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Principles of Marketing Version 2.0

By John F. Tanner, Jr. and Mary Anne Raymond

687922

Principles of Marketing Version 2.0

John F. Tanner, Jr. and Mary Anne Raymond

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Flat World Knowledge, Inc. One Bridge Street Irvington, NY 10533

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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10

Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16

Brief Contents

About the Authors Acknowledgments Preface

What Is Marketing? Strategic Planning Consumer Behavior: How People Make Buying Decisions Business Buying Behavior Market Segmenting, Targeting, and Positioning Creating Offerings Developing and Managing Offerings Using Marketing Channels to Create Value for Customers Using Supply Chains to Create Value for Customers Gathering and Using Information: Marketing Research and Market Intelligence Integrated Marketing Communications and the Changing Media Landscape Public Relations, Social Media, and Sponsorships Professional Selling Customer Satisfaction, Loyalty, and Empowerment Price, the Only Revenue Generator The Marketing Plan

Index

1

2

3

5Chapter 1

5 11 13 15 20 22

23Chapter 2

23 25 34 38 40 43 44

45Chapter 3

46 60

65 67

69Chapter 4

69 72 77 80 84 88 91 93

95Chapter 5

95 99

Contents

About the Authors

Acknowledgments

Preface

What Is Marketing?

Defining Marketing Who Does Marketing? Why Study Marketing? Themes and Organization of This Book Discussion Questions and Activities Endnotes

Strategic Planning

The Value Proposition Components of the Strategic Planning Process Developing Organizational Objectives and Formulating Strategies Where Strategic Planning Occurs within Firms Strategic Portfolio Planning Approaches Discussion Questions and Activities Endnotes

Consumer Behavior: How People Make Buying Decisions

Factors That Influence Consumers’ Buying Behavior Low-Involvement Versus High-Involvement Buying Decisions and the Consumer’s Decision-Making Process Discussion Questions and Activities Endnotes

Business Buying Behavior

The Characteristics of Business-to-Business (B2B) Markets Types of B2B Buyers Buying Centers Stages in the B2B Buying Process and B2B Buying Situations International B2B Markets and E-commerce Ethics in B2B Markets Discussion Questions and Activities Endnotes

Market Segmenting, Targeting, and Positioning

Targeted Marketing versus Mass Marketing How Markets Are Segmented

110 114 116 118

119Chapter 6

119 125 128 131 135 136

139Chapter 7

140 146 155 156

157Chapter 8

157 164 169 173 176 180 182

183Chapter 9

185 189 194 198 201 202

203Chapter 10

205 212 229 231

233Chapter 11

233 238

Selecting Target Markets and Target-Market Strategies Positioning and Repositioning Offerings Discussion Questions and Activities Endnotes

Creating Offerings

What Composes an Offering? Types of Consumer Offerings Types of Business-to-Business (B2B) Offerings Branding, Labeling, and Packaging Managing the Offering Discussion Questions and Activities

Developing and Managing Offerings

The New Offering Development Process Managing New Products: The Product Life Cycle Discussion Questions and Activities Endnotes

Using Marketing Channels to Create Value for Customers

Marketing Channels and Channel Partners Typical Marketing Channels Functions Performed by Channel Partners Marketing Channel Strategies Channel Dynamics Discussion Questions and Activities Endnotes

Using Supply Chains to Create Value for Customers

Sourcing and Procurement Demand Planning and Inventory Control Warehousing and Transportation Track and Trace Systems and Reverse Logistics Discussion Questions and Activities Endnotes

Gathering and Using Information: Marketing Research and Market Intelligence

Marketing Information Systems Steps in the Marketing Research Process Discussion Questions and Activities Endnotes

Integrated Marketing Communications and the Changing Media Landscape

Integrated Marketing Communications (IMC) The Promotion (Communication) Mix

240

243 245 252 254 259 260

261Chapter 12

262 267 269 270

271Chapter 13

271 277 282 287 290 295 298

299Chapter 14

299 304 310 315 320 321

323Chapter 15

323 326 330 337 338

339Chapter 16

339 341 350 355 358 359

Factors Influencing the Promotion Mix, Communication Process, and Message Problems Advertising and Direct Marketing Message Strategies The Promotion Budget Sales Promotions Discussion Questions and Activities Endnotes

Public Relations, Social Media, and Sponsorships

Public Relations Activities and Tools Social Media Discussion Questions and Activities Endnotes

Professional Selling

The Role Professional Salespeople Play Customer Relationships and Selling Strategies Sales Metrics (Measures) Ethics in Sales and Sales Management Integrating Sales and Marketing Outsourcing the Sales Function Discussion Questions and Activities

Customer Satisfaction, Loyalty, and Empowerment

Customer Communities Loyalty Management Customer Satisfaction Ethics, Laws, and Customer Empowerment Discussion Questions and Activities Endnotes

Price, the Only Revenue Generator

The Pricing Framework and a Firm’s Pricing Objectives Factors That Affect Pricing Decisions Pricing Strategies Discussion Questions and Activities Endnotes

The Marketing Plan

Marketing Planning Roles Functions of the Marketing Plan Forecasting Ongoing Marketing Planning and Evaluation Discussion Questions and Activities Endnotes

361Index

Source: Photo by Lilly Tanner, used with permission.

About the Authors

JEFF TANNER John F. (Jeff) Tanner, Jr., is professor of marketing at the Hankamer School of Business, Baylor University. He is an internationally recognized expert in sales and sales manage- ment. He is the author or coauthor of twelve books, including two best-selling text- books with McGraw-Hill—Selling: Building Partnerships and Business Marketing: Con- necting Strategy, Relationships and Learning. His books have been translated into sever- al languages and distributed in over thirty countries.

Dr. Tanner spent eight years in marketing and sales with Rockwell International and Xerox Corporation. In 1988, he earned his PhD from the University of Georgia and joined the faculty at Baylor University, where he currently serves as the research direct- or of the Center for Professional Selling.

In addition to writing and research, Dr. Tanner maintains an active consulting and training practice. Recent clients include IBM, Hillcrest Medical System, and others. He is the managing partner of Team Fulcrum, which conducts sales training and market- ing research, and he is a founder and research director of BPT Partners, the premier training and education company focused on advancing the skills and competency of professionals in the customer relationship management industry.

MARY ANNE RAYMOND Mary Anne Raymond is a professor and chair of marketing at Clemson University. Pri- or to joining the faculty at Clemson, she served on the faculty at American University in Washington, DC, and helped coordinate the graduate marketing program at Johns Hopkins University. Previously, she was an invited Fulbright Professor of Marketing at Seoul National University in Seoul, Korea.

Dr. Raymond received her PhD from the University of Georgia. She has extensive industry experience doing strategic planning and acquisition analysis, marketing re- search, and investment analysis for Holiday Inns, Inc.; Freeport Sulphur; and Howard, Weil, Labouisse, Friedrichs. Dr. Raymond also does consulting, seminars, and market- ing training for multinational companies, which have included organizations such as Merit Communications in Seoul, Korea; the Conference Center and Inn at Clemson University; and Sangyong Group.

Her research focuses on strategy in domestic and international markets, public policy issues, and social marketing. Dr. Raymond has published over one hundred pa- pers appearing in journals such as International Marketing Review, the Journal of Ad- vertising Research, the Journal of Marketing Education, the Journal of Personal Selling and Sales Management, and the Journal of Public Policy and Marketing, as well as nu- merous other journals and international conference proceedings. Dr. Raymond has also received numerous awards and recognition for her teaching and research. She received the Professor of the Year Award from Clemson University Panhellenic Association, the Undergraduate Teaching Excellence Award from the College of Business and Behavior- al Science at Clemson three times, the Eli Lilly Faculty Excellence Awards for Outstand- ing Research and Outstanding Teaching, and the Eli Lilly Partnership Awards, and re- cognition for Leadership in Student Development from the Dow Chemical Company.

Acknowledgments The authors would like to thank the following reviewers for their feedback, which helped shape the second edition:

< Stephen M. Berry, Anne Arundel Community College < Bob Conrad, Ph.D., APR, Conrad Communications, LLC. < Ted Lapekas, SUNY/Empire State College < Donald G. Purdy, University at Albany < Elizabeth F. Purinton, Marist College < Kelly Sell, Bucks County Community College < Richard L. Sharman, Lone Star College-Montgomery < Gary Tucker, Northwestern Oklahoma State University < Gregory R. Wood, Canisius College < Anne Zahradnik, Marist College

The authors would like to thank Camille Schuster for her input, examples, and feedback on the first edition chapters. The authors would also like to thank the following colleagues who have reviewed the first edition text and provided comprehensive feedback and suggestions for improving the material:

< Christie Amaot, University of North Carolina, Charlotte < Andrew Baker, Georgia State University < Jennifer Barr, The Richard Stockton College of New Jersey < George Bernard, Seminole Community College < Patrick Bishop, Ferris State University < Donna Crane, Northern Kentucky University < Lawrence Duke, Drexel University < Mary Ann Edwards, College of Mount St. Joseph < Paulette Faggiano, Southern New Hampshire University < Bob Farris, Mt. San Antonio College < Leisa Flynn, Florida State University < Renee Foster, Delta State University < Alfredo Gomez, Broward College < Jianwei Hou, Minnesota State University, Mankato < Craig Kelley, California State University, Sacramento < Marilyn Liebrenz-Himes, George Washington University < Alicia Lupinacci, Tarrant County College < John Miller, Pima Community College, Downtown < Melissa Moore, Mississippi State University < Kathy Rathbone, Tri-County Community College < Michelle Reiss, Spalding University < Tom Schmidt, Simpson College < Richard Sharman, Lonestar College < Karen Stewart, The Richard Stockton College of New Jersey < Victoria Szerko, Dominican College < Robert Winsor, Loyola Marymount University

Preface Principles of Marketing 2.0 by Tanner and Raymond teaches the experience and process of actually doing marketing—not just the vocabulary. It carries five dominant themes throughout in order to expose students to marketing in today’s environment:

1. Service-dominant logic—This textbook employs the term “offering” instead of the more traditional first P—product. That is because consumers don’t sacrifice value when alternating between a product and a service. They are evaluating the entire ex- perience, whether they interact with a product, a service, or a combination. So the fundamental focus is providing value throughout the value chain, whether that value chain encompasses a product, a service, or both.

2. Sustainability—Increasingly, companies are interested in their impact on their local community as well as on the overall en- vironment. This is often referred to as the “triple bottom line” of financial, social, and environment performance.

3. Ethics and social responsibility—Following on the sustainability notion is the broader importance of ethics and social re- sponsibility in creating successful organizations. The authors make consistent references to ethical situations throughout chapter coverage, and end-of-chapter material in many chapters will encompass ethical situations.

4. Global coverage—Whether it is today’s price of gasoline, the current U.S. presidential race, or midwestern U.S. farming, al- most every industry and company needs strong global awareness. And today’s marketing professionals must understand the world in which they and their companies operate. Examples of decisions relative to the global marketplace are discussed throughout the text.

5. Metrics—Firms today have the potential to gather more information than ever before about their current and potential cus- tomers. That information gathering can be costly, but it can also be very revealing. With the potential to capture so much more detail about micro transactions, firms should now be more able to answer, “Was this marketing strategy really worth it?” and “What is the marketing ROI?” and finally, “What is this customer or set of customers worth to us over their lifetime?”

In this second edition, you’ll also find more emphasis on omni-channel marketing, social media in marketing, and the other com- ponents of the digital media revolution that are changing marketing so rapidly. Examples, videos, illustrations, and more reflect the latest in how marketing gets done.

4 PRINCIPLES OF MARKETING VERSION 2.0

marketing

“The activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.”

creating

In marketing, a term that involves collaboration with suppliers and customers in order to generate offerings of value to customers.

exchanging

The act of transacting value between a buyer and a seller.

C H A P T E R 1 What Is Marketing? What makes a business idea work? Does it only take money? Why are some products a huge success and similar

products a dismal failure? How was Apple, a computer company, able to create and launch the wildly successful

iPod, yet Microsoft’s first foray into MP3 players was a total disaster? If the size of the company and the money

behind a product’s launch were the difference, Microsoft would have won. But for Microsoft to have won, it would

have needed something it’s not had in a while—good marketing so it can produce and sell products that

consumers want.

So how does good marketing get done?

1. DEFINING MARKETING

L E A R N I N G O B J E C T I V E

1. Define marketing and outline its components.

Marketing is defined by the American Marketing Association as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for cus- tomers, clients, partners, and society at large.”[1] If you read the definition closely, you see that there are four activities, or components, of marketing:

1. Creating. The process of collaborating with suppliers and customers to create offerings that have value.

2. Communicating. Broadly, describing those offerings, as well as learning from customers. 3. Delivering. Getting those offerings to the consumer in a way that optimizes value. 4. Exchanging. Trading value for those offerings.

The traditional way of viewing the components of marketing is via the four Ps: 1. Product. Goods and services (creating offerings). 2. Promotion. Communication. 3. Place. Getting the product to a point at which the customer can purchase it (delivering). 4. Price. The monetary amount charged for the product (exchanging).

Introduced in the early 1950s, the four Ps were called the marketing mix, meaning that a marketing plan is a mix of these four components.

If the four Ps are the same as creating, communicating, delivering, and exchanging, you might be wondering why there was a change. The answer is that they are not exactly the same. Product, price, place, and promotion are nouns. As such, these words fail to capture all the activities of marketing. For example, exchanging requires mechanisms for a transaction, which consist of more than simply a price or place. Exchanging requires, among other things, the transfer of ownership. For example, when you buy a car, you sign documents that transfer the car’s title from the seller to you. That’s part of the ex- change process.

Even the term product, which seems pretty obvious, is limited. Does the product include services that come with your new car purchase (such as free maintenance for a certain period of time on some models)? Or does the product mean only the car itself?

Finally, none of the four Ps describes particularly well what marketing people do. However, one of the goals of this book is to focus on exactly what it is that marketing professionals do.

value

Total sum of benefits received that meet a buyer’s needs. See personal value equation.

personal value equation

The net benefit a consumer receives from a product less the price paid for it and the hassle or effort expended to acquire it.

marketing concept

A philosophy underlying all that marketers do, driven by satisfying customer wants and needs.

market oriented

The degree to which a company follows the marketing concept.

1.1 Value Value is at the center of everything marketing does (Figure 1.1). What does value mean?

F I G U R E 1 . 1

Marketing is composed of four activities centered on customer value: creating, communicating, delivering, and exchanging value.

When we use the term value, we mean the benefits buyers receive that meet their needs. In other words, value is what the customer gets by purchasing and consuming a company’s offering. So, al- though the offering is created by the company, the value is determined by the customer.

Furthermore, our goal as marketers is to create a profitable exchange for consumers. By profitable, we mean that the consumer’s personal value equation is positive. The personal value equation is

value = benefits received – [price + hassle]

Hassle is the time and effort the consumer puts into the shopping process. The equation is a personal one because how each consumer judges the benefits of a product will vary, as will the time and effort he or she puts into shopping. Value, then, varies for each consumer.

One way to think of value is to think of a meal in a restaurant. If you and three friends go to a res- taurant and order the same dish, each of you will like it more or less depending on your own personal tastes. Yet the dish was exactly the same, priced the same, and served exactly the same way. Because your tastes varied, the benefits you received varied. Therefore the value varied for each of you. That’s why we call it a personal value equation.

Value varies from customer to customer based on each customer’s needs. The marketing concept, a philosophy underlying all that marketers do, requires that marketers seek to satisfy custom- er wants and needs. Firms operating with that philosophy are said to be market oriented. At the same time, market-oriented firms recognize that exchange must be profitable for the company to be success- ful. A marketing orientation is not an excuse to fail to make profit.

6 PRINCIPLES OF MARKETING VERSION 2.0

production orientation

A belief that the way to compete is a function of product innovation and reducing production costs, as good products appropriately priced sell themselves.

production era

A period beginning with the Industrial Revolution and concluding in the 1920s in which production-orientation thinking dominated the way in which firms competed.

selling orientation

A philosophy that products must be pushed through selling and advertising in order for a firm to compete successfully.

selling era

A period running from the 1920s to until after World War II in which the selling orientation dominated the way firms competed.

product orientation

A philosophy that focuses on competing through product innovation.

marketing era

From 1950 to at least 1990 (see service-dominant logic era, value era, and one-to-one era), the dominant philosophy among businesses is the marketing concept.

value era

From the 1990s to the present, some argue that firms moved into the value era, competing on the basis of value; others contend that the value era is simply an extension of the marketing era and is not a separate era.

one-to-one era

From the 1990s to the present, the idea of competing by building relationships with customers one at a time and seeking to serve each customer’s needs individually.

Firms don’t always embrace the marketing concept and a market orientation. Beginning with the Industrial Revolution in the late 1800s, companies were production orientation. They believed that the best way to compete was by reducing production costs. In other words, companies thought that good products would sell themselves. Perhaps the best example of such a product was Henry Ford’s Model A automobile, the first product of his production line innovation. Ford’s production line made the automobile cheap and affordable for just about everyone. The production era lasted until the 1920s, when production-capacity growth began to outpace demand growth and new strategies were called for. There are, however, companies that still focus on production as the way to compete.

From the 1920s until after World War II, companies tended to be selling orientation, meaning they believed it was necessary to push their products by heavily emphasizing advertising and selling. Consumers during the Great Depression and World War II did not have as much money, so the com- petition for their available dollars was stiff. The result was this push approach during the selling era. Companies like the Fuller Brush Company and Hoover Vacuum began selling door-to-door and the vacuum-cleaner salesman (they were always men) was created. Just as with production, some compan- ies still operate with a push focus.

In the post–World War II environment, demand for goods increased as the economy soared. Some products, limited in supply during World War II, were now plentiful to the point of surplus. Companies believed that a way to compete was to create products different from the competition, so many focused on product innovation. This focus on product innovation is called the product orient- ation. Companies like Procter & Gamble created many products that served the same basic function but with a slight twist or difference in order to appeal to a different consumer, and as a result products proliferated. But as consumers had many choices available to them, companies had to find new ways to compete. Which products were best to create? Why create them? The answer was to create what cus- tomers wanted, leading to the development of the marketing concept. During this time, the marketing concept was developed, and from about 1950 to 1990, businesses operated in the marketing era.

So what era would you say we’re in now? Some call it the value era: a time when companies em- phasize creating value for customers. Is that really different from the marketing era, in which the em- phasis was on fulfilling the marketing concept? Maybe not. Others call today’s business environment the one-to-one era, meaning that the way to compete is to build relationships with customers one at a time and seek to serve each customer’s needs individually. For example, the longer you are customer of Amazon, the more detail they gain in your purchasing habits and the better they can target you with offers of new products. With the advent of social media and the empowerment of consumers through ubiquitous information that includes consumer reviews, there is clearly greater emphasis on meeting customer needs. Yet is that substantially different from the marketing concept?

CHAPTER 1 WHAT IS MARKETING? 7

service-dominant logic

An approach to business that recognizes that customers do not distinguish between the tangible and the intangible aspects of a good or service, but rather see a product in terms of its total value.

service-dominant logic era

The period from 1990 to the present in which some believe that the philosophy of service-dominant logic dominates the way firms compete.

offering

The entire bundle of a tangible good, intangible service, and price that composes what a company offers to customers.

communicating

In marketing, a broad term meaning describing the offering and its value to potential customers, as well as learning from customers.

Still others argue that this is the time of service-dominant logic and that we are in the service- dominant logic era. Service-dominant logic is an approach to business that recognizes that con- sumers want value no matter how it is delivered, whether it’s via a product, a service, or a combination of the two. Although there is merit in this belief, there is also merit to the value approach and the one- to-one approach. As you will see throughout this book, all three are intertwined. Perhaps, then, the name for this era has yet to be devised.

Whatever era we’re in now, most historians would agree that defining and labeling it is difficult. Value and one-to-one are both natural extensions of the marketing concept, so we may still be in the marketing era. To make matters more confusing, not all companies adopt the philosophy of the era. For example, in the 1800s Singer and National Cash Register adopted strategies rooted in sales, so they operated in the selling era forty years before it existed. Some companies are still in the selling era. Re- cently, many considered automobile manufacturers to be in the trouble they were in because they work too hard to sell or push product and not hard enough on delivering value.

Creating Offerings That Have Value

Marketing creates those goods and services that the company offers at a price to its customers or cli- ents. That entire bundle consisting of the tangible good, the intangible service, and the price is the company’s offering. When you compare one car to another, for example, you can evaluate each of these dimensions—the tangible, the intangible, and the price—separately. However, you can’t buy one manufacturer’s car, another manufacturer’s service, and a third manufacturer’s price when you actually make a choice. Together, the three make up a single firm’s offer.

Marketing people do not create the offering alone. For example, when the iPad was created, Apple’s engineers were also involved in its design. Apple’s financial personnel had to review the costs of producing the offering and provide input on how it should be priced. Apple’s operations group needed to evaluate the manufacturing requirements the iPad would need. The company’s logistics managers had to evaluate the cost and timing of getting the offering to retailers and consumers. Apple’s dealers also likely provided input regarding the iPad’s service policies and warranty structure. Market- ing, however, has the biggest responsibility because it is marketing’s responsibility to ensure that the new product delivers value.

Communicating Offerings

Communicating is a broad term in marketing that means describing the offering and its value to your potential and current customers, as well as learning from customers what it is they want and like. Sometimes communicating means educating potential customers about the value of an offering, and sometimes it means simply making customers aware of where they can find a product. Communicating also means that customers get a chance to tell the company what they think. Today companies are find- ing that to be successful, they need a more interactive dialogue with their customers. For example, Comcast customer service representatives monitor Twitter. When they observe consumers tweeting problems with Comcast, the customer service reps will post resolutions to their problems. Similarly, JCPenney has created consumer groups that talk among themselves on JCPenney-monitored Web sites. The company might post questions, send samples, or engage in other activities designed to solicit feedback from customers.

Mobile devices, like iPads and Droid smartphones, make mobile marketing possible too. For ex- ample, if consumers check-in at a shopping mall on Foursquare or Facebook, stores in the mall can send coupons and other offers directly to their phones and pad computers.

8 PRINCIPLES OF MARKETING VERSION 2.0

F I G U R E 1 . 2

A BMW X5 costs much more than a Honda CRV, but why is it worth more? What makes up the complete offering that creates such value?

Source: Wikimedia Commons.

F I G U R E 1 . 3

Social media sites like Foursquare and Facebook have a location feature that allows consumers to post their location. Retailers can then use this to send coupons and other special offers to the consumer’s phone or pad for immediate use.

Source: Flickr.

Companies use many forms of communication, including advertising on the Web or television, on bill- boards or in magazines, through product placements in movies, and through salespeople. Other forms of communication include attempting to have news media cover the company’s actions (part of public relations [PR]), participating in special events such as the annual International Consumer Electronics Show in which Apple and other companies introduce their newest gadgets, and sponsoring special events like the Susan G. Komen Race for the Cure.

CHAPTER 1 WHAT IS MARKETING? 9

delivering

In marketing, as in delivering value, a broad term that means getting the product to the consumer and making sure that the user gets the most out of the product and service.

supply chain

All of the organizations that participate in the production, promotion, and delivery of a product or service from the producer to the end consumer.

logistics

The physical flow of materials in the supply chain.

exchange

The transaction of value, usually economic, between a buyer and seller.

Delivering Offerings

Marketing can’t just promise value, it also has to deliver value. Delivering an offering that has value is much more than simply getting the product into the hands of the user; it is also making sure that the user understands how to get the most out of the product and is taken care of if he or she requires ser- vice later. Value is delivered in part through a company’s supply chain. The supply chain includes a number of organizations and functions that mine, make, assemble, or deliver materials and products from a manufacturer to consumers. The actual group of organizations can vary greatly from industry to industry, and include wholesalers, transportation companies, and retailers. Logistics, or the actual transportation and storage of materials and products, is the primary component of supply chain man- agement, but there are other aspects of supply chain management that we will discuss later.

Exchanging Offerings

In addition to creating an offering, communicating its benefits to consumers, and delivering the offer- ing, there is the actual transaction, or exchange, that has to occur. In most instances, we consider the exchange to be cash for products and services. However, if you were to fly to Louisville, Kentucky, for the Kentucky Derby, you could “pay” for your airline tickets using frequent-flier miles. You could also use Hilton Honors points to “pay” for your hotel, and cash back points on your Discover card to pay for meals. None of these transactions would actually require cash. Other exchanges, such as informa- tion about your preferences gathered through surveys, might not involve cash.

When consumers acquire, consume (use), and dispose of products and services, exchange occurs, including during the consumption phase. For example, via Apple’s “One-to-One” program, you can pay a yearly fee in exchange for additional periodic product training sessions with an Apple profession- al. So each time a training session occurs, another transaction takes place. A transaction also occurs when you are finished with a product. For example, you might sell your old iPhone to a friend, trade in a car, or ask the Salvation Army to pick up your old refrigerator.

Disposing of products has become an important ecological issue. Batteries and other components of cell phones, computers, and high-tech appliances can be very harmful to the environment, and many consumers don’t know how to dispose of these products properly. Some companies, such as Office De- pot, have created recycling centers to which customers can take their old electronics.

Apple has a Web page where consumers can fill out a form, print it, and ship it along with their old cell phones and MP3 players to Apple. Apple then pulls out the materials that are recyclable and prop- erly disposes of those that aren’t. By lessening the hassle associated with disposing of products, Office Depot and Apple add value to their product offerings.

K E Y T A K E A W A Y

The focus of marketing has changed from emphasizing the product, price, place, and promotion mix to one that emphasizes creating, communicating, delivering, and exchanging value. Value is a function of the be- nefits an individual receives and consists of the price the consumer paid and the time and effort the person expended making the purchase.

R E V I E W Q U E S T I O N S

1. What is the marketing mix?

2. How has marketing changed from the four Ps approach to the more current value-based perspective?

3. What is the personal value equation?

We want to hear your feedback

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10 PRINCIPLES OF MARKETING VERSION 2.0

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nonprofit marketing

Marketing activities conducted to meet the goals of nonprofit organizations.

2. WHO DOES MARKETING?

L E A R N I N G O B J E C T I V E

1. Describe how the various institutions and entities that engage in marketing use marketing to deliver value.

The short answer to the question of who does marketing is “everybody!” But that answer is a bit glib and not too useful. Let’s take a moment and consider how different types of organizations engage in marketing.

2.1 For-Profit Companies The obvious answer to the question, “Who does marketing?” is for-profit companies like McDonald’s, Procter & Gamble (the makers of Tide detergent and Crest toothpaste), and Walmart. For example, McDonald’s creates a new breakfast chicken sandwich for $1.99 (the offering), launches a television campaign (communicating), makes the sandwiches available on certain dates (delivering), and then sells them in its stores (exchanging). When Procter & Gamble (or P&G for short) creates a new Crest tartar control toothpaste, it launches a direct mail campaign in which it sends information and samples to dentists to offer to their patients. P&G then sells the toothpaste through retailers like Walmart, which has a panel of consumers sample the product and provide feedback through an online com- munity. These are all examples of marketing activities.

For-profit companies can be defined by the nature of their customers. A B2C (business-to-con- sumer) company like P&G sells products to be used by consumers like you, while a B2B (business-to- business) company sells products to be used within another company’s operations, as well as by gov- ernment agencies and entities. To be sure, P&G sells toothpaste to other companies like Walmart (and probably to the army, prisons, and other government agencies), but the end user is an individual person.

Other ways to categorize companies that engage in marketing is by the functions they fulfill. P&G is a manufacturer, Walmart is a retailer, and Grocery Supply Company (http://www.grocerysupply.com) is a wholesaler of grocery items and buys from companies like P&G in order to sell to small convenience store chains. Though they have different functions, all these types of for-profit companies engage in marketing activities. Walmart, for example, advertises to consumers. Grocery Supply Company salespeople will call on convenience store owners and take orders, as well as build in-store displays. P&G might help Walmart or Grocery Supply Company with templates for ad- vertising or special cartons to use in an in-store display, but all the companies are using marketing to help sell P&G’s toothpaste.

Similarly, all the companies engage in dialogues with their customers in order to understand what to sell. For Walmart and Grocery Supply, the dialogue may result in changing what they buy and sell; for P&G, such customer feedback may yield a new product or a change in pricing strategy.

2.2 Nonprofit Organizations Nonprofit organizations also engage in marketing. When the American Heart Association (AHA) cre- ated a heart-healthy diet for people with high blood pressure, it bound the diet into a small book, along with access to a special Web site that people can use to plan their meals and record their health-related activities. The AHA then sent copies of the diet to doctors to give to patients. When does an exchange take place, you might be wondering? And what does the AHA get out of the transaction?

From a monetary standpoint, the AHA does not directly benefit. Nonetheless, the organization is meeting its mission, or purpose, of getting people to live heart-healthy lives and considers the cam- paign a success when doctors give the books to their patients. The point is that the AHA is engaged in the marketing activities of creating, communicating, delivering, and exchanging. This won’t involve the same kind of exchange as a for-profit company, but it is marketing. When a nonprofit organization en- gages in marketing activities, this is called nonprofit marketing. Some schools offer specific courses in nonprofit marketing, and many marketing majors begin their careers with nonprofit organizations.

Government entities also engage in marketing activities. For example, when the U.S. Army advert- ises to parents of prospective recruits, sends brochures to high schools, or brings a Bradley Fighting Vehicle to a state fair, the army is engaging in marketing. The U.S. Army also listens to its constituen- cies, as evidenced by recent research aimed at understanding how to serve military families more

CHAPTER 1 WHAT IS MARKETING? 11

http://www.grocerysupply.com
social marketing

Marketing conducted in an effort to achieve social change.

effectively. One result was advertising aimed at parents and improving their response to their children’s interest in joining the army; another was a program aimed at encouraging spouses of military person- nel to access counseling services when their spouse is serving overseas.

Similarly, the Environmental Protection Agency (EPA) runs a number of advertising campaigns designed to promote environmentally friendly activities. One such campaign promoted the responsible disposal of motor oil instead of simply pouring it on the ground or into a storm sewer.

There is a difference between these two types of activities. When the army is promoting the be- nefits of enlisting, it hopes young men and women will join the army. By contrast, when the EPA runs commercials about how to properly dispose of motor oil, it hopes to change people’s attitudes and be- haviors so that social change occurs. Marketing conducted in an effort to achieve certain social object- ives can be done by government agencies, nonprofit institutions, religious organizations, and others and is called social marketing. Convincing people that global warming is a real threat via advertise- ments and commercials is social marketing, as is the example regarding the EPA’s campaign to pro- mote responsible disposal of motor oil.

2.3 Individuals If you create a résumé, are you using marketing to communicate the value you have to offer prospective employers? If you sell yourself in an interview, is that marketing? When you work for a wage, you are delivering value in exchange for pay. Is this marketing, too?

Some people argue that these are not marketing activities and that individuals do not necessarily engage in marketing. (Some people also argue that social marketing really isn’t marketing either.) Can individuals market themselves and their ideas?

In some respects, the question is a rhetorical one, designed for academics to argue about in class. Our point is that in the end, it may not matter. If, as a result of completing this book, you can learn how to more effectively create value, communicate and deliver that value to the receiver, and receive something in exchange, then we’ve achieved our purpose.

K E Y T A K E A W A Y

Marketing can be thought of as a set of business practices that for-profit organizations, nonprofit organiza- tions, government entities, and individuals can utilize. When a nonprofit organization engages in marketing activities, this is called nonprofit marketing. Marketing conducted in an effort to achieve certain social object- ives is called social marketing.

R E V I E W Q U E S T I O N S

1. What types of companies engage in marketing?

2. What is the difference between nonprofit marketing and social marketing?

3. What can individuals do for themselves that would be considered marketing?

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12 PRINCIPLES OF MARKETING VERSION 2.0

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3. WHY STUDY MARKETING?

L E A R N I N G O B J E C T I V E

1. Explain the role marketing plays in individual firms and society as a whole.

3.1 Marketing Enables Profitable Transactions to Occur Products don’t, contrary to popular belief, sell themselves. Generally, the “build it and they will come” philosophy doesn’t work. Good marketing educates customers so that they can find the products they want, make better choices about those products, and extract the most value from them. In this way, marketing helps facilitate exchanges between buyers and sellers for the mutual benefit of both parties. Likewise, good social marketing provides people with information and helps them make healthier de- cisions for themselves and for others.

Of course, all business students should understand all functional areas of the firm, including mar- keting. There is more to marketing, however, than simply understanding its role in the business. Mar- keting has tremendous impact on society.

3.2 Marketing Delivers Value Not only does marketing deliver value to customers, but also that value translates into the value of the firm as it develops a reliable customer base and increases its sales and profitability. So when we say that marketing delivers value, marketing delivers value to both the customer and the company. Franklin D. Roosevelt, the U.S. president with perhaps the greatest influence on our economic system, once said, “If I were starting life over again, I am inclined to think that I would go into the advertising business in preference to almost any other. The general raising of the standards of modern civilization among all groups of people during the past half century would have been impossible without the spreading of the knowledge of higher standards by means of advertising.”[2] Roosevelt referred to advertising, but ad- vertising alone is insufficient for delivering value. Marketing finishes the job by ensuring that what is delivered is valuable.

3.3 Marketing Benefits Society Marketing benefits society in general by improving people’s lives in two ways. First, as we mentioned, it facilitates trade. As you have learned, or will learn, in economics, being able to trade makes people’s lives better. Otherwise people wouldn’t do it. (Imagine what an awful life you would lead if you had to live a Robinson Crusoe–like existence as did Tom Hanks’s character in the movie Castaway.) In addi- tion, because better marketing means more successful companies, jobs are created. This generates wealth for people, who are then able to make purchases, which, in turn, creates more jobs.

The second way in which marketing improves the quality of life is based on the value delivery function of marketing, but in a broader sense. When you add all the marketers together who are trying to deliver offerings of greater value to consumers and are effectively communicating that value, con- sumers are able to make more informed decisions about a wider array of choices. From an economic perspective, more choices and smarter consumers are indicative of a higher quality of life.

3.4 Marketing Costs Money Marketing can sometimes be the largest expense associated with producing a product. In the soft drink business, marketing expenses account for about one-third of a product’s price—about the same as the ingredients used to make the soft drink itself. At the bottling and retailing level, the expenses involved in marketing a drink to consumers like you and me make up the largest cost of the product.

Some people argue that society does not benefit from marketing when it represents such a huge chunk of a product’s final price. In some cases, that argument is justified. Yet when marketing results in more informed consumers receiving a greater amount of value, then the cost is justified.

CHAPTER 1 WHAT IS MARKETING? 13

3.5 Marketing Offers People Career Opportunities Marketing is the interface between producers and consumers. In other words, it is the one function in the organization in which the entire business comes together. Being responsible for both making money for your company and delivering satisfaction to your customers makes marketing a great career. In addition, because marketing can be such an expensive part of a business and is so critical to its suc- cess, companies actively seek good marketing people. At the beginning of each chapter in this book, we profile a person in the marketing profession and let that person describe for you what he or she does. As you will learn, there’s a great variety of jobs available in the marketing profession. These positions represent only a few of the opportunities available in marketing.

< Marketing research. Personnel in marketing research are responsible for studying markets and customers in order to understand what strategies or tactics might work best for firms.

< Merchandising. In retailing, merchandisers are responsible for developing strategies regarding what products wholesalers should carry to sell to retailers such as Target and Walmart.

< Sales. Salespeople meet with customers, determine their needs, propose offerings, and make sure that the customer is satisfied. Sales departments can also include sales support teams who work on creating the offering.

< Advertising. Whether it’s for an advertising agency or inside a company, some marketing personnel work on advertising. Television commercials and print ads are only part of the advertising mix. Many people who work in advertising spend all their time creating advertising for electronic media, such as Web sites and their pop-up ads, podcasts, and the like.

< Product development. People in product development are responsible for identifying and creating features that meet the needs of a firm’s customers. They often work with engineers or other technical personnel to ensure that value is created.

< Direct marketing. Professionals in direct marketing communicate directly with customers about a company’s product offerings via channels such as e-mail, chat lines, telephone, or direct mail.

< Digital media. Digital media professionals combine advertising, direct marketing, and other areas of marketing to communicate directly with customers via social media, the Web, and mobile media (including texts). They also work with statisticians in order to determine which consumers receive which message and with IT professionals to create the right look and feel of digital media.

< Event marketing. Some marketing personnel plan special events, orchestrating face-to-face conversations with potential and current customers in a special setting.

< Nonprofit marketing. Nonprofit marketers often don’t get to do everything listed previously as nonprofits typically have smaller budgets. But their work is always very important as they try to change behaviors without having a product to sell.

A career in marketing can begin in a number of different ways. Entry-level positions for new college graduates are available in many of the positions previously mentioned. A growing number of CEOs are people with marketing backgrounds. Some legendary CEOs like Ross Perot and Mary Kay Ash got their start in marketing. More recently, CEOs like Mark Hurd, CEO of Oracle, and Jeffrey Immelt at GE are showing how marketing careers can lead to the highest pinnacles of the organization.

Criticisms of Marketing

Marketing is not without its critics. We already mentioned that one reason to study marketing is be- cause it is costly, and business leaders need to understand the cost/benefit ratio of marketing in order to make wise investments. Yet that cost is precisely why some criticize marketing. If that money could be put into research and development of new products, perhaps the consumers would be better sat- isfied. Or, some critics argue, prices could be lowered. Marketing executives, though, are always on the lookout for less expensive ways to have the same performance, and do not intentionally waste money on marketing.

Another criticism is that marketing creates wants among consumers for products and services that aren’t really needed. For example, fashion marketing creates demand for high-dollar jeans when much less expensive jeans can fulfill the same basic function. Taken to the extreme, consumers may take on significant credit card debt to satisfy wants created by marketing, with serious negative consequences. When marketers target their messages carefully so an audience that can afford such products is the only group reached, such extreme consequences can be avoided.

14 PRINCIPLES OF MARKETING VERSION 2.0

K E Y T A K E A W A Y

By facilitating transactions, marketing delivers value to both consumers and firms. At the broader level, this process creates jobs and improves the quality of life in a society. Marketing can be costly, so firms need to hire good people to manage their marketing activities. Being responsible for both making money for your com- pany and delivering satisfaction to your customers makes marketing a great career.

R E V I E W Q U E S T I O N S

1. Why study marketing?

2. How does marketing provide value?

3. Why does marketing cost so much? Is marketing worth it?

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4. THEMES AND ORGANIZATION OF THIS BOOK

L E A R N I N G O B J E C T I V E

1. Understand and outline the elements of a marketing plan as a planning process.

4.1 Marketing’s Role in the Organization We previously discussed marketing as a set of activities that anyone can do. Marketing is also a func- tional area in companies, just like operations and accounting are. Within a company, marketing might be the title of a department, but some marketing functions, such as sales, might be handled by another department. Marketing activities do not occur separately from the rest of the company, however.

As we have explained, pricing an offering, for example, will involve a company’s finance and ac- counting departments in addition to the marketing department. Similarly, a marketing strategy is not created solely by a firm’s marketing personnel. Instead, it flows from the company’s overall strategy. We’ll discuss strategy much more completely in Chapter 2.

4.2 Everything Starts with Customers Most organizations start with an idea of how to serve customers better. Apple’s engineers began work- ing on the iPod by looking at the available technology and thinking about how customers would like to have their music more available, as well as more affordable, through downloading.

Many companies think about potential markets and customers when they start. John Deere, for ex- ample, founded his company on the principle of serving customers. When admonished for making constant improvements to his products even though farmers would take whatever they could get, Deere reportedly replied, “They haven’t got to take what we make and somebody else will beat us, and we will lose our trade.”[3] He recognized that if his company failed to meet customers’ needs, someone else would. The mission of the company then became the one shown in Figure 1.4.

CHAPTER 1 WHAT IS MARKETING? 15

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F I G U R E 1 . 4 Mission Statement of Deere and Company

Source: Deere and Company, used with permission.

Here are a few mission statements from other companies. Note that they all refer to their customers, either directly or by making references to relationships with them. Note also how these are written to inspire employees and others who interact with the company and may read the mission statement.

IBM

IBM will be driven by these values:

< Dedication to every client’s success. < Innovation that matters, for our company and for the world. < Trust and personal responsibility in all relationships.[4]

Coca-Cola

Everything we do is inspired by our enduring mission:

< To refresh the world…in body, mind, and spirit. < To inspire moments of optimism…through our brands and our actions. < To create value and make a difference…everywhere we engage.[5]

McDonald’s

< To be our customers’ favorite place and way to eat.[6]

16 PRINCIPLES OF MARKETING VERSION 2.0

marketing plan

A document that is designed to communicate the marketing strategy for an offering. The purpose of the plan is to influence executives, suppliers, distributors, and other important stakeholders of the firm so they will invest money, time, and effort to ensure the plan is a success.

Merck

< To provide innovative and distinctive products and services that save and improve lives and satisfy customer needs, to be recognized as a great place to work, and to provide investors with a superior rate of return.[7]

Not all companies create mission statements that reflect a marketing orientation. Note Apple’s mission statement: “Apple ignited the personal computer revolution in the 1970s with the Apple II and rein- vented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the in- dustry in innovation with its award-winning computers, OS X operating system and iLife and profes- sional applications. Apple is also spearheading the digital media revolution with its iPod portable mu- sic and video players and iTunes online store, and has entered the mobile phone market with its re- volutionary iPhone.”[8] This mission statement reflects a product orientation, or an operating philo- sophy based on the premise that Apple’s success is due to great products and that simply supplying them will lead to demand for them. The challenge, of course, is how to create a “great” product without thinking too much about the customer’s wants and needs. Apple, and for that matter, many other com- panies, have fallen prey to thinking that they knew what a great product was without asking their cus- tomers. In fact, Apple’s first attempt at a graphic user interface (GUI) was the LISA, a dismal failure.

4.3 The Marketing Plan The marketing plan is the strategy for implementing the components of marketing: creating, com- municating, delivering, and exchanging value. Once a company has decided what business it is in and expressed that in a mission statement, the firm then develops a corporate strategy. Marketing strategists subsequently use the corporate strategy and mission and combine that with an understand- ing of the market to develop the company’s marketing plan. This is the focus of Chapter 2. Figure 1.5 shows the steps involved in creating a marketing plan.

The book then moves into understanding customers. Understanding the customer’s wants and needs; how the customer wants to acquire, consume, and dispose of the offering; and what makes up their personal value equation are three important goals. Marketers want to know their customers—who they are and what they like to do—so as to uncover this information. Generally, this requires marketing researchers to collect sales and other related customer data and analyze it.

CHAPTER 1 WHAT IS MARKETING? 17

F I G U R E 1 . 5 Steps in Creating a Marketing Plan

Once this information is gathered and digested, the planners can then work to create the right offering. Products and services are developed, bundled together at a price, and then tested in the market. De- cisions have to be made as to when to alter the offerings, add new ones, or drop old ones. These de- cisions are the focus of the next set of chapters and are the second step in marketing planning.

Following the material on offerings, we explore the decisions associated with building the value chain. Once an offering is designed, the company has to be able to make it and then be able to get it to the market. This step, planning for the delivery of value, is the third step in the marketing plan.

The fourth step is creating the plan for communicating value. How does the firm make consumers aware of the value it has to offer? How can it help them recognize that value and decide that they should purchase products? These are important questions for marketing planners.

Once a customer has decided that her personal value equation is likely to be positive, then she will decide to purchase the product. That decision still has to be acted on, however, which is the exchange. The details of the exchange are the focus of the last few chapters of the book. As exchanges occur, mar- keting planners then refine their plans based on the feedback they receive from their customers, what their competitors are doing, and how market conditions are changing.

4.4 The Changing Marketing Environment At the beginning of this chapter, we mentioned that the view of marketing has changed from a static set of four Ps to a dynamic set of processes that involve marketing professionals as well as many other em- ployees in an organization. The way business is being conducted today is changing, too, and marketing is changing along with it. There are several themes, or important trends, that you will notice throughout this book.

18 PRINCIPLES OF MARKETING VERSION 2.0

social responsibility

The idea that companies should manage their businesses not just to earn profits but to advance the well-being of society.

Sustainability

An example of social responsibility that involves engaging in practices that do not diminish the earth’s resources.

< Ethics and social responsibility. Businesses exist only because society allows them to. When businesses begin to fail society, society will punish them or revoke their license. The crackdown on companies in the subprime mortgage-lending industry is one example. These companies created and sold loans (products) that could only be paid back under ideal circumstances, and when consumers couldn’t pay these loans back, the entire economy suffered greatly. Scandals such as these illustrate how society responds to unethical business practices. However, whereas ethics require that you only do no harm, the concept of social responsibility requires that you must actively seek to improve the lot of others. Today, people are demanding businesses take a proactive stance in terms of social responsibility, and they are being held to ever-higher standards of conduct.

< Sustainability. Sustainability is an example of social responsibility and involves engaging in practices that do not diminish the earth’s resources. Coca-Cola, for example, is working with governments in Africa to ensure clean water availability, not just for manufacturing Coke products but for all consumers in that region. Further, the company seeks to engage American consumers in participating by offering opportunities to contribute to clean water programs. Right now, companies do not have to engage in these practices, but because firms really represent the people behind them (their owners and employees), forward-thinking executives are seeking ways to reduce the impact their companies are having on the planet.

< Service-dominant logic. You might have noticed that we use the word offering a lot instead of the term product. That’s because of service-dominant logic, the approach to business that recognizes that consumers want value no matter how it is delivered—whether through a tangible product or through intangible services. That emphasis on value is what drives the functional approach to value that we’ve taken—that is, creating, communicating, delivering, and exchanging value.

< Metrics. Technology has increased the amount of information available to decision makers. As such, the amount and quality of data for evaluating a firm’s performance is increasing. Earlier in our discussion of the marketing plan, we explained that customers communicate via transactions. Although this sounds both simple and obvious, better information technology has given us a much more complete picture of each exchange. Cabela’s, for example, combines data from Web browsing activity with purchase history in order to determine what the next best offer is likely to be. Using data from many sources, we can build more effective metrics that can then be used to create better offerings, better communication plans, and so forth.

< A global environment. Every business is influenced by global issues. The price of oil, for example, is a global concern that affects everyone’s prices and even the availability of some offerings. We already mentioned Coke’s concern for clean water. But Coke also has to be concerned with distribution systems in areas with poor or nonexistent roads, myriads of government policies and regulations, workforce availability, and so many different issues in trying to sell and deliver Coke around the world. Even companies with smaller markets source some or all their offerings from companies in other countries or else face some sort of direct competition from companies based in other countries. Every business professional, whether marketing or otherwise, has to have some understanding of the global environment in which companies operate.

K E Y T A K E A W A Y

A company’s marketing plan flows from its strategic plan. Both begin with a focus on customers. The essential components of the plan are understanding customers, creating an offering that delivers value, communicat- ing the value to the customer, exchanging with the customer, and evaluating the firm’s performance. A mar- keting plan is influenced by environmental trends such as social responsibility, sustainability, service-dominant logic, the increased availability of data and effective metrics, and the global nature of the business environment.

R E V I E W Q U E S T I O N S

1. Why does everything start with customers? Or is it only marketing that starts with customers?

2. What are the key parts of a marketing plan?

3. What is the relationship between social responsibility, sustainability, service-dominant logic, and the global business environment? How does the concept of metrics fit?

CHAPTER 1 WHAT IS MARKETING? 19

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5. DISCUSSION QUESTIONS AND ACTIVITIES

D I S C U S S I O N Q U E S T I O N S

1. Compare and contrast a four Ps approach to marketing versus the value approach (creating, communicating, and delivering value). What would you expect to be the same and what would you expect to be different between two companies that apply one or the other approach?

2. Assume you are about to graduate. How would you apply marketing principles to your job search? In what ways would you be able to create, communicate, and deliver value as a potential employee, and what would that value be, exactly? How would you prove that you can deliver that value?

3. Is marketing always appropriate for political candidates? Why or why not?

4. How do the activities of marketing for value fulfill the marketing concept for the market-oriented organization?

5. This chapter introduces the personal value equation. How does that concept apply to people who buy for the government or for a business or for your university? How does that concept apply when organizations are engaged in social marketing?

6. This chapter addresses several reasons why marketing is an important area of study. Should marketing be required for all college students, no matter their major? Why or why not?

7. Of the four marketing functions, where does it look like most of the jobs are? What are the specific positions? How are the other marketing functions conducted through those job positions, even though in a smaller way?

8. Why is service-dominant logic important?

9. What is the difference between a need and a want? How do marketers create wants? Provide several examples.

10. The marketing concept emphasizes satisfying customer needs and wants. How does marketing satisfy your needs as a college student? Are certain aspects of your life influenced more heavily by marketing than others? Provide examples.

11. A company’s offering represents the bundling of the tangible good, the intangible service, and the price. Describe the specific elements of the offering for an airline carrier, a realtor, a restaurant, and an online auction site.

12. The value of a product offering is determined by the customer and varies accordingly. How does a retailer like Walmart deliver value differently than Banana Republic?

13. Explain how Apple employed the marketing concept in designing, promoting, and supplying the iPhone. Identify the key benefit(s) for consumers relative to comparable competitive offerings.

A C T I V I T I E S

1. One of your friends is contemplating opening a coffee shop near your college campus. She seeks your advice about size of the prospective customer base and how to market the business according to the four Ps. What strategies can you share with your friend to assist in launching the business?

2. You are considering working for United Way upon graduation. Explain how the marketing goals, strategies, and markets for the nonprofit differ from a for-profit organization.

3. Think about the last time you ate at McDonald’s. Evaluate your experience using the personal value equation.

4. Marketing benefits organizations, customers, and society. Explain how an organization like DuPont benefits the community in which it operates as well as society at large.

20 PRINCIPLES OF MARKETING VERSION 2.0

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CHAPTER 1 WHAT IS MARKETING? 21

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1.

2.

3.

4. 5.

6.

7.

8.

ENDNOTES

American Marketing Association, “Definition of Marketing,” http://www.marketingpower.com/AboutAMA/Pages/ DefinitionofMarketing.aspx?sq=definition+of+marketing (accessed December 3, 2009).

Famous Quotes and Authors, “Franklin D. Roosevelt Quotes and Quotations,” http://www.famousquotesandauthors.com/authors/ franklin_d__roosevelt_quotes.html (accessed December 7, 2009).

John Deere, “John Deere: A Biography,” http://www.deere.com/en_US/compinfo/ history/johndeere2.html (accessed December 3, 2009).

IBM, “About IBM,” http://www.ibm.com/ibm/us/en (accessed December 3, 2009).

The Coca-Cola Company, “Mission, Vision & Values,” http://www.thecoca-colacompany.com/ourcompany/mission_vision_values.html (accessed December 3, 2009).

McDonald’s, “Our Company,” http://aboutmcdonalds.com/mcd/our_company/ mcd_faq/student_research.html#1 (accessed December 3, 2009).

Merck & Co., Inc., “The New Merck,” http://www.merck.com/about/ Merck%20Vision%20Mission.pdf (accessed December 7, 2009).

Apple, Inc., “Apple’s App Store Downloads Top 1.5 Billion in First Year,” http://www.apple.com/hk/en/pr/library/2009/07/14apps.html (accessed December 3, 2009).

22 PRINCIPLES OF MARKETING VERSION 2.0

http://www.marketingpower.com/AboutAMA/Pages/DefinitionofMarketing.aspx?sq=definition+of+marketing
http://www.marketingpower.com/AboutAMA/Pages/DefinitionofMarketing.aspx?sq=definition+of+marketing
http://www.famousquotesandauthors.com/authors/franklin_d__roosevelt_quotes.html
http://www.famousquotesandauthors.com/authors/franklin_d__roosevelt_quotes.html
http://www.deere.com/en_US/compinfo/history/johndeere2.html
http://www.deere.com/en_US/compinfo/history/johndeere2.html
http://www.ibm.com/ibm/us/en
http://www.thecoca-colacompany.com/ourcompany/mission_vision_values.html
http://aboutmcdonalds.com/mcd/our_company/mcd_faq/student_research.html#1
http://aboutmcdonalds.com/mcd/our_company/mcd_faq/student_research.html#1
http://www.merck.com/about/Merck%20Vision%20Mission.pdf
http://www.merck.com/about/Merck%20Vision%20Mission.pdf
http://www.apple.com/hk/en/pr/library/2009/07/14apps.html
value proposition

A statement that summarizes the key benefits or value for target customers. It explains why customers should buy a product, why stakeholders should donate, or why prospective employers may want to hire someone for their organization.

C H A P T E R 2 Strategic Planning Have you ever wondered how an organization decides which products and services to develop, price, promote,

and sell? Organizations typically develop plans and strategies that outline how they want to go about this process.

Such a plan must take into account a company’s current internal conditions, such as its resources, capabilities,

technology, and so forth. The plan must also take into account conditions in the external environment, such as the

economy, competitors, and government regulations that could affect what the firm wants to do. Organizations

must also offer value to customers and graduates must provide value to their employers. As such, the value

proposition becomes the basis for developing strategies. Given its importance for both organizations and students,

we begin with the value proposition and then discuss the strategic planning process.

Just as your personal plans—such as what you plan to major in or where you want to find a job—are likely to

change, organizations also have contingency plans. Individuals and organizations both must develop long-term

(longer than a year) strategic plans, match their strengths and resources to available opportunities, and adjust their

plans to changing circumstances as necessary.

1. THE VALUE PROPOSITION

L E A R N I N G O B J E C T I V E S

1. Explain what a value proposition is. 2. Understand why a company may develop different value propositions for different target

markets.

1.1 What Is a Value Proposition? Individual buyers and organizational buyers both evaluate products and services to see if they provide desired benefits. For example, when you’re exploring your vacation options, you want to know the be- nefits of each destination and the value you will get by going to each place. Before you (or a firm) can develop a strategy or create a strategic plan, you first have to develop a value proposition. A value pro- position is a thirty-second “elevator speech” stating the specific benefits a product or service offering provides a buyer. It shows why the product or service is superior to competing offers. The value pro- position answers the questions, “Why should I buy from you or why should I hire you?” As such, the value proposition becomes a critical component in shaping strategy.

The following is an example of a value proposition developed by a sales consulting firm: “Our cli- ents grow their business, large or small, typically by a minimum of 30–50% over the previous year. They accomplish this without working 80 hour weeks and sacrificing their personal lives.”[1]

Note that although a value proposition will hopefully lead to profits for a firm, when the firm presents its value proposition to its customers, it doesn’t mention its own profits. That’s because the goal is to focus on the external market or what customers want.

F I G U R E 2 . 1

Like any other company, Beaches, an all- inclusive chain of resorts for families, must explain what its value proposition is to customers. In other words, why does a Beaches resort provide more value to vacationing families than do other resorts?

Source: Wikimedia Commons.

target market

The group of customers toward which an organization directs its marketing efforts.

Firms typically segment markets and then identify different target markets, or groups of customers, they want to reach when they are developing their value proposi- tions. Target markets will be discussed in more detail in Chapter 5. For now, be aware that companies sometimes develop different value propositions for different target markets just as individuals may develop a different value proposition for different em- ployers. The value proposition tells each group of customers (or potential employers) why they should buy a product or service, vacation to a particular destination, donate to an organization, hire you, and so forth.

Once the benefits of a product or service are clear, the firm must develop strategies that support the value proposition. The value proposition serves as a guide for this pro- cess. In the case of our sales consulting firm, the strategies it develops must help clients improve their sales by 30–50 percent. Likewise, if a company’s value proposition states that the firm is the largest retailer in the region with the most stores and best product selection, opening stores or increasing the firm’s inventory might be a key part of the company’s strategy. Looking at Amazon’s value proposition, “Low price, wide selection with added convenience anytime, anywhere,” one can easily see how Amazon has been so successful.[2]

Individuals and students should also develop their own personal value proposi- tions. Tell companies why they should hire you or why a graduate school should accept you. Show the value you bring to the situation. A value proposition will help you in different situations. Think about how your internship experience and/or study abroad experience may help a future employer. For example, you should explain to the em- ployer the benefits and value of going abroad. Perhaps your study abroad experience helped you understand customers that buy from Company X and your customer ser-

vice experience during your internship increased your ability to generate sales, which improved your employer’s profit margin. Thus you may be able to quickly contribute to Company X, something that they might very much value.

K E Y T A K E A W A Y

A value proposition is a thirty-second “elevator speech” stating the specific value a product or service provides to a target market. Firms may develop different value propositions for different groups of customers. The value proposition shows why the product or service is superior to competing offers and why the customer should buy it or why a firm should hire you.

R E V I E W Q U E S T I O N S

1. What is a value proposition?

2. You are interviewing for an internship. Create a value proposition for yourself that you may use as your thirty-second “elevator speech” to get the company interested in hiring you or talking to you more.

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24 PRINCIPLES OF MARKETING VERSION 2.0

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strategic planning process

A process that helps an organization allocate its resources under different conditions to accomplish its objectives, deliver value, and be competitive in a market-driven economy.

situation analysis

An assessment of an organization’s internal and external environments.

2. COMPONENTS OF THE STRATEGIC PLANNING PROCESS

L E A R N I N G O B J E C T I V E S

1. Explain how a mission statement helps a company with its strategic planning. 2. Describe how a firm analyzes its internal environment. 3. Describe the external environment a firm may face and how it is analyzed.

Strategic planning is a process that helps an organization allocate its resources to capitalize on oppor- tunities in the marketplace. Typically, it is a long-term process. The strategic planning process in- cludes conducting a situation analysis and developing the organization’s mission statement, objectives, value proposition, and strategies. Figure 2.2 shows the components of the strategic planning process. Let’s now look at each of these components.

F I G U R E 2 . 2 The Strategic Planning Process

2.1 Conducting a Situation Analysis As part of the strategic planning process, a situation analysis must be conducted before a company can decide on specific actions. A situation analysis involves analyzing both the external (macro and mi- cro factors outside the organization) and the internal (company) environments. Figure 2.2 and Figure 2.3 show examples of internal and external factors and in a SWOT analysis. The firm’s internal envir- onment—such as its financial resources, technological resources, and the capabilities of its personnel

CHAPTER 2 STRATEGIC PLANNING 25

SWOT analysis

An acronym for strengths, weaknesses, opportunities, and threats, the SWOT analysis is a tool that frames the situational analysis.

and their performance—has to be examined. It is also critical to examine the external macro and micro environments the firm faces, such as the economy and its competitors. The external environment sig- nificantly affects the decisions a firm makes, and thus must be continuously evaluated. For example, during the economic downturn in 2008–2009, businesses found that many competitors cut the prices of their products drastically. Other companies reduced package sizes or the amount of product in pack- ages. Firms also offered customers incentives (free shipping, free gift cards with purchase, rebates, etc.) to purchase their goods and services online, which allowed businesses to cut back on the personnel needed to staff their brick-and-mortar stores. While a business cannot control things such as the eco- nomy, changes in demographic trends, or what competitors do, it must decide what actions to take to remain competitive—actions that depend in part on their internal environment.

2.2 Conducting a SWOT Analysis Based on the situation analysis, organizations analyze their strengths, weaknesses, opportunities, and threats, or conduct what’s called a SWOT analysis. Strengths and weaknesses are internal factors and are somewhat controllable. For example, an organization’s strengths might include its brand name, effi- cient distribution network, reputation for great service, and strong financial position. A firm’s weak- nesses might include lack of awareness of its products in the marketplace, a lack of human resources talent, and a poor location. Opportunities and threats are factors that are external to the firm and largely uncontrollable. Opportunities might entail the international demand for the type of products the firm makes, few competitors, and favorable social trends such as people living longer. Threats might include a bad economy, high interest rates that increase a firm’s borrowing costs, and an aging population that makes it hard for the business to find workers.

You can conduct a SWOT analysis of yourself to help determine your competitive advantage. Per- haps your strengths include strong leadership abilities and communication skills, whereas your weak- nesses include a lack of organization. Opportunities for you might exist in specific careers and indus- tries; however, the economy and other people competing for the same position might be threats. Moreover, a factor that is a strength for one person (say, strong accounting skills) might be a weakness for another person (poor accounting skills). The same is true for businesses. See Figure 2.3 for an illus- tration of some of the factors examined in a SWOT analysis.

F I G U R E 2 . 3 Elements of a SWOT Analysis

The easiest way to determine if a factor is external or internal is to take away the company, organiza- tion, or individual and see if the factor still exists. Internal factors such as strengths and weaknesses are specific to a company or individual, whereas external factors such as opportunities and threats affect multiple individuals and organizations in the marketplace. For example, if you are doing a situation analysis on PepsiCo and are looking at the weak economy, take PepsiCo out of the picture and see what factors remain. If the factor—the weak economy—is still there, it is an external factor. Even if PepsiCo hadn’t been around in 2008–2009, the weak economy reduced consumer spending and affected a lot of companies.

2.3 Assessing the Internal Environment As we have indicated, when an organization evaluates which factors are its strengths and weaknesses, it is assessing its internal environment. Once companies determine their strengths, they can use those strengths to capitalize on opportunities and develop their competitive advantage. For example, strengths for PepsiCo are what are called “mega” brands, or brands that individually generate over $1

26 PRINCIPLES OF MARKETING VERSION 2.0

billion in sales.[3] These brands are also designed to contribute to PepsiCo’s environmental and social responsibilities.

PepsiCo’s brand awareness, profitability, and strong presence in global markets are also strengths. Especially in foreign markets, the loyalty of a firm’s employees can be a major strength, which can provide it with a competitive advantage. Loyal and knowledgeable employees are easier to train and tend to develop better relationships with customers. This helps organizations pursue more opportunities.

Although the brand awareness for PepsiCo’s products is strong, smaller companies often struggle with weaknesses such as low brand awareness, low financial reserves, and poor locations. When organ- izations assess their internal environments, they must look at factors such as performance and costs as well as brand awareness and location. Managers need to examine both the past and current strategies of their firms and determine what strategies succeeded and which ones failed. This helps a company plan its future actions and improves the odds they will be successful. For example, a company might look at packaging that worked very well for a product and use the same type of packaging for new products. Firms may also look at customers’ reactions to changes in products, including packaging, to see what works and doesn’t work. When PepsiCo changed the packaging of major brands in 2008, customers had mixed responses. Tropicana switched from the familiar orange with the straw in it to a new pack- age and customers did not like it. As a result, Tropicana changed back to their familiar orange with a straw after spending $35 million for the new package design.

Video Clip

Tropicana’s Recent Ad Tropicana’s recent ad left out the familiar orange with a straw.

View the video online at: http://www.youtube.com/v/LDnkqlnhGGI

CHAPTER 2 STRATEGIC PLANNING 27

Tropicana’s familiar orange with a straw appears on its newer containers.

Source: Wikimedia

Individuals are also wise to look at the strategies they have tried in the past to see which ones failed and which ones succeeded. Have you ever done poorly on an exam? Was it the instructor’s fault, the strategy you used to study, or did you decide not to study? See which strategies work best for you and perhaps try the same type of strategies for future exams. If a strategy did not work, see what went wrong and change it. Doing so is similar to what organizations do when they analyze their internal environments.

2.4 Assessing the External Environment Analyzing the external environment involves tracking conditions in the macro and micro marketplace that, although largely uncontrollable, affect the way an organization does business. The macro environ- ment includes economic factors, demographic trends, cultural and social trends, political and legal reg- ulations, technological changes, and the price and availability of natural resources. Each factor in the macro environment is discussed separately in the next section. The micro environment includes com- petition, suppliers, marketing intermediaries (retailers, wholesalers), the public, the company, and cus- tomers. We focus on competition in our discussion of the external environment in the chapter. Cus- tomers, including the public will be the focus of Chapter 3 and marketing intermediaries and suppliers will be discussed in Chapter 8 and Chapter 9.

When firms globalize, analyzing the environment becomes more complex because they must ex- amine the external environment in each country in which they do business. Regulations, competitors, technological development, and the economy may be different in each country and will affect how firms do business. To see how factors in the external environment such as technology may change edu- cation and lives of people around the world, watch the videos “Did You Know 2.0?” and “Did You Know 3.0?” which provide information on social media sites compared to populations in the world. Originally created in 2006 and revised in 2007, the video has been updated and translated into other languages. Another edition of “Did You Know?” (4.0) focused on changing media and technology and showed how information may change the world as well as the way people communicate and conduct business.

28 PRINCIPLES OF MARKETING VERSION 2.0

Video Clip

Did You Know 2.0? To see how the external environment and world are changing and in turn affecting marketing strategies, check out “Did You Know 2.0?”

Video Clip

Did You Know 4.0? To see how fast things change and the impact of technology and social media, visit “Did You Know 4.0?”

Although the external environment affects all organizations, companies must focus on factors that are relevant for their operations. For example, government regulations on food packaging will affect Pep- siCo but not Goodyear. Similarly, students getting a business degree don’t need to focus on job oppor- tunities for registered nurses.

The Competitive Environment

All organizations must consider their competition, whether it is direct or indirect competition vying for the consumer’s dollar. Both nonprofit and for-profit organizations compete for customers’ re- sources. Coke and Pepsi are direct competitors in the soft drink industry, Hilton and Sheraton are competitors in the hospitality industry, and organizations such as United Way and the American Can- cer Society compete for resources in the nonprofit sector. However, hotels must also consider other op- tions that people have when selecting a place to stay, such as hostels, dorms, bed and breakfasts, or rental homes.

A group of competitors that provide similar products or services form an industry. Michael Porter, a professor at Harvard University and a leading authority on competitive strategy, developed an ap- proach for analyzing industries. Called the five forces model[4] and shown in Figure 2.5, the framework helps organizations understand their current competitors as well as organizations that could become competitors in the future. As such, firms can find the best way to defend their position in the industry.

View the video online at: http://www.youtube.com/v/pMcfrLYDm2U

View the video online at: http://www.youtube.com/v/6ILQrUrEWe8

CHAPTER 2 STRATEGIC PLANNING 29

mystery shopper

A person who is paid to shop at a firm’s establishment or one of its competitors’ to observe the level of service, cleanliness of the facility, and so forth, and report his or her findings to the firm.

F I G U R E 2 . 5 Five Forces Model[5]

Competitive Analysis

When a firm conducts a competitive analysis, they tend to focus on direct competitors and try to de- termine a firm’s strengths and weaknesses, its image, and its resources. Doing so helps the firm figure out how much money a competitor may be able to spend on things such as research, new product de- velopment, promotion, and new locations. Competitive analysis involves looking at any information (annual reports, financial statements, news stories, observation details obtained on visits, etc.) available on competitors. Another means of collecting competitive information utilizes mystery shoppers, or people who act like customers. Mystery shoppers might visit competitors to learn about their customer service and their products. Imagine going to a competitor’s restaurant and studying the menu and the prices and watching customers to see what items are popular and then changing your menu to better compete. Competitors battle for the customer’s dollar and they must know what other firms are doing. Individuals and teams also compete for jobs, titles, and prizes and must figure out the competitors’ weaknesses and plans in order to take advantage of their strengths and have a better chance of winning.

According to Porter, in addition to their direct competitors (competitive rivals), organizations must consider the strength and impact the following could have:[6]

< Substitute products < Potential entrants (new competitors) in the marketplace < The bargaining power of suppliers < The bargaining power of buyers

When any of these factors change, companies may have to respond by changing their strategies. For ex- ample, because buyers are consuming fewer soft drinks these days, companies such as Coke and Pepsi have had to develop new, substitute offerings such as vitamin water and sports drinks. However, other companies such as Dannon or Nestlé may also be potential entrants in the flavored water market. When you select a hamburger fast-food chain, you also had the option of substitutes such as getting food at the grocery or going to a pizza place. When computers entered the market, they were a substi- tute for typewriters. Most students may not have ever used a typewriter, but some consumers still use typewriters for forms and letters.

30 PRINCIPLES OF MARKETING VERSION 2.0

F I G U R E 2 . 6

When personal computers were first invented, they were a serious threat to typewriter makers such as Smith Corona.

Source: Flickr.

F I G U R E 2 . 7

The U.S. Food and Drug Administration prohibits companies from using unacceptable levels of lead in toys and other household objects, such as utensils and furniture. Mattel voluntarily recalled Sarge cars made in mid-2000.

Source: U.S. Consumer Product

Safety Commission.

Suppliers, the companies that supply ingredients as well as packaging materials to other companies, must also be considered. If a company cannot get the supplies it needs, it’s in trouble. Also, sometimes suppliers see how lucrative their customers’ mar- kets are and decide to enter them. Buyers, who are the focus of marketing and strategic plans, must also be considered because they have bargaining power and must be sat- isfied. If a buyer is large enough, and doesn’t purchase a product or service, it can affect a selling company’s performance. Walmart, for instance, is a buyer with a great deal of bargaining power. Firms that do business with Walmart must be prepared to make concessions to them if they want their products on the company’s store shelves.

Lastly, the world is becoming “smaller” and a more of a global marketplace. Com- panies everywhere are finding that no matter what they make, numerous firms around the world are producing the same “widget” or a similar offering (substitute) and are eager to compete with them. Employees are in the same position. The Internet has made it easier than ever for customers to find products and services and for workers to find the best jobs available, even if they are abroad. Companies are also acquiring for- eign firms. These factors all have an effect on the strategic decisions companies make.

The Political and Legal Environment

All organizations must comply with government regulations and understand the political and legal en- vironments in which they do business. Different government agencies enforce the numerous regula- tions that have been established to protect both consumers and businesses. For example, the Sherman Act (1890) prohibits U.S. firms from restraining trade by creating monopolies and cartels. The regula- tions related to the act are enforced by the Federal Trade Commission (FTC), which also regulates de- ceptive advertising. The U.S. Food and Drug Administration (FDA) regulates the labeling of consum- able products, such as food and medicine. One organization that has been extremely busy is the Con- sumer Product Safety Commission, the group that sets safety standards for consumer products. Unsafe baby formula and toys with lead paint caused a big scare among consumers in 2008 and 2009.

As we have explained, when organizations conduct business in multiple markets, they must under- stand that regulations vary across countries and across states. Many states and countries have different laws that affect strategy. For example, suppose you are opening up a new factory because you cannot keep up with the demand for your products. If you are considering opening the factory in France (perhaps because the demand in Europe for your product is strong), you need to know that it is illegal for employees in that country to work more than thirty-five hours per week.

The Economic Environment

The economy has a major impact on spending by both consumers and businesses, which, in turn, affects the goals and strategies of organizations. Economic factors include variables such as inflation, unemployment, interest rates, and whether the economy is in a growth period or a recession. Inflation occurs when the cost of living continues to rise, eroding the purchasing power of money. When this happens, you and other consumers and businesses need more money to purchase goods and services. Interest rates often rise when inflation rises. Recessions can also occur when inflation rises because higher prices sometimes cause low or negative growth in the economy.

During a recessionary period, it is possible for both high-end and low-end products to sell well. Consumers who can afford luxury goods may continue to buy them, while consumers with lower in- comes tend to become more value conscious. Other goods and services, such as products sold in tradi- tional department stores, may suffer. In the face of a severe economic downturn, even the sales of lux- ury goods can suffer. The economic downturn that began in 2008 affected consumers and businesses at all levels worldwide. Consumers reduced their spending, holiday sales dropped, financial institutions went bankrupt, the mortgage industry collapsed, and the “Big Three” U.S. auto manufacturers (Ford, Chrysler, and General Motors) asked for emergency loans.

CHAPTER 2 STRATEGIC PLANNING 31

F I G U R E 2 . 8

A small condiment business in California caters to Hispanic customers.

© 2010 Jupiterimages Corporation

F I G U R E 2 . 9

Technology changes the way we do business. Banking on a cell phone adds convenience for customers. Bar codes on merchandise speed the checkout process.

© 2010 Jupiterimages Corporation

green marketing

Marketing environmentally safe products and services in a way that is good for the environment.

mission statement

Defines the purpose of the organization and answers the question of how a company defines its business.

The Demographic and Social and Cultural Environments

The demographic and social and cultural environments—including social trends, such as people’s atti- tudes toward fitness and nutrition; demographic characteristics, such as people’s age, income, marital status, education, and occupation; and culture, which relates to people’s beliefs and values—are con- stantly changing in the global marketplace. Fitness, nutrition, and health trends affect the product offerings of many firms. For example, PepsiCo produces vitamin water and sports drinks. More women are working, which has led to a rise in the demand for services such as house cleaning and daycare. U.S. baby boomers are reaching retirement age, sending their children to college, and trying to care of their elderly parents all at the same time. Firms are responding to the time constraints their buyers face by creating products that are more convenient, such as frozen meals and nutritious snacks.

The composition of the population is also constantly changing. Hispanics are the fastest-growing minority in the United States. Consumers in this group and other diverse groups prefer different types of products and brands. In many cities, stores cater specifically to Hispanic customers.

Technology

The technology available in the world is changing the way people communicate and the way firms do business. Everyone is affected by technological changes. Self-scanners and video displays at stores, ATMs, the Internet, and mobile phones are a few examples of how technology is affecting businesses and consumers. Many consumers get information, read the news, use text messaging, and shop online. As a result, marketers have begun allocating more of their promotion budgets to online ads and mobile marketing and not just to traditional print media such as newspapers and magazines. Applications for telephones and electronic devices are changing the way people obtain information and shop, allowing customers to comparison shop without having to visit multiple stores. As you saw in "Did You Know 4.0?" technology and social media are changing people’s lives. Many young people may rely more on electronic books, magazines, and newspapers and depend on mobile devices for most of their informa- tion needs. Organizations must adapt to new technologies in order to succeed.

Natural Resources

Natural resources are scarce commodities, and consumers are becoming increasingly aware of this fact. Today, many firms are doing more to engage in “sustainable” prac- tices that help protect the environment and conserve natural resources. Green mar- keting involves marketing environmentally safe products and services in a way that is good for the environment. Water shortages often occur in the summer months, so many restaurants now only serve patrons water upon request. Hotels voluntarily con- serve water by not washing guests’ sheets and towels every day unless they request it. Reusing packages (refillable containers) and reducing the amount of packaging, paper, energy, and water in the production of goods and services are becoming key considera- tions for many organizations, whether they sell their products to other businesses or to final users (consumers). Construction companies are using more energy efficient ma- terials and often have to comply with green building solutions. Green marketing not only helps the environment but also saves the company, and ultimately the consumer, money. Sustainability, ethics (doing the right things), and social responsibility (helping society, communities, and other people) influence an organization’s planning process

and the strategies they implement. Although environmental conditions change and must be monitored continuously, the situation

analysis is a critical input to an organization’s or an individual’s strategic plan. Let’s look at the other components of the strategic planning process.

2.5 The Mission Statement The firm’s mission statement states the purpose of the organization and why it exists. Both profit and nonprofit organizations have mission statements, which they often publicize. The following are ex- amples of mission statements:

32 PRINCIPLES OF MARKETING VERSION 2.0

PepsiCo’s Mission Statement

“Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.”[7]

The United Way’s Mission Statement

“To improve lives by mobilizing the caring power of communities.”[8]

Sometimes SBUs develop separate mission statements. For example, PepsiCo Americas Beverages, Pep- siCo Americas Foods, and PepsiCo International might each develop a different mission statement.

K E Y T A K E A W A Y

A firm must analyze factors in the external and internal environments it faces throughout the strategic plan- ning process. These factors are inputs to the planning process. As they change, the company must be pre- pared to adjust its plans. Different factors are relevant for different companies. Once a company has analyzed its internal and external environments, managers can begin to decide which strategies are best, given the firm’s mission statement.

R E V I E W Q U E S T I O N S

1. What factors in the external environment are affecting the “Big Three” U.S. automobile manufacturers?

2. What are some examples of Walmart’s strengths?

3. Suppose you work for a major hotel chain. Using Porter’s five forces model, explain what you need to consider with regard to each force.

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CHAPTER 2 STRATEGIC PLANNING 33

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objectives

What organizations want to accomplish (the end results) in a given time frame.

strategies

Actions (means) taken to accomplish objectives.

tactics

Actions taken to execute strategies.

marketing plan

A document that is designed to communicate the marketing strategy for an offering. The purpose of the plan is to influence executives, suppliers, distributors, and other important stakeholders of the firm so they will invest money, time, and effort to ensure the plan is a success.

3. DEVELOPING ORGANIZATIONAL OBJECTIVES AND FORMULATING STRATEGIES

L E A R N I N G O B J E C T I V E S

1. Explain how companies develop the objectives driving their strategies. 2. Describe the different types of product strategies and market entry strategies that companies

pursue.

3.1 Developing Objectives Objectives are what organizations want to accomplish—the end results they want to achieve—in a given time frame. In addition to being accomplished within a certain time frame, objectives should be realistic (achievable) and be measurable, if possible. “To increase sales by 2 percent by the end of the year” is an example of an objective an organization might develop. You have probably set objectives for yourself that you want to achieve in a given time frame. For example, your objectives might be to main- tain a certain grade point average and get work experience or an internship before you graduate.

Objectives help guide and motivate a company’s employees and give its managers reference points for evaluating the firm’s marketing actions. Although many organizations publish their mission state- ments, most for-profit companies do not publish their objectives. Accomplishments at each level of the organization have helped PepsiCo meet its corporate objectives over the course of the past few years. PepsiCo’s business units (divisions) have increased the number of their facilities to grow their brands and enter new markets. PepsiCo’s beverage and snack units have gained market share by developing healthier products and products that are more convenient to use.

A firm’s marketing objectives should be consistent with the company’s objectives at other levels, such as the corporate level and business level. An example of a marketing objective for PepsiCo might be “to increase by 4 percent the market share of Gatorade by the end of the year.” The way firms ana- lyze their different divisions or businesses will be discussed later in the chapter.

3.2 Formulating Strategies Strategies are the means to the ends, the game plan, or what a firm is going to do to achieve its object- ives. Successful strategies help organizations establish and maintain a competitive advantage that com- petitors cannot imitate easily. Tactics include specific actions, such as coupons, television commer- cials, banner ads, and so on, taken to execute the strategy. PepsiCo attempts to sustain its competitive advantage by constantly developing new products and innovations, including “mega brands,” which include nineteen individual brands that generate over $1 billion in sales each. The tactics may consist of specific actions (commercials during the Super Bowl; coupons; buy one, get one free, etc.) to advert- ise each brand.

Firms often use multiple strategies to accomplish their objectives and capitalize on marketing op- portunities. For example, in addition to pursuing a low cost strategy (selling products inexpensively), Walmart has simultaneously pursued a strategy of opening new stores rapidly around the world. Many companies develop marketing strategies as part of their general, overall business plans. Other compan- ies prepare separate marketing plans. We’ll look at marketing plans here and discuss them more com- pletely in Chapter 16.

A marketing plan is a strategic plan at the functional level that provides a firm’s marketing group with direction. It is a road map that improves the firm’s understanding of its competitive situation. The marketing plan also helps the firm allocate resources and divvy up the tasks that employees need to do for the company to meet its objectives. The different components of marketing plans will be discussed throughout the book and then discussed together at the end of the book. Next, let’s take a look at the different types of basic market strategies firms pursue before they develop their marketing plans.

34 PRINCIPLES OF MARKETING VERSION 2.0

market penetration strategy

Selling more of existing products and services to existing customers.

product development strategy

Creating new products or services for existing markets.

market development strategy

Selling existing products or services to new customers. Foreign markets often present opportunities for organizations to expand. Exporting, licensing, franchising, joint ventures, and direct investment are methods that companies use to enter international markets.

export

Sell products to buyers in foreign markets.

license

Sell the right to use some aspect of the production process, trademark, or patent to individuals in foreign markets.

F I G U R E 2 . 1 0 Product and Market Entry Strategies

The different types of product and market entry strategies a firm can pursue in order to meet their objectives.

Market penetration strategies focus on increasing a firm’s sales of its existing products to its exist- ing customers. Companies often offer consumers special promotions or low prices to increase their us- age and encourage them to buy products. When Frito-Lay distributes money-saving coupons to cus- tomers or offers them discounts to buy multiple packages of snacks, the company is utilizing a penetra- tion strategy. The Campbell Soup Company gets consumers to buy more soup by providing easy re- cipes using their soup as an ingredient for cooking quick meals.

Product development strategies involve creating new products for existing customers. A new product can be a totally new innovation, an improved product, or a product with enhanced value, such as one with a new feature. Cell phones that allow consumers to charge purchases with the phone or take pictures are examples of a product with enhanced value. A new product can also be one that comes in different variations, such as new flavors, colors, and sizes. Mountain Dew Voltage, introduced by PepsiCo Americas Beverages in 2009, is an example. Keep in mind, however, that what works for one company might not work for another. For example, just after Starbucks announced it was cutting back on the number of its lunch offerings, Dunkin’ Donuts announced it was adding items to its lunch menu.

Market development strategies focus on entering new markets with existing products. For ex- ample, during the recent economic downturn, manufacturers of high-end coffee makers began target- ing customers who go to coffee shops. The manufacturers are hoping to develop the market for their products by making sure consumers know they can brew a great cup of coffee at home for a fraction of what they spend at Starbucks.

New markets can include any new groups of customers such as different age groups, new geo- graphic areas, or international markets. Many companies, including PepsiCo and Hyundai, have entered—and been successful in—rapidly emerging markets such as Russia, China, and India. De- cisions to enter foreign markets are based on a company’s resources as well as the complexity of factors such as the political environmental, economic conditions, competition, customer knowledge, and probability of success in the desired market. As Figure 2.10 shows, there are different ways, or strategies, by which firms can enter international markets. The strategies vary in the amount of risk, control, and investment that firms face. Firms can simply export, or sell their products to buyers abroad, which is the least risky and least expensive method but also offers the least amount of control. Many small firms export their products to foreign markets.

Firms can also license, or sell the right to use some aspect of their production processes, trade- marks, or patents to individuals or firms in foreign markets. Licensing is a popular strategy, but firms must figure out how to protect their interests if the licensee decides to open its own business and void the license agreement. The French luggage and handbag maker Louis Vuitton faced this problem when it entered China. Competitors started illegally putting the Louis Vuitton logo on different products, which cut into Louis Vuitton’s profits.

CHAPTER 2 STRATEGIC PLANNING 35

franchising

Granting an independent operator the right to use your company’s business model, techniques, and trademarks for a fee.

contract manufacturing

When companies hire manufacturers to produce their products in another country.

joint venture

An entity that is created when two parties agree to share their profits, losses, and control with one another in an economic activity they jointly undertake.

direct investment

Owning a company or facility overseas.

F I G U R E 2 . 1 1

The front of a KFC franchise in Asia may be much larger than KFC stores in the United States. Selling franchises is a popular way for firms to enter foreign markets.

Source: Wikimedia Commons.

Franchising is a longer-term (and thus riskier) form of licensing that is extremely popular with ser- vice firms, such as restaurants like McDonald’s and Subway, hotels like Holiday Inn Express, and cleaning companies like Stanley Steamer. Franchisees pay a fee for the franchise and must adhere to certain standards; however, they benefit from the advertising and brand recognition the franchising company provides.

Contract manufacturing allows companies to hire manufacturers to produce their products in another country. The manufacturers are provided specifications for the products, which are then man- ufactured and sold on behalf of the company that contracted the manufacturing. Contract manufactur- ing may provide tax incentives and may be more profitable than manufacturing the products in the home country. Examples of products in which contract manufacturing is often used include cell phones, computers, and printers.

Joint ventures combine the expertise and investments of two companies and help companies enter foreign markets. The firms in each country share the risks as well as the investments. Some coun- tries such as China often require companies to form a joint venture with a domestic firm in order to enter the market. After entering the market in a partnership with a domestic firm and becoming estab- lished in the market, some firms may decide to separate from their partner and become their own busi- ness. Fuji Xerox Co., Ltd. is an example of a joint venture between the Japanese Fuji Photo Film Co. and the American document management company Xerox. Another example of a joint venture is Sony Ericsson. The venture combined the Japanese company Sony’s electronic expertise with the Swedish company Ericsson’s telecommunication expertise. With investment by both companies, joint ventures are riskier than exporting, licensing, franchising, and contract manufacturing but also provide more control to each partner.

Direct investment (owning a company or facility overseas) is another way to enter a foreign market, providing the most control but also having the most risk. For example, In Bev, the Dutch maker of Beck’s beer, was able to capture market share in the United States by purchasing St. Louis- based Anheuser-Busch. A direct investment strategy involves the most risk and investment but offers the most control. Other companies such as advertising agencies may want to invest and develop their own businesses directly in international markets rather than trying to do so via other companies.