition between banks and other financial institutions will continue to intensify.
The survivors will be those that have best mastered the art of services marketing.
Health Care
The distribution of health care services is of vital concern. In health care delivery, the
inseparability characteristic presents more of a handicap than in other service industries
because users (patients) literally place themselves in the hands of the seller. Although direct
personal contact between producer and user is often necessary, new and more efficient
means of distribution seem to be evolving.
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Up until the past few decades, medical care has been traditionally associated with the
solo practice, fee-for-service system. Recently, several alternative delivery systems have
been developed, most notably the health maintenance organization (HMO). This type of
delivery system stresses the creation of group health care clinics using teams of salaried
health practitioners (physicians, pharmacists, technicians, and so forth) that serve a speci-
fied, enrolled membership on a prepaid basis. The primary benefits to the customer
(patient) from membership in an HMO are (1) the ability to have all ailments treated at one
facility, (2) payment of a fixed fee for services, and (3) the encouragement of preventive
versus remedial treatments. The success of the HMO concept in traditional medical care
has inspired similar programs to be developed for dental and eye care.
In the pharmaceutical field, Chronimed of Minnetonka, Minnesota, has focused on pro-
viding great customer service as its avenue to success.16 The company supplies 100,000
patients across the United States with specialized medications that local pharmacies can’t
afford to stock. Chronimed’s skill is twofold. First, it provides needed drugs by mail to
organ transplant recipients and patients with diabetes or AIDS. Second, it employs a team
of 50 pharmacists and assistants who provide much-needed information about the medications
they dispense, such as details about drug interaction and side effects. As evidenced by the
above examples, health care companies, regardless of the specific area in which they com-
pete, are becoming more and more market oriented as they try to differentiate their
offerings from those of the competition.
Insurance
In recent years, the insurance industry has exploded with new product and service offer-
ings. Not too long ago, customers were faced with limited options in choosing life, hospi-
tal, or auto insurance. Now there is a wide array of insurance policies to choose from,
including universal life policies, which double as retirement savings; nursing care insur-
ance; reversible mortgages, which allow people to take equity from their house while still
living in it; and other offerings aimed at serving an aging population. To illustrate, Pruden-
tial Insurance Company offers a program whereby terminally ill policyholders are allowed
to withdraw funds against the face value of their policy while still alive. In addition to
insurance services, most insurance companies now offer a full range of financial services,
including auto loans, mortgages, mutual funds, and certificates of deposit.
Distribution of insurance services has also been growing. The vending machines found
in airports for flight insurance have been finding their way into other areas. Travel auto
insurance is now available in many motel chains and through the AAA. Group insurance
written through employers and labor unions also has been extremely successful. In each
instance, the insurance industry has used intermediaries to distribute its services.
Travel
The travel industry, most notably the airlines, has been a leader in the use of technology.
Computerized reservation systems allow customers to book plane tickets from home or
work. Nearly all airlines are using Internet sites to dispense flight and fare information. Air-
lines are in the midst of implementing ticketless travel programs in which passengers pur-
chase tickets, select their seats, and pick up boarding passes and luggage tags at machines
resembling ATMs.17 Technology has also allowed airlines to make strategic pricing deci-
sions through the use of yield management. In yield management, certain seats on aircraft
are discounted and certain ones aren’t. Through the use of elaborate computer programs,
managers are able to determine who their customer segments are and who is likely to pur-
chase airline tickets when and to where.
Despite its success in employing technology to attract additional customers and offer
added convenience, the airline industry has operated in somewhat dire straits, plagued by
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problems associated with overcapacity, high labor costs, and low perceived service quality.
The decade of the 90s could be considered the most turbulent ever encountered by U.S.
commercial airlines.18 During this time, some airlines either went out of business (Midway,
Eastern, and Pan Am) or were in and out of bankruptcy proceedings (Continental, America
West, and TWA); and most others operated at a loss. In the early 2000s, both United
Airlines and Delta Airlines faced bankruptcy.
A notable exception to the fate that befell most carriers is Southwest Airlines, which has
finally convinced its peers that a carrier can be consistently profitable by offering cheap
fares on short-distance routes. Now, big carriers such as Continental and United have cre-
ated their own Southwest look-alikes to supplement their long-haul, full-service, high-fare
operations. Southwest’s secret to success (which other airlines may or may not be able to
imitate) is the high level of employee morale everyone associated with the company
exhibits. This has come as a direct result of upper management’s internal marketing efforts.
Implications for Service Marketers
The preceding sections emphasized the use of all components of the marketing mix. Many
service industries have been criticized for an overdependence on advertising. The overde-
pendence on one or two elements of the marketing mix is a mistake that service marketers
cannot afford. The sum total of the marketing mix elements represents the total impact of
the firm’s marketing strategy. The slack created by severely restricting one element cannot
be compensated by heavier emphasis on another, since each element in the marketing mix
is designed to address specific problems and achieve specific objectives.
186
MARKETING INSIGHT Nice Customers
12–6
”I’m a nice customer. You all know me. I’m the one who never complains, no matter what
kind of service I get.
“I’ll go into a restaurant, and I’ll sit while the waitress gossips with a friend and never
bothers to look to see if my hamburger is ready to go. Sometimes a party who came in af-
ter I did gets my hamburger, but I don’t say a word in complaint when the waitress tells me,
‘Oh, I’m sorry. I’ll order another for you.’ I just wait.
It’s the same when I go to a bank. I don’t throw my weight around. I try to be thought-
ful of the other person. If I get poor service I’m as polite as can be. I don’t believe rudeness
in return is the answer.
“The other day I stopped in at the neighborhood gas station. I waited for almost five
minutes before the attendant took care of me. And when he did, he spilled gas and wiped
the car windows with an oily rag. I didn’t expect him to thank me for stopping by—and he
didn’t. Naturally, I didn’t complain about the service.
“I never kick. I never nag. I never criticize. And I wouldn’t dream of making a scene, as
I’ve seen some people do in public places. I think that’s uncalled for. No, I’m the nice cus-
tomer. And I’ll tell you what else I am.
“I’m the customer who never comes back!
“In fact, a nice customer like me, multiplied by others of my kind, can just about ruin a
business. There are a lot of nice people in the world, just like me. When we get pushed far
enough, we go on down the street to another store, another bank, where they’re smart
enough to hire help who have been trained to appreciate nice customers.
“He laughs loudest, they say, who laughs last. I laugh when I see you frantically spend-
ing your money on expensive advertising to get me back, when you could have had me in
the first place for a few kind words and a smile and some good services.
“I don’t care what business you’re in. Maybe you live in a different town; maybe I’ve
never heard of you. But if you’re going broke or your business is bad, maybe there are
enough people like me, who do know you. I’m your customer who never comes back.”
Source: Unknown.
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Barlow, Janelle, and Paul Steward. Branded Customer Service. San Francisco, CA: Berrett Koehler,
2006.
Berry, Leonard L. Discovering the Soul of Service. NY: Free Press, 2000.
Berry, Leonard L. and Kent D. Seltman. Management Lessons From Mayo Clinic. NY: McGraw-
Hill, 2008.
Blackshaw, Pete. Satisfied Customers Tell Three Friends, Angry Customers Tell 3,000. NY: Double-
day, 2008.
Fullerton, Sam. Sports Marketing. Burr Ridge, IL: McGraw-Hill/Irwin, 2007.
Gronroos, Christian. Service Management and Marketing. 3rd ed. NY: John Wiley and Sons, 2007.
Hoffman, K. Douglas, and John E. G. Bateson. Service Marketing. Mason, OH: Thomson South-
western, 2009.
Keiningham, Timothy, and Terry Vavra. The Customer Delight Principle. NY: McGraw-Hill, 2001.
Solomon, Robert. The Art of Client Service. NY: Kaplan, 2008.
Services must be made available to prospective users, which implies distribution in the
marketing sense of the word. The revised concept of the distribution of services points out that
service marketers must distinguish conceptually between the production and distribution of
services. The problem of making services more widely available must not be ignored.
The above sections also pointed out the critical role of new service development. In sev-
eral of the examples described, indirect distribution of the service was made possible
because “products” were developed that included a tangible representation of the service.
This development facilitates the use of intermediaries, because the service can now be sep-
arated from the producer. In addition, the development of new services paves the way for
companies to expand and segment their markets. With the use of varying service bundles,
new technology, and alternative means of distributing the service, companies are now able
to practice targeted marketing.
CONCLUSION
This chapter has dealt with the complex topic of service marketing. While the marketing of
services has much in common with the marketing of products, unique problems in the area
require highly creative marketing management skills. Many of the problems in the service
area can be traced to the intangible and inseparable nature of services and the difficulties
involved in measuring service quality. However, considerable progress has been made in
understanding and reacting to these difficult problems, particularly in the area of distribu-
tion. In view of the major role services play in our economy, it is important for marketing
practitioners to better understand and appreciate the unique problems of service marketing.
Chapter Twelve The Marketing of Services 187
Additional
Resources
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188
Part D
M
arketing in Special Fields
Chapter13
Global Marketing
A growing number of U.S. corporations have transversed geographical boundaries and
become truly multinational in nature. For most other domestic companies, the question is
no longer, Should we go international? Instead, the questions relate to when, how, and
where the companies should enter the international marketplace. The past 15 years have
seen the reality of a truly world market unfold.
Firms invest in foreign countries for the same basic reasons they invest in their own
country. These reasons vary from firm to firm but fall under the categories of achieving
offensive or defensive goals. Offensive goals are to (1) increase long-term growth and
profit prospects; (2) maximize total sales revenue; (3) take advantage of economies of
scale; and (4) improve overall market position. As many American markets reach saturation,
American firms look to foreign markets as outlets for surplus production capacity, sources
of new customers, increased profit margins, and improved returns on investment. For
example, the ability to expand the number of locations of McDonald’s restaurants in the
United States is becoming severely limited. Yet, on any given day, only 0.5 percent of
the world’s population visits McDonald’s. Indeed, in the recent past, of the 50 most prof-
itable McDonald’s outlets, 25 were located in Hong Kong. For PepsiCo, the results are
similar. Its restaurant division operates over 10,000 Kentucky Fried Chicken, Pizza Hut,
and Taco Bell outlets abroad.
Multinational firms also invest in other countries to achieve defensive goals. Chief
among these goals are the desire to (1) compete with foreign companies on their own turf
instead of in the United States, (2) gain access to technological innovations that are developed
in other countries, (3) take advantage of significant differences in operating costs between
countries, (4) preempt competitors’ global moves, and (5) avoid being locked out of future
markets by arriving too late.
Such well-known companies as Zenith, Pillsbury, Shell Oil, CBS Records, and Firestone
Tire & Rubber are now owned by non-U.S. interests. Since 1980, the share of the U.S.
high-tech market held by foreign products has grown from less than 8 percent to over 25
percent. In such diverse industries as power tools, tractors, television, and banking, U.S.
companies have lost the dominant position they once held. By investing solely in domestic
operations or not being willing to adapt products to foreign markets, U.S. companies are
more susceptible to foreign incursions. For example, there has been a great uproar over
Japan’s practice of not opening up its domestic automobile market to U.S. companies.
However, as of the end of the 90s, a great majority of the American cars shipped to Japan
still had the steering wheel located on the left side of the vehicle—the opposite of where it
should be for the Japanese market.
In many ways, marketing globally is the same as marketing at home. Regardless of
which part of the world the firm sells in, the marketing program must still be built around
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13–1
MARKETING INSIGHT Some Well Known U.S. Companies
and Their International Sales
a sound product or service that is properly priced, promoted, and distributed to a carefully
analyzed target market. In other words, the marketing manager has the same controllable
decision variables in both domestic and nondomestic markets.
Although the development of a marketing program may be the same in either domestic
or nondomestic markets, special problems may be involved in the implementation of mar-
keting programs in nondomestic markets. These problems often arise because of the envi-
ronmental differences that exist among various countries that marketing managers may be
unfamiliar with.
In this chapter, marketing management in a global context will be examined. Methods
of organizing global versus domestic markets, global market research tasks, methods of en-
try strategies into global markets, and potential marketing strategies for a multinational
firm will be discussed. In examining each of these areas, the reader will find a common
thread—knowledge of the local cultural environment—that appears to be a major prereq-
uisite for success in each area.
With the proper adaptations, many companies have the capabilities and resources
needed to compete successfully in the global marketplace. To illustrate, companies as
diverse as Kellogg’s, Avon, Eli Lilly, and Sun Microsystems all generate a large percentage
of their sales from foreign operations. Smaller companies can also be successful. For
example, Nemix, Inc., of Bell Gardens, California, is a franchisee of Church’s Fried
Chicken. Small by world standards, this company has succeeded in developing a fully ver-
tical operation in Poland, doing everything from raising chickens to operating restaurants.1
THE COMPETITIVE ADVANTAGE OF NATIONS
As each year passes, it becomes more and more clear that some industries and companies
succeed on a global scale while others do not. Harvard Business School professor Michael
Porter introduced what he calls the “diamond” of national advantage to explain a nation’s
competitive advantage and why some companies and industries become global business
leaders. Figure 13.1 presents Porter’s model. The diamond presents four factors that deter-
mine the competitive advantage or disadvantage of a nation.
1. Factor conditions. The nation’s ability to turn its natural resources, skilled labor, and in-
frastructure into a competitive advantage.
189
Global Revenues Percent Revenues from
Company (billions) Outside the U.S.
Walmart $345.0 22.3%
Ford Motor 160.3 46.1
General Electric 163.4 47.7
CitiGroup 89.6 42.6
Hewlett-Packard 91.7 65.0
Boeing 61.5 37.4
Intel 35.4 > 78.0
Coca-Cola 24.1 > 71.0
Apple 24.0 ~ 40.0
Starbucks 7.8 17.0
Source: Philip R. Cateora, Mary C. Gilly, and John I. Graham, International Marketing, 14th ed. (Burr Ridge,
IL: McGraw-Hill/Irwin, 2009), p.9.
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2. Demand conditions. The nature of domestic demand and the sophistication of domestic
customers for the industry’s product or service.
3. Related and supporting industries. The existence or absence in the country of supplier
and related industries that are also internationally competitive.
4. Company strategy, structure, and rivalry. The conditions in the nation that govern how
companies are created, organized, and managed, and how intensely they compete do-
mestically.
Before Porter developed his model, he studied companies in more than 100 industries.
While the most successful companies differed in many ways and employed different strategies,
a very important common theme emerged: A company that succeeds on a global scale, first
succeeded in intense domestic competition. His model is a dynamic model and illustrates how
over time, a nation can build up and maintain its competitive advantage in any industry.
ORGANIZING FOR GLOBAL MARKETING
When compared with the tasks it faces at home, a firm attempting to establish a global mar-
keting organization faces a much higher degree of risk and uncertainty. In a foreign market,
management is often less familiar with the cultural, political, and economic situation. Many
of these problems arise as a result of conditions specific to the foreign country. Managers
are also faced with the decisions concerning how to organize the multinational company.
Problems with Entering Foreign Markets
While numerous problems could be cited, attention here will focus on those that firms most
often face when entering foreign markets.
Cultural Misunderstanding
Differences in the cultural environment of foreign countries may be misunderstood or
not even recognized because of the tendency for marketing managers to use their own
cultural values and priorities as a frame of reference. Some of the most common areas
of difference lie in the way dissimilar cultures perceive time, thought patterns, personal
space, material possessions, family roles and relationships, personal achievement,
competitiveness, individuality, social behavior, and other interrelated issues.2 Another
190 Part D Marketing in Special Fields
Company
strategy, structure
and rivalry
Related and
supporting
industries
Demand
conditions
Factor
conditions
FIGURE 13.1
Porter’s Diamond of
National Advantage
Source: Michael E. Porter,
The Competitive Advantage
of Nations (New York: Fress
Press, 1990), pp. 577–615.
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important source of misunderstandings is in the perceptions of managers about the people
with whom they are dealing. Feelings of superiority can lead to changed communication
mannerisms.
American managers must make the necessary efforts to learn, understand, and adapt to
the cultural norms of the managers and customers they deal with in other parts of the world.
Failure to do so will result in missed market opportunities.
On the other hand, companies should not shy away from attempting to enter global
markets because conventional wisdom says that products and service will not succeed in
some regions purely due to cultural reasons. For example, PepsiCo’s Pepsi division entered
into a $500 million offensive to try to grab a larger share of the $6 billion Brazilian soft-
drink market.3 Understanding the dramatic changes that had taken place in Brazil, Pepsi
repositioned itself as the choice of a new Brazil. Advertisements for the Pepsi brand fea-
ture young people enumerating recent changes in Brazil, such as the devaluation of its
currency in 1999. Does this campaign sound familiar? It should since it’s a takeoff on the
popular “Pepsi, the choice of a new generation” theme used in the United States. Actions
taken by PepsiCo’s Frito-Lay unit serve as another example of a successful adaptation to
cultural differences.4 In China, Frito-Lay introduced its popular Cheetos snack food. The
twist to this effort lies in the fact that the Chinese are not big consumers of dairy products.
In China, Cheetos are cheeseless, instead consisting of flavors such as “Savory American
Cream” and “Zesty Japanese Steak.” As a result of these and other adaptations, it’s no
wonder that PepsiCo ranks among the leaders in the global food and beverage industry.
Political Uncertainty
Governments are unstable in many countries, and social unrest and even armed conflict
must sometimes be reckoned with. Other nations are newly emerging and anxious to seek
their independence. These and similar problems can greatly hinder a firm seeking to estab-
lish its position in foreign markets. For example, at the turn of the century, firms scaled
back their investment plans in Russia due to, among other reasons, (1) a business environ-
ment plagued by mobsters, (2) politics badly corrupted by the botched invasion of Chech-
nya, and (3) an economy troubled by runaway inflation and a plummeting ruble.5 This is not
to say investment in Russia is a poor choice. Rather, in situations like this, caution must be
used and companies must have a keen understanding of the risks involved in undertaking
sizable investments.
Import Restrictions
Tariffs, import quotas, and other types of import restrictions hinder global business. These
are usually established to promote self-sufficiency and can be a huge roadblock for the
multinational firm. For example, a number of countries, including South Korea, Taiwan,
Thailand, and Japan, have placed import restrictions on a variety of goods produced in
America, including telecommunications equipment, rice, wood products, automobiles, and
produce. In other cases, governments may not impose restrictions that are commonly ad-
hered to in the United States. For example, Chrysler pulled out of a proposed investment
deal in China, worth billions of dollars, because the Chinese government refused to protect
its right to limit access to technological information.
Exchange Controls and Ownership Restrictions
Some nations establish limits on the amount of earned and invested funds that can be with-
drawn from it. These exchange controls are usually established by nations that are experi-
encing balance-of-payment problems. In addition, many nations have a requirement that the
majority ownership of a company operating there be held by nationals. These and other
types of currency and ownership regulations are important considerations in the decision
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13–2
MARKETING INSIGHT Examples of Cultural Differences That
Could Lead to Marketing Problems
Body Language
• Standing with your hands on your hips is a gesture of defiance in Indonesia.
• Carrying on a conversation with your hands in your pockets makes a poor impression in
France, Belgium, Finland, and Sweden.
• Shaking your head from side to side means yes in Bulgaria and Sri Lanka.
• Crossing your legs to expose the sole of your shoe is really taboo in Muslim countries. In
fact, to call a person a “shoe” is a deep insult.
Physical Contact
• Patting a child on the head is a grave offense in Thailand or Singapore, since the head is
revered as the location of the soul.
• In an Oriental culture, touching another person is considered an invasion of privacy; in
Southern European and Arabic countries, it is a sign of warmth and friendship.
Promptness
• Be on time when invited for dinner in Denmark or in China.
• In Latin countries, your host or business associate would be surprised if you arrived at the
appointed hour.
Eating and Cooking
• It is rude to leave anything on your plate when eating in Norway, Malaysia, or Singapore.
• In Egypt, it is rude not to leave something.
• In Italy and Spain, cooking is done with oil.
• In Germany and Great Britain, margarine and butter are used.
Other Social Customs
• In Sweden, nudity and sexual permissiveness are quite all right, but drinking is really
frowned on.
• In Spain, there is a very negative attitude toward life insurance. By receiving insurance
benefits, a wife feels that she is profiting from her husband’s death.
• In Western European countries, many consumers still are reluctant to buy anything
(other than a house) on credit. Even for an automobile, they will pay cash.
Source: William J. Stanton, Michael J. Etzel, and Bruce J. Walker, Fundamentals of Marketing, 13th ed. (Burr
Ridge IL: McGraw-Hill/Irwin, 2004), p. 544.
192
to expand into a foreign market. For example, up until a few years ago, foreign holdings
in business ventures in India were limited to a maximum of 40 percent. Once this ban
was lifted, numerous global companies such as Sony, Whirlpool, JVC, Grundig, Panasonic,
Kellogg’s, Levi Strauss, Pizza Hut, and Domino’s rushed to invest in this market.6
Economic Conditions
As noted earlier, nations’ economies are becoming increasingly intertwined, and business
cycles tend to follow similar patterns. However, there are differences, mainly due to political
upheaval or social changes, and these may be significant. In determining whether to invest,
marketers need to perform in-depth analyses of a country’s stage of economic development,
the buying power of its populace, and the strength of its currency. For example, when the
North American Free Trade Agreement (NAFTA) was signed, many American companies
rushed to invest in Mexico, building production facilities and retail outlets. These companies
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assumed that signing the agreement would stabilize Mexico’s economy. In the long term,
these investments may pay off. However, many companies lost millions of dollars there due
to the devaluation of the peso. Indeed, the crash of the peso caused the retail giant Walmart to
scale back a $1 billion investment project to open stores throughout Mexico.
Organizing the Multinational Company
There are two kinds of global companies—the multidomestic corporation and the global
corporation.7 The multidomestic company pursues different strategies in each of its foreign
markets. It could have as many different product variations, brand names, and advertising
campaigns as countries in which it operates. Each overseas subsidiary is autonomous.
Local managers are given the authority to make the necessary decisions and are held
accountable for results. In effect, the company competes on a market-by-market basis.
Honeywell and General Foods are U.S. firms that have operated this way.
The global company, on the other hand, views the world as one market and pits its re-
sources against the competition in an integrated fashion. It emphasizes cultural similarities
across countries and universal consumer needs and wants rather than differences. It stan-
dardizes marketing activities when there are cultural similarities and adapts them when the
cultures are different. Since there is no one clear-cut way to organize a global company,
three alternative structures are normally used: (1) worldwide product divisions, each re-
sponsible for selling its own products throughout the world; (2) divisions responsible for all
products sold within a geographic region; and (3) a matrix system that combines elements
of both of these arrangements. Many organizations, such as IBM, Caterpillar, Timex,
General Electric, Siemens, and Mitsubishi, are structured in a global fashion.
Most companies are realizing the need to take a global approach to managing their busi-
nesses. However, recognizing the need and actually implementing a truly global approach are
two different tasks. For some companies, industry conditions dictate that they take a global
perspective. The ability to actually implement a global approach to managing international
operations, however, largely depends on factors unique to the company. Globalization, as a
competitive strategy, is inherently more vulnerable to risk than a multidomestic or domestic
strategy, due to the relative permanence of the organizational structure once established.
In determining whether or not to globalize a particular business, managers should look
first at their industry.8 Market, economic, environmental, and competitive factors all influ-
ence the potential gains to be realized by following a global strategy. Factors constituting
the external environment that are conducive to a global strategy are:
1. Market factors. Homogeneous market needs, global customers, shorter product life cycles,
transferable brands and advertising, and the ability to globalize distribution channels.
2. Economic factors. Worldwide economies of scale in manufacturing and distribution,
steep learning curves, worldwide sourcing efficiencies, rising product development
costs, and significant differences in host-country costs.
3. Environmental factors. Improving communications, favorable government policies, and
the increasing speed of technological change.
4. Competitive factors. Competitive interdependencies among countries, global moves of
competitors, and opportunities to preempt a competitor’s global moves.9
Many of the reasons given in the first part of the chapter about why a domestic company
should become a multinational can also be used to support the argument that a firm should
take a global perspective. This is because the integration of markets is forcing companies
that wish to remain successful not only to become multinationals but also to take a global
perspective in doing so. In the past, companies had the option of remaining domestic or
going multinational due to the separation of markets. This is no longer the case.
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MARKETING INSIGHT The Ten Commandments of Global
Branding 13–3
194
Several internal factors can either facilitate or impede a company’s efforts to under-
take a global approach to marketing strategies. These factors and their underlying
dimensions are
1. Structure. The ease of installing a centralized global authority and the absence of rifts
between present domestic and international divisions or operating units.
2. Management processes. The capabilities and resources available to perform global plan-
ning, budgeting, and coordination activities, coupled with the ability to conduct global
performance reviews and implement global compensation plans.
3. Culture. The ability to project a global versus national identity, a worldwide versus do-
mestic commitment to employees, and a willingness to tolerate interdependence among
business units.
4. People. The availability of employable foreign nationals and the willingness of current
employees to commit to multicountry careers, frequent travel, and having foreign superiors.
Overall, whether a company should undertake a multidomestic or global approach to or-
ganizing its international operations will largely depend on the nature of the company and
its products, how different foreign cultures are from the domestic market, and the com-
pany’s ability to implement a global perspective. Many large brands have failed in their
Growth in global markets has created opportunities for building global brands. The advan-
tages are many and so are the pitfalls. Here are 10 commandments that marketers can use
when planning a global branding campaign.
1. Understand similarities and differences in the global branding landscape. The best brands
retain consistency of theme and alter specific elements to suit each country.
2. Don’t take shortcuts in brand building. Build brands in new markets from the “bottom up.”
3. Establish marketing infrastructure. Most often, firms adopt or invest in foreign partners
for manufacturing and distribution.
4. Embrace integrated marketing communications. Because advertising opportunities may
be more limited, marketers must use other forms of communication such as sponsor-
ship and public relations.
5. Establish brand partnerships. Most global brands have marketing partners ranging
from joint venture partners to franchisees and distributors who provide access to
distribution.
6. Balance standardization and customization. Know what to standardize and what to
customize.
7. Balance global and local control. This is very important in the following areas: organization
structure, entry strategies, coordination processes, and mechanisms.
8. Establish operable guidelines. Set the rules about how the brand will be positioned and
marketed.
9. Implement a global brand equity measurement system. The ideal measurement system
provides complete, up-to-date information on the brand and on all its competitors to
the appropriate decision makers.
10. Leverage brand elements. If the meanings of the brand name and all related trademarked
identifiers are clear, they can be an invaluable source of brand equity worldwide.
Source: Kevin Lane Keller, “The Ten Commandments of Global Branding,” MBA Bullet Point, October 3–16,
2000, p. 3, and Kevin Lane Keller, Strategic Brand Management, 3rd ed. (Upper Saddle River, NJ: Prentice-Hall,
2008), chap. 14.
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Chapter Thirteen Global Marketing 195
quest to go global. The primary reason for this failure is rushing the process. Successful
global brands carefully stake out their markets, allowing plenty of time to develop their
overseas marketing efforts and evolve into global brands.
Indeed, in many cases, f irms do not undertake either purely multidomestic or global
approaches to marketing. Instead, they develop a hybrid approach whereby these global
brands carry with them the same visual identity, the same strategic positioning, and the
same advertising. In addition, local characteristics are factored in. Regardless of the
approach undertaken, management and organizational skills that emphasize the need to
handle diversity are the critical factors that determine the long-term success of any
company’s endeavors in the global marketplace.
PROGRAMMING FOR GLOBAL MARKETING
In this section of the chapter, the major areas in developing a global marketing program
will be examined. As mentioned at the outset, marketing managers must organize the same
controllable decision variables that exist in domestic markets. However, many firms that
have been extremely successful in marketing in the United States have not been able to du-
plicate their success in foreign markets.
Global Marketing Research
Because the risks and uncertainties are so high, marketing research is equally important in
foreign markets and in domestic markets and probably more so. Many companies en-
counter losing situations abroad because they do not know enough about the market.10 They
don’t know how to get the information or find the cost of collecting the information too
high. To be successful, organizations must collect and analyze pertinent information to sup-
port the basic go/no-go decision before getting to the issues addressed by conventional
market research. Toward this end, in attempting to analyze foreign consumers and markets,
at least four organizational issues must be considered.
Population Characteristics
Population characteristics are one of the major components of a market, and significant dif-
ferences exist between and within foreign countries. If data are available, the marketing
manager should be familiar with the total population and with the regional, urban, rural,
and interurban distribution. Other demographic variables, such that the number and size of
families, education, occupation, and religion, are also important. In many markets, these
variables can have a significant impact on the success of a firm’s marketing program. For
example, in the United States, a cosmetics firm can be reasonably sure that the desire to use
cosmetics is common among women of all income classes. However, in Latin America
the same firm may be forced to segment its market by upper-, middle-, and lower-income
groups, as well as by urban and rural areas. This is because upper-income women want
high-quality cosmetics promoted in prestige media and sold through exclusive outlets. In
some rural and less prosperous areas, cosmetics must be inexpensive; in other rural areas,
women do not accept cosmetics.
Ability to Buy
To assess the ability of consumers in a foreign market to buy, four broad measures should
be examined: (1) gross national product or per capita national income, (2) distribution of
income, (3) rate of growth in buying power, and (4) extent of available financing. Since
each of these vary in different areas of the world, the marketing opportunities available
must be examined closely.
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MARKETING INSIGHT Tips for Global Consumer Marketing
Research 13–4
196
Willingness to Buy
The cultural framework of consumer motives and behavior is integral to the understanding of
the foreign consumer. If data are available, cultural values and attitudes toward the material cul-
ture, social organizations, the supernatural, aesthetics, and language should be analyzed for
their possible influence on each of the elements in the firm’s marketing program. It is easy to
see that such factors as the group’s values concerning acquisition of material goods, the role of
the family, the positions of men and women in society, and the various age groups and social
classes can have an effect on marketing because each can influence consumer behavior.
In some areas tastes and habits seem to be converging, with different cultures becoming
more and more integrated into one homogeneous culture, although still separated by national
Many consumer goods companies have sought growth by expanding into global markets.
For U.S. companies, this is sound strategy since 95 percent of the world’s population and
two-thirds of its purchasing power are located outside their country. The potential for suc-
cess in global markets is enhanced when companies carefully research and analyze con-
sumers in foreign countries, just as it is in domestic markets. Below are some suggestions for
companies seeking to successfully market to global consumers.
• Research the cultural nuances and customs of the market. Be sure that the company and
brand name translate favorably in the language of the target country, and if not, con-
sider using an abbreviation or entirely different brand name for the market. Consider
using marketing research firms or ad agencies that have detailed knowledge of the culture.
• Determine whether the product can be exported to the foreign country as is or whether
it has to be modified to be useful and appealing to targeted consumers. Also, determine
what changes need to be made to packaging and labeling to make the product appeal-
ing to the market.
• Research the prices of similar products in the target country or region. Determine the
necessary retail price to make marketing it profitable in the country, and research
whether a sufficient number of consumers would be willing to pay that price. Also,
determine what the product has to offer that would make consumers willing to pay a
higher price.
• On the basis of research, decide whether the targeted country or region will require a
unique marketing strategy or whether the same general strategy can be used in all
geographic areas.
• Research the ways consumers purchase similar products in the targeted country or re-
gion and whether the company’s product can be sold effectively using this method of
distribution. Also, determine if a method of distribution not currently being used in the
country could create a competitive advantage for the product.
• Pretest integrated marketing communication efforts in the targeted country to ensure
not only that messages are translated accurately but also that subtle differences in mean-
ing are not problematic. Also, research the effectiveness of planned communication
efforts.
Marketing consumer goods successfully in global markets requires a long-term com-
mitment because it may take time to establish an identity in new markets. However, with
improving technology and the evolution of a global economy, both large and small
companies have found global marketing both feasible and profitable.
Source: Dom Del Prete, “Winning Strategies Lead to Global Marketing Success,” Marketing News, August 18,
1997, pp. 1, 2. Also see Philip R. Cateora, Mary C. Gilly, and John L. Graham, International Marketing, 14th ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2008), chap. 8.
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MARKETING INSIGHT Global Product Development
13–5
197
boundaries. This appears to be the case in Western Europe, where consumers are develop-
ing into a mass market. This convergence obviously will simplify the task for a marketer in
this region. However, cultural differences still prevail among many areas of the world and
strongly influence consumer behavior. Marketing organizations may have to do primary
research in many foreign markets to obtain usable information about these issues.
Differences in Research Tasks and Processes
In addition to the dimensions mentioned above, the processes and tasks associated with
carrying out the market research program may also differ from country to country. Many
market researchers count on census data for in-depth demographic information. However,
in foreign countries the market researcher is likely to encounter a variety of problems in
using census data. These include11
1. Language. Some nations publish their census reports in English. Other countries offer
census reports only in their native language; some do not take a census.
2. Data content. Data contained in a census vary from country to country and often omit
items of interest to researchers. For example, most foreign nations do not include an
income question on their census. Others do not include such items as marital status or
education levels.
3. Timeliness. The United States takes a census every 10 years. Japan and Canada conduct
one every five years. However, some northern European nations are abandoning the
census as a data-collection tool and instead are relying on population registers to
account for births, deaths, and changes in marital status or place of residence.
4. Availability in the United States. If a researcher requires detailed household demo-
graphics on foreign markets, the cost and time required to obtain the data will be signif-
icant. Unfortunately, census data for many countries do not exist. For some it will be
difficult to obtain, although data about others can be found on the Internet.
Procter & Gamble: According to the P&G Web site, P&G products are developed as
global R&D projects. P&G has 22 research centers in 13 countries from which they can
draw expertise. As a good example of a global product, consider the Swiffer mop. P&G
made use of its research centers in the United States and France to conduct market research
and testing in support of this new product.
Apple: In the development of the iPod, Apple worked with about ten different firms and
independent contractors throughout the world, and did product design and customer re-
quirement definition in both the United States and Japan.
Ikea: The Swedish furniture retailer knows that its target market (middle-class strivers)
crosses international and intercontinental lines, so it operates globally in a streamlined fash-
ion. It identifies an unmet customer need (say a certain style of table at a given price point),
commissions in-house and outsourced designers to compete for the best design, then its
manufacturing partners worldwide compete for the rights to manufacture it. Excellent
global logistics complete the value delivery to customers.
Bungie Studios: This boutique software company, now owned by Microsoft, developed
the MS Halo gaming software series in the United States, but product-tested it in Europe
and Asia. Like Ikea customers in the prior example, gamers are much alike the world over.
Source: Loida Rosario, “Borderless Innovation: The Impact of Globalization on NPD in Three Industries,”
Visions, June 2006. Merle Crawford and Anthony DiBenedetto, New Products Management, 9th ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 10.
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198 Part D Marketing in Special Fields
Global Product Strategy
Global marketing research can help determine whether (1) there is an unsatisfied need for
which a new product could be developed to serve a foreign market or (2) there is an unsatis-
fied need that could be met with an existing domestic product, either as is or adapted to the
foreign market. In either case, product planning is necessary to determine the type of product
to be offered and whether there is sufficient demand to warrant entry into a foreign market.
Most U.S. firms would not think of entering a domestic market without extensive prod-
uct planning. However, some marketers have failed to do adequate product planning when
entering foreign markets. An example of such a problem occurred when American manu-
facturers began to export refrigerators to Europe. The firms exported essentially the same
models sold in the United States. However, the refrigerators were the wrong size, shape,
and temperature range for some areas and had weak appeal in others—thus failing
miserably. Although adaptation of the product to local conditions may have eliminated this
failure, this adaptation is easier said than done. For example, even in the domestic market,
overproliferation of product varieties and options can dilute economies of scale. This dilu-
tion results in higher production costs, which may make the price of serving each market
segment with an adapted product prohibitive.
The solution to this problem is not easy. In some cases, changes need not be made at all
or, if so, can be accomplished rather inexpensively. In other cases, the sales potential of
the particular market may not warrant expensive product changes. For example, Pepsi’s
Radical Fruit line of juice drinks was introduced without adaptation on three continents.
On the other hand, U.S. companies wishing to market software in foreign countries must
undertake painstaking and costly efforts to convert the embedded code from English to
foreign languages. This undertaking severely limits the potential markets where individ-
ual software products can be profitably marketed. In any case, management must examine
these product-related problems carefully prior to making foreign market entry decisions.
Global Distribution Strategy
The role of the distribution network in facilitating the transfer of goods and titles and in the
demand stimulation process is as important in foreign markets as it is at home. Figure 13.2
FIGURE 13.2
International
Channel-of-
Distribution
Alternatives
Source: Philip R. Cateora,
Mary C. Gilly, and John I.
Graham, International Mar-
keting, 14th ed. (Burr Ridge,
IL: Mcgraw-Hill/Irwin, 2009),
p. 408.
Open distribution
via domestic
wholesale
middlemen
Exporter Importer
Foreign
agent or
merchant
wholesalers
Foreign
retailer
Foreign
consumer
Export management
company or
company sales force
Home country
Foreign country
The foreign marketer or
producer sells to or through
Domestic
producer
or marketer
sells to or
through
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Chapter Thirteen Global Marketing 199
illustrates some of the most common channel arrangements in global marketing.
They range from no control to almost complete control of the distribution system by
manufacturers.
Global distribution strategy can be extremely challenging because sellers must influ-
ence two sets of channels: one in the home country and one in the foreign country. There
are many possibilities as the f igure clearly illustrates. The arrows indicate to whom
the producers and various middlemen might sell in order to move products between
countries.
Manufacturers can become more directly involved and, hence, have greater control over
distribution, when they select agents and distributors located in foreign markets. Both per-
form similar functions, except that agents do not assume title to the manufacturers’ products,
while wholesalers do. If manufacturers should assume the functions of foreign agents or
wholesalers and establish their own foreign branch, they greatly increase control over their
global distribution system. Manufacturers’ effectiveness will then depend on their own
administrative organization rather than on independent intermediaries. If the foreign branch
sells to other intermediaries, such as wholesalers and retailers, as is the case with most
consumer goods, manufacturers again relinquish some control. However, since the manu-
facturers are located in the market area, they have greater potential to influence these inter-
mediaries. For example, Volkswagen, Anheuser-Busch, and Procter & Gamble have each
made substantial investments in building manufacturing facilities in Brazil. These invest-
ments allow the companies to begin making direct sales to dealers and retailers in the
country.
The channel arrangement that enables manufacturers to exercise a great deal of control
is where the manufacturer sells directly to organizational buyers or ultimate consumers. Al-
though this arrangement is most common in the sale of organizational goods, some con-
sumer goods companies have also pursued this arrangement.
Global Pricing Strategy
In domestic markets, pricing is a complex task. The basic approaches used in price determi-
nation in foreign markets are the same as those discussed earlier in the chapter on pricing.
However, the pricing task is often more complicated in foreign markets because of additional
problems associated with tariffs, antidumping laws, taxes, inflation, and currency conversion.
Import duties are probably the major constraint for global marketers and are encoun-
tered in many markets. Management must decide whether import duties will be paid by the
firm or the foreign consumer, or whether they will be paid by both. This and similar
constraints may force the firm to abandon an otherwise desirable pricing strategy or may
force the firm out of a market altogether.
Another pricing problem arises because of the rigidity in price structures found in many
foreign markets. Many foreign intermediaries are not aggressive in their pricing policies.
They often prefer to maintain high unit margins at the expense of low sales volume rather
than develop large sales volume by means of lower prices and smaller margins per unit.
Many times this rigidity is encouraged by legislation that prevents retailers from cutting
prices substantially at their own discretion. These are only a few of the pricing problems
foreign marketers encounter.
Global Advertising and Sales Promotion Strategy
When expanding their operations into the world marketplace, most firms are aware of the
language barriers that exist and realize the importance of translating their messages into the
proper idiom. However, numerous other issues must be resolved as well, such as selecting
appropriate media and advertising agencies in foreign markets.
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There are many problems in selecting media in foreign markets. Often the media that are
traditionally used in the domestic market are not available. For example, it was not until re-
cently that national commercial TV became a reality in the former Soviet Union. If media
are available, they may be so only on a limited basis or they may not reach the potential
buyers. In addition to the problem of availability, other difficulties arise from the lack of
accurate media information. There is no rate and data service or media directory that covers
all the media available throughout the world. Where data are available, their accuracy is
often questionable.
Another important promotion decision that must be made is the type of agency used to
prepare and place the firm’s advertisements. Along with the growth in multinational prod-
uct companies, more multinational advertising agencies are available. Among the top
15 global advertising agencies, less than half are U.S. owned. Alliances and takeovers have
stimulated growth in the formation of global agencies. The U.S. company can take either of
two major approaches to choosing an agency. The first is to use a purely local agency in
each area where the advertisement is to appear. The rationale for this approach is that a
purely local agency employing only local nationals can better adapt the firm’s message to
the local culture.
The other approach is to use either a U.S.-based multinational agency or a multinational
agency with U.S. offices to develop and implement the ad campaign. For example, the
Coca-Cola Company uses one agency to create ads for the 80 nations in which Diet Coke
is marketed. The use of these so-called super agencies is increasing (annual growth rates
averaged over 30 percent in the last decade). By using global advertising agencies, com-
panies are able to take advantage of economies of scale and other efficiencies. However,
global agencies are not without their critics. Many managers believe that small, local agen-
cies in emerging markets take a more entrepreneurial and fresher approach to advertising
than do global agencies. Much discussion has developed over which approach is best, and
it appears that both approaches can be used successfully.
The use of sales promotion can also lead to opportunities and problems for marketers in
foreign markets. Sales promotions often contain certain characteristics that are more
attractive than other elements of the promotion mix.12 In less-wealthy countries, consumers
tend to be even more interested in saving money through price discounts, sampling, or pre-
miums. Sales promotion can also be used as a strategy for bypassing restrictions on adver-
tising placed by some foreign governments. In addition, sales promotion can be an effective
means for reaching people who live in rural locations where media support for advertising
is virtually nonexistent.
ENTRY AND GROWTH STRATEGIES FOR GLOBAL MARKETING
A major decision facing companies that desire either to enter a foreign market or pursue
growth within a specific market relates to the choice of entry or growth strategy. What type
of strategy to employ depends on many factors, including the analysis of market opportu-
nities, company capabilities, the degree of marketing involvement and commitment the
company is willing to make, and the amount of risk that the company is able to tolerate.13
A company can decide to (1) make minimal investments of funds and resources by limiting
its efforts to exporting; (2) make large initial investments of resources and management ef-
fort to try to establish a long-term share of global markets; or (3) take an incremental ap-
proach whereby the company starts with a low-risk mode of entry that requires the least
financial and other resource commitment and gradually increases its commitment over
time. All three approaches can be profitable. In general, a company can initially enter a
global market and, subsequently, pursue growth in the global marketplace in six ways:
200 Part D Marketing in Special Fields
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Chapter Thirteen Global Marketing 201
1. Exporting. Exporting occurs when a company produces the product outside the final
destination and then ships it there for sale. It is the easiest and most common approach for a
company making its first international move. Exporting has two distinct advantages. First, it
avoids the cost of establishing manufacturing operations in the host country; second, it may
help a firm achieve experience-curve and location economies. By manufacturing the product
in a centralized location and exporting it to other national markets, the firm may be able to
realize substantial scale economies from its global sales volume. This method is what allowed
Sony to dominate the global TV market. The major disadvantages related to exporting include
(1) the sometimes higher cost associated with the process, (2) the necessity of the exporting
firm to pay import duties or face trade barriers, and (3) the delegation of marketing responsi-
bility for the product to foreign agents who may or may not be dependable.
2. Licensing. Companies can grant patent rights, trademark rights, and the right to use
technological processes to foreign companies. This is the most common strategy for small
and medium-size companies. The major advantage to licensing is that the firm does not have
to bear the development costs and risks associated with opening up a foreign market. In
addition, licensing can be an attractive option in unfamiliar or politically volatile markets.
The major disadvantages are that (1) the firm does not have tight control over manufactur-
ing, marketing, and strategy that is required for realizing economies of scale; and (2) there
is the risk that foreign companies may capitalize on the licensed technology. RCA Corpora-
tion, for example, once licensed its color TV technology to a number of Japanese firms.
These firms quickly assimilated the technology and used it to enter the U.S. market.
3. Franchising. Franchising is similar to licensing but tends to involve longer-term
commitments. Also, franchising is commonly employed by service firms, as opposed to
manufacturing firms. In a franchising agreement, the franchisor sells limited rights to use
its brand name in return for a lump sum and share of the franchisee’s future profits. In con-
trast to licensing agreements, the franchisee agrees to abide by strict operating procedures.
Advantages and disadvantages associated with franchising are primarily the same as with
licensing except to a lesser degree. In many cases, franchising offers an effective mix of
centralized and decentralized decision making.
4. Joint ventures. A company may decide to share management with one or more col-
laborating foreign firms. Joint ventures are especially popular in industries that call for
large investments, such as natural gas exploration and automobile manufacturing. Control
of the joint venture may be split equally, or one party may control decision making. Joint
ventures hold several advantages. First, a firm may be able to benefit from a partner’s
knowledge of the host country’s competitive position, culture, language, political systems,
and so forth. Second, the firm gains by sharing costs and risks of operating in a foreign
market. Third, in many countries, political considerations make joint ventures the only fea-
sible entry mode. Finally, joint ventures allow firms to take advantage of a partner’s distri-
bution system, technological know-how, or marketing skills. For example, General Mills
teamed up with CPC International in an operation called International Dessert Partners to
develop a major baking and dessert-mix business in Latin America. The venture combines
General Mills’ technology and Betty Crocker dessert products with CPC’s marketing and
distribution capabilities in Latin America. The major disadvantages associated with joint
ventures are that (1) a firm may risk giving up control of proprietary knowledge to its part-
ner; and (2) the firm may lose the tight control over a foreign subsidiary needed to engage
in coordinated global attacks against rivals.
5. Strategic alliances. Although some consider strategic alliances a form of joint ven-
ture, we consider them a distinct entity for two reasons. First, strategic alliances are nor-
mally partnerships that two or more firms enter into to gain a competitive advantage on a
worldwide versus local basis. Second, strategic alliances are usually of a much longer-term
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202 Part D Marketing in Special Fields
nature than are joint ventures. In strategic alliances, the partners share long-term goals and
pledge almost total cooperation. Strategic alliances can be used to reduce manufacturing
costs, accelerate technological diffusion and new product development, and overcome legal
and trade barriers.14 The major disadvantage associated with formation of a strategic
alliance is the increased risk of competitive conflict between the partners.
6. Direct ownership. Some companies prefer to enter or grow in markets either through
establishment of a wholly owned subsidiary or through acquisition. In either case, the firm
owns 100 percent of the stock. The advantages to direct ownership are that the firm has
(1) complete control over its technology and operations, (2) immediate access to foreign
markets, (3) instant credibility and gains in the foreign country when acquisitions are the
mode of entry or growth, and (4) the ability to install its own management team. Of course,
the primary disadvantages of direct ownership are the huge costs and significant risks
associated with this strategy. These problems may more than offset the advantages depending
upon the country entered.
Regardless of the choice of methods used to gain entry into and grow within a foreign
marketplace, companies must somehow integrate their operations. The complexities in-
volved in operating on a worldwide basis dictate that firms decide on operating strategies.
A critical decision that marketing managers must make relates to the extent of adaptation
of the marketing mix elements for the foreign country in which the company operates. De-
pending on the area of the world under consideration and the particular product mix, dif-
ferent degrees of standardization/adaptation of the marketing mix elements may take place.
As a guideline, standardization of one or more parts of the marketing mix is a function of
many factors that individually and collectively affect companies’ decision making.15 It is
more likely to succeed under the following conditions:
• When markets are economically similar.
• When worldwide customers, not countries, are the basis for segmenting markets.
• When customer behavior and lifestyles are similar.
• When the product is culturally compatible across the host country.
• When a firm’s competitive position is similar in different markets.
• When competing against the same competitors, with similar market shares, in different
countries, rather than competing against purely local companies.
• When the product is an organizational and high-technology product rather than a
consumer product.
• When there are similarities in the physical, political, and legal environments of home
and host countries.
• When the marketing infrastructure in the home and host countries is similar.
The decision to adapt or standardize marketing should be made only after a thorough
analysis of the product-market mix has been undertaken. The company’s end goal is to de-
velop, manufacture, and market the products best suited to the actual and potential needs of
the local (wherever that may be) customer and to the social and economic conditions of the
marketplace. There can be subtle differences from country to country and from region to
region in the ways a product is used and what customers expect from it.
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Chapter Thirteen Global Marketing 203
Behravesh, Nariman. Spin Free Economics: A No-Nonsense Nonpartisan Guide to Today’s Global
Economic Debates. NY: McGraw-Hill 2009.
Elkers, Richard J. Jr. Winner Take All: How Competitiveness Shapes the Fate of Nations. NY: Basic
Books, 2008.
Erdem, Tulin, Joffe Swait, and Ana Valenzuela. “Brands as Signals: A Cross Country Validation
Study.” Journal of Marketing, January 2006, pp. 34–49.
Friedman, Thomas L. The World is Flat. NY: Farrar, Straus, and Giroux, 2005.
McEwen, William, Xiaoguang Fang, Zhang Chuanping, and Richard Bunkholder. “Inside the Mind
of the Chinese Consumer.” Harvard Business Review, March 2006, pp. 66–67.
Sirkin, Harold L., James W. Hemerling, and Arindam K. Bhattacharya. Globality: Competing with
Everyone from Everywhere for Everything. NY: Business Plus, 2008.
Steenkamp, Jan-Benedict E.M., and Inge Geyskens. “How Country Characteristics Affect the Per-
ceived Value of Web Sites.” Journal of Marketing, July 2006, pp. 136–150.
Additional
Resources
CONCLUSION
The world is truly becoming a global market. Many companies that avoid operating in the
global arena are destined for failure. For those willing to undertake the challenges and risks
necessary to become multinational corporations, long-term survival and growth are likely
outcomes. The purpose of this chapter was to introduce the reader to the opportunities,
problems, and challenges involved in global marketing.
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Se
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an
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Analyzing
Marketing Problems
and Cases
Section
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206
The use of business cases was developed by faculty members of the Harvard Graduate
School of Business Administration in the 1920s. Case studies have been widely accepted as
one effective way of exposing students to strategic marketing processes.
Basically, cases represent detailed descriptions or reports of business situations. They
are often written by a trained observer who was actually involved in the firm or organiza-
tion and had some dealings with the problems under consideration. Cases generally entail
both qualitative and quantitative data that the student must analyze to determine appropri-
ate alternatives and solutions.
The primary purpose of the case method is to introduce a measure of realism into
marketing management education. Rather than emphasizing the teaching of concepts, the
case method focuses on application of concepts and sound logic to real-world business
problems. In this way, students learn to bridge the gap between abstraction and application
and to appreciate the value of both.
The primary purpose of this section is to offer a logical format for the analysis of case
problems. Although there is no one format that can be successfully applied to all cases, the
following framework is intended to be a logical sequence from which to develop sound
analyses. This framework is presented for analysis of comprehensive marketing cases;
however, the process should also be useful for shorter marketing cases, incidents, and problems.
A CASE ANALYSIS FRAMEWORK
A basic approach to case analysis involves a four-step process. First, the problem is
defined. Second, alternative courses of action are formulated to solve the problem. Third,
the alternatives are analyzed in terms of their strengths and weaknesses. And fourth, an
alternative is accepted and a course of action is recommended. This basic approach is quite
useful for students well versed in case analysis, particularly for shorter cases or incidents.
However, for the newcomer, this framework may be oversimplified. Thus, the following
1
MARKETING INSIGHT A Case for Case Analysis
Case studies help bridge the gap between classroom learning and the practice of marketing
management. They provide us with an opportunity to develop, sharpen, and test our
analytical skills at
• Assessing situations.
• Sorting out and organizing key information.
• Asking the right questions.
• Defining opportunities and problems.
• Identifying and evaluating alternative courses of action.
• Interpreting data.
• Evaluating the results of past strategies.
• Developing and defending new strategies.
• Interacting with other managers.
• Making decisions under conditions of uncertainty.
• Critically evaluating the work of others.
• Responding to criticism.
Source: David W. Cravens, Charles W. Lamb, Jr., and Victoria L. Crittenden, Strategic Marketing Management
Cases, 7th ed., (Burr Ridge, IL: McGraw-Hill/Irwin, 2002), p. 671.
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expanded framework and checklists are intended to aid students in becoming proficient in
case and problem analysis.
1. Analyze and Record the Current Situation
Whether the analysis of a firm’s problems is done by a manager, student, or paid business
consultant, the first step is to analyze the current situation. This does not mean writing up
a history of the firm but entails the type of analysis described below. This approach is
useful not only for getting a better grip on the situation but also for discovering both real
and potential problems—central concerns of any case analysis.
Phase 1: The Environment
The first phase in analyzing a marketing problem or case is to consider the environment in
which the firm is operating. The environment can be broken down into a number of different
components such as the economic, social, political, and legal areas. Any of these may contain
threats to a firm’s success or opportunities for improving a firm’s situation.
Phase 2: The Industry
The second phase involves analyzing the industry in which the firm operates. A framework
provided by Michael Porter includes five competitive forces that need to be considered to
do a complete industry analysis.1 The framework is shown in Figure 1 and includes rivalry
among existing competitors, threat of new entrants, and threat of substitute products. In
addition, in this framework, buyers and suppliers are included as competitors because they
can threaten the profitability of an industry or firm.
While rivalry among existing competitors is an issue in most cases, analysis and strategies
for dealing with the other forces can also be critical. This is particularly so when a firm is
considering entering a new industry and wants to forecast its potential success. Each of the
five competitive forces is discussed below.
Rivalry among Existing Competitors In most cases and business situations a firm needs
to consider the current competitors in its industry in order to develop successful strategies.
Strategies such as price competition, advertising battles, sales promotion offers, new product
Section II Analyzing Marketing Problems and Cases 207
FIGURE 1 Competitive Forces in an Industry
Rivalry among
existing
competitors
Threat of
new entrants
Bargaining
power of
buyers
Threat of
substitute
products
Bargaining
power of
suppliers
Source: Adapted from Michael E. Porter, “Industry Structure and Competitive Strategy: Keys to Profitability,” Financial Analysts Journal, July–August 1980, p. 33.
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introductions, and increased customer service are commonly used to attract customers from
competitors.
To fully analyze existing rivalry, it is important to determine which firms are the major
competitors and what are their annual sales, market share, growth profile, and strengths and
weaknesses. Also, it is useful to analyze their current and past marketing strategies to try to
forecast their likely reactions to a change in a competitive firm’s strategy. Finally, it is
important to consider any trends or changes in government regulation of an industry or
changes in technology that could affect the success of a firm’s strategy.
Threat of New Entrants It is always possible for firms in other industries to try to compete
in a new industry. New entrants are more likely in industries that have low entry barriers.
Entry barriers include such things as a need for large financial resources, high brand equity
for existing brands in an industry, or economies of scale obtained by existing firms in an
industry. Also, existing firms in an industry may benefit from experience curves; that is,
their cumulative experience in producing and marketing a product may reduce their per-unit
costs below those of inexperienced firms. In general, the higher the entry barriers, the less
likely outside firms are to enter an industry. For example, the entry barriers for starting up a
new car company are much higher than for starting up an online software company.
Threat of Substitute Products In a broad sense, all firms in an industry compete with
industries producing substitute products. For example, in cultures where bicycles are the
major means of transportation, bicycle manufacturers compete with substitute products
such as motor scooters and automobiles. Substitutes limit the potential return in an industry
by placing a ceiling on the prices a firm in the industry can profitably charge. The more
attractive the price–performance alternative offered by substitutes, the tighter the lid on
industry profits. For example, the price of candy, such as Raisinets chocolate-covered
raisins, may limit the price that can be charged for granola bars.
Bargaining Power of Suppliers Suppliers can be a competitive threat in an industry
because they can raise the price of raw materials or reduce their quality. Powerful suppliers
can reduce the profitability of an industry or firm if companies cannot raise their prices to
cover price increases by suppliers. Also, suppliers may be a threat because they may forward
integrate into an industry by purchasing a firm that they supply or other firms in the industry.
Bargaining Power of Buyers Buyers can compete with an industry by forcing prices
down, bargaining for higher quality or more services, and playing competitors off against
each other. All these tactics can lower the profitability of a firm or industry. For example,
because Walmart sells such a large percentage of many companies’ products, it can
negotiate for lower prices than smaller retailers can. Also, buyers may be a threat because
they may backward integrate into an industry by purchasing firms that supply them or other
firms in the industry.
Phase 3: The Organization
The third phase involves analysis of the organization itself not only in comparison with the
industry and industry averages but also internally in terms of both quantitative and qualitative
data. Key areas of concern at this stage are such factors as objectives, constraints, management
philosophy, financial condition, and the organizational structure and culture of the firm.
Phase 4: The Marketing Strategy
Although there may be internal personnel or structural problems in the marketing department
that need examination, typically an analysis of the current marketing strategy is the
next phase. In this phase, the objectives of the marketing department are analyzed in
comparison with those of the firm in terms of agreement, soundness, and attainability. Each
element of the marketing mix as well as other areas, such as marketing research and
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MARKETING INSIGHT What Does Case “Analysis” Mean?
2
209
information systems, is analyzed in terms of whether it is internally consistent, synchronized
with the goals of the department and firm, and focused on specific target markets. Although
cases often are labeled in terms of their primary emphasis, such as “pricing” or “advertising,”
it is important to analyze the marketing strategy and entire marketing mix, since a change in
one element will usually affect the entire marketing program.
In performing the analysis of the current situation, the data should be analyzed carefully
to extract the relevant from the superfluous. Many cases contain information that is not
relevant to the problem; it is the analyst’s job to discard this information to get a clearer
picture of the current situation. As the analysis proceeds, a watchful eye must be kept on
each phase to determine (1) symptoms of problems, (2) current problems, and (3) potential
problems. Symptoms of problems are indicators of a problem but are not problems in and
of themselves. For example, a symptom of a problem may be a decline in sales in a particular
sales territory. However, the problem is the root cause of the decline in sales—perhaps the
field representative quit making sales calls and is relying on phone orders only.
A common criticism of prepared cases goes something like this: “You repeated an awful lot
of case material, but you really didn’t analyze the case.” Yet, at the same time, it is difficult
to verbalize exactly what analysis means—that is, “I can’t explain exactly what it is, but I
know it when I see it!”
This is a common problem since the term analysis has many definitions and means
different things in different contexts. In terms of case analysis, one thing that is clear is that
analysis means going beyond simply describing the case information. It includes determining
the implications of the case information for developing strategy. This determination may
involve careful financial analysis of sales and profit data or thoughtful interpretation of the
text of the case.
One way of thinking about analysis involves a series of three steps: synthesis, generalizations,
and implications. A brief example of this process follows.
The high growth rate of frozen pizza sales has attracted a number of large food proces-
sors, including Pillsbury (Totino’s), Quaker Oats (Celeste), American Home Products (Chef
Boy-ar-dee), Nestlé (Stouffer’s), General Mills (Saluto), and H. J.
Heinz (La Pizzeria). The major independents are Jeno’s, Tony’s,
and John’s. Jeno’s and Totino’s are the market leaders, with mar-
ket shares of about 19 percent each. Celeste and Tony’s have
about 8 to 9 percent each, and the others have about 5 percent
or less.
The frozen pizza market is a highly competitive and highly
fragmented market.
In markets such as this, attempts to gain market share through
lower consumer prices or heavy advertising are likely to be quickly
copied by competitors and thus tend not to be very effective.
Lowering consumer prices and spending more on advertising
are likely to be poor strategies. Perhaps increasing freezer space in
retail outlets could be effective (this might be obtained through
trade discounts). A superior product, for example, better-tasting
pizza, microwave pizza, or increasing geographic coverage of the
market, may be better strategies for obtaining market share.
Note that none of the three analysis steps includes any
repetition of the case material. Rather, they all involve abstracting
a meaning of the information and, by pairing it with marketing
principles, coming up with the strategic implications of the
information.
Case Material
Synthesis
Generalizations
Implications
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The following is a checklist of the types of questions that should be asked when
performing the analysis of the current situation.
Checklist for Analyzing the Current Situation
Phase 1: The Environment
1. What is the state of the economy and are there any trends that could affect the industry,
firm, or marketing strategy?
2. What are current trends in cultural and social values and how do these affect the industry,
firm, or marketing strategy?
3. What are current political values and trends and how do they affect the industry, firm, or
marketing strategy?
4. Is there any current or pending federal, state, or local legislation that could change the
industry, firm, or marketing strategy?
5. Overall, are there any threats or opportunities in the environment that could influence
the industry, firm, or marketing strategy?
Phase 2: The Industry
1. What industry is the firm in?
2. Which firms are the major competitors in the industry and what are their annual sales,
market share, and growth profile?
3. What strategies have competitors in the industry been using and what has been their
success with them?
4. What are the relative strengths and weaknesses of competitors in the industry?
5. Is there a threat of new competitors coming into the industry and what are the major
entry barriers?
6. Are there any substitute products for the industry and what are their advantages and
disadvantages compared to this industry’s products?
7. How much bargaining power do suppliers have in this industry and what is its impact on
the firm and industry profits?
8. How much bargaining power do buyers have in this industry and what is its impact on
the firm and industry profits?
Phase 3: The Organization
1. What are the objectives of the organization? Are they clearly stated? Attainable?
2. What are the strengths of the organization? Managerial expertise? Financial? Copyrights
or patents?
3. What are the constraints and weaknesses of the organization?
4. Are there any real or potential sources of dysfunctional conflict in the structure of the
organization?
5. How is the marketing department structured in the organization?
Phase 4: The Marketing Strategy
1. What are the objectives of the marketing strategy? Are they clearly stated? Are they
consistent with the objectives of the firm? Is the entire marketing mix structured to meet
these objectives?
2. What marketing concepts are at issue in the current strategy? Is the marketing strategy
well planned and laid out? Is the strategy consistent with sound marketing principles? If
the strategy takes exception to marketing principles, is there a good reason for it?
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3. To what target market is the strategy directed? Is it well defined? Is the market large
enough to be profitably served? Does the market have long-run potential?
4. What competitive advantage does the marketing strategy offer? If none, what can be
done to gain a competitive advantage in the marketplace?
5. What products are being sold? What are the width, depth, and consistency of the firm’s
product lines? Does the firm need new products to fill out its product line? Should any
product be deleted? What is the profitability of the various products?
6. What promotion mix is being used? Is promotion consistent with the products and product
images? What could be done to improve the promotion mix?
7. What channels of distribution are being used? Do they deliver the product at the right
time and right place to meet customer needs? Are the channels typical of those used in
the industry? Could channels be made more efficient?
8. What pricing strategies are being used? How do prices compare with similar products of
other firms? How are prices determined?
9. Are marketing research and information systematically integrated into the marketing
strategy? Is the overall marketing strategy internally consistent?
The relevant information from this preliminary analysis is now formalized and recorded.
At this point the analyst must be mindful of the difference between facts and opinions.
Facts are objective statements, such as financial data, whereas opinions are subjective
interpretations of facts or situations. The analyst must make certain not to place too much
emphasis on opinions and to carefully consider any variables that may bias such opinions.
Regardless of how much information is contained in the case or how much additional
information is collected, the analyst usually finds that it is impossible to specify a complete
framework for the current situation. At this point, assumptions must be made. Clearly, since
each analyst may make different assumptions, it is critical that assumptions be explicitly stated.
When presenting a case, the analyst may wish to distribute copies of the assumption list to all
class members. This avoids confusion about how the analyst perceives the current situation,
and others can evaluate the reasonableness and necessity of the assumptions.
2. Analyze and Record Problems and Their Core Elements
After careful analysis, problems and their core elements should be explicitly stated and
listed in order of importance. Finding and recording problems and their core elements can
be difficult. It is not uncommon when reading a case for the first time for the student to
view the case as a description of a situation in which there are no problems. However, careful
analysis should reveal symptoms, which lead to problem recognition.
Recognizing and recording problems and their core elements is most critical for a
meaningful case analysis. Obviously, if the root problems are not explicitly stated and
understood, the remainder of the case analysis has little merit because the true issues are
not being dealt with. The following checklist of questions is designed to assist in
performing this step of the analysis.
Checklist for Analyzing Problems and Their Core Elements
1. What is the primary problem in the case? What are the secondary problems?
2. What proof exists that these are the central issues? How much of this proof is based on
facts? On opinions? On assumptions?
3. What symptoms are there that suggest these are the real problems in the case?
4. How are the problems, as defined, related? Are they independent or are they the result
of a deeper problem?
5. What are the ramifications of these problems in the short run? In the long run?
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MARKETING INSIGHT Mistakes that Marketers Make
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3. Formulate, Evaluate, and Record
Alternative Courses of Action
This step is concerned with the question of what can be done to resolve the problem
defined in the previous step. Generally, a number of alternative courses of action are available
that could potentially help alleviate the problem condition. Three to seven are usually a
reasonable number of alternatives to work with. Another approach is to brainstorm as many
alternatives as possible initially and then reduce the list to a workable number.
Sound logic and reasoning are very important in this step. It is critical to avoid alternatives
that could potentially alleviate the problem, but would create a greater new problem or require
greater resources than the firm has at its disposal.
After serious analysis and listing of a number of alternatives, the next task is to
evaluate them in terms of their costs and benef its. Costs are any output or effort the
f irm must exert to implement the alternative. Benef its are any input or value received
by the f irm. Costs to be considered are time, money, other resources, and opportunity
costs; benef its are such things as sales, prof its, brand equity, and customer satisfaction.
The following checklist provides a guideline of questions to be used when performing
this phase of the analysis.
Checklist for Formulating and Evaluating Alternative Courses of Action
1. What possible alternatives exist for solving the firm’s problems?
2. What limits are there on the possible alternatives? Competence? Resources? Management
preference? Ethical responsibility? Legal restrictions?
It is possible that a case could describe a company that is doing everything right and there
are no serious problems in it. However, most of the time, analysis of a case will reveal one
or more important shortcomings in the organization’s marketing strategy. Below is a sam-
ple list of mistakes that marketers make that could be in a case.
1. The organization failed to offer products that customers want either because it did no
research, did poor research, failed to interpret the research appropriately, or failed to re-
act to it appropriately.
2. The organization underestimated the ability of competitors to gain market share and
failed to react appropriately to successful competitive strategies.
3. The organization failed to react appropriately to changes in other aspects of the envi-
ronment such as social, political, or legal changes.
4. The organization failed to keep up with or underestimated the impact of competitors’
innovations in production and product development.
5. The organization did not position its products on dimensions that customers care
about.
6. The organization overestimated the likely success of new products because of faulty
sales forecasts or wishful thinking.
7. The organization expanded too rapidly into new markets or offered its products in too
many outlets in existing markets.
8. The organization failed to raise prices when warranted or raised prices too much or too
frequently.
9. The organization offered an inconsistent marketing mix that failed to provide a clear
image of the product in the minds of customers.
10. The organization relied on promotion to sell an inferior product.
11. The organization failed to use the best channels to reach customers.
12. The organization underestimated the cost of competing effectively in an industry.
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3. What major alternatives are now available to the firm? What marketing concepts are
involved that affect these alternatives?
4. Are the listed alternatives reasonable, given the firm’s situation? Are they logical? Are
the alternatives consistent with the goals of the marketing program? Are they consistent
with the firm’s objectives?
5. What are the financial and other costs of each alternative? What are the benefits? What
are the advantages and disadvantages of each alternative?
6. Which alternative best solves the problem and minimizes the creation of new problems,
given the above constraints?
4. Select and Record the Chosen Alternative
and Implementation Details
In light of the previous analysis, the alternative is now selected that best solves the problem
with a minimum creation of new problems. It is important to record the logic and
reasoning that precipitated the selection of a particular alternative. This includes articulating
not only why the alternative was selected but also why the other alternatives were not
selected.
No analysis is complete without an action-oriented decision and plan for implementing
the decision. The accompanying checklist indicates the type of questions that should be
answered in this stage of analysis.
Checklist for Selecting and Implementing the Chosen Alternative
1. What must be done to implement the alternative?
2. What personnel will be involved? What are the responsibilities of each?
3. When and where will the alternative be implemented?
4. What will be the probable outcome?
5. How will the success or failure of the alternative be measured?
PITFALLS TO AVOID IN CASE ANALYSIS
Following is a summary of some of the most common errors analysts make when analyzing
cases. When evaluating your analysis or those of others, this list provides a useful guide for
spotting potential shortcomings.
1. Inadequate definition of the problem. By far the most common error made in case
analysis is attempting to recommend courses of action without first adequately defining or
understanding the core problems. Whether presented orally or in a written report, a case analysis
must begin with a focus on the central issues and problems represented in the case situation.
Closely related is the error of analyzing symptoms without determining the root problem.
2. The search for “the answer.” In case analysis, there are usually no clear-cut solutions.
Keep in mind that the objective of case studies is learning through discussion and exploration.
There is usually no one “official” or “correct” answer to a case. Rather, there are usually
several reasonable alternative solutions.
3. Not enough information. Analysts often complain there is not enough information in
some cases to make a good decision. However, there is justification for not presenting all of
the information in a case. As in real life, a marketing manager or consultant seldom has all the
information necessary to make an optimal decision. Thus, reasonable assumptions have to be
made, and the challenge is to find intelligent solutions in spite of the limited information.
Section II Analyzing Marketing Problems and Cases 213
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214
MARKETING INSIGHT Understanding the Current Situation
through SWOT Analysis 4
A useful approach to gaining an understanding of the situation an organization is facing at
a particular time is called SWOT analysis. SWOT stands for the organization’s strengths and
weaknesses and the opportunities and threats it faces in the environment. Below are some is-
sues an analyst should address in performing a SWOT analysis.
POTENTIAL RESOURCE STRENGTHS AND COMPETITIVE CAPABILITIES
• A powerful strategy.
• Core competencies in .
• A distinctive competence in .
• A product that is strongly differentiated from those of rivals.
• Competencies and capabilities that are well matched to industry key success factors.
• A strong financial condition; ample financial resources to grow the business.
• Strong brand-name image/company reputation.
• An attractive customer base.
• Economy of scale and/or learning and experience curve advantages over rivals.
• Proprietary technology/superior technological skills/important patents.
• Superior intellectual capital relative to key rivals.
• Cost advantages over rivals.
• Strong advertising and promotion.
• Product innovation capabilities.
• Proven capabilities in improving production processes.
• Good supply chain management capabilities.
• Good customer service capabilities.
• Better product quality relative to rivals.
• Wide geographic coverage and/or strong global distribution capability.
• Alliances/joint ventures with other firms that provide access to valuable technology,
competencies, and/or attractive geographic markets.
POTENTIAL RESOURCE WEAKNESSES AND COMPETITIVE DEFICIENCIES
• No clear strategic direction.
• Resources that are not well matched to industry key success factors.
• No well-developed or proven core competencies.
• A weak balance sheet; too much debt.
• Higher overall unit costs relative to key competitors.
• Weak or unproven product innovation capabilities.
• A product/service with ho-hum attributes or features inferior to those of rivals.
• Too narrow a product line relative to rivals.
• Weak brand image or reputation.
• Weaker dealer network than key rivals and/or lack of adequate global distribution capability.
4. Use of generalities. In analyzing cases, specific recommendations are necessarily not
generalities. For example, a suggestion to increase the price is a generality; a suggestion to
increase the price by $1.07 is a specific.
5. A different situation. Analysts sometimes exert considerable time and effort contend-
ing that “If the situation were different, I’d know what course of action to take” or “If the
marketing manager hadn’t already fouled things up so badly, the firm wouldn’t have a
problem.” Such reasoning ignores the fact that the events in the case have already happened
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215
MARKETING INSIGHT Understanding the Current Situation
through SWOT Analysis (continued) 4
• Behind on product quality, R&D, and/or technological know-how.
• In the wrong strategic group.
• Losing market share because .
• Lack of management depth.
• Inferior intellectual capital relative to leading rivals.
• Subpar profitability because .
• Plagued with internal operating problems or obsolete facilities.
• Behind rivals in e-commerce capabilities.
• Short on financial resources to grow the business and pursue promising initiatives.
• Too much underutilized plant capacity.
POTENTIAL MARKET OPPORTUNITIES
• Openings to win market share from rivals.
• Sharply rising buyer demand for the industry’s product.
• Serving additional customer groups or market segments.
• Expanding into new geographic markets.
• Expanding the company’s product line to meet a broader range of customer needs.
• Utilizing existing company skills or technological know-how to enter new product lines
or new businesses.
• Online sales.
• Integrating forward or backward.
• Falling trade barriers in attractive foreign markets.
• Acquiring rival firms or companies with attractive technological expertise or capabilities.
• Entering into alliances or joint ventures that can expand the firm’s market coverage or
boost its competitive capability.
• Openings to exploit emerging new technologies.
POTENTIAL EXTERNAL THREATS TO A COMPANY’S WELL-BEING
• Increasing intensity of competition among industry rivals—may squeeze profit margins.
• Slowdowns in market growth.
• Likely entry of potent new competitors.
• Loss of sales to substitute products.
• Growing bargaining power of customers or suppliers.
• A shift in buyer needs and tastes away from the industry’s product.
• Adverse demographic changes that threaten to curtail demand for the industry’s product.
• Vulnerability to industry driving forces.
• Restrictive trade policies on the part of foreign governments.
• Costly new regulatory requirements.
Source: Arthur A. Thompson, Jr., A. J. Strickland III, and John E. Gamble, Crafting and Executing Strategy,
16th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2008), p. 105.
and cannot be changed. Even though analysis or criticism of past events is necessary in
diagnosing the problem, in the end, the present situation must be addressed and decisions
must be made based on the given situations.
6. Narrow vision analysis. Although cases are often labeled as a specific type of case,
such as “pricing,” “product,” and so forth, this does not mean that other marketing variables
should be ignored. Too often analysts ignore the effects that a change in one marketing
element will have on the others.
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7. Realism. Too often analysts become so focused on solving a particular problem that
their solutions become totally unrealistic. For instance, suggesting a $1 million advertising
program for a firm with a capital structure of $50,000 is an unrealistic solution.
8. The marketing research solution. A quite common but unsatisfactory solution to case
problems is marketing research; for example, “The firm should do this or that type of
marketing research to find a solution to its problem.” Although marketing research may be
helpful as an intermediary step in some cases, marketing research does not solve problems
or make decisions. In cases where marketing research is recommended, the cost and potential
benefits should be fully specified in the case analysis.
9. Rehashing the case material. Analysts sometimes spend considerable effort rewriting
a two- or three-page history of the firm as presented in the case. This is unnecessary since
the instructor and other analysts are already familiar with this information.
10. Premature conclusions. Analysts sometimes jump to premature conclusions instead
of waiting until their analysis is completed. Too many analysts jump to conclusions upon
first reading the case and then proceed to interpret everything in the case as justifying their
conclusions, even factors logically against it.
COMMUNICATING CASE ANALYSES
The final concern in case analysis deals with communicating the results of the analysis. The
most comprehensive analysis has little value if it is not communicated effectively. Case analy-
ses are communicated through two primary media—the written report and the oral presentation.
The Written Report
Since the structure of the written report will vary by the type of case analyzed, the purpose
of this section is not to present a “one and only” way of writing up a case; it is to present
some useful generalizations to aid analysts in case write-ups.
A good written report starts with an outline that organizes the structure of the analysis
in a logical manner. The following is a general outline for a marketing case report.
I. Title Page
II. Table of Contents
III. Executive Summary (one- to two-page summary of the analysis and recommendations)
IV. Situation Analysis
A. Environment
1. Economic conditions and trends
2. Cultural and social values and trends
3. Political and legal issues
4. Summary of environmental opportunities and threats
5. Implications for strategy development
B. Industry
1. Classification and definition of industry
2. Analysis of existing competitors
3. Analysis of potential new entrants
4. Analysis of substitute products
5. Analysis of suppliers
6. Analysis of buyers
7. Summary of industry opportunities and threats
8. Implications for strategy development
C. Organization
1. Objectives and constraints
2. Financial condition
216 Section II Analyzing Marketing Problems and Cases
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MARKETING INSIGHT An Operational Approach to Case
and Problem Analysis 5
3. Management philosophy
4. Organizational structure
5. Organizational culture
6. Summary of the firm’s strengths and weaknesses
7. Implications for strategy development
D. Marketing strategy
1. Objectives and constraints
2. Analysis of sales, profits, and market share
3. Analysis of target market(s)
4. Analysis of marketing mix variables
5. Summary of marketing strategy’s strengths and weaknesses
6. Implications for strategy development
V. Problems Found in Situation Analysis
A. Statement of primary problem(s)
1. Evidence of problem(s)
2. Effects of problem(s)
B. Statement of secondary problem(s)
1. Evidence of problem(s)
2. Effects of problem(s)
VI. Strategic Alternatives for Solving Problems
A. Description of strategic alternative 1
1. Benefits of alternative 1
2. Costs of alternative 1
217
1. Read the case quickly to get an overview of the situation.
2. Read the case again thoroughly. Underline relevant information and take notes on
potential areas of concern.
3. Review outside sources of information on the environment and the industry. Record
relevant information and the source of this information.
4. Perform comparative analysis of the firm with the industry and industry averages.
5. Analyze the firm.
6. Analyze the marketing program.
7. Record the current situation in terms of relevant environmental, industry, firm, and
marketing strategy parameters.
8. Make and record necessary assumptions to complete the situational framework.
9. Determine and record the major issues, problems, and their core elements.
10. Record proof that these are the major issues.
11. Record potential courses of action.
12. Evaluate each initially to determine constraints that preclude acceptability.
13. Evaluate remaining alternatives in terms of costs and benefits.
14. Record analysis of alternatives.
15. Select an alternative.
16. Record alternative and defense of its selection.
17. Record the who, what, when, where, how, and why of the alternative and its imple-
mentation.
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B. Description of strategic alternative 2
1. Benefits of alternative 2
2. Costs of alternative 2
C. Description of strategic alternative 3
1. Benefits of alternative 3
2. Costs of alternative 3
VII. Selection of Strategic Alternative and Implementation
A. Statement of selected strategy
B. Justification for selection of strategy
C. Description of implementation of strategy
VIII. Summary
IX. Appendices
A. Financial analysis
B. Technical analysis
Writing the case report entails filling out the details of the outline in prose form. Of
course, not every case report requires all the headings listed above, and different headings
may be required for some cases. Like any other skill, it takes practice to determine the
appropriate headings and approach for writing particular cases. However, good case reports
flow logically from topic to topic, are clearly written, are based on solid situation analysis,
and demonstrate sound strategic thinking.
The Oral Presentation
Case analyses are often presented by an individual or team. As with the written report, a
good outline is critical, and it is often useful to hand out the outline to each class member.
Although there is no best way to present a case or to divide responsibility between team
members, simply reading the written report is unacceptable because it encourages boredom
and interferes with all-important class discussion.
The use of visual aids can be quite helpful in presenting class analyses. However, simply
presenting financial statements contained in the case is a poor use of visual media. On
the other hand, graphs of sales and profit curves can be more easily interpreted and can be
quite useful for making specific points.
Oral presentation of cases is particularly helpful to analysts for learning the skill of
speaking to a group. In particular, the ability to handle objections and disagreements with-
out antagonizing others is a skill worth developing.
CONCLUSION
From the discussion it should be obvious that good case analyses require a major commitment
of time and effort. Individuals must be highly motivated and willing to get involved in the
analysis and discussion if they expect to learn and succeed in a course where cases are used.
Persons with only passive interest who perform “night before” analyses cheat themselves out
of valuable learning experiences that can aid them in their careers.
218 Section II Analyzing Marketing Problems and Cases
Additional
Resources
Aaker, David A. Strategic Market Management. 8th ed. Hoboken, NJ: Wiley, 2008.
Cravens, David W; Charles W. Lamb, Jr.; and Victoria L. Crittenden. Strategic Marketing Management
Cases. 7th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2002, Appendix B.
Ellet, William. The Case Study Handbook. Boston: Harvard Business School Press, 2007.
Kevin, Roger A., and Robert A. Peterson. Strategic Marketing Problems. 11th ed. Upper Saddle
River, NJ: Prentice Hall, 2007.
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Se
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III
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Financial Analysis
for Marketing Decisions
Section
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220 Section III Financial Analysis for Marketing Decisions
FINANCIAL ANALYSIS
Financial analysis is an important aspect of strategic marketing planning and should be an
integral part of marketing problem and case analysis. In this section, we present several
financial tools that are useful for analyzing marketing problems and cases. First, we
investigate break-even analysis, which is concerned with determining the number of units
or dollar sales, or both, necessary to break even on a project or to obtain a given level of
profits. Second, we illustrate net present value analysis, which is a somewhat more
sophisticated tool for analyzing marketing alternatives. Finally, we investigate ratio analysis,
which can be a useful tool for determining the financial condition of the firm, including its
ability to invest in a new or modified marketing program.
Break-Even Analysis
Break-even analysis is a common tool for investigating the potential profitability of a
marketing alternative. The break-even point is that level of sales in either units or sales
dollars at which a firm covers all of its costs. In other words, it is the level at which total
sales revenue just equals the total costs necessary to achieve these sales.
To compute the break-even point, an analyst must have or be able to obtain three values.
First, the analyst needs to know the selling price per unit of the product (SP). For example,
suppose the Ajax Company plans to sell its new electric car through its own dealerships at
a retail price of $5,000. Second, the analyst needs to know the level of fixed costs (FC ).
Fixed costs are all costs relevant to the project that do not change regardless of how many
units are produced or sold. For instance, whether Ajax produces and sells 1 or 100,000 cars,
Ajax executives will receive their salaries, land must be purchased for a plant, a plant must
be constructed, and machinery must be purchased. Other fixed costs include such things as
interest, lease payments, and sinking fund payments. Suppose Ajax has totaled all of its
fixed costs and the sum is $1.5 million. Third, the analyst must know the variable costs per
unit produced (VC). As the name implies, variable costs are those that vary directly with the
number of units produced. For example, each car Ajax produces involves costs for raw
materials and components to build the car, such as batteries, electric motors, steel bodies,
and tires; labor costs for operating employees; and machine costs, such as electricity and
welding rods. Suppose Ajax totals these costs and the variable costs for each car produced
equal $3,500. With this information, the analyst can now determine the break-even point,
which is the number of units that must be sold to just cover the cost of producing the cars.
The break-even point is determined by dividing total fixed costs by the contribution margin.
The contribution margin is simply the difference between the selling price per unit (SP) and
variable costs per unit (VC ). Algebraically,
BEP(in units) !
!
Substituting the Ajax estimates,
BEP(in units) !
!
! 1,000 units
1,500,000
“”
1,500
1,500,000
“”
5,000 # 3,500
FC
“”
SP # VC
Total fixed costs
“””
Contribution margin
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Section III Financial Analysis for Marketing Decisions 221
In other words, the Ajax Company must sell 1,000 cars to just break even (i.e., for total
sales revenue to cover total costs).
Alternatively, the analyst may want to know the break-even point in terms of dollar
sales volume. Of course, if the preceding analysis has been done, one could simply multiply
the BEP(in units) times the selling price to determine the break-even sales volume (i.e., 1,000
units $ $5,000%unit ! $5 million). However, the BEP(in dollars) can be computed directly,
using the formula below:
BEP(in dollars) !
!
!
! $5,000,000
Thus, Ajax must produce and sell 1,000 cars, which equals $5 million sales, to break
even. Of course, firms do not want to just break even but want to make a profit. The logic
of break-even analysis can easily be extended to include profits (P). Suppose Ajax decided
that a 20 percent return on fixed costs would make the project worth the investment. Thus,
Ajax would need 20% $ $1,500,000 ! $300,000 before-tax profit. To calculate how
many units Ajax must sell to achieve this level of profits, the profit figure (P) is added to
fixed costs in the above formulas. (We will label the break-even point as BEP& to show
that we are now computing unit and sales levels to obtain a given profit level.) In the
Ajax example:
BEP&(in units) ! “S
F
P
C
#
‘
V
P
C
”
!
!
! 1,200 units
In terms of dollars,
BEP&(in dollars) !
!
! ”
1,
1
80
#
0,0
.7
00
”
! $6,000,000
1,500,000 ‘ 300,000
“””
1 # ”
3
5
,
,
5
0
0
0
0
0
”
FC ‘ P
”
1 # ”
V
SP
C
”
1,800,000
“”
1,500
1,500,000 ‘ 300,000
“””
5,000 # 3,500
1,500,000
“”
1 # .7
1,500,000
“”
1 # ”
3
5
,
,
5
0
0
0
0
0
”
FC
”
1 # ”
V
SP
C
”
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Thus, Ajax must produce and sell 1,200 cars (sales volume of $6 million) to obtain a 20 percent
return on fixed costs. Analysis must now be directed at determining whether a given marketing
plan can be expected to produce sales of at least this level. If the answer is yes, the project
would appear to be worth investing in. If not, Ajax should seek other opportunities.
Net Present Value Analysis
The profit-oriented marketing manager must understand that the capital invested in new
products has a cost. It is a basic principle in business that whoever wishes to use capital must
pay for its use. Dollars invested in new products could be diverted to other uses—to pay off
debts, pay dividends to stockholders, or buy U.S. Treasury bonds that would yield economic
benefits to the corporation. If, on the other hand, all of the dollars used to finance a new product
have to be borrowed from lenders outside the corporation, interest has to be paid on the loan.
One of the best ways to analyze the financial aspects of a marketing alternative is net
present value analysis. This method employs a discounted cash flow, which takes into ac-
count the time value of money and its price to the borrower. The following example will
illustrate this method.
To compute the net present value of an investment proposal, the cost of capital must be
estimated. The cost of capital can be defined as the required rate of return on an investment
that would leave the owners of the firm as well off as if the project was not undertaken.
Thus, it is the minimum percentage return on investment that a project must make to be
worth undertaking. There are many methods of estimating the cost of capital. However,
because these methods are not the concern of this text, we will simply assume that the cost
of capital for the Ajax Corporation has been determined to be 10 percent.1 Again, it should
be noted that once the cost of capital is determined, it becomes the minimum rate of return
required for an investment—a type of cutoff point. However, some firms in selecting their
new product investments select a minimum rate of return that is above the cost of capital
figure to allow for errors in judgment or measurement.
The Ajax Corporation is considering a proposal to market instant-developing movie
film. After conducting considerable marketing research, sales were projected to be $1 million
per year. In addition, the finance department compiled the following information concerning
the projects:
222 Section III Financial Analysis for Marketing Decisions
To compute the net present value of this project, the net cash flow for each year of the
project must first be determined. This can be done in four steps:
1. Sales # Cost of goods and expenses ! Gross income or
$1,000,000 # 700,000 ! $300,000
2. Gross income # Depreciation ! Taxable income or
$300,000 # (10% $ 600,000) ! $240,000
New equipment needed $700,000
Useful life of equipment 10 years
Depreciation 10% per year
Salvage value $100,000
Cost of goods and expenses $700,000 per year
Cost of capital 10%
Tax rate 50%
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Section III Financial Analysis for Marketing Decisions 223
3. Taxable income # Tax ! Net income or
$240,000 # (50% $ 240,000) ! $120,000
4. Net income ‘ Depreciation ! Net cash flow or
$120,000 ‘ 60,000 ! $180,000 per year
Because the cost of capital is 10 percent, this figure is used to discount the net cash flows
for each year. To illustrate, the $180,000 received at the end of the first year would be
discounted by the factor 1!(1 ‘ 0.10), which would be 180,000 $ 0.9091 ! $163,638; the
$180,000 received at the end of the second year would be discounted by the factor
1!(1 ‘ 0.10)2, which would be 180,000 $ 0.8264 ! $148,752, and so on. (Most finance
textbooks have present value tables that can be used to simplify the computations.) The
table that follows shows the present value computations for the 10-year project. It should
be noted that the net cash flow for year 10 is $280,000 because there is an additional
$100,000 inflow from salvage value.
Thus, at a discount rate of 10 percent, the present value of the net cash flow from new
product investment is greater than the $700,000 outlay required, and so the decision can be
considered profitable by this standard. Here the net present value is $444,560, which is the
difference between the $700,000 investment outlay and the $1,144,560 discounted cash
flow. The present value ratio is nothing more than the present value of the net cash flow
divided by the cash investment. If this ratio is 1 or larger than 1, the project would be
profitable for the firm to invest in.
There are many other measures of investment worth, but only one additional method
will be discussed. It is the very popular and easily understood payback method. Payback
refers to the amount of time required to pay back the original outlay from the cash flows.
Staying with the example, the project is expected to produce a stream of cash proceeds that
is constant from year to year, so the payback period can be determined by dividing the
investment outlay by this annual cash flow. Dividing $700,000 by $180,000, the payback
period is approximately 3.9 years. Firms often set a maximum payback period before a
project will be accepted. For example, many firms refuse to take on a project if the payback
period exceeds three years.
This example should illustrate the difficulty in evaluating marketing investments from a
profitability or economic worth standpoint. The most challenging problem is that of
developing accurate cash flow estimates because there are many possible alternatives, such as
price of the product and channels of distribution, and the consequences of each alternative
Year Net Cash Flow 0.10 Discount Factor Present Value
1 $ 180,000 0.9091 $ 163,638
2 180,000 0.8264 148,752
3 180,000 0.7513 135,234
4 180,000 0.6830 122,940
5 180,000 0.6209 111,762
6 180,000 0.5645 101,610
7 180,000 0.5132 92,376
8 180,000 0.4665 83,970
9 180,000 0.4241 76,338
10 280,000 0.3855 107,940
Total $1,900,000 $1,144,560
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MARKETING INSIGHT Selected Present Value Discount Factors
1
224
must be forecast in terms of sales volumes, selling costs, and other expenses. In spite of all
the problems, management must evaluate the economic worth of new product and other
decisions, not only to reduce some of the guesswork and ambiguity surrounding marketing
strategy development but also to reinforce the objective of making profits.
Ratio Analysis
Firms’ income statements and balance sheets provide a wealth of information that is
useful for developing marketing strategies. Frequently, this information is included in
marketing cases, yet analysts often have no convenient way of interpreting the financial
position of the firm to make sound marketing decisions. Ratio analysis provides the
analyst an easy and efficient method for investigating a firm’s financial position by
comparing the firm’s ratios across time or with ratios of similar firms in the industry or
with industry averages.
Ratio analysis involves four basic steps:
1. Choose the appropriate ratios.
2. Compute the ratios.
3. Compare the ratios.
4. Check for problems or opportunities.
1. Choose the Appropriate Ratios
The five basic types of financial ratios are (1) liquidity ratios, (2) asset management
ratios, (3) profitability ratios, (4) debt management ratios, and (5) market value ratios.2
While calculating ratios of all five types is useful, liquidity, asset management, and
profitability ratios provide information that is most directly relevant for marketing
decision making. Although many ratios can be calculated in each of these groups, we have
selected two of the most commonly used and readily available ratios in each group to
illustrate the process.
Liquidity Ratios One of the first considerations in analyzing a marketing problem is the
liquidity of the firm. Liquidity refers to the ability of the firm to pay its short-term
obligations. If a firm cannot meet its short-term obligations, there is little that can be done
until this problem is resolved. Simply stated, recommendations to increase advertising, to
do marketing research, or to develop new products are of little value if the firm is about to
go bankrupt.
Years 4% 6% 8% 10% 12% 14%
1 .9615 .9434 .9259 .9091 .8929 .8772
2 .9246 .8900 .8573 .8264 .7972 .7695
3 .8890 .8396 .7938 .7513 .7118 .6750
4 .8548 .7941 .7350 .6830 .6355 .5921
5 .8219 .7473 .6806 .6209 .5674 .5194
6 .7903 .7050 .6302 .5645 .5066 .4556
7 .7599 .6651 .5835 .5132 .4523 .3996
8 .7307 .6274 .5403 .4665 .4039 .3506
9 .7026 .5919 .5002 .4241 .3606 .3075
10 .6756 .5584 .4632 .3855 .3220 .2697
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MARKETING INSIGHT Financial Ratios: Where to Find Them
2
225
The two most commonly used ratios for investigating liquidity are the current ratio and
the quick ratio (or “acid test”). The current ratio is determined by dividing current assets by
current liabilities and is a measure of the overall ability of the firm to meet its current
obligations. A common rule of thumb is that current ratio should be about 2:1.
The quick ratio is determined by subtracting inventory from current assets and dividing
the remainder by current liabilities. Since inventory is the least liquid current asset, the quick
ratio deals with assets that are most readily available for meeting short-term (one-year)
obligations. A common rule of thumb is that the quick ratio should be at least 1:1.
Asset Management Ratios Asset management ratios investigate how well the firm
handles its assets. For marketing problems, two of the most useful asset management ratios
are concerned with inventory turnover and total asset utilization. The inventory turnover
ratio is determined by dividing sales by inventories.3 If the firm is not turning its inventory
over as rapidly as other firms, it suggests that too much money is being tied up in
unproductive or obsolete inventory. In addition, if the firm’s turnover ratio is decreasing
over time, it suggests that there may be a problem in the marketing plan, because inventory
is not being sold as rapidly as it had been in the past. One problem with this ratio is that,
since sales usually are recorded at market prices and inventory usually is recorded at cost,
the ratio may overstate turnover. Thus, some analysts prefer to use cost of sales rather than
sales in computing turnover. We will use cost of sales in our analysis.
A second useful asset management ratio is total asset utilization. It is calculated by
dividing sales by total assets and is a measure of how productively the firm’s assets have been
used to generate sales. If this ratio is well below industry figures, it suggests that the firm’s
marketing strategies are less effective than those of competitors or that some unproductive
assets need to be eliminated.
Profitability Ratios Profitability is a major goal of marketing and is an important measure
of the quality of a firm’s marketing strategies. Two key profitability ratios are profit margin
on sales and return on total assets. Profit margin on sales is determined by dividing profit
before tax by sales. Serious questions about the firm and marketing plan should be raised
if profit margin on sales is declining across time or is well below other firms in the industry.
1. http://finance.yahoo.com/. Input the company symbol to receive financial ratios and
other useful information. Under the “Company” heading, “Key statistics,” “Competitors,”
and “Industry” are most useful for comparative ratio analyses.
2. Annual Statement Studies. Published by Robert Morris Associates, this work includes 11
financial ratios computed annually for over 150 lines of business. Each line of business is
divided into four size categories.
3. Industry Norms and Key Business Ratios. Published by Dun & Bradstreet, this work
provides a variety of industry ratios.
4. Almanac of Business and Industrial Financial Ratios. The almanac, published by Prentice
Hall, Inc., lists industry averages for 22 financial ratios. Approximately 170 businesses
and industries are listed.
5. Quarterly Financial Report for Manufacturing Corporations. This work, published jointly by
the Federal Trade Commission and the Securities and Exchange Commission, contains
balance-sheet and income-statement information by industry groupings and by
asset-size categories.
6. Trade associations and individual companies often compute ratios for their industries and
make them available to analysts.
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226 Section III Financial Analysis for Marketing Decisions
Return on total assets is determined by dividing profit before tax by total assets. This ratio is
the return on the investment for the entire firm.
2. Compute the Ratios
The next step in ratio analysis is to compute the ratios. Figure 1 presents the balance sheet
and income statement for the Ajax Home Computer Company. These six ratios can be
calculated from the Ajax balance sheet and income statement as follows:
Liquidity ratios:
Current ratio ! ! ”
7
3
0
1
0
5
” ! 2.2
Quick ratio ! ! ”
2
3
7
1
0
5
” ! .86
Current assets # Inventory
“””
Current liabilities
Current assets
“”
Current liabilities
FIGURE 1 Balance Sheet and Income Statement for Ajax Home Computer Company
Ajax Home Computer Company
Balance Sheet
March 31, 2010
(in thousands)
Assets Liabilities and Stockholders’ Equity
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 30 Trade accounts payable . . . . . . . . . . . . . . . . . . . . . .$ 150
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .200 Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .430 Accrued income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 700 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . .315
Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . .1,000 Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .500
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .1,500
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,400 Total liabilities and stockholders’ equity . . . . . . . . . .$2,400
Ajax Home Computer Company
Income Statement
for the 12-Month Period Ending March 31, 2010
(in thousands)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,600
Cost of sales
Labor and materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,000
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,780
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820
Less interest expense
Interest on notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Interest on debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Interest on bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Total interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520
Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Federal income tax (@40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Net profit after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 180
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Section III Financial Analysis for Marketing Decisions 227
Asset management ratios:
Inventory turnover ! ”
C
I
o
n
s
v
t
e
o
n
f
to
sa
ry
les
” ! ”
2
4
,7
3
8
0
0
” ! 6.5
Total asset utilization ! ”
Tot
S
al
al
a
e
s
s
sets
” ! ”
3
2
,
,
6
4
0
0
0
0
” ! 1.5
Profitability ratios:
Profit margin on sales ! ”
Profit
S
b
a
e
le
fo
s
re tax
” ! ”
3
3
,6
0
0
0
0
” ! 8.3%
Return on total assests ! ”
Pro
T
f
o
i
t
t
a
b
l
e
a
f
s
o
s
r
e
e
ts
tax
” ! ”
2
3
,4
0
0
0
0
” ! 12.5%
3. Compare the Ratios
While rules of thumb are useful for analyzing ratios, it cannot be overstated that comparison
of ratios is always the preferred approach. The ratios computed for a firm can be compared
in at least three ways. First, they can be compared over time to see if there are any favorable
or unfavorable trends in the firm’s financial position. Second, they can be compared with the
ratios of other firms of similar size in the industry. Third, they can be compared with
industry averages to get an overall idea of the firm’s relative financial position in the industry.
Figure 2 provides a summary of the ratio analysis. The ratios computed for Ajax are
presented along with the median ratios for firms of similar size in the industry and the
industry median. The median is often reported in financial sources, rather than the mean,
to avoid the strong effect of outliers.4
4. Check for Problems or Opportunities
The ratio comparison in Figure 2 suggests that Ajax is in reasonably good shape financially.
The current ratio is above the industry figures, although the quick ratio is slightly below
them. However, the high inventory turnover ratio suggests that the slightly low quick ratio
should not be a problem, since inventory turns over relatively quickly. Total asset utilization
is slightly below industry averages and should be monitored closely. This, coupled with the
slightly lower return on total assets, suggests that some unproductive assets should be elim-
inated or that the production process needs to be made more efficient. While the problem
could be ineffective marketing, the high profit margin on sales suggests that marketing effort
is probably not the problem.
FIGURE 2
Ratio Comparison for
Ajax Home Computer
Company
Industry Firms Overall
Ajax Median ($1–10 Industry
Million in Assets) Median
Liquidity ratios
Current ratio 2.2 1.8 1.8
Quick ratio .86 .9 1.0
Asset management ratios
Inventory turnover 6.5 3.2 2.8
Total assets utilization 1.5 1.7 1.6
Profitability ratios
Profit margin 8.3% 6.7% 8.2%
Return on total assets 12.5% 15.0% 14.7%
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228 Section III Financial Analysis for Marketing Decisions
CONCLUSION
This section has focused on several aspects of financial analysis that are useful for marketing
decision making. The first, break-even analysis, is commonly used in marketing problem and
case analysis. The second, net present value analysis, is quite useful for investigating the
financial impact of marketing alternatives, such as new product introductions or other
long-term strategic changes. The third, ratio analysis, is a useful tool sometimes overlooked
in marketing problem solving. Performing a ratio analysis as a regular part of marketing
problem and case analysis can increase the understanding of the firm and its problems
and opportunities.
Additional
Resources
Brealey, Richard A., Stewart C. Myers, and Alan J. Marcus. Fundamentals of Corporate Finance.
6th ed. Burr Ridge, McGraw-Hill, 2009.
Cornett, Marcia Millon, Troy Adair, and John Nofsinger. Finance: Applications and Theory. Burr
Ridge, IL: Irwin/McGraw-Hill, 2009.
Ross, Stephen A.; Randolph W. Westerfield; and Bradford D. Jordan. Fundamentals of Corporate
Finance. 8th ed. Burr Ridge, IL: Irwin/McGraw-Hill, 2008.
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Developing
Marketing Plans
Se
ct
io
n
IV
De
ve
lo
pi
ng
M
ar
ke
tin
g
Pl
an
s
Section
4
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Imagine this scenario. After receiving your bachelor’s or master’s degree in marketing, you
are hired by a major consumer goods company. Because you’ve done well in school, you
are confident that you have a lot of marketing knowledge and a lot to offer to the firm.
You’re highly motivated and are looking forward to a successful career.
After just a few days of work you are called in for a conference with the vice president
of marketing. The vice president welcomes you and tells you how glad the firm is that you
have joined them. The vice president also says that, because you have done so well in your
marketing courses and have had such recent training, he wants you to work on a special
project.
He tells you that the company has a new product, which is to be introduced in a few
months. He also says, confidentially, that recent new product introductions by the company
haven’t been too successful. Suggesting that the recent problems are probably because the
company has not been doing a very good job of developing marketing plans, the vice president
tells you not to look at marketing plans for the company’s other products.
Your assignment, then, is to develop a marketing plan for the proposed product in the
next six weeks. The vice president explains that a good job here will lead to rapid advancement
in the company. You thank the vice president for the assignment and promise that you’ll do
your best.
How would you feel when you returned to your desk? Surely, you’d be flattered that
you had been given this opportunity and be eager to do a good job. However, how
confident are you that you could develop a quality marketing plan? Would you even know
where to begin?
We suspect that many of you, even those who have an excellent knowledge of marketing
principles and are adept at solving marketing cases, may not yet have the skills necessary
to develop a marketing plan from scratch. Thus, the purpose of this section is to offer a
framework for developing marketing plans. In one sense, this section is no more than a
summary of the whole text. In other words, it is an organizational framework based on the
text material that can be used to direct the development of marketing plans.
Students should note that we are not presenting this framework and discussion as the
only way to develop a marketing plan. While we believe this is a useful framework for
logically analyzing the problems involved in developing a marketing plan, other approaches
can be used just as successfully.
Often, successful firms prepare much less detailed plans because much of the
background material and current conditions are well known to everyone involved.
However, our review of plans used in various firms suggests that something like this
framework is not uncommon.
We would like to mention one other qualification before beginning our discussion.
Students should remember that one important part of the marketing plan involves the
development of a sales forecast. While we have discussed several approaches to sales
forecasting in the text, we will detail only one specific approach here.
A MARKETING PLAN FRAMEWORK
Marketing plans have three basic purposes. First, they are used as a tangible record of
analysis so the logic involved can be checked. This is done to ensure the feasibility and
internal consistency of the project and to evaluate the likely consequences of implementing
the plan. Second, they are used as roadmaps or guidelines for directing appropriate actions.
A marketing plan is designed to be the best available scenario and rationale for directing
the firm’s efforts for a particular product or brand. Third, they are used as tools to obtain
funding for implementation. This funding may come from internal or external sources. For
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Section IV Developing Marketing Plans 231
example, a brand manager may have to present a marketing plan to senior executives in a
firm to get a budget request filled. This would be an internal source. Similarly, proposals
for funding from investors or business loans from banks often require a marketing plan.
These would be external sources.
Figure 1 presents a format for preparing marketing plans. Each of the 10 elements will
be briefly discussed. We will refer to previous chapters and sections in this text and to other
sources where additional information can be obtained when a marketing plan is being
prepared. We also will offer additional information for focusing particular sections of the
plan as well as for developing financial analysis.
Title Page
The title page should contain the following information: (1) the name of the product or
brand for which the marketing plan has been prepared—for example, Marketing Plan for
Little Friskies Dog Food; (2) the time period for which the plan is designed—for example,
2008–2010; (3) the person(s) and position(s) of those submitting the plan—for example,
submitted by Amy Lewis, brand manager; (4) the persons, group, or agency to whom the
plan is being submitted—for example, submitted to Lauren Ellis, product group manager;
and (5) the date of submission of the plan—for example, June 30, 2008.
While preparing the title page is a simple task, remember that it is the first thing readers
see. Thus, a title page that is poorly laid out, is smudged, or contains misspelled words can
lead to the inference that the project was developed hurriedly and with little attention to
detail. As with the rest of the project, appearances are important and affect what people
think about the plan.
Executive Summary
The executive summary is a two- to three-page summary of the contents of the report. Its
purpose is to provide a quick summary of the marketing plan for executives who need to be
informed about the plan but are typically not directly involved in plan approval. For
instance, senior executives for firms with a broad product line may not have time to read
the entire plan but need an overview to keep informed about operations.
The executive summary should include a brief introduction, the major aspects of the
marketing plan, and a budget statement. This is not the place to go into detail about each and
every aspect of the marketing plan. Rather, it should focus on the major market opportunity
and the key elements of the marketing plan that are designed to capitalize on this opportunity.
It is also useful to state specifically how much money is required to implement the plan.
In an ongoing firm, many costs can be estimated from historical data or from discussions with
other executives in charge of specific functional areas. However, in many situations (such as
a class project), sufficient information is not always available to give exact costs for every
aspect of production, promotion, and distribution. In these cases, include a rough estimate of
FIGURE 1
A Marketing Plan
Format
• Title page.
• Executive summary.
• Table of contents.
• Introduction.
• Situational analysis.
• Marketing planning.
• Implementation and control of the marketing plan.
• Summary.
• Appendix: Financial analysis.
• References.
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total marketing costs of the plan. In many ongoing firms, marketing cost elements are
concentrated in the areas of promotion and marketing research, and these figures are
integrated with those from other functional areas as parts of the overall business plan.
Table of Contents
The table of contents is a listing of everything contained in the plan and where it is located
in the report. Reports that contain a variety of charts and figures may also have a table of
exhibits listing their titles and page numbers within the report.
In addition to using the table of contents as a place to find specific information, readers
may also review it to see if each section of the report is logically sequenced. For example,
situational analysis logically precedes marketing planning as an activity, and this ordering
makes sense in presenting the plan.
Introduction
The types of information and amount of detail reported in the introduction depend in part
on whether the plan is being designed for a new or existing product or brand. If the product
is new, the introduction should explain the product concept and the reasons it is expected to
be successful. Basically, this part of the report should make the new idea sound attractive
to management or investors. In addition, it is useful to offer estimates of expected sales,
costs, and return on investment.
If the marketing plan is for an existing brand in an ongoing firm, it is common to begin
the report with a brief history of the brand. The major focus here is on the brand’s
performance in the last three to five years. It is useful to prepare graphs of the brand’s
performance that show its sales, profits, and market share for previous years and to explain
the reasons for any major changes. These exhibits can also be extended to include predicted
changes in these variables given the new marketing plan. A brief discussion of the overall
strategy followed in previous years also provides understanding of how much change is
being proposed in the new marketing plan.
Also useful in the introduction is to offer a precise statement of the purpose of the report
as well as a roadmap of the report. In other words, tell readers what this report is, how it is
organized, and what will be covered in the following sections.
Situational Analysis
The situational analysis is not unlike the analysis discussed in Chapter 1 and Section II of
this text. The focus remains on the most critical and relevant environmental conditions (or
changes in them) that affect the success or failure of the proposed plan. While any aspect
of the economic, social, political, legal, or cooperative environments might deserve
considerable attention, there is seldom if ever a marketing plan in which the competitive
environment does not require considerable discussion. In fact, the competitive environment
may be set off as a separate section called industry analysis. The strengths and weaknesses
of major competitors, their relative market shares, and the success of various competitive
strategies are critical elements of the situation analysis.
Marketing Planning
Marketing planning is, of course, a critical section of the report. As previously noted, it
includes three major elements: marketing objectives, target markets, and the marketing mix.
Marketing Objectives
Marketing objectives are often stated in plans in terms of the percentage of particular outcomes
that are to be achieved: for example, 80 percent awareness of the brand in particular markets,
increase in trial rate by 30 percent, distribution coverage of 60 percent, or increase in total
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1
MARKETING INSIGHT Some Questions to Consider
in Competitive Analysis
233
market share by 3 percent over the life of the plan. Similarly, objectives may be stated in
terms of sales units or dollars or increases in these. Of course, the reasons for selection of
the particular objectives and rationale are important points to explain.
Target Markets
The target markets discussion explains the customer base and rationale or justification for
it. An approach to developing appropriate target markets is contained in Chapter 5 of this
text.
This section also includes relevant discussion of changes or important issues in
consumer or organizational buyer behavior: for example, what benefits consumers are
seeking in this products class, what benefits does the particular brand offer, or what
purchasing trends are shaping the market for this product. Discussions of consumer and
organizational buyer behavior are contained in Chapters 3 and 4 of this text.
Marketing Mix
The marketing mix discussion explains in detail the selected strategy consisting of product,
promotion, distribution and price, and the rationale for it. Also, if marketing research has
been done on these elements or is planned, it can be discussed in this section.
Product The product section details a description of the product or brand, its packaging,
and its attributes. Product life-cycle considerations should be mentioned if they affect the
proposed plan.
Of critical importance in this discussion is the competitive advantage of the product or
brand. Here it must be carefully considered whether the brand really does anything better
than the competition or is purchased primarily on the basis of brand equity or value. For
example, many brands of toothpaste have fluoride, yet Crest has the largest market share
primarily through promoting this attribute of its brand. Thus, does Crest do anything more
than other toothpastes, or is it Crest’s image that accounts for sales?
Discussion of product-related issues is contained in Chapters 6 and 7, and services are
discussed in Chapter 12 of this text. For discussion of marketing plans for products marketed
globally, see Chapter 13.
Understanding an industry and the actions of competitors is critical to developing successful
marketing plans. Below is a list of some questions to consider when performing competitive
analysis. Thinking about these questions can aid the marketing planner in developing better
marketing strategies.
1. Which firms compete in this industry and what is their financial position and marketing
capability?
2. What are the relative market shares of various brands?
3. How many brands and models does each firm offer?
4. What marketing strategies have the market leaders employed?
5. Which brands have gained and which have lost market share in recent years, and what
factors have led to these changes?
6. Are new competitors likely to enter the market?
7. How quickly do competitive firms react to changes in the market?
8. From which firms or brands might we be able to take market share?
9. What are the particular strengths and weaknesses of competitors in the industry?
10. How do we compare with other firms in the industry in terms of financial strength and
marketing skills?
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Promotion The promotion discussion consists of a description and justification of the
planned promotion mix. It is useful to explain the theme of the promotion and to include
some examples of potential ads as well as the nature of the sales force if one is to be used.
For mass-marketed consumer goods, promotion costs can be large and need to be considered
explicitly in the marketing plan.
Discussion of promotion-related issues is contained in Chapters 8 and 9 of this text.
Secondary sources, such as Standard Rate and Data, Simmons Media/Market Service,
Starch Advertising Readership Service, and the Nielsen Television Index, provide useful
information for selecting, budgeting, and justifying media and other promotional decisions.
Distribution The distribution discussion describes and justifies the appropriate channel
or channels for the product. This includes types of intermediaries and specifically who they
will be. Other important issues concern the level of market coverage desired, cost, and
control considerations. In many cases, the channels of distribution used by the firm, as well
as competitive firms, are well established. For example, General Motors and Ford distribute
their automobiles through independent dealer networks. Thus, unless there is a compelling
reason to change channels, the traditional channel will often be the appropriate alternative.
However, serious consideration may have to be given to methods of obtaining channel
support, for example, trade deals to obtain sufficient shelf space.
Discussion of distribution-related issues is contained in Chapter 10 of this text. Useful
retail distribution information can be found in the Nielsen Retail Index and the Audits and
Surveys National Total-Market Index.
Price The pricing discussion starts with a specific statement of the price of the product.
Depending on what type of channel is used, manufacturer price, wholesale price, and
suggested retail price need to be listed and justified. In addition, special deals or trade discounts
that are to be employed must be considered in terms of their effect on the firm’s selling price.
Discussion of price-related issues is contained in Chapter 11. In addition to a variety of
other useful information, the Nielsen Retail Index provides information on wholesale and
retail prices.
Marketing Research For any aspect of marketing planning, there may be a need for
marketing research. If such research is to be performed, it is important to justify it and
explain its costs and benefits. Such costs should also be included in the financial analysis.
If marketing research has already been conducted as part of the marketing plan, it can
be reported as needed to justify various decisions that were reached. To illustrate, if
research found that two out of three consumers like the taste of a new formula Coke, this
information would likely be included in the product portion of the report. However, the
details of the research could be placed here in the marketing research section. Discussion
of marketing research is contained in Chapter 2.
Implementation and Control of the Marketing Plan
This section contains a discussion and justification of how the marketing plan will be
implemented and controlled. It also explains who will be in charge of monitoring and
changing the plan should unanticipated events occur and how the success or failure of the
plan will be measured. Success or failure of the plan is typically measured by a comparison
of the results of implementing the plan with the stated objectives.
For a marketing plan developed within an ongoing firm, this section can be quite
explicit, because procedures for implementing plans may be well established. However, for
a classroom project, the key issues to be considered are the persons responsible for
implementing the plan, a timetable for sequencing the tasks, and a method of measuring
and evaluating the success or failure of the plan.
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MARKETING INSIGHT Stating Objectives: How to Tell
a Good One from a Bad One 2
235
For the direction-setting purpose of objectives to be fulfilled, objectives need to meet five
specifications:
1. An objective should relate to a single, specific topic. (It should not be stated in the form
of a vague abstraction or a pious platitude—“we want to be a leader in our industry” or
“our objective is to be more aggressive marketers.”)
2. An objective should relate to a result, not to an activity to be performed. (The objective
is the result of the activity, not the performance of the activity.)
3. An objective should be measurable (stated in quantitative terms whenever feasible).
4. An objective should contain a time deadline for its achievement.
5. An objective should be challenging but achievable.
Consider the following examples:
1. Poor: Our objective is to maximize profits.
Remarks: How much is “maximum”? The statement is not subject to measurement.
What criterion or yardstick will management use to determine if and when actual profits
are equal to maximum profits? No deadline is specified.
Better: Our total profit target in 2010 is $1 million.
2. Poor: Our objective is to increase sales revenue and unit volume.
Remarks: How much? Also, because the statement relates to two topics, it may be
inconsistent. Increasing unit volume may require a price cut, and if demand is price
inelastic, sales revenue would fall as unit volume rises. No time frame for achievement is
indicated.
Better: Our objective this calendar year is to increase sales revenues from $30 million
to $35 million; we expect this to be accomplished by selling 1 million units at an average
price of $35.
3. Poor: Our objective in 2010 is to boost advertising expenditures by 15 percent.
Remarks: Advertising is an activity, not a result. The advertising objective should be
stated in terms of what result the extra advertising is intended to produce.
Better: Our objective is to boost our market share from 8 percent to 10 percent in
2010 with the help of a 15 percent increase in advertising expenditures.
4. Poor: Our objective is to be a pioneer in research and development and to be the
technological leader in the industry.
Remarks: Very sweeping and perhaps overly ambitious; implies trying to march in too
many directions at once if the industry is one with a wide range of technological
frontiers. More a platitude than an action commitment to a specific result.
Better: During the 2010–2020 decade, our objective is to continue as a leader in
introducing new technologies and new devices that will allow buyers of electrically
powered equipment to conserve on electric energy usage.
5. Poor: Our objective is to be the most profitable company in our industry.
Remarks: Not specific enough by what measures of profit—total dollars, or earnings
per share, or unit profit margin, or return on equity investment, or all of these? Also,
because the objective concerns how well other companies will perform, the objective,
while challenging, may not be achievable.
Better: We will strive to remain atop the industry in terms of rate of return on equity
investment by earning a 25 percent after-tax return on equity investment in 2010.
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MARKETING INSIGHT Some Questions to Consider
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Summary
This summary need not be much different than the executive summary stated at the begin-
ning of the document. However, it is usually a bit longer, more detailed, and states more
fully the case for financing the plan.
Appendix—Financial Analysis
Financial analysis is a very important part of any marketing plan. While a complete business
plan often includes extensive financial analysis, such as a complete cost breakdown and
estimated return on investment, marketing planners frequently do not have complete
accounting data for computing these figures. For example, decisions concerning how much
overhead is to be apportioned to the product are not usually made solely by marketing
personnel. However, the marketing plan should contain at least a sales forecast and estimates
of relevant marketing costs.
Sales Forecast
As noted, there are a variety of ways to develop sales forecasts. Regardless of the method,
however, they all involve trying to predict the future as accurately as possible. It is, of
course, necessary to justify the logic for the forecasted figures, rather than offer them with
no support.
One basic approach to developing a sales forecast is outlined in Figure 2. This approach
begins by estimating the total number of persons in the selected target market. This estimate
comes from the market segmentation analysis and may include information from test
236
Knowledge of consumers is paramount to developing successful marketing plans. Below is
a list of questions that are useful to consider when analyzing consumers. For some of the
questions, secondary sources of information or primary marketing research can be
employed to aid in decision making. However, a number of them require the analyst to do
some serious thinking about the relationship between brands of the product and various
consumer groups to better understand the market.
1. How many people purchase and use this product in general?
2. How many people purchase and use each brand of the product?
3. Is there an opportunity to reach nonusers of the product with a unique marketing
strategy?
4. What does the product do for consumers functionally and how does this vary by brand?
5. What does the product do for consumers in a social or psychological sense and how does
this vary by brand?
6. Where do consumers currently purchase various brands of the product?
7. How much are consumers willing to pay for specific brands and is price a determining
factor for purchase?
8. What is the market profile of the heavy user of this product and what percentage of the
total market are heavy users?
9. What media reach these consumers?
10. On average, how often is this product purchased?
11. How important is brand equity for consumers of this product?
12. Why do consumers purchase particular brands?
13. How brand loyal are consumers of this product?
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Section IV Developing Marketing Plans 237
marketing and from secondary sources, such as Statistical Abstracts of the United States.
For example, suppose a company is marketing a solar-powered watch that is designed not
only to tell time but also to take the pulse of the wearer. The product is targeted at joggers
and others interested in aerobic exercise. By reviewing the literature on these activities, the
marketing planner, John Murphy, finds that the average estimate of this market on a
national level is 60 million persons and is growing by 4 million persons per year. Thus,
John might conclude that the total number of people in the target market for next year is 64
million. If he has not further limited the product’s target market and has no other information,
John might use this number as a basis for starting the forecast analysis.
The second estimate John needs is the annual number of purchases per person in the
product’s target market. This estimate could be quite large for such products as breakfast
cereal or less than one (annual purchase per person) for such products as automobiles. For
watches, the estimate is likely to be much less than one since people are likely to buy a new
watch only every few years. Thus, John might estimate the annual number of purchases per
person in the target market to be .25. Of course, as a careful marketing planner, John would
probably carefully research this market to refine this estimate. In any event, multiplying
these two numbers gives John an estimate of the total potential market, in this case, 64 million
times .25 equals 16 million. In other words, if next year alone John’s company could sell a
watch to every jogger or aerobic exerciser who is buying a watch, the company could expect
sales to be 16 million units.
Of course, the firm cannot expect to sell every jogger a watch for several reasons. First, it is
unlikely to obtain 100 percent market coverage in the first year, if ever. Even major consumer
goods companies selling convenience goods seldom reach the entire market in the first year
and many never achieve even 90 percent distribution. Given the nature of the product and
depending on the distribution alternative, John’s company might be doing quite well to aver-
age 50 percent market coverage in the first year. If John’s plans call for this kind of coverage,
his estimate of the total available market would be 16 million times .5, which equals 8 million.
A second reason John’s plans would not call for dominating the market is that his company
does not have the only product available or wanted by this target market. Many of the people
who will purchase such a watch will purchase a competitive brand. He must, therefore, estimate
the product’s likely market share. Of all the estimates made in developing a sales forecast, this
one is critical because it is a reflection of the entire marketing plan. Important factors to
consider in developing this estimate include (1) competitive market shares and likely marketing
strategies; (2) competitive retaliation should the product do well; (3) competitive advantage of
the product, such as lower price; (4) promotion mix and budget relative to competitors; and
(5) market shares obtained by similar products in the introductory year.
FIGURE 2
A Basic Approach to
Sales Forecasting
Total number of people in target markets (a) a
Annual number of purchases per person (b)
!
”
#
b
c
!
Total potential market (c)
Total potential market (c) c
Percent of total market coverage (d )
!
”
#
d
e
!
Total available market (e)
Total available market (e) e
Expected market share (f )
!
#
”
g
f
!
Sales forecast (in units) (g)
Sales forecast (in units) (g) g
Price (h)
!
”
#
h
i
!
Sales forecast (in dollars)(i )
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MARKETING INSIGHT Some Questions to Consider
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238
Overall, suppose John estimates the product’s market share to be 5 percent, because
other competitive products have beat his company to the market and because the company’s
competitive advantage is only a slightly more stylish watch. In this case, the sales forecast
for year one would be 8 million times .05, which equals 400,000 units. If the manufacturer’s
selling price was $50, then the sales forecast in dollars would be 400,000 times $50, which
equals $20 million.
This approach can also be used to extend the sales forecast for any number of years.
Typically, estimates of most of the figures change from year to year, depending on changes
in market size, distribution coverage, and expected market shares. The value of this
approach is that it forces an analyst to carefully consider and justify each of the estimates
offered, rather than simply pulling numbers out of the air.
Estimates of Marketing Costs
A complete delineation of all costs, apportionment of overhead, and other accounting tasks
are usually performed by other departments within a firm. All of this information, including
expected return on investment from implementing the marketing plan, is part of the overall
business plan.
However, the marketing plan should at least contain estimates of major marketing costs.
These include such things as advertising, sales force training and compensation, channel
development, and marketing research. Estimates may also be included for product development
and package design.
For some marketing costs, reasonable estimates are available from sources such as Standard
Rate and Data. However, some cost figures, such as marketing research, might be obtained
from asking various marketing experts for the estimated price of proposed research. Other
Below is a brief list of questions about the marketing planning section of the report.
Answering them honestly and recognizing both the strengths and weaknesses of the
marketing plan should help to improve it.
1. What key assumptions were made in developing the marketing plan?
2. How badly will the product’s market position be hurt if these assumptions turn out to
be incorrect?
3. How good is the marketing research?
4. Is the marketing plan consistent? For example, if the plan is to seek a prestige position
in the market, is the product priced, promoted, and distributed to create this image?
5. Is the marketing plan feasible? For example, are the financial and other resources (such
as a distribution network) available to implement it?
6. How will the marketing plan affect profits and market share, and is it consistent with
corporate objectives?
7. Will implementing the marketing plan result in competitive retaliation that will end up
hurting the firm?
8. Is the marketing mix designed to reach and attract new customers or increase usage
among existing users or both?
9. Will the marketing mix help to develop brand-loyal consumers?
10. Will the marketing plan not only be successful in the short run but also contribute to a
profitable long-run position?
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MARKETING INSIGHT Some Questions to Consider
in Implementation and Control 5
types of marketing costs might be estimated from financial statements of firms in the industry.
For example, Morris’s Annual Statement Studies offers percentage breakdowns of various
income statement information by industry. These might be used to estimate the percentage of
the sales-forecast figure that would likely be spent in a particular cost category.
References
The references section contains the sources of any secondary information that was used in
developing the marketing plan. This information might include company reports and
memos, statements of company objectives, and articles or books used for information or
support of the marketing plan.
References should be listed alphabetically using a consistent format. One way of preparing
references is to use the same approach as is used in marketing journals. For example, the
format used for references in Journal of Marketing articles is usually acceptable.
CONCLUSION
Suppose you’re now sitting at your desk faced with the task of developing a marketing plan
for a new product. Do you believe that you might have the skills to develop a marketing
plan? Of course, your ability to develop a quality plan will depend on your learning
experiences during your course work and the amount of practice you’ve had; for example,
if you developed a promotion plan in your advertising course, it is likely that you could do
a better job on the promotion phase of the marketing plan. Similarly, your experiences in
analyzing cases should have sharpened your skills at recognizing problems and developing
solutions to them. But inexperience (or experience) aside, hopefully you now feel that you
understand the process of developing a marketing plan. You at least know where to start,
where to seek information, how to structure the plan, and some of the critical issues that
require analysis.
239
Implementation and control of a marketing plan require careful scheduling and attention to
detail. While some firms have standard procedures for dealing with many of the questions
raised below, thinking through each of the questions should help improve the efficiency of
even these firms in this stage of the process.
1. Who is responsible for implementing and controlling the marketing plan?
2. What tasks must be performed to implement the marketing plan?
3. What are the deadlines for implementing the various tasks and how critical are specific
deadlines?
4. Has sufficient time been scheduled to implement the various tasks?
5. How long will it take to get the planned market coverage?
6. How will the success or failure of the plan be determined?
7. How long will it take to get the desired results from the plan?
8. How long will the plan be in effect before changes will be made to improve it based on
more current information?
9. If an ad agency or other firms are involved in implementing the plan, how much
responsibility and authority will they have?
10. How frequently will the progress of the plan be monitored?
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Additional
Resources
Cohen, William A. The Marketing Plan. 5th ed. New York: John Wiley & Sons, 2006.
Cravens, David W., and Nigel F. Piercy, Strategic Marketing, 9th ed. Burr Ridge, IL: McGraw-Hill/
Irwin, 2009.
Hiebing, Romon G., and Scott W. Cooper. The Successful Marketing Plan, Burr Ridge, IL:
McGraw-Hill, 2003.
Hiebing, Roman G., and Scott W. Cooper. The One-Day Marketing Plan: Organizing and
Completing a Plan that Works. 3rd ed. Burr Ridge, IL: McGraw-Hill, 2004.
Kerin, Roger A., Steven W. Hartley, and William Rudelius. Marketing. 9th ed. Burr Ridge, IL:
Mcgraw-Hill /Irwin, 2009, pp. 54–67.
Lehmann, Donald R., and Russell S. Winer. Analysis for Marketing Planning. 7th ed. Burr Ridge,
IL: McGraw-Hill/Irwin, 2008.
Walker, Orville C., John Mullins, and Harper W. Boyd, Jr. Marketing Strategy: A Decision Focused
Approach. 6th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2008.
240 Section IV Developing Marketing Plans
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Chapter Notes
241
Chapter 1
1. See Reinhard Angelmar and Christian Pinson, “The
Meaning of Marketing,” Philosophy of Science, June
1975, pp. 208–14.
2. “Marketing Redefined,” Marketing News, September 15,
2004, p. 1.
3. Much of this section is based on J. H. Donnelly, Jr.,
J. L. Gibson, and J. M. Ivancevich, Fundamentals
of Management, 9th ed. (Burr Ridge, IL: Irwin/
McGraw-Hill, 1998), chap. 7.
4. The process may differ depending on the type of
organization or management approach, or both. For
certain types of organizations, one strategic plan will
be sufficient. Some manufacturers with similar
product lines or limited product lines will develop only
one strategic plan. However, organizations with widely
diversified product lines and widely diversified
markets may develop strategic plans for units or
divisions. These plans usually are combined into a
master strategic plan.
5. For a discussion of this topic, see Gerald E. Ledford,
Jr., Jon R. Wendenhof, and James T. Strahely, “Realizing
a Corporate Philosophy,” Organizational Dynamics,
Winter 1995, pp. 4–19; and Stephan Cummings and
John Davies, “Mission, Vision, Fusion,” Long Range
Planning, December 1994, pp. 147–50.
6. Philip Kotler and Gary Armstrong, Principles of
Marketing, 6th ed. (Englewood Cliffs, NJ: Prentice Hall,
1994), Chap. 2.
7. Philip Kotler, Marketing Management: Analysis,
Planning, Implementation and Control, 8th ed.
(Englewood Cliffs, NJ: Prentice Hall, 1994), chap. 3.
8. Norton Paley, “A Sign of Intelligence,” Sales &
Marketing Management, March 1995, pp. 30–31.
9. Peter Drucker, Management: Tasks, Responsibilities,
Practices (New York: Harper & Row, 1974), pp. 77–89;
Kotler, Marketing Management, chap. 3.
10. Much of the following discussion is based on
Drucker, Management, pp. 79–87.
11. Noel B. Zabriskie and Alan B. Huellmantel,
“Marketing Research as a Strategic Tool,” Long Range
Planning, February 1994, pp. 107–18.
12. Originally discussed in the classic H. Igor Ansoff,
Corporate Strategy (New York: McGraw-Hill, 1965).
13. For complete coverage of this topic, see Michael E.
Porter, Competitive Advantage: Creating and Sustaining
Superior Performance (New York: The Free Press, 1985).
Material in this section is based upon discussions
contained in Steven J. Skinner, Marketing, 2nd ed.
(Boston: Houghton Mifflin Co., 1994), pp. 48–50; and
Thomas A. Bateman and Carl P. Zeithaml, Management
Function & Strategy, 2nd ed. (Burr Ridge, IL:
Irwin/McGraw-Hill, 1993), pp. 152–53.
14. For a complete discussion of this topic, see Michael
Treacy and Fred Wiersema, The Discipline of Market
Leaders (Reading, MA: Addison-Wesley, 1995); and
Michael Treacy and Fred Wiersema, “How Market
Leaders Keep Their Edge,” Fortune, February 6, 1995,
pp. 88–98.
15. Philip Kotler, Marketing Management, p. 13.
16. For a discussion of this issue and other mistakes
marketers frequently make, see Kevin J. Clancy and
Robert S. Shulman, “Breaking the Mold,” Sales &
Marketing Management, January 1994, pp. 82–84.
17. George S. Day and David B. Montgomery,
“Diagnosing the Experience Curve,” Journal of
Marketing, Spring 1983, pp. 44–58.
18. P. Rajan Varadarajan, Terry Clark, and William M.
Pride, “Controlling the Uncontrollable: Managing Your
Market Environment,” Sloan Management Review,
Winter 1992, pp. 39–47.
19. Reed E. Nelson, “Is There Strategy in Brazil?”
Business Horizons, July–August 1992, pp. 15–23.
20. Peter S. Davis and Patrick L. Schill, “Addressing
the Contingent Effects of Business Unit Strategic
Orientation on the Relationship between Organizational
Context and Business Unit Performance,” Journal of
Business Research, 1993, pp. 183–200.
21. J. Scott Armstrong and Roderick J. Brodie, “Effects
of Portfolio Planning Methods on Decision Making:
Experimental Results,” International Journal of Research
in Marketing, January 1994, pp. 73–84.
22. Michel Roberts, “Times Change but Do Business
Strategies?” Journal of Business Strategy, March–April
1993, pp. 12–15.
23. Donald L. McCabe and V. K. Narayanan, “The Life
Cycle of the PIMS and BCG Models,” Industrial
Marketing Management, November 1991, pp. 347–52.
Chapter 2
1. Based on Peter D. Bennett, ed., Dictionary of
Marketing Terms, 2nd ed. (Chicago: American Marketing
Association, 1995), p. 77.
2. Gilbert A. Churchill, Jr., and J. Paul Peter, Marketing:
Creating Value for Customers, 2nd ed. (Burr Ridge, IL:
Irwin/McGraw-Hill, 1998), p. 116.
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3. For a discussion of some general problems in
marketing research, see Alan G. Sawyer and J. Paul
Peter, “The Significance of Statistical Significance
Testing in Marketing Research,” Journal of Marketing
Research, May 1983, pp. 122–33.
4. This section is based on Churchill and Peter,
Marketing, pp. 114–16.
Chapter 3
1. Richard P. Coleman, “The Continuing Significance
of Social Class to Marketing,” Journal of Consumer
Research, December 1983, pp. 265–80.
2. See William O. Bearden and Michael J. Etzel,
“Reference Group Influence on Product and Brand
Purchase Decisions,” Journal of Consumer Research,
September 1982, pp. 183–94; and Terry L. Childers and
Akshay R. Rao, “The Influence of Familial and Peer-
Based Reference Groups on Consumer Decisions,”
Journal of Consumer Research, September 1992,
pp. 198–211.
3. See Rosann L. Spiro, “Persuasion in Family Decision
Making,” Journal of Consumer Research, March 1983,
pp. 393–402.
4. See Janet Wagner and Sherman Hanna, “The
Effectiveness of Family Life Cycle Variables in Consumer
Expenditure Research,” Journal of Consumer Research,
December 1983, pp. 281–91. Also see Charles M.
Schanninger and William D. Danko, “A Conceptual and
Empirical Comparison of Alternative Household Life
Cycle Models,” Journal of Consumer Research, March
1993, pp. 580–94.
5. Russell W. Belk, “Situational Variables and
Consumer Behavior,” Journal of Consumer Research,
December 1975, pp. 156–64. Also see Jacob Hornik,
“Situational Effects on the Consumption of Time,”
Journal of Marketing, Fall 1982, pp. 44–55; C. Whan
Park, Easwer S. Iyer, and Daniel C. Smith, “The Effects
of Situational Factors on In-Store Grocery Shopping
Behavior: The Role of Store Environment and Time
Available for Shopping,” Journal of Consumer
Research, March 1989, pp. 422–33; and Mary Jo
Bitner, “Servicescapes: The Impact of Physical
Surroundings on Customers and Employees,” Journal
of Marketing, April 1992, pp. 57–71.
6. J. Paul Peter and Jerry C. Olson, Consumer Behavior
and Marketing Strategy, 7th ed. (Burr Ridge, IL:
Irwin/McGraw-Hill, 2005), chap. 4.
7. A. H. Maslow, Motivation and Personality (New York:
Harper & Row, 1954); also see James F. Engel, Roger D.
Blackwell, and Paul W. Miniard, Consumer Behavior,
8th ed. (Fort Worth, TX: Dryden Press, 1995), chap. 5, for
further discussion of need recognition.
8. For a detailed review of research on external search,
see Sharon E. Beatty and Scott M. Smith, “External
Search Effort: An Investigation across Several Product
Categories,” Journal of Consumer Research, June 1987,
pp. 83–95. Also see Narasimhan Srinivasan and Brian T.
Ratchford, “An Empirical Test of a Model of External
Search for Automobiles,” Journal of Consumer Research,
September 1991, pp. 233–42; and Julie L. Ozanne,
Merrie Brucks, and Dhruv Grewal, “A Study of
Information Search Behavior during the Categorization
of New Products,” Journal of Consumer Research, March
1992, pp. 452–63.
9. For further discussion of information processing, see
J. Paul Peter and Jerry C. Olson, Consumer Behavior
and Marketing Strategy, 8th ed. (Burr Ridge, IL:
Irwin/McGraw-Hill, 2008), chap. 3.
10. For a summary of research on attitude modeling, see
Blair H. Sheppard, Jon Hartwick, and Paul R. Warshaw,
“The Theory of Reasoned Action: A Meta-Analysis of
Past Research with Recommendations for Modification
and Future Research,” Journal of Consumer Research,
December 1988, pp. 325–43.
11. For further discussion of postpurchase feelings, see
Richard L. Oliver, “Cognitive, Affective, and Attribute
Bases of the Satisfaction Response,” Journal of
Consumer Research, December 1993, pp. 418–30; and
Haim Mano and Richard L. Oliver, “Assessing the
Dimensionality and Structure of the Consumption
Experience: Evaluation, Feeling, and Satisfaction,”
Journal of Consumer Research, December 1993,
pp. 451–66.
Chapter 4
1. This discussion is based on Gilbert A. Churchill, Jr.,
and J. Paul Peter, Marketing: Creating Value for Customers,
2nd ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1998),
pp. 182–84. Also see Michele D. Bunn, “Taxonomy of
Buying Decision Approaches,” Journal of Marketing,
January 1993, pp. 38–56.
2. This discussion is based on Eric N. Berkowitz, Roger
A. Kerin, Steven W. Hartley, and William Rudelius,
Marketing, 8th ed. Irwin/McGraw-Hill (Burr Ridge, IL:
2006), p. 157.
3. For research on influence strategies in organizational
buying, see Gary L. Frazier and Raymond Rody, “The Use
of Influence Strategies in Interfirm Relationships in
Industrial Product Channels,” Journal of Marketing,
January 1991, pp. 52–69; and Julia M. Bristor, “Influence
Strategies in Organizational Buying,” Journal of Business-
to-Business Marketing, 1993, pp. 63–98.
4. For research on the role of organizational climate in
industrial buying, see William J. Qualls and Christopher
P. Puto, “Organizational Climate and Decision Framing:
An Integrated Approach to Analyzing Industrial Buying
Decisions,” Journal of Marketing Research, May 1989,
pp. 179–92.
242 Chapter Notes
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Chapter 5
1. Russell I. Haley, “Benefit Segmentation: A Decision-
Oriented Research Tool,” Journal of Marketing, July
1968, pp. 30–35; Russell I. Haley, “Benefit
Segmentation—20 Years Later,” Journal of Consumer
Marketing, 1983, pp. 5–13; and Russell I. Haley,
“Benefit Segments: Backwards and Forwards,”
Journal of Advertising Research, February–March
1984, pp. 19–25.
2. Roger J. Calantone and Alan G. Sawyer, “The
Stability of Benefit Segments,” Journal of Marketing
Research, August 1978, pp. 395–404; also see James R.
Merrill and William A. Weeks, “Predicting and
Identifying Benefit Segments in the Elderly Market,” in
AMA Educator’s Proceedings, eds. Patrick Murphy et al.
(Chicago: American Marketing Association, 1983),
pp. 399–403; Wagner A. Kamakura, “A Least Squares
Procedure for Benefit Segmentation with Conjoint
Experiments,” Journal of Marketing Research, May 1988,
pp. 157–67; and Michel Wedel and Jan-Benedict E. M.
Steenkamp, “A Clusterwise Regression Method for
Simultaneous Fuzzy Market Structuring and Benefit
Segmentation,” Journal of Marketing Research,
November 1991, pp. 385–96.
3. John L. Lastovicka, John P. Murry, Jr., and Eric
Joachimsthaler, “Evaluating the Measurement Validity of
Lifestyle Typologies with Qualitative Measures and
Multiplicative Factoring,” Journal of Marketing
Research, February 1990, pp. 11–23.
4. This discussion is taken from J. Paul Peter and
Jerry C. Olson, Consumer Behavior and Marketing
Strategy, 8th ed. (Burr Ridge, IL: Irwin/McGraw-Hill,
2008), pp. 373–75.
5. Ibid, pp. 379–381.
6. See Al Ries and Jack Trout, Positioning: The Battle
for Your Mind (New York: Warner Books, 1981); and
Al Ries and Jack Trout, Marketing Warfare (New York:
McGraw-Hill, 1986).
Chapter 6
1. Material for this section is based on discussions
contained in Louis E. Boone and David L. Kurtz,
Contemporary Marketing, 8th ed. (Fort Worth, TX: Dryden,
1995), Chap. 2; Gilbert A. Churchill, Jr., and J. Paul Peter,
Marketing: Creating Value for Customers (Burr Ridge, IL:
Irwin/McGraw-Hill, 1995), chap. 1, p. 634; James H.
Donnelly, James L. Gibson, and John M. Ivancevich,
Fundamentals of Management, 9th ed. (Burr Ridge, IL:
Irwin/McGraw-Hill 1995), p. 501; Joseph M. Juran,
“Made in the U.S.A.: A Renaissance in Quality,” Harvard
Business Review, July–August 1993, pp. 42–47, 50; and
Valerie A. Zeithaml, “Consumer Perceptions of Price,
Quality, and Value: A Means End Model and Synthesis of
Evidence,” Journal of Marketing, April 1988, pp. 35–48.
2. For a discussion on this topic, see Andrew J. Bergman,
“What the Marketing Professional Needs to Know about
ISO 9000 Series Registration,” Industrial Marketing
Management, 1994, pp. 367–70.
3. The material for this section comes from Glenn L.
Urban and Steven H. Star, Advanced Marketing Strategy
(Englewood Cliffs, NJ: Prentice Hall, 1991), Chap. 16.
4. For a detailed discussion of this topic, see Anne Perkins,
“Product Variety beyond Black,” Harvard Business Review,
November–December 1994, pp. 13–14; and “Perspectives:
The Logic of Product-Line Extensions,” Harvard Business
Review, November–December 1994, pp. 53–62.
5. Mats Urde, “Brand Orientation—A Strategy for
Survival,” Journal of Consumer Marketing, 1994, pp. 18–32.
6. James Lowry, “Survey Finds Most Powerful Brands,”
Advertising Age, July 11, 1988, p. 31.
7. Peter H. Farquhar, “Strategic Challenges for
Branding,” Marketing Management, 1994, pp. 8–15.
8. Peter D. Bennett, ed., Dictionary of Marketing Terms,
2nd ed. (Chicago: American Marketing Association,
1995), p. 27.
9. Terance Shimp, Promotion Management and
Marketing Communications, 2nd ed. (Hinsdale, IL:
Dryden Press, 1990), p. 67.
10. David A. Aaker and Kevin Lane Keller, “Consumer
Evaluations of Brand Extensions,” Journal of Marketing,
January 1990, pp. 27–41.
11. Ibid.
12. For a detailed discussion of brand equity, see David
Aaker, Managing Brand Equity (New York and London:
Free Press, 1991).
13. For a complete discussion of this topic, see Geoffrey
L. Gordon, Roger J. Calantone, and C. A. Di Benedetto,
“Brand Equity in the Business-to-Business Sector: An
Exploratory Study,” Journal of Product & Brand
Management, 1993, pp. 4–16.
14. Jeffrey D. Zbar, “Industry Trends Hold Private-
Label Promise,” Advertising Age, April 3, 1995, p. 31.
15. Karen Benezra, “Frito Bets ‘Reduced’ Pitch Is in the
Chips,” Brandweek, January 23, 1995, p. 18.
16. Thomas Hine, “Why We Buy,” Worth, May 1995,
pp. 80–83.
17. For a discussion of problems related to this issue, see
Geoffrey L. Gordon, Roger J. Calantone, and C. Anthony
Di Benedetto, “Mature Markets and Revitalization
Strategies: An American Fable,” Business Horizons,
May–June 1991, pp. 39–50.
18. Barry L. Bayus, “Are Product Life Cycles Really
Getting Shorter?” Journal of Product Innovation
Management, September 1994, pp. 300–308.
19. The discussion on benchmarking is based on Stanley
Brown, “Don’t Innovate—Imitate,” Sales & Marketing
Management, January 1995, pp. 24–25; Charles
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Goldwasser, “Benchmarking: People Make the Process,”
Management Review, June 1995, pp. 39–43; and
L. S. Pryor and S. J. Katz, “How Benchmarking Goes
Wrong (and How to Do It Right),” Planning Review,
January–February 1993, pp. 6–14.
Chapter 7
1. “Face Value: The Mass Production of Ideas, and Other
Impossibilities,” The Economist, March 18, 1995, p. 72.
2. Greg Erickson, “New Package Makes a New Product
Complete,” Marketing News, May 8, 1995, p. 10.
3. Zina Mouhkheiber, “Oversleeping,” Forbes, June 15,
1995, pp. 78–79.
4. The material on the five categories of new products is
from C. Merle Crawford and Anthony Di Benedetto, New
Products Management, 6th ed. (Burr Ridge, IL: McGraw-
Hill/Irwin, 2000), chap. 1.
5. H. Igor Ansoff, Corporate Strategy (New York:
McGraw-Hill, 1965), pp. 109–10.
6. Richard Stroup, “Growing in a Crowded Market
Requires Old and New Strategies,” Brandweek, August
22, 1994, p. 19.
7. These two examples came from Justin Martin, “Ignore
Your Customers,” Fortune, May 1, 1995, pp. 121–26.
8. “Where Do They Get All Those Ideas?” Machine
Design, January 26, 1995, p. 40.
9. This section is based on Daryl McKee, “An
Organizational Learning Approach to Product
Innovation,” Journal of Product Innovation Management,
September 1992, pp. 232–45.
10. The discussion on risk is from Thomas D.
Kuczmarski and Arthur G. Middlebrooks, “Innovation
Risk and Reward,” Sales & Marketing Management,
February 1993, pp. 44–51.
11. For a more complete discussion on the advantages
and disadvantages of strategic alliances, see Richard N.
Cardozo, Shannon H. Shipp, and Kenneth J. Roering,
“Proactive Strategic Partnerships: A New Business
Markets Strategy,” Journal of Business and Industrial
Marketing, Winter 1992, pp. 51–63; and Frank K.
Sonnenberg, “Partnering: Entering the Age of
Cooperation,” Journal of Business Strategy, May/June
1992, pp. 49–52.
12. James Quinn, “Managing Innovation: Controlled
Chaos,” Harvard Business Review, May–June 1985,
pp. 73–84; and Hirotaka Takeuchi and Ikujiro Nonaka,
“The New New Product Development Game,” Harvard
Business Review, January–February 1986, pp. 137–46.
13. For a discussion of this issue, see Eric M. Olson,
Orville C. Walker, Jr., and Robert W. Ruekert,
“Organizing for Effective New Product Development: The
Moderating Role of Product Innovativeness,” Journal of
Marketing, January 1995, pp. 48–62; and Christopher
Meyer, “How the Right Measures Help Teams Excel,”
Harvard Business Review, May–June 1994, pp. 95–97.
14. For a detailed discussion on these stages, see Karl T.
Ulrich and Steven D. Eppinger, Product Design and
Development (New York: McGraw-Hill, 1995); and Glen
Rifken, “Product Development: Emphatic Design Helps
Understand Users Better,” Harvard Business Review,
March–April 1994, pp. 10–11.
15. Patricia W. Meyers and Gerald A. Athaide, “Strategic
Mutual Learning between Producing and Buying Firms
during Product Innovation,” Journal of Product
Innovation Management, September 1991, pp. 155–69.
16. For a discussion of this issue, see Christina Brown
and James Lattin, “Investigating the Relationship
between Time in Market and Pioneering Advantage,”
Management Science, October 1994, pp. 1361–69; Robin
Peterson, “Forecasting for New Product Introduction,”
Journal of Business Forecasting, Fall 1994, pp. 21–23; and
Tracy Carlson, “The Race Is On,” Brandweek, May 9,
1994, pp. 22–27.
17. For a discussion of reasons why products fail, see
Betsy Spellman, “Big Talk, Little Dollars,” Brandweek,
January 23, 1995, pp. 21–29.
Chapter 8
1. This discussion is adapted from material contained in
Gilbert A. Churchill, Jr., and J. Paul Peter, Marketing:
Creating Value for Customers, 2nd ed., (Burr Ridge, IL:
Irwin/McGraw-Hill, 1998), chap. 18.
2. Material for this section is largely based on the
discussion of advertising tasks and objectives contained
in William Arens and Courtland Bovèe, Contemporary
Advertising, 5th ed. (Burr Ridge, IL: Irwin/McGraw-Hill,
1994), chap. 7.
3. For more comprehensive coverage of this topic, see
George E. Belch and Michael A. Belch, Advertising and
Promotion: An Integrated Marketing Communications
Perspective, 7th ed. (Burr Ridge, IL: Irwin/McGraw-Hill,
2007), chap. 12.
4. For a fuller explanation of the pros and cons associated
with push marketing strategies, see Betsy Spellman,
“Trade Promotion Redefined,” Brandweek, March 13,
1995, pp. 25–34; and John McManus, “‘Lost’ Money
Redefined as ‘Found’ Money Won’t Connect the
Disconnects,” Brandweek, March 25, 1995, p. 16.
5. This discussion is based on Donald R. Glover,
“Distributor Attitudes toward Manufacturer-Sponsored
Promotions,” Industrial Marketing Management, August
1991, pp. 241–49.
6. For a discussion of this topic, see Murray Raphel,
“Frequent Shopper Clubs: Supermarkets’ Newest
Weapon,” Direct Marketing, May 1995, pp. 18–20; Richard
G. Barlow, “Five Mistakes of Frequency Marketing,”
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Direct Marketing, March 1995, pp. 16–17; and Alice
Cuneo, “Savvy Frequent-Buyer Plans Build on a Loyal
Base,” Advertising Age, March 20, 1995, pp. S10–11.
Chapter 9
1. Warren Keegan, Sandra Moriarty, and Thomas
Duncan, Marketing, 2nd ed. (Englewood Cliffs, NJ:
Prentice Hall, 1994), p. 654.
2. Material for this discussion came from Ronald B.
Marks, Personal Selling: An Interactive Approach, 5th ed.
(Boston, MA: Allyn and Bacon, 1994), pp. 12–13.
3. Material for the discussion of objectives is adapted
from Joel R. Evans and Barry Berman, Marketing, 6th
ed. (New York: Macmillan, 1994), pp. 640–42.
4. Unless otherwise noted, the discussion on the
relationship-building process is based largely on material
contained in Barton A. Weitz, Stephen B. Castleberry,
and John F. Tanner, Jr., Selling: Building Partnerships,
3rd ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1998); and
Rolph Anderson, Essentials of Personal Selling: The New
Professionalism (Englewood Cliffs, NJ: Prentice
Hall, 1995). For an in-depth discussion of this topic,
readers should consult these references.
5. The discussion of aftermarketing is based on the work
of Terry Vavra, Aftermarketing: How to Keep Customers
for Life through Relationship Marketing (Burr Ridge, IL:
McGraw-Hill, 1995).
6. Ibid.
7. The discussion on national account management is
from James S. Boles, Bruce K. Pilling, and George W.
Goodwyn, “Revitalizing Your National Account
Marketing Program,” Journal of Business & Industrial
Marketing, no. 1 (1994), pp. 24–33.
8. Based on a survey by the National Industrial
Conference Board: “Forecasting Sales,” Studies in
Business Policy, no. 106.
9. Much of the discussion in this section is based on
material contained in Gilbert A. Churchill, Jr., Neil M.
Ford, and Orville C. Walker, Jr., Sales Force Management,
4th ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1993); and
William J. Stanton, Richard H. Buskirk, and Rosann L.
Spiro, Management of a Sales Force, 9th ed. (Burr Ridge,
IL: Irwin/McGraw-Hill, 1995), pp. 319–20.
10. For a complete discussion of the skills and policies
successful sales leaders use in motivating salespeople, see
David W. Cravens, Thomas N. Ingram, Raymond W.
LaForge, and Clifford E. Young, “Hallmarks of Effective
Sales Organizations,” Marketing Management, Winter
1992, pp. 57–66; Thomas R. Wortruba, John S. Mactie,
and Jerome A. Colletti, “Effective Sales Force Recognition
Programs,” Industrial Marketing Management, February
1991, pp. 9–15; and Ken Blanchard, “Reward Salespeople
Creatively,” Personal Selling Power, March 1992, p. 24.
Chapter 10
1. Peter D. Bennett, Dictionary of Marketing Terms,
2nd ed. (Chicago: American Marketing Association,
1995), p. 242.
2. For further discussion of relationship marketing, see
Jan B. Heide, “Interorganizational Governance in
Marketing Channels,” Journal of Marketing, January
1994, pp. 71–85; Robert M. Morgan and Shelby D. Hunt,
“The Commitment-Trust Theory of Relationship
Marketing,” Journal of Marketing, July 1994, pp. 20–38;
and Manohar U. Kalwani and Narakesari Narayandas,
“Long-Term Manufacturer-Supplier Relationships: Do
They Pay Off for the Supplier Firm?” Journal of
Marketing, January 1995, pp. 1–16.
3. This section is based on Donald J. Bowersox and M.
Bixby Cooper, Strategic Marketing Channel
Management (New York: McGraw-Hill, 1992),
pp. 104–7; Bert Rosenbloom, Marketing Channels: A
Management View, 4th ed. (Hinsdale, IL: Dryden Press),
pp. 440–65; and Roger A. Kerin, Eric N. Berkowitz,
Steven W. Hartley, and William Rudelius, Marketing,
8th ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 2006),
pp. 405–407.
4. This section is based on Gilbert A. Churchill, Jr., and
J. Paul Peter, Marketing: Creating Value for Customers,
2nd ed. (Burr Ridge, IL: Irwin/McGraw-Hill, 1998),
pp. 392–98.
5. www.naics.com, April 6, 2007.
6. This classification is based on Michael Levy and
Barton A. Weitz, Retailing Management, 8th ed. (Burr
Ridge, IL: Irwin/McGraw-Hill, 2007), chap. 2.
7. For an excellent discussion of electronic exchange, see
David W. Stewart and Qin Zhao, “Internet Marketing,
Business Models, and Public Policy,” Journal of Public
Policy & Marketing, Fall 2000, pp. 287–96.
Chapter 11
1. Kent B. Monroe, “Buyers’ Subjective Perceptions of
Price,” Journal of Marketing Research, February 1973,
pp. 70–80; also see Donald R. Lichtenstein and Scot
Burton, “The Relationship between Perceived and
Objective Price—Quality,” Journal of Marketing
Research, November 1989, pp. 429–43.
2. For research concerning the effects of price and
several other marketing variables on perceived product
quality, see Akshay R. Rao and Kent B. Monroe, “The
Effect of Price, Brand Name, and Store Name on Buyers’
Perceptions of Product Quality: An Integrative Review,”
Journal of Marketing Research, August 1989, pp. 351–57;
and William B. Dodds, Kent B. Monroe, and Dhruv
Grewal, “Effects of Price, Brand, and Store Evaluations
on Buyers’ Product Evaluations,” Journal of Marketing
Research, August 1991, pp. 307–19.
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3. For further discussion of price elasticity, see Stephen J.
Hoch, Byung-Do Kim, Alan L. Montgomery, and Peter
Rosi, “Determinants of Store-Level Price Elasticity,”
Journal of Marketing Research, February 1995, pp. 17–29.
4. For further discussion of legal issues involved in
pricing, see Louis W. Stern and Thomas L. Eovaldi, Legal
Aspects of Marketing Strategy (Englewood Cliffs, NJ:
Prentice Hall, 1984), chap. 5.
5. For more detailed discussions, see Frederick E.
Webster, Marketing for Managers (New York: Harper &
Row, 1974), pp. 178–79; also see Thomas T. Nagle and
Reed K. Holden, The Strategy and Tactics of Pricing
(Englewood Cliffs, NJ: Prentice Hall, 1995); and Kent B.
Monroe, Pricing: Making Profitable Decisions, 3rd ed.
(Burr Ridge, IL: McGraw-Hill/Irwin, 2003).
Chapter 12
1. Much of the material for this introduction came from
Ronald Henkoff, “Service Is Everybody’s Business,”
Fortune, June 27, 1994, pp. 48–60; and Tim R. Smith,
“The Tenth District’s Expanding Service Sector,”
Economic Review, Third Quarter 1994, pp. 55–66.
2. Peter D. Bennett, ed., Dictionary of Marketing Terms,
2nd ed. (Chicago: American Marketing Association,
1995), p. 261.
3. The material in this section draws from research
performed by Leonard L. Berry, Valerie A. Zeithaml, and
A. Parasuraman, “Quality Counts in Services, Too,”
Business Horizons, May–June 1985, pp. 44–52; A.
Parasuraman, Valerie A. Zeithaml, and Leonard L.
Berry, “A Conceptual Model of Service Quality and Its
Implications for Future Research,” Journal of Marketing,
Fall 1985, pp. 41–50; Leonard L. Berry, A. Parasuraman,
and Valerie A. Zeithaml, “The Service-Quality Puzzle,”
Business Horizons, September–October 1988, pp. 35–43;
Stephen W. Brown and Teresa A. Swartz, “A Gap Analysis
of Professional Service Quality,” Journal of Marketing,
April 1989, pp. 92–98; Leonard L. Berry, Valerie A.
Zeithaml, and A. Parasuraman, “Five Imperatives for
Improving Service Quality,” Sloan Management Review,
Summer 1990, pp. 29–38; A. Parasuraman, Leonard L.
Berry, and Valerie A. Zeithaml, “Understanding
Customer Expectations of Service,” Sloan Management
Review, Spring 1991, pp. 39–48; and Leonard L. Berry,
On Great Service: A Framework for Action (New York: Free
Press, 1995).
4. Rick Berry, “Define Service Quality So You Can
Deliver It,” Best’s Review, March 1995, p. 68.
5. Material for this section is drawn from John T.
Mentzer, Carol C. Bienstock, and Kenneth B. Kahn,
“Benchmarking Satisfaction,” Marketing Management,
Summer 1995, pp. 41–46; and Alan Dutka, AMA
Handbook for Customer Satisfaction: A Complete Guide to
Research, Planning and Implementation (Lincolnwood,
IL: NTC Books, 1994). For detailed information on this
topic, readers are advised to consult these sources.
6. Much of the material for this section was taken from
Karl Albrecht and Ron Zemke, Service America (Burr
Ridge, IL: Irwin/McGraw-Hill, 1985); and Ron Zemke
and Dick Schaaf, The Service Edge 101: Companies That
Profit from Customer Care (New York: New American
Library, 1989).
7. Chip R. Bell and Kristen Anderson, “Selecting Super
Service People,” HR Magazine, February 1992, pp. 52–54.
8. James A. Schlesinger and James L. Heskett,
“Breaking the Cycle of Failure in Services,” Sloan
Management Review, Spring 1991, pp. 17–28.
9. Leonard L. Berry and A. Parasuraman, “Services
Marketing Starts from Within,” Marketing Management,
Winter 1992, pp. 25–34.
10. Ibid.
11. Leonard L. Berry and A. Parasuraman, “Prescriptions
for a Service Quality Revolution in America,”
Organizational Dynamics, Spring 1992, pp. 5–15.
12. Bob O’Neal, “World-Class Service,” Executive
Excellence, September 1994, pp. 11–12.
13. This example is from David E. Bowen and Edward E.
Lawler III, “The Empowerment of Service Workers:
What, Why, How, and When,” Sloan Management Review,
Spring 1992, pp. 31–39.
14. Howard Schlossberg, “Study: U.S. Firms Lag in
Using Customer Satisfaction Data,” Marketing News,
June 1992, p. 14.
15. Andrew E. Serwer, “The Competition Heats Up in
Online Banking,” Fortune, June 26, 1995, pp. 18–19.
16. John Labate, “Chronimed,” Fortune, February 20,
1995, p. 118.
17. Elaine Underwood, “Airlines Continue Flight to
E-Ticketing,” Brandweek, May 8, 1995, p. 3.
18. Peter L. Ostrowski, Terrence V. O’Brien, and
Geoffrey L. Gordon, “Determinants of Service Quality in
the Commercial Airline Industry: Differences between
Business and Leisure Travelers,” Journal of Travel &
Tourism Marketing 3, no. 1 (1994), pp. 19–47.
Chapter 13
1. Jason Vogel, “Chicken Diplomacy,” Financial World,
March 14, 1995, pp. 46–49.
2. For a full explanation on cultural differences, see Rose
Knotts, “Cross-Cultural Management: Transformations
and Adaptations,” Business Horizons, January–February
1989, pp. 29–33.
3. Claudia Penteado, “Pepsi’s Brazil Blitz,” Advertising
Age, January 16, 1995, p. 12.
4. Karen Benezra, “Fritos ‘Round the World,’”
Brandweek, March 27, 1995, pp. 32, 35.
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5. Material for this section is from Craig Mellow, “Russia:
Making Cash from Chaos,” Fortune, April 17, 1995,
pp. 145–51; and Peter Galuszka, “And You Think You’ve
Got Tax Problems,” Business Week, May 29, 1995, p. 50.
6. Mir Magbool Alam Khan, “Enormity Tempts
Marketers to Make a Passage to India,” Advertising Age
International, May 15, 1995, p. 112.
7. This section was taken from James F. Bolt, “Global
Competitors: Some Criteria for Success,” Business
Horizons, January–February 1988, pp. 34–41.
8. This section is based on George S. Yip, Pierre M.
Loewe, and Michael Y. Yoshino, “How to Take Your
Company to the Global Market,” Columbia Journal of
World Business, Winter 1988, pp. 37–48.
9. Ibid.
10. The introductory material on foreign research is based
on Michael R. Czintoka, “Take a Shortcut to Low-Cost
Global Research,” Marketing News, March 13, 1995, p. 3.
11. Donald B. Pittenger, “Gathering Foreign
Demographics Is No Easy Task,” Marketing News,
January 8, 1990, pp. 23, 25.
12. This discussion is based on John Burnett, Promotion
Management (Boston: Houghton-Mifflin Co., 1993),
chap. 19.
13. The material for this section on market entry and
growth approaches is based on Philip R. Cateora,
International Marketing, 8th ed. (Burr Ridge, IL:
Irwin/McGraw-Hill, 1993), pp. 325–34; Charles W. L.
Hill, International Business: Competing in the Global
Marketplace (Burr Ridge, IL: Irwin/McGraw-Hill, 1994),
pp. 402–8; and William M. Pride and O. C. Ferrell,
Marketing: Concepts and Strategy, 9th ed. (Boston:
Houghton-Mifflin Co., 1995), pp. 111–14.
14. Bruce A. Walters, Steve Peters, and Gregory G. Dess,
“Strategic Alliances and Joint Ventures: Making Them
Work,” Business Horizons, July–August 1994, pp. 5–10.
15. Material in this section is based on Subhash C. Jain,
“Standardization of International Marketing Strategy:
Some Research Hypotheses,” Journal of Marketing,
January 1989, pp. 70–79.
Section II
1. Michael E. Porter, Competitive Strategy (New York:
Free Press, 1980). Also see Michael E. Porter, Competitive
Advantage: Creating and Sustaining Superior
Performance (New York: Free Press, 1985); and Michael
E. Porter, The Competitive Advantage of Nations (New
York: Free Press, 1990).
Section III
1. For methods of estimating the cost of capital, see
Charles P. Jones, Introduction to Financial Management
(Burr Ridge, IL: Irwin/McGraw-Hill, 1992), chap. 14.
2. See Eugene F. Brigham, Fundamentals of Financial
Management (Hinsdale, IL: Dryden Press, 1986).
3. It is useful to use average inventory rather than a
single end-of-year estimate if monthly data are available.
4. For a discussion of ratio analysis for retailing, see
Michael Levy and Barton A. Weitz, Retailing
Management (Burr Ridge, IL: McGraw-Hill/Irwin,
2007), chap. 5.
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Name Index
A
Aaker, David A., 85, 218, 243
Abdela, Andrew W., 21
Adair, Troy, 228
Albrecht, Karl, 246
Anderson, Erin, 160
Anderson, James C., 63
Anderson, Kristen, 246
Anderson, Rolph, 245
Angelmar, Reinhard, 241
Ansoff, H. Igor, 97, 241, 244
Arens, Christian, 116, 121
Arens, William F., 116, 121, 244
Armstrong, Gary, 241
Armstrong, J. Scott, 241
Ash, Mary Kay, 145
Athaide, Gerald A., 244
Atuahene, Kwaku, 95
B
Babin, Barry J., 39
Barlow, Janelle, 187
Barlow, Richard G., 244
Bartick, G. A., 145
Bartick, Paul, 145
Bateman, Thomas A., 241
Bates, Albert D., 154
Bateson, John E. G., 159, 187
Bayus, Barry L., 243
Bearden, William O., 3, 5, 33, 44, 66, 99, 115, 242
Beatty, Sharon E., 242
Behravesh, Nariman, 203
Belch, George E., 138, 244
Belch, Michael A., 138, 244
Belk, Russell W., 242
Bell, Chip R., 246
Benezra, Karen, 243, 246
Bennett, Peter D., 241, 243, 245, 246
Berenson, Conrad, 92
Bergman, Andrew J., 243
Berkowitz, Eric N., 86, 242, 245
Berman, Barry, 245
Berry, Leonard L., 21, 177, 187, 246
Berry, Rick, 246
Best, Roger, 52
Bhattacharya, Arindam K., 203
Biehal, Gabriel, 127
Bienstock, Carol C., 246
Birley, Sue, 154
Bitner, Mary Jo, 242
Biyalogorsky, Eyal, 108, 109
Blackshaw, Pete, 187
Blackwell, Roger D., 52, 242
Blanchard, Ken, 245
Boles, James S., 245
Bolt, James F., 247
Bolton, Ruth N., 76
Boone, Louis E., 243
Boorstin, Julia, 32
Boulding, William, 108, 109
Bovèe, Courtland, 244
Bowen, David E., 246
Bowersox, Donald J., 245
Boyd, Harper W., Jr., 240
Brady, Diane, 32
Brealey, Richard A., 228
Brennan, Ross, 63
Brigham, Eugene F., 247
Bristor, Julia M., 242
Brodie, Roderick J., 241
Brown, Christina, 244
Brown, Stanley, 243
Brown, Stephen W., 246
Brucks, Merrie, 242
Bunkholder, Richard, 203
Bunn, Michele D., 242
Burnett, John, 247
Burton, Scot, 245
Bush, Robert P., 39
Buskirk, Richard H., 245
C
Calantone, Roger J., 67, 243
Cameron, Doug, 8
Canning, Louise E., 63
Cannon, J. P., 5, 88
Cardozo, Richard N., 244
Carlson, Tracy, 244
Castleberry, Stephen B., 134, 245
Cateora, Philip R., 111, 196, 198, 247
Charan, Ram, 21
Childers, Terry L., 242
Chopra, Sunil, 160
Christensen, Clayton M., 21
Chuanping, Zhang, 203
Churchill, Gilbert A., Jr., 34, 39, 241, 242, 243,
244, 245
Clancy, Kevin J., 241
Clark, Terry, 241
Cohen, William A., 240
Coleman, Richard P., 242
Colletti, Jerome A., 245
Cook, Scott, 21
Cooper, Donald R., 31, 38, 39
Cooper, M. Bixby, 245
Cooper, Robert G., 99
Cooper, Scott W., 240
Cooper-Martin, Elizabeth, 74
Cornett, Marcia Millon, 228
Coughlin, Anne T., 160
Cox, Jennifer L., 169
Cravens, David W., 8, 101, 206, 218, 240, 245
Crawford, C. Merle, 87, 97, 104, 105, 244
Crittenden, Victoria L., 206, 218
Cummings, Stephan, 241
Cuneo, Alice, 245
Czintoka, Michael R., 247
248
D
Daniels, David, 127
Danko, William D., 242
Davies, John, 241
Davis, Peter S., 241
Day, George S., 241
Del Prete, Dom, 196
DeLuca, Luigi M., 95
Dess, Gregory G., 247
Deutsch, Donny, 145
Di Benedetto, Anthony, 87, 97, 104, 105, 243
Dickson, Peter R., 76
Dixit, Avinash K., 21
Dodds, William B., 245
Dolan, Robert J., 162
Domeniquini, Jennifer, 108
Donnelly, James H., Jr., 179, 181, 241, 243
Drucker, Peter, 8, 241
Duncan, Thomas, 245
Dutka, Alan, 246
Dwyer, F. Robert, 57, 60, 63
E
El-Ansary, Adel I., 160
Elkers, Richard J., Jr., 203
Ellet, William, 218
Engel, James F., 52, 242
Eovaldi, Thomas L., 246
Eppinger, Steven D., 244
Erdem, Tulin, 203
Erickson, Greg, 244
Estrin, Judy, 109
Etzel, Michael J., 44, 82, 192, 242
Evans, Joel R., 245
F
Farquhar, Peter H., 243
Ferrell, O. C., 247
Ford, Neil M., 245
Frankfurt, Lew, 32
Frazier, Gary L., 242
Freking, Kevin, 74
Friedman, Thomas L., 203
Fullerton, Sam, 187
Futrell, Charles M., 141
G
Galuszka, Peter, 247
Gamble, John E., 9, 215
Geyskens, Inge, 203
Gibson, J. L., 241, 243
Gilly, Mary C., 111, 196, 198
Ginter, James L., 76
Gladwell, Malcolm, 95
Glover, Donald R., 244
Goldwasser, Charles, 243–244
Gonzalez, Gabriel R., 145
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Kerin, Roger A., 35, 86, 108, 218, 240, 242, 245
Khan, Alam, 247
Kim, Byung-Do, 246
Knapp, Duane, 95
Knotts, Rose, 246
Kotler, Philip, 241
Krishnan, R., 39
Kuczmarski, Thomas D., 244
Kurtz, David L., 243
L
Labate, John, 246
LaForge, Raymond W., 3, 5, 33, 66, 115, 143, 245
Lamb, Charles W., Jr., 18, 206, 218
Landry, Edward, 109
Laster, Timothy M., 109
Lastovicka, John L., 243
Lattin, James, 244
Lawler, Edward E., III, 246
Ledford, Gerald E., Jr., 241
Lehmann, Donald R., 16, 240
Lemon, Katherine N., 5
Levitt, Ted, 21
Levy, Michael, 160, 164, 245, 247
Lichtenstein, Donald R., 245
Lindstrom, Martin, 95
Loewe, Pierre, 108, 247
Lofton, LouAnn, 32
Lovallo, Dan P., 108
Lowry, James, 243
Luntz, Frank, 127, 145
M
MacGregor, Jena, 108
MacInnis, Deborah J., 52
Mack, Ben, 109
Mactie, John S., 245
Magbool, Mir, 247
Mano, Haim, 242
Marcus, Alan J., 228
Markower, Jack, 21
Marks, Ronald B., 245
Martin, Justin, 244
Maslow, A. H., 47, 242
Mayer, Marissa, 101
Mazumdar, Tridib, 170
McCabe, Donald L., 241
McCarthy, E. Jerome, 5, 88
McDaniel, Carl, 18
McDowell, Raymond, 63
McEwen, William, 203
McKee, Daryl, 244
McManus, John, 244
Meer, David, 76
Meindl, Peter, 160
Mellow, Craig, 247
Mentzer, John T., 246
Merrill, James R., 243
Meyer, Christopher, 244
Meyers, Patricia W., 244
Middlebrooks, Arthur G., 244
Miniard, Paul W., 52, 242
Moeller, Leslie H., 109
Goodwyn, George W., 245
Gordon, Geoffrey L., 243, 246
Graham, John L., 111, 196, 198
Grewal, Dhruv, 39, 242, 245
Gronroos, Christian, 187
Guiltinan, Joseph, 124
H
Hair, Joseph F., Jr., 18, 39
Haley, Russell, 67, 243
Hall, Tandy, 21
Hanna, Sherman, 242
Hartley, Steven W., 35, 86, 108, 240, 242, 245
Hartwick, Jon, 242
Hawkins, Del I., 52
Heath, Chip, 109
Heath, Dan, 109
Heide, Jan B., 245
Hemerling, James W., 203
Heskett, James L., 246
Hiebing, Romon G., 240
Hine, Thomas, 243
Hoch, Stephen J., 246
Hoffman, Douglas, 145
Hoffman, K. Douglas, 187
Hogan, John, 170
Holden, Reed K., 246
Honeycutt, Earl D., Jr., 59, 63
Hornik, Jacob, 242
Hoyer, Wayne D., 52
Huellmantel, Alan B., 241
Hunt, Shelby D., 245
Hunter, Gary K., 145
Hutt, Michael D., 63
I
Iacobucci, Dawn, 34, 39
Ingram, Thomas N., 3, 5, 33, 66, 115, 143, 145,
245
Ivancevich, J. M., 241, 243
Iyer, Easwer S., 242
J
Jain, Subhash C., 247
Joachimsthaler, Eric, 243
Jones, Charles P., 247
Jordan, Bradford D., 228
Juran, Joseph M., 243
K
Kahn, Kenneth B., 246
Kalwani, Manohar U., 245
Kamakura, Wagner A., 243
Kaminsky, Philip, 160
Kanuck, Leslie Lazar, 41, 52
Kaplan, Robert S., 21
Katz, S. J., 244
Keegan, Warren, 245
Keiningham, Timothy, 187
Keller, Kevin Lane, 86, 87, 92, 194, 243
Keough, Donald R., 95
Kerber, Ronald L., 109
Mohr-Jackson, Iris, 92
Molhatra, Naresh K., 39
Monroe, Kent B., 162, 169, 170, 245, 246
Montgomery, Alan L., 246
Montgomery, David B., 241
Morgan, Robert M., 245
Moriarty, Sandra, 245
Morris, Michael H., 59, 63
Mothersbaugh, David L., 52
Mouhkheiber, Zina, 244
Mullin, Jeanniery, 127
Mullins, John, 240
Murphy, Patrick, 243
Murry, John P., Jr., 243
Myers, James H., 76
Myers, Matthew B., 76
Myers, Stewart C., 228
N
Nagle, Thomas T., 170, 246
Narayanan, V. K., 241
Narayandas, Narakesari, 245
Narus, James A., 63
Nelson, Reed E., 241
Netemeyer, Richard G., 95
Noblebuff, Barry J., 21
Nofsinger, John, 228
Nonaka, Ikujiro, 244
Norton, David, 21
O
O’Brien, Terrence V., 246
Oliver, Richard L., 242
Olson, Eric M., 244
Olson, Jerry C., 44, 52, 242, 243
O’Neal, Bob, 246
Ortinau, David J., 39
Ostrowski, Peter L., 246
O’Sullivan, Don, 21
Ozanne, Julie L., 242
P
Paley, Norton, 241
Parasuraman, A., 39, 177, 246
Park, C. Whan, 242
Paul, Gordon, 124
Penteado, Claudia, 246
Percival, Sean, 127
Perkins, Anne, 243
Perreault, W. D., Jr., 5, 88
Perreault, William D., 145
Peter, J. Paul, 44, 52, 241, 242, 243, 244, 245
Peters, Steve, 247
Peterson, Robert A., 218
Peterson, Robin, 244
Piercy, Nigel F., 8, 101, 240
Pilling, Bruce K., 245
Pinson, Christian, 241
Pitt, Leyland F., 59, 63
Pittenger, Donald B., 247
Porter, Jane, 32
Porter, Michael, 12, 189, 190, 207, 241, 247
Name Index 249
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Shulman, Robert S., 241
Sibony, Oliver, 108
Simchi-Levi, David, 160
Simchi-Levi, Edith, 160
Simmons, Carolyn J., 95
Simon, Hermann, 162
Sinha, Indrajit, 170
Sirkin, Harold L., 203
Skinner, Steven J., 241
Smith, Daniel C., 242
Smith, N. Craig, 74
Smith, Scott M., 242
Smith, Tim R., 246
Soloman, Don, 127
Solomon, Michael R., 52
Sonnenberg, Frank K., 244
Speh, Thomas W., 63
Spell, Chester, 154
Spellman, Betsy, 244
Spinelli, Stephen, Jr., 154
Spiro, Rosann L., 242, 245
Srinivasan, Narasimhan, 242
Staelin, Richard, 108, 109
Stanton, William J., 82, 192, 245
Star, Steven H., 243
Steenkamp, Jan-Benedict E. M., 203, 243
Stern, Louis W., 160, 246
Steward, Paul, 187
Stewart, David W., 245
Strahely, James T., 241
Strickland, A. J., III, 9, 215
Stroup, Richard, 244
Swait, Joffe, 203
Swartz, Teresa A., 246
T
Takeuchi, Hirotaka, 244
Tanner, John F., Jr., 57, 63, 134, 245
Thompson, Arthur A., 9
Thompson, Arthur A., Jr., 215
Thompson, Debra Viana, 95
Thompson, Rebecca, 95
Treacy, Michael, 241
Trout, Jack, 243
Tsao, Amy, 32
U
Ulrich, Karl T., 244
Urban, Glenn L., 243
Urde, Mats, 243
Precourt, Geoffrey, 127
Pride, William M., 241, 247
Pryor, L. S., 244
Pullig, Chris, 95
Puto, Christopher P., 242
Q
Qualls, William J., 242
Quinn, James, 244
R
Raj, S. P., 170
Rao, Akshay R., 242, 245
Raphel, Murray, 244
Ratchford, Brian T., 242
Reich, Brian, 127
Reichheld, Frederick F., 5
Ries, Al, 243
Rifken, Glen, 244
Roberts, Michel, 241
Rody, Raymond, 242
Roering, Kenneth J., 244
Rosenberg, Robert M., 154
Rosenbloom, Bert, 160, 245
Rosi, Peter, 246
Ross, Stephen A., 228
Rudelins, William, 86
Rudelius, William, 35, 108, 240, 242, 245
Ruekert, Robert W., 244
Rust, Roland T., 5, 95
S
Sawyer, Alan G., 67, 242, 243
Schaaf, Dick, 246
Schanninger, Charles M., 242
Schiffman, Leon G., 41, 52
Schill, Patrick L., 241
Schindler, Pamela S., 31, 38, 39
Schlesinger, James A., 246
Schlossberg, Howard, 246
Schwepker, Charles H., 143
Seiders, Kathleen, 21
Seltman, Kent D., 187
Serwer, Andrew E., 246
Shane, Scott, 154
Shenin, Daniel A., 127
Sheppard, Blair H., 242
Shimp, Terance, 243
Shipp, Shannon H., 244
V
Valenzuela, Ana, 203
Varadarajan, P. Rajan, 241
Vavra, Terry, 136, 187, 245
Vogel, Jason, 246
Vollmer, Christopher, 127
W
Wagner, Janet, 242
Walker, Bruce J., 82, 192
Walker, Orville C., Jr., 240, 244, 245
Walters, Bruce A., 247
Warshaw, Paul R., 242
Webster, Frederick E., Jr., 3, 246
Wedel, Michel, 243
Weeks, William A., 243
Weigold, Michael F., 116, 121
Weitz, Barton A., 134, 160, 164, 245, 247
Wendenhof, Jon R., 241
Westerfield, Randolph W., 228
White, Philip D., 154
Wiersema, Fred, 241
Winer, Russell S., 16, 170, 240
Wortruba, Thomas R., 245
X
Xiaoguang, William, 203
Y
Yankelovich, Daniel, 76
Yip, George S., 247
Yoshino, Michael Y., 247
Young, Clifford E., 245
Z
Zabriskie, Noel B., 241
Zbar, Jeffrey D., 243
Zeithamel, Valerie A., 5
Zeithaml, Carl P., 241
Zeithaml, Valarie A., 177, 243, 246
Zellner, Wendy, 8
Zemke, Ron, 183, 246
Zhao, Qin, 245
Zikmund, William G., 39
250 Name Index
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Subject Index
A
accounting, 10
achievers, 69, 70, 71
ACNielsen, 31, 71
ACR. See automated call routing (ACR)
activities, defined, 67
activity, interest, and opinion (AIO) questions, 67
Ad* Access, 38
Ad Forum, 38
adaptive organization, 59
administered systems, 153
advertising
consumer behavior and, 44
cooperative, 167
direct response, 126
direct-action, 148
global marketing and, 199–200
marketing communications and, 111–112, 113,
114–122
new products and, 103
objectives of, 114
outdoor, 119
product management and, 82
strategic planning and, 12
advertising decisions, 114–122
Advertising World, 38
aesthetics, 105
aftermarketing, 136–137
after-sale service, 132
agent, 147, 148, 149, 155
agricultural products, 79
AIO questions. See activity, interest, and opinion
(AIO) questions
Airborne Express, 13
Ajax Drug Company, 142, 220–222, 226, 227
Alcohol and Tobacco Tax Division, 129
alliances, 102, 200, 201–202
Allstate, 4
Almanac of Business and Industrial Financial
Ratios, 225
alternative evaluation, 47, 49
alternative search, 47, 48
Altria, 4, 13, 96
Amazon.com, 159
America West Airlines, 186
American Airlines, 125, 138
American cultural values, 41
American Demographics, 38
American Factfinder, 38
American Home Products, 209
American Marketing Association, 3, 49, 173
American Medical Association, 30
American Tobacco, 7
analysis
break-even, 163, 165, 220–222
case (See case studies/analysis)
competitive, 233
consumer, 236
correlation, 142
defined, 209
financial (See financial analysis)
marketing research and, 35, 36
net present value, 222–224
problem, 220 (See also case studies/analysis)
ratio, 224–227
situation, 15, 64, 216–217, 232
SWOT, 214–215
time-series, 141
vendor, 54, 61, 62
Anheuser-Busch, 199
Annual Statement Studies, 225
Apple, 138, 197
Arbitron, 71, 114
Arm & Hammer, 11
art, defined, 131
asset management ratios, 225, 227
assorting, defined, 147
assurance, 179
AT&T, 93
attitude, 10, 41, 124
attributes, 93
audits, 91–93
Audits and Surveys National Total-Market
Index, 234
automated call routing (ACR), 176
average frequency, 122
Avis, 153
Avon, 158, 189
awareness, 110, 113, 114, 124
B
b2b marketing. See business-to-business (b2b)
marketing
backward integration, 154
banking, 175, 184
Bass Pro Shop, 158
Batteries Plus, 157
BCG. See Boston Consulting Group (BCG)
BCG model, 24–25, 26
behavioral influences/perspective, 54, 58–60, 152
BehaviorScan, 31
Belgium, 192
believers, 69, 70, 71
belongingness and love needs, defined, 47–48
benchmarking, 93
benefit segmentation, 67
Best Buy, 148
Better Business Bureau, 16
BizMiner, 38
Black & Decker, 94
body language, 192
bonus packs, 125
Boston Consulting Group (BCG), 14, 23–24
brand, defined, 83, 84
brand associations, 85
brand equity, 44–45, 82–86
brand extension, 83
brand image, 85
brand loyalty, 85
brand names, 83–84, 86
brand personality, 82
251
brand selection, 44
brand strategy, 78. See also product management
branding, 82–86, 194–195
brand-manager system, 94
Brazil, 191, 199
break-even analysis/formulas, 163, 165, 220–222
break-even point, defined, 220
broker, 147, 155
Brothers Gourmet Coffees, 96
Buick, 73
build shares, 25, 26
Bulgaria, 192
bundle pricing, defined, 162
Bungle Studios, 197
Burger King, 73
business strength, 25, 26
business-to-business (b2b) marketing, 53
buying, defined, 147
buying center, 56
C
Cabela’s, 158
cable selling, 148
Campbell’s, 73
Canada, 197
Career Track, 138
case studies/analysis
alternative/implementation details and, 213
communicating results, 216–218
courses of action and, 212–213
current situation and, 207–211
defined, 209
entry barriers and, 208
environment and, 207, 210, 216
framework for, 206–213
industry and, 207, 210, 216
marketing strategy and, 208–210, 210–211,
212, 217
mistakes in, 212
operational approach to, 217
oral presentation for, 218
organization and, 208, 210, 216–217
pitfalls in, 213, 215–216
problems for, 211–212, 217
purpose of, 206
reports for, 216–218
rivalry and, 207–208
substitute products and, 208
suppliers and, 208
SWOT analysis and, 214–215
cash cows, 24, 25
catalog selling, 148
catalogs, 126, 157
Caterpillar, 193
cause marketing, defined, 4
CBDNet, 38
CBS Records, 188
Chanel, 32
channel flexibility, 152
channel relationships, 111
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252 Subject Index
defined, 46–47
need recognition in, 47–48
postpurchase evaluation in, 47, 50–52
purchase decision in, 47, 49–50
consumer goods, 80, 82, 148
consumer marketing research, global, 195–197
consumer promotions, 124, 125
contests, 125
Continental Airlines, 186
contract research, 34–35
contractual systems, 153
contribution margin, defined, 220
control, defined, 93
convenience goods, 80
convenience stores, 157
conventional channels, 152, 153
conviction, 113, 114
cooking, 192
cooperative advertising, 167
cooperative environment, 6, 14–15
corporate objectives, 163
corporate systems, 153–154
correlation analysis, 142
cost considerations, in pricing, 163–165
cost leadership strategy, 12
cost of capital, defined, 222
Costco, 13, 156
cost-oriented pricing, 163–164
cost-plus pricing, defined, 163
costs
fixed, 220
opportunity, 96
pricing model and, 168–169
variable, 220
Cott Corporation, 13
coupons, 125
CPC International, 201
credit card, 175
cross-functional teams, 19, 94, 102, 137, 138, 139
CSA TMO, 31
CSM. See customer satisfaction measurement
(CSM)
cultural misunderstanding/differences, 190–191
cultural values, 41
culture
global marketing and, 196–197
subculture and, 41–42
current conditions, 45
current ratio, 225
customer efforts, 174, 177–178
customer expectations method, 141
customer migration patterns, 92
customer orientation, 2
customer relationship, client vs., 176
customer satisfaction, 180
customer satisfaction measurement (CSM), 180
customer service, 185
customer structure, 139, 140
customer value, defined, 12–13
customers
clients vs., 181
nice, 186
cyclicality, GE model and, 26
D
data
performance and, 35
pricing strategy and, 163
primary, 30, 37
channels of distribution
defined, 146, 148
in distribution strategy, 146, 147, 148–154
function of, 147
global marketing and, 198–199
managing, 152–154
product management and, 80, 87, 93
selecting, 149–152
Chase Manhattan, 184
Chechnya, 191
China, 191, 192
Chronimed, 185
Chrysler, 73, 100, 173, 191
Church’s Fried Chicken, 189
Citibank, 184
Claritas, Inc., 71
Clayton Act, 167
client relationship, 174, 176
clients, customers vs., 181
Coach, 32
cobranding, 83
Coca-Cola, 12, 73, 82, 84, 93, 115, 122, 155,
162, 200
cognitive dissonance, 50
commercialization, 100, 104
commission, defined, 144
commitment
defined, 58–59
in relationship-building process, 133, 136
communication
marketing (See marketing communications)
nonpersonal, 110, 111, 126
personal, 110, 111
communication channels, 120
communication process, 118
company research, 34–35
Compaq, 100
Competia Express, 38
competition
pricing strategy and, 166
services marketing and, 182–183, 184
strategic planning and, 12
competitive advantage, 12, 13, 46, 102, 114, 131,
189–190
competitive analysis, 233
competitive environment, 6, 13, 15
competitive parity, 117
competitive strategy, 193
comprehension, 113, 114
ConAgra, 86
conformance, 105
consumer analysis, 236
consumer behavior
American cultural values and, 41
consumer decision making and (See consumer
decision making)
consumer decision-making process and (See
consumer decision-making process)
ethical conduct toward customers and, 49
information search and, 51
overview, 40
reference group influence and, 41, 43, 44
consumer decision making
marketing influences on, 40, 43–45
psychological influences on, 40, 45–46
situational influences on, 40, 45
social influences on, 40, 41–42
consumer decision-making process
alternative evaluation in, 47, 49
alternative search in, 47, 48
processing, 35
secondary, 30, 32
data collection methods, 33
data mining, 35
database management software, 38
deceptive pricing practices, 167
deciders, 56
decision making
advertising and, 114–122
consumer (See consumer decision making)
extensive, 46
for financial analysis (See financial analysis)
global marketing and, 202
limited, 46–47
marketing research and, 28–39
for new products, 105–107
organizational buyers and, 57
routine, 47
decision-making skills, 106
degree of control, 151
deletions, 91–93
Dell Computers, 13, 53
Delta Airlines, 186
demand influences, on pricing, 161–163
demand, services marketing and, 176
demographic factors, on pricing, 161
Denmark, 192
Department of Justice, 129
depth of product mix, 81
deregulation, 182
Diameter, 31
direct channel, 148
direct effects, defined, 41
direct mail, 119, 126, 148, 157
direct marketing, 111–112, 115, 126–127, 148
direct ownership, 202
direct response advertising, 126
direct sales, 158
direct selling, 148
direct-action advertising, 148
disconfirmation paradigm, 51–52
discrimination, price, 167
distinctive competencies, 7, 13
distinctiveness, 165, 167
distribution, defined, 234
distribution cost, 151–152
distribution coverage, 150
distribution intensity, 82
distribution strategy
channels of distribution in (See channels of
distribution)
global, 198–199
marketing intermediaries and, 146–147, 148
marketing management process and, 15
retailing in, 156–159
wholesaling in, 155–156
distributor, 147, 155. See also
wholesaler/wholesaling
distributor image, 85
diversification, 12, 97, 98
divest, 25
divisions, 13
dogs, 24, 25
Domino’s, 192
DoubleClick, 31
“drifting” organization, 6
dual branding, 83
Dun’s Business Locator, 53
DuPont, 93
durability, 105
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financial analysis
break-even analysis and, 220–222
of marketing plan, 236–239
marketing plan and, 231
net present value analysis and, 222–224
ratio analysis and, 224–227
financial ratios, 225
financial resources, 10, 13
financing, defined, 147
Finland, 192
Firestone Tire & Rubber, 188
fixed costs, defined, 220
flexibility, channel, 152
focus groups, 30, 33
Folgers, 46
Food and Drug Administration, 129
Ford, 93, 153, 162, 173, 234
forecasting sales, 140–142
Forrester Research Reports, 38
forward integration, 153–154
France, 192
franchise extension, 84
franchising, 153, 154, 201
frequency marketing programs, 125
Frito-Lay, 86, 162, 191
Fuji Photo, 162
functional relationships, 137
functional skills, 106
G
Gallup, 71
Gallup Poll, 38
Gap, The, 85, 157
gatekeepers, 56
Gateway, 4, 148
General Electric, 4, 14, 25–26, 84, 193
General Foods, 96, 193
General Mills, 81, 115, 125, 201, 209
General Motors, 173, 199, 234
generic product, defined, 78
geodemographic segmentation, 72
geographic structure, 139, 140
Germany, 192
Gillette, 86, 96
global advertising strategy, 199–200
global branding, 194–195
global company, 193
global consumer marketing research, 195–197
global distribution strategy, 198–199
Global Edge, 38
global marketing
advertising strategy for, 199–200
competitive advantage of nations, 189–190
cultural misunderstanding/differences and,
190–191, 192
distribution strategy for, 198–199
economic conditions and, 192–193
entry strategies for, 200–202
exchange controls and, 191–192
foreign markets and, 190–193
growth strategies for, 200–202
import restrictions and, 191
multinational company and, 193–195
organizing for, 190–195
overview of, 188–189
ownership restrictions and, 191–192
political uncertainty and, 191
pricing strategy for, 199
product development for, 197
E
early adopters, 91
early majority, 91
Eastern Airlines, 186
Eastman Kodak, 93, 94
eating, 192
economic conditions, global marketing and, 192–193
economic environment, 6, 15
Economics Statistics Briefing Room, 38
Eddie Bauer, 158
EDGAR Database of Corporate Information (SEC
filings), 38
EDLP. See everyday low pricing (EDLP)
educational institutions, 42
effort, 46
Egypt, 192
Eight-M formula, 118
electronic commerce, 160
electronic exchanges, 158–160
Eli Lilly, 189
empathy, 179
entry barriers, 208
entry strategies, 200–202
environment
case studies/analysis and, 207, 210, 216
competitive, 6, 13, 15
cooperative, 6, 14–15
economic, 6, 15
legal, 6, 17
organization, 7
political, 6, 16–17
social, 6, 16
environmental influences, on pricing, 166–167
e-service, 175
esteem needs, defined, 48
ethical conduct, customers and, 49
ethical responsibilities, of marketing researchers, 37
ethics, for organizational buyers, 60
evaluation, of new products, 105
everyday low pricing (EDLP), 164
exchange controls, global marketing and, 191–192
exclusive distribution, 150
expenses, sales force and, 144
experience, 137
experience curves, defined, 23
experiencers, 69, 70, 71
experiential sources, 48
experimental research, 32
exporting, 201
extended product, defined, 78
extensive decision making, 46
external information, 39
Exxon, 94
F
facilitating agent, 147
fads, 90
family, 42, 43
family branding, 84
family life cycle, 43
fashions, 90
Federal Communications Commission, 129
Federal Express, 181–182
Federal Trade Commission, 129, 225
Federal Trade Commission Act, 166, 167
FedStats, 38
finance, 10
finance plan, 20
product strategy for, 198
programming for, 195–200
sales promotion strategy for, 199–200
global marketing research, 195–197, 198
global pricing strategy, 199
global product development, 197
global product strategy, 198
global sales promotion strategy, 199–200
global strategy, 193
globalization, 193
going-rate pricing, defined, 166
goods, services vs., 174, 178
goods-service continuum, 173
government agencies, 54
government regulations, 166–167
GPO Access, 38
grading, defined, 147
Grain Division, 129
Grainger, 54
Great Britain, 192
green zone, 26
group influence, 46
group sources, 48
growth strategy, 96, 98, 200–202
Grundig, 192
guarantee, defined, 106
Gucci, 32
H
H. J. Heinz, 209
Harbor View Savings and Loan Association, 7
Harley-Davidson, 46
Harris Poll, 38
harvest, 25
health care, 184–185
health maintenance organization (HMO), 185
Heileman Brewing Company, 74
Hertz, 162
Hewlett-Packard, 101, 148
high/low, 164
Hills Brothers, 96
history, 7
HMO. See health maintenance organization (HMO)
hold share, 25
Holiday Inn, 153, 183
Home Depot, 164
Home Shopping Network, 158
Homescan, 31
Honda, 13
Honeywell, 193
horizontal market, 80
Hormel Meats, 7
H&R Block, 183
human resource plan, 20
human resources, 10
Hyundai, 73
I
IBM, 84, 93, 94, 138, 193
idea generation, 99–101
idea screening, 100, 101–102
Ikea, 197
images, 110
imitation products, 97
import restrictions, 191
indirect channels, 148, 152
indirect effects, defined, 41
Indonesia, 192
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254 Subject Index
KnowThis.com Marketing Virtual Library, 38
Kroger, 85, 156
L
L. L. Bean, 12
label brands, 85–86
laggards, 91
Lands’ End, 13, 159
late majority, 91
lead, defined, 134–135
leadership, GE model and, 26
learning curves, defined, 23
legal environment, 6, 17
legthargic organization, 59
Levenger, 157
Lever Brothers, 73
Levi Strauss, 6, 94, 192
Library of Congress, 129
licensing, 201
life cycle, 165–166, 167
lifestyles, 67
limitations
of nonstore retailing, 158
price, 168–169
of research process, 36–37
Limited, 85
limited decision making, 46–47
line extension, 84
liquidity ratios, 224–225, 226
long interviews, 30
long-term relationships, 54, 133, 136–137, 153
LouisVuitton, 32
love and belongingness needs, defined, 47–48
lower Americans, 42
M
Macy’s, 156
magazines, 119
Mail Boxes Etc., 138
mail surveys, 33
major account management, 139
makers, 69, 70, 71
mall intercepts, 33
manufacturer brands, 86
manufacturers’ agent, 147
manufacturers’ representatives, 155
March of Dimes, 6
market, defined, 136
market development, 97, 98
market development strategies, 11–12
market growth, GE model and, 26
market penetration, 97, 98
market penetration strategies, 11
market risk, 102
market segmentation
bases for, 67–72
benefit segmentation as, 67
consumer needs/wants and, 65
decisions and, 74–75
defined, 64
delineation of current situation and, 64
dimensions for, 65
geodemographic segmentation as, 72
marketing mix design and, 75–76
priori/post hoc segmentation and, 66
product positioning development and, 73–74
industry, 207, 210, 216
industry attractiveness, 25–26
Industry Norms and Key Business Ratios, 225
inflation
GE model and, 26
pricing strategies and, 170
influencers, 56
information, external/internal, 39
information provision, 131
Information Resources, 31
information search, 51
information systems, 19
initiators, 56
innovations, 10
innovative firms, 59
innovators, 69, 70, 91
inseparability, 174, 175–176, 182
institutions, 54
insurance, 130, 176, 185
intangibility, 174–175, 182, 183
integrated marketing communications, 112–114.
See also marketing communications
Intel, 53, 84
IntelliQuest, 31
intensive distribution, 150
intention to buy, 124
interests, defined, 67
intermediaries, 54
internal information, 39
internal marketing, 180–182
internal risk, 102
internal sources, 48
Internet, 156
global marketing and, 197
marketing communications and, 119, 127
service on, 183
Internet Confidence Index, 31
Internet marketing, 53
Internet surveys, 33
interpersonal skills, 106
interviews, marketing research and, 30, 33
inventory turnover ratio, 225
IRI, 71
Italy, 192
J
Japan, 188, 191, 197, 201
JCPenney Company, Inc., 86, 158, 159
J.D. Power Associates, 31, 71
JD Power Satisfaction Studies, 38
jobber, 147
joint alliance, 102
joint branding, 83
joint ventures, 201, 202
Journal of Marketing, 239
jury of executive opinion method, 141
just-in-time inventory, 55
JVC, 192
K
Kate Spade, 32
Keebler, 86
Kellogg, 115, 189, 192
Kentucky Fried Chicken, 188
Kerlins.net Qualitative Research Bibliography, 38
Kmart, 85, 153
psychographic segmentation as, 67–72
reasons for, 66
relevance for, 66–67
target marketing and, 74
market share, GE model and, 26
market size, GE model and, 26
market standing, 10
market test, 124
marketability questions, 75
marketing
b2b, 53
cause, 4
defined, 3–4
direct, 111–112, 115, 126–127, 148
internal, 180–182
Internet, 53
limited view of, 182
multichannel, 158–160
organization, 4
person, 4
product, 4
profitable, 40
relationship, 152
services (See services marketing/marketers)
target, 74
test, 36–37, 100, 103
Marketing and Research Library, 38
marketing communications
advertising and, 111–112, 113, 114–122
consumer behavior and, 44
direct marketing and, 111–112, 115, 126–127
Eight-M formula and, 118
goals of, 110–111
integrated, 112–114
media and, 114, 119, 120, 121, 122, 126
promotion mix and, 111–112
public relations and, 111–112, 115, 126
sales promotion and, 111–112, 113, 115,
122–126
marketing concept, 2–3, 17, 40, 136, 184
marketing costs, 238–239
marketing dimensions, 93
marketing influences, 40, 43–45, 46
marketing information, defined, 147
marketing information systems, 19, 38–39
marketing intermediaries, 146–147, 148
marketing management process
case analysis and, 206
defined, 14
marketing information systems in, 19
marketing planning in, 17–18
marketing research in, 19
situation analysis in, 14–17
strategic planning and (See strategic planning)
marketing mix
distribution strategy and, 146
market segmentation and, 64, 75–76
marketing management process and, 15,
17–18
marketing plans and, 233
in marketing strategy, 208, 209, 210, 217
new products and, 103
product management and, 80
sales/relationship-building process and, 141
services marketing and, 172, 186
“marketing myopia,” 78
marketing objectives, 15, 18, 163, 232–233
marketing philosophy, 3
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Mitsubishi, 193
Mobil, 153
model base management software, 39
modified rebuy, 55, 56, 61
Monsanto, 94
motivational impact, 124
Motorola, 93, 94, 102
multibranding, 83
multichannel marketing, 158–160
multidomestic company, 193
multinational company, 193–195
N
Nabisco, 86
NAFTA. See North American Free Trade
Agreement (NAFTA)
NAICS. See North American Industry
Classification System (NAICS)
name awareness, 85
name symbol, 85
National, 31
National Association of Retail Dealers of America,
30
national brands, 86
National Cash Register, 7
National People Meter, 31
need recognition, 47–48
Nemix, Inc., 189
Nestlé, 96, 162, 209
net present value analysis, 222–224
new category entries, 97
new products
commercialization for, 104
decision making for, 105–107
failure of, 96, 97, 107–108
features of, 106
idea generation for, 99–101
idea screening for, 101–102
performance of, 105
personal selling and, 130
planning/development for, 96–109
product design and, 106–107
product development for, 103
project planning for, 102
quality and, 105–106
research and, 107–108
safety of, 107
strategy for, 97–99
test marketing for, 103
time and, 104
new task purchase, 55–56, 61
news conference, 126
news release, 126
newspapers, 119
new-to-the-world products, 97
Nielsen Index, 114
Nielsen Media Research, 31, 71
Nielsen Retail Index, 234
Nielsen Television Index, 234
Nike, 13
Nokia, 84
nonfinancial resources, 13
nonpersonal communication, 110, 111, 126
nonstore retailing, 156, 157–160
NOP World, 31
Nordstrom, 44
marketing plan framework
appendix in, 231, 236–239
competitive analysis and, 233
consumer analysis and, 236
executive summary in, 231–232
financial analysis and, 231, 236–239
implementation/control and, 231, 234, 239
industry analysis in, 232
introduction to, 230, 231, 232
marketing planning in, 231, 232–234
objectives in, 235
purposes of, 230
questions for, 238
references in, 231, 239
situational analysis in, 231, 232
summary in, 231, 236
table of contents in, 231, 232
title page in, 231
marketing plan/planning, 15, 16, 17–20, 23
marketing research
Coach and, 32
data collection methods in, 33
data mining and, 35
defined, 28, 147, 234
limitations of, 36–37
marketing information systems and, 38–39
performance of, 29, 35
plan of, 29, 30–35
pricing strategy and, 162
processing of, 29, 35–36
purpose of, 29
questions and, 29–30, 33, 34
report for, 29, 36
role of, 28–29
services marketing and, 172
marketing research process, 28, 29–37
marketing sources, 48
marketing strategy, 162, 172, 208–210, 212, 217, 224
marketing-manager system, 94
MarketingPower.com, 38
markup pricing, defined, 163
Marlboro, 84
Mary Kay, 158
mass market, 64
mass merchandisers, 156
MasterCard, 173
mathematical modeling research, 32–33
Maxwell House, 46
McDonald’s, 11, 47, 73, 84, 153, 173, 188
meaningfulness questions, 75
measurability questions, 75
media, 114, 119, 120, 121, 122, 126
media mix, 120, 122
MediaMark, 31, 71
Medi-test Company, 143
merchant middleman, 147
Merrill Lynch & Co., 183
message strategy, 118, 120
Mexico, 192–193
Microsoft, 12, 13, 84, 197
middle class, 42
middleman, 147, 149
Midway Airlines, 186
Miliken, 93
Millstone Coffee, Inc., 96
Millward Brown, 31
mission, 5–9, 14, 15, 20
missionary salespeople, 138
North American Free Trade Agreement (NAFTA),
192
North American Industry Classification System
(NAICS), 53, 156
Northwest, 183
O
objections, 133, 136
objectives
of advertising, 114
corporate, 163
marketing, 15, 18, 163, 232–233
marketing management process and, 14, 15,
17, 18
in marketing plan framework, 235
marketing research and, 35
organizational, 6, 9–10, 11, 14, 15, 20
pricing, 163, 167, 168
strategic planning and, 6, 9–10, 11, 20
observation, 33
observational research, 30
odd pricing, defined, 162
Office Depot, 164
Office Max, 148
off-peak pricing, 176
online selling, 148
operations. See production/operations
OPERBAC, 31
opinion tests, 124
opinions, defined, 67
opportunity costs, 96
oral presentation, 218
ordering, 113, 114
organization marketing, defined, 4
organizational buyers/buying
behavioral influences on, 58–60
categories of, 53–54
decisions facing, 59
ethics for, 60
influences on, 55–56, 56–58
marketing differences to, 57
organizational buying process, 54, 60–63
organizational goods, 79–80, 148
organizational mission, 5–9, 15, 20
organizational needs, 54, 61
organizational objectives, 6, 9–10, 11, 14, 15, 20
organizational portfolio plan, 6, 13–14, 15, 20
organizational products, 83, 84–85
organizational strategies, 6, 11–13, 15, 20
organization’s distinctive competencies, 7, 13
organization’s environment, 7
organization’s history, 7
outdoor advertising, 119
out-rotation, 101
ownership restrictions, 191–192
P
packaging
new products and, 103
product management and, 86–88
strategic planning and, 12
Pan Am Airlines, 186
Panasonic, 192
partnerships, 137–138
Patent Office, 129
payback, defined, 223
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256 Subject Index
price fixing, 166
price influences, 43–44
price limitations, 168–169
price structure, 168, 169, 170
Priceline.com, 159
pricing
bundle, 162
cost considerations in, 163–165
cost-oriented, 163–164
cost-plus, 163
everyday low, 164
going-rate, 166
markup, 163
odd, 162
off-peak, 176
prestige, 162
product considerations in, 165–166
promotional, 167
rate-of-return, 163–164
sealed-bid, 166
target, 163–164
value, 167
pricing model, 167–170
pricing objectives, 163, 167, 168
pricing strategy/decisions, 15, 199
competition and, 166
cost considerations and, 163–165, 168–169
demand influences on, 161–163
demographic factors for, 161
environmental influences on, 166–167
government regulations and, 166–167
improving, 169
price changes and, 162
price elasticity and, 162–163
price structure and, 168, 169, 170
pricing model and, 167–170
profit potential and, 168, 169
psychological factors for, 161–162
retail, 164
supply influences on, 163–166
primary data, 30, 37
primary reference groups, 43
priori segmentation, 66
private brands, 86
PRIZM NE. See Potential Ranking Index of ZIP
Markets—New Evolution (PRIZM NE)
problem analysis, 220. See also case
studies/analysis
problems, in marketing research, 29, 36–37
problem-solving skills, 106
Procter & Gamble, 81, 84, 96, 104, 115, 125, 133,
139, 197, 199
producers, 53
product, defined, 233
product adoption/diffusion, 91
product audit, 91–93
product classification, 79–80
product design, 106–107
product development, 96, 97, 98, 100, 103, 197
product development strategies, 12
product failure, 96, 97, 107–108
product features, 105, 106
product improvement, 93, 97
product influences, 43
product involvement, defined, 46
product knowledge, defined, 45–46
product life cycle, 88–91, 92
product lines, 13, 81–82, 85, 94, 97
penetration policy, 166
Pepperidge Farm, 86
Pepsi, 73, 94, 115, 122, 153, 155, 188, 191, 198
perceived quality, 85
percent of sales, 115, 117
performance
consumer decision making and, 52
marketing management process and, 17
of marketing research, 29, 35
of new products, 105
relationship-building process and, 142, 144
services marketing and, 178
strategic planning and, 9, 10
perishability, 165, 167, 174, 176
person marketing, defined, 4
personal communication, 110, 111
personal (in-depth) interviews, 33
personal motivations, 58
personal selling
defined, 130
importance of, 130–131
marketing communications and, 112, 113, 115,
126
relationships-building and (See relationship-
building process)
persuasion, 131–132
per-unit expenditure, 117
Philips, 162
physical contact, 192
physical features of situation, 45
physical resources, 10
physiological needs, 47
Pillsbury, 188, 209
PIMS study. See Profit Impact of Marketing
Strategies (PIMS) study
Pizza Hut, 188, 192
place influences, 44–45
planning, strategic. See strategic planning
Polaroid, 94
political environment, 6, 16–17
political uncertainty, global marketing and, 191
Poll Question Database, 38
Polling Report, The, 38
portfolio models, 14, 23–25
portfolio plan, 6, 13–14, 15, 20
portfolio theory, 23–24
positioning map, 73
positioning strategies, 73. See also product
positioning
post hoc segmentation, 66
Postal Service, 129
postdecision dissonance, 50
postpurchase dissonance, 50, 51
postpurchase evaluation, 47, 50–52, 54, 61–63
postpurchase satisfaction, 50
Potential Ranking Index of ZIP Markets—New
Evolution (PRIZM NE), 71, 72
PowerGram, 31
PowerReport, 31
premiums, 125
preparation, for marketing research, 29, 36
present value ratio, defined, 223, 224
presenting, 133, 136
press release, 126
prestige pricing, defined, 162
price, defined, 234
price deals, 125, 167
price discrimination, 167
price elasticity, 162–163
product management
branding/brand equity and, 82–86
organizing for, 93–96
packaging and, 86–88
product classification and, 79–80
product definition and, 78–79
product line and, 81–82
product mix and, 81–82
product quality and, 80–81
value and, 80–81
product marketing, defined, 4
product mix, 81–82
product positioning, 73–74
product quality, 80–81, 82
product safety, 107
product selection, 44
product specialization, 142
product strategy, 15, 78, 79, 88, 198. See also
product management
product structure, 139, 140
production orientation, 2
production plan, 11, 20
production/operations, 10
productivity, 10
product-management system, 94
product-market matrix, 11
product-price relationships, 167–168
product(s)
defined, 78–79
extended, 78
generic, 78
imitation, 97
new (See new products)
new-to-the-world, 97
organizational, 83, 84–85
rejuvenating, 92
tangible, 78
profit contribution, 92
Profit Impact of Marketing Strategies (PIMS)
study, 23
profit margin on sales, 225–226
profit potential, 168, 169
profitability, GE model and, 26
profitability ratios, 225–226, 227
project planning, 100, 102
projective techniquest, 33
promotion, defined, 234
promotion influences, 44
promotion mix, 111–112, 130, 131, 200
promotion strategy, 15, 93
promotional allowances, 169
promotional pricing, 167
promptness, 192
prospects/prospecting, 110–111, 133–135
Prudential Insurance Company, 185
psychographic segmentation, 67–72
psychological factors, on pricing, 161–162
psychological influences, on consumer decision
making, 40, 45–46
Public Agenda, 38
Public Opinion, 38
public relations, 111–112, 115, 126
public service announcements, 126
public sources, 48
publicity
consumer behavior and, 44
defined, 112
forms of, 126
marketing communications and, 112, 113, 126
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management of, 139–144
objections in, 133, 136
partnerships in, 133, 137–138
performance in, 144
presenting in, 133, 136
prospecting in, 133–135
sales, 132–138
sales call in, 133, 135–136
sales force in, 140–144
sales leads in, 134
sales management task and, 139–140
sales process and, 131
relationships
channel, 111
client, 174, 176
customer, 176
functional, 137
long-term, 54, 133, 136–137, 154
product-price, 167–168
relay approach, 102
reliability, 105, 178
religious organizations, 42
report, for marketing research, 29, 36
research
company, 34–35
contract, 34–35
on CSMs, 180
experimental, 32
global marketing, 195–197, 198
limitations of, 36–37
market segmentation and, 66, 67
marketing (See marketing research)
mathematical modeling, 32–33
new products and, 107–108
observational, 30
on pricing objectives, 163
qualitative, 30, 32–33, 35
quantitative, 30, 32–33, 35
survey, 30, 32
research and development, 10
research approach, 117–118
resources
financial, 10, 13
human, 10
nonfinancial, 13
physical, 10
portfolio models and, 23
salespeople as, 130
target market and, 17
responsibility, social, 10
responsiveness, 178
retail pricing strategies, 164
retailer, 147, 148, 153, 154, 156
return on total assets, 225–226
RFID technology. See radio-frequency
identification (RFID) technology
risk
consumer decision making and, 50
internal, 102
market, 102
new products and, 101–102, 107
strategic, 102
risk taking, defined, 147
rivalry, 207–208
R.J. Reynolds Tobacco Company, 74
RJR Nabisco, 74, 94
Roadway, 13
Robinson-Patman Act, 167
role perceptions, 58–60
pull strategies, 122, 123
purchase activities, 54, 61
purchase decision, 47, 49–50
purchase-type influences, 54, 55–56
purchasing policies/procedures, 57–58
purchasing roles, 56
Purex, 94
push strategies, 122, 123
Q
Quaker Oats, 86, 209
qualitative research, 30, 32–33, 35
quality
new products and, 105–106
perceived, 85
pricing strategy and, 162
product, 80–81, 82
service, 175, 178–179, 180, 183
quantitative research, 30, 32–33, 35
quantitative techniques, 142
quantity discounts, 169
quantity, pricing and, 163
Quarterly Financial Report for Manufacturing
Corporations, 225
question marks, 24, 25
questions
AIO, 67
for case studies/analysis, 210–211, 211,
212–213
for competitive analysis, 233
in consumer analysis, 236
in implementation/control, 239
marketability, 75
for marketing communications, 115–118, 120,
122
in marketing planning, 238
for marketing research, 29–30, 33, 34, 36
meaningfulness, 75
measurability, 75
for new products, 108
for pricing decisions, 161–162
for relationship-building process, 134–135
for Web site development, 159
quick ratio, 225
Quirk’s Marketing Research Review, 38
QVC, 158
R
radio, 119, 120
radio-frequency identification (RFID) technology, 35
Raisinets, 208
random lead generation, 134
rate-of-return pricing, defined, 163–164
ratio analysis, 224–227
raw materials, 79
RCA Corporation, 201
reach, 122
rebates, 125
recall tests, 124
recognition tests, 124
red zone, 26
reference group, 41, 43, 44
refunds, 125
relationship marketing, defined, 152
relationship-building process
commitment in, 133, 136
long-term relationships in, 133, 136–137
Rolex, 12
Roper Center for Public Opinion Research, 38
Roper Reports, 38
routine decision making, 47
Rubbermaid, 13, 100
rugby approach, 102
Russia, 191
S
safety needs, 47
salary, defined, 144
sales call, 133, 135–136
sales force, 135, 138, 139, 140–144
sales force composite method, 141
sales forecast, 140–142, 236–238
sales management, 139–144
sales process, 131–138
sales promotion, 44, 111–112, 113, 115, 122–126,
130, 200
sales promotion strategy, 199–200
sales quotas, 142–143
sales relationship-building process, 132–138
sales territories, 142–143
sales trends, 92
salespeople
consumer behavior and, 44
evaluating, 143
missionary, 138
personal selling and, 130–132
relationship-building process and, 134–139,
142, 143
traits of effective, 138
sampling, 125
SBUs. See strategic business units (SBUs)
Scantrack, 31
Scarborough Research, 31
schools, 13
screening, 134
sealed-bid pricing, defined, 166
Sears, 105, 153
secondary data, 30, 32
secondary reference groups, 43
Securities and Exchange Commission, 129, 225
segmentation strategy, 74–75
selected-lead searching, 134
selective distribution, 150
self-actualization needs, defined, 48
selling, defined, 147. See also personal selling
selling orientation, 2
service products, 173, 178–182
service quality, 175, 178–179, 180, 183
serviceability, 105
services
defined, 172–173
goods vs., 174, 178
services marketing/marketers
banking as, 184
challenges for, 176, 184–187
characteristics of, 174–178
client relationships and, 174, 176
competition and, 182–183
customer efforts and, 174, 177–178
customer satisfaction and, 180
defined, 4, 172–173
demand and, 176
health care as, 184–185
implications for, 186–187
inseparability and, 174, 175–176, 182
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258 Subject Index
organizational portfolio plan and, 6, 13–14
organizational strategies and, 6, 11–13
Strategic Planning Institute, 23
strategic risk, 102
strivers, 69, 70, 71
structural influences, 54, 56–58
subculture, culture and, 41–42
substitute products, 208
Sun Microsystems, 189
Sunshine Biscuits, 86
supply influences, on pricing, 163–166
Survey of Current Business, 30
survey research, 30, 32
surveys, 33
survival, 9
survivors, 69, 70, 71
Sweden, 192
sweepstakes, 125
SWOT analysis, 214–215
T
Taco Bell, 188
Taiwan, 191
takeovers, 200
tangible product, defined, 78
tangibles, 178
Target, 85
target market selection, 15, 17, 64, 76, 233
target marketing, 74
target pricing, defined, 163–164
tariffs, 191
task approach, 118
task features of situation, 45
Taylor Nelson Sofres Intersearch Global
eCommerce, 31
teams
case studies/analysis and, 218
cross-functional, 19, 94, 102, 137, 138, 139
venture, 94
technical sales specialist, 138
technical skills, 106
technology
market segmentation and, 65
marketing communications and, 122, 127
product life cycle and, 89
RFID, 35
services marketing and, 176, 182, 185
technology plan, 20
telemarketing, 148
telephone surveys, 33
television, 119, 120
television home shopping, 158
test marketing, 36–37, 100, 103
Thailand, 191, 192
theater tests, 124
thinkers, 69, 70, 71
3M Company, 96
time, 45, 46, 104
time to market, defined, 104
time-series analysis, 141
Timex Group Ltd., 12, 193
T.J. Maxx, 156
total asset utilization, 225, 227
total-quality management (TQM), 80–81
Toyota, 73, 84
Toys ‘R’ Us, 164
TQM. See Total-quality management (TQM)
trade sales promotions, 123–124
services marketing/marketers (Continued)
insurance as, 185
intangibility and, 174–175, 182, 183
internal marketing and, 180–182
noncreative management and, 183
obsolescence and, 183–184
obstacles in, 182–184
perishability and, 174, 176
relationship marketing in, 179, 181
service products for, 178–182
travel as, 185–186
uniformity and, 174, 178
view of, 182
7-Eleven, 157
Shell Oil, 188
Sherman Antitrust Act, 166
Siemens, 193
Simmons Media/Market Service, 234
Simmons Reports, 114
Simmons (SMRB), 31
Singapore, 192
situation analysis, 15, 64, 216–217, 232
situational influences, on consumer decision
making, 40, 45, 46
skimming policy, 165
skunkworks, 102
slotting allowances, 169
smart tag, 35
Smith New Court PLC, 183
social class, 41, 42–43
social customs, 192
social environment, 6, 16
social features of situation, 45
social influences, on decision making, 40, 41–42
social responsibility, 10
software, 38–39
sole sourcing, 57–58, 61, 62
Sony, 192
sorting, defined, 147
South Korea, 191
Southwest Airlines, 12, 13, 186
Spain, 192
specialty stores, 157
sponsorship, 126
SRI Consulting Business Intelligence, 69
Sri Lanka, 192
Standard Rate and Data, 234, 238
Starbucks, 13, 46, 96, 138
Starch Ad Readership Studies, 31, 234
Starch Reports, 114
Stars, 24, 25
Statistical Abstracts of the United States, 30, 237
Stat-USA, 38
store brands, 86
store retailing, 156–157
storing, defined, 147
straight rebuy, 55, 56, 58, 61
strategic alliance, 102, 137, 201–202
strategic business units (SBUs), 13–14, 23, 24–25,
26
strategic partnerships, 137
strategic planning
defined, 4–14
marketing and, 3–4, 19–20
marketing concept and, 2–3
marketing management process and (See
marketing management process)
organizational mission and, 5–9
organizational objectives and, 6, 9–10
trademark, defined, 83
training, 137, 138
transporting, defined, 147
travel, 185–186
Tupperware, 158
TWA, 186
U
uniformity, services marketing and, 174, 178
United Airlines, 138, 186
United Parcel Service of America (UPS), 138
upper Americans, 42
UPS. See United Parcel Service of America (UPS)
U.S. Airways, 183
U.S. Bureau of Labor Statistics, 38
U.S. Bureau of the Census, 38
U.S. Department of Commerce, 38
U.S. Patent and Trademark Office, 38
U.S. Small Business Administration, 38
users, 56
V
VALS™. See values and lifestyles (VALS™)
value brands, 86
value pricing, 167
value(s), 12–13, 41, 80–81
values and lifestyles (VALS™), 69–72
variable costs, defined, 220
vending machines, 158
vendor analysis, 54, 61, 62
venture team, 94
vertical market, 80
vertical marketing systems, 152–154
VF Corporation, 13
Volkswagon, 199
Volvo, 73
W
Walgreens, 86
Walmart, 12, 44, 54, 85, 86, 153, 155, 156, 159,
164, 193
Walt Disney Co., 84
warranty, defined, 105–106
Web sites
developing, 159
P&G, 197
popular, 111
Whirlpool, 192
wholesaler/wholesaling, 147, 148, 153, 154, 155–156
width of product mix, 81
working class, 42
world scope, GE model and, 26
X
Xerox, 93, 94
Y
Yahoo!, 31
yellow zone, 26
Yves Saint Laurent, 32
Z
Zenith, 188
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