3Learning Objectives After studying this chapter you should be able to: understand the importance of strategic marketing planning• identify the main steps in strategic marketing planning• develop an appropriate business mission statement• describe the criteria for stating good strategic marketing objectives• understand how portfolio models are used to select alternatives• explain the advantages and disadvantages of using strategic models • like Ansoff’s growth matrix, the BCG and GE models understand the advantages of segmentation• describe the steps involved in segmentation• explain the STP-process• discuss criteria for successful segmentation in B2C and B2B markets• discuss ways of segmenting global markets• discuss possible barriers in implementing segmentation in the organi-• sation 3. Strategy Formulation in the Marketing Planning Process Kapitel_3.indd 109 03.08.2010 12:47:54 Uhr 3. Strategy Formulation in the Marketing Planning Process110 The word ‘strategy’ is derived from the Greek term ‘strategós’ and when it appeared in use during the 18th century, it was seen in its narrow sense as the ‘art of the general’ and ‘the art of arrangement’ of troops. Military strategy deals with the planning and conduct of campaigns, the movement and disposition of forces, and the deception of the enemy. Thus, strategy originally referred to the skills and decision making process of the general (executive), while ‘stratagem’, translated as ‘an operation or act of generalship’, and referred to a specific decision made by the executive. To complicate matters even further, some writers suggest that a ‘strategy’ implies a formal and explicitly stated logic, whilst others have argued that a strategy can emerge from a set of decisions and need not be explicitly stated. Mintzberg and Walters (1985) even specifically distinguished between ‘deliberate’ and ‘emergent’ strategies. 3.1 Strategic Marketing Planning Strategic planning is the process of developing and maintaining a strategic fit between the company’s goals and capabilities and its changing marketing opportunities (Kotler and Armstrong, 2009). Planning is a complex process which consists of several interrelated stages. However, with time there is change and hence planning is and should be a continuous process, where each stage needs to be reconsidered for relevancy and in relation to the other stages. The plan is the stages ‘frozen’ in time; the process is a continuous assessment of the relevancy of each of these stages with changes in time. In planning we look ahead to decide what to do. The planning process itself is a systematic way of approaching the following questions and they will be used as guidance for the rest of the chapter. What business are we in? (Mission statement – section 3.1.1)• Where are we today (situation analysis – chapter 2)• Where do we want to go (strategic objectives – section 3.1.2)• How do we get there?• Estimation of planning gap and problem diagnosis (section 3.1.3) – The search for strategic alternatives (Ansoff’s growth matrix, Porter’s three generic – strategies, the BCG and GE mode – section 3.1.4 – 3.1.8) Strategy evaluation and selection (section 3.1.10) – Estimating financial consequences/How can progress be measured? (Marketing – metrics) (section 3.1.11) Although there is never any certainty about the future, every business or organisation will sensibly lean towards a proactive rather than a reactive stance. A proactive stance is one where the organisation tries to predict the future in order to influence it, that is, plan to adapt to it rather than just to surrender it. This is in contrast with a mere reactive stance where action mainly takes place in response to events with no plan to anticipate events and seek to influence them. This is similar to the two concepts explained in Chapter 2: Market driving (Resource-Based View) versus Market driven (Market Orientation View). Kapitel_3.indd 110 03.08.2010 12:47:54 Uhr 3.1 Strategic Marketing Planning 111 3.1.1 Vision and Mission Statement The vision and mission concepts are often interlinked but generally there is a difference: A • business mission statement describes ‘Who we are and what is the overall purpose of our business’. It is a company‘s reason for being and reflects people’s idealistic motivations for doing the company’s work by capturing the soul of the organisation. The core purpose or mission of a company is like a ‘guiding star’ on the horizon continuously providing direction and inspiring change. It is important to state that mission statements should not only be defined in technology terms (‘We make and sell furniture’) but with respect to the market and in terms of customer needs as products and technologies eventually become outdated, but basic market needs may last forever. For example Nike’s mission is not simply to sell shoes but to ‘Help people experience the emotion of competition, winning and crushing competitors’. A • business vision statement describes ‘Where we wish to go,’ ‘What do we wish to become?’ It provides a mental image of the successful accomplishment of the mission. It is typically: Short – Idealistic and imaginative – Inspires enthusiasm – Ambitious – The rest of this section will primarily be about the mission: Mission reflects unique qualities of the program. Whether the organisation is a large corporation or a small non-profit agency, its mission statement visibly articulates its strategic scope. The mission statement should answer fundamental questions such as, ‘What is our business?’, ‘Who are our constituencies?’, ‘What value do we provide customers, employees, suppliers, and other constituent groups?’ and ‘What should our business be in the future?’ Senior management in all businesses needs to answer such questions. The responsibility for developing and articulating a mission statement is at the corporate level. Mission statements should be driven by three factors: heritage, resources, and environment (Hollensen, 2006). The organisation’s heritage is its history – where it has been, what it has done well, and what it has done poorly. A superior mission statement cannot ignore previous events and how they shaped the organisation. It also must be sensitive to the organisation’s image in the minds of its constituencies. Past successes should be extended, past failures avoided, and the organisation's current image must be addressed realistically For example, for a food company to adopt a mission statement such as ‘to be a world leader in information technology in five years’ will be perceived as unrealistic by customers, employees, and shareholders. Such a mission statement is likely to elicit more scepticism than support. Resources refer to everything the organisation can manage, such as cash reserves, recognized brands, unique technologies, and talented employees. Resources can also include borrowing power, existing relationships with distributors, and excess plant capacity. A good mission statement notes the organisation’s resources and sets paths that are compatible with what the organisation has at its disposal. As in the case of heritage, mission statements that are out of touch with organisation’s resources elicit scepticism and can Kapitel_3.indd 111 03.08.2010 12:47:54 Uhr 3. Strategy Formulation in the Marketing Planning Process112 do more harm than good. If a minor regional brand were to include ‘penetrating Asian markets’ in its mission statement, it would be met with substantial scepticism. The environment is everything happening currently that affects the company’s ability to achieve objectives or implement strategies, both inside and outside the organisation. Some environmental factors are temporary, such as a hurricane. Most temporary factors are too short-sighted to be considered in a mission statement. Other factors, however, such as changes in the political system of the Russian Republic, terror acts, rise or fall of oil prices may have a longer life and should be considered in the mission statement if they affect the organisation’s ability to survive and prosper. At the corporate level, the mission statement defines the organisation’s business and reflects fundamental beliefs about its strengths and weaknesses, as well as its environment. Collins and Porras (2002) suggest that the vision framework is envisioned future which consists of a 10-30-year big, hairy, audacious goal (BHAG) plus vivid descriptions of what it will be like to achieve it. A true BHAG is clear and compelling, serves as a unifying focal point of effort, and acts as a catalyst for team spirit. It has a clear finish line, so the organisation can know when it has achieved the goal; it imbues motivation as people like to shoot for finish lines. A BHAG engages people – it is tangible, energizing, highly focused and people get it right away; it takes little or no explanation. Although organisations may have many BHAGs at different levels operating at the same time, vision requires a special type of BHAG – a vision-level BAHAG that applies to the entire organisation and requires 10 to 30 years of effort to complete. Examples include: Become a $ 125 billion company by the year 2000 (Wal-Mart, 1990)• Democratize the automobile (Ford Motor Company, early 1900s)• Become the company most know for changing the worldwide poor-quality image of • Japanese products (Sony, early 1950s) Become the most powerful, the most serviceable, the most far-reaching world finan-• cial institution that has ever been (City Bank, predecessor to Citicorp, 1915) Become the dominant player in commercial aircraft and bring the world into the jet • age (Boeing, 1950) Corporate mission statements can vary in length, but should always communicate a clear sense of the organisation's purpose and be specific enough to be useful in developing goals and objectives. Typically, mission statements focus on meeting customer needs and providing value to its shareholders. Furthermore, they often include judgments about the most promising directions for organisations, implying that directions not listed are not as promising and should be given lower priority or ignored altogether. In addition to vision-level BHAGs, an envisioned future needs a vivid description which is a vibrant, engaging, and specific description of what it will be like to achieve the BHAG. It translates the vision from words into pictures and creates an image that people can carry around in their heads (Collins and Porras, 2002). Henry Ford brought to life the goal of democratizing the automobile using the following vivid description: ‘I will build a motor car for the great multitude…It will be so low in price that no man making a good salary will be unable to own one and enjoy with his family the blessings of hours of pleasure in God‘s great open spaces…When I‘m through, everybody will be able to afford one, and everyone will have one. The horse will have disappeared from our Kapitel_3.indd 112 03.08.2010 12:47:55 Uhr 3.1 Strategic Marketing Planning 113 highways, the automobile will be taken for granted…[and we will] give a large number of men employment at good wages.’ Not all organisations have mission statements, and not all mission statements meet the ideal standards described above. Developing a company mission statement that provides long-term vision and guidance in developing goals and objectives can be complicated. Writing an effective mission statement requires senior managers to struggle with the questions listed earlier – questions that sound simple but can be tough issues for an organisation to address. The increasing visibility and importance of marketing as a philosophy for doing business, however, forces many organisations to tackle the task of defining their corporate mission. At the same time, an emphasis on marketing also helps organisations ensure that meeting customer needs profitably lies at the centre of any mission statement (Hollensen, 2006). 3.1.2 Strategic Objectives Strategic management also requires that firms set strategic objectives-specific and measurable performance standards for strategically important areas. The company’s mission needs to be turned into detailed supporting objectives for each level of management. Each manager should have objectives and be responsible for reaching them (Kotler and Armstrong, 2009). An organisation cannot set realistic, realizable objectives until it has the requisite information but, on the basis of experience, marketing management will nonetheless have tentative on sales volume, market share or whatever indicators represent progress towards accomplishing the firm’s vision. What exactly these tentative will be influenced by subjective estimates of what is considered reasonable at the time in relation to what resources are likely to be available. For a manager to be able to direct an activity towards the achievement of some objectives it must be possible to imagine the goal in a way that is meaningful for guiding the activity. This is why objective objectives purely in terms of profit are inadequate; they offer too little direction. Strategic objectives can be stated in terms of different criteria, such as sales, market share or return on investment, or they can be stated in absolute or relative terms. To be effective, objectives must be specific in terms of: the performance dimension being measured• the measures most appropriate for the performance dimension• the target value for each measure• the time by which the target should be achieved• The emphasis given each component of the organisation’s objectives, and the level at which measures and the time horizon are set, can differ at different organisational levels. At the corporate level, profit and growth, objectives might be most important and the time horizon might be set in five-year increments. At a business unit level, however, cash flow and cost reductions may be most important in declining markets, and market share gains in emerging markets. Similarly, the time horizon might be shorter than five years for business units because a new technology will make current operations obsolete, or it might be longer because market acceptance is slow. The characteristics of business units and their immediate environment should primarily establish strategic Kapitel_3.indd 113 03.08.2010 12:47:55 Uhr 3. Strategy Formulation in the Marketing Planning Process114 objectives, provided that the objectives do not violate the organisation’s mission. The objectives should also be compatible with the culture unless the business unit is soon to be divested (Hollensen, 2006). Strategic objectives at different managerial levels can sometimes diverge. Conflict can also arise between the different levels of organisational judgment. An organisation might set objectives pertaining to a desired culture that conflict with its more detailed objectives for staff development. Consider, for example, a mission statement that states as a goal providing opportunities for employee personal development at the same time that the company claims to value teamwork. Maximizing individual employee development can undermine teamwork if the primary means of development is to promote high performers quickly. Such a company has conflicting objectives, even if they are implicit and not simply recognized. Managers must establish strategic objectives with great concern. Strategic objectives must be articulated at every level of the organisation at which it makes sense to have objectives. They must be expressed in terms that are easily understood by the people who are required to achieve them, they must be measurable and specific, and they must be set at achievable levels. Setting objectives at attainable yet challenging levels is important. It should be clear that strategic objectives must be in tune with the organisation’s mission; at the same time they may conflict over what are relevant evaluation criteria, performance measures, and time horizons. Conflict between strategic objectives must be resolved through compromise, and it is senior management’s job to reconcile these differences within the broad framework of having a market-oriented philosophy of doing business (Hollensen, 2006). 3.1.3 Estimation of the Planning Gap and Problem Diagnosis What do the’ facts’ suggest will be the future if the firm takes no action to change current strategies? Such a prediction is known as a ‘reference projection’. A reference projection is the future that can be expected in the absence of planned change. The reference projection is compared with some ‘target projection’ or the set of tentative goals, which the company sets for itself. The planning gap (performance gap) is the difference between the target and the reference projections (see Figure 3.1). The gap may stem from the difference between future desired profit objectives and a forecast of expected profit based on past performance and following existing strategy. In the face of such a planning gap, a number of options are available; the intention, however is to close the gap. For example, the gap could be closed by revising objectives in a downward way. Such a step might be taken where the initial objectives are unrealistic. Alternatively, or in addition, the gap could be closed by actions designed to move the company off the projection curve and towards the desired curve. The planning gaps identified will depend on which performances are of interest. At the highest level, it could be cash flow projections, economic value added, earnings per share, sales and market share or various financial indices like return on investment (ROI). At the marketing level, it would be in terms of sales, market share, costs or various behavioural indices like buyer attitudes. Kapitel_3.indd 114 03.08.2010 12:47:55 Uhr 3.1 Strategic Marketing Planning 115 Problem Diagnosis If a company has a large planning gap, we speak freely of its being the problem. More accurately, the planning gap is not the problem but the symptom of one. The recognition of a problem situation is not in itself the identification of the actual problem. We do not discover a problem but diagnose one. Problem diagnosis aims at identifying the type of solution that applies which is the first step on the road to developing an actual solution, just as diagnosing a failure to start the car as being due to some electrical fault, is the first step towards getting the car started again. Unfortunately, different people will make different diagnosis, depending on their experience, professional expertise and their concerns. We cannot recognize a problem without understanding what would count as a solution, just as we cannot comprehend an objective without accepting what would count as the achievement of it. The actual problem that is addressed depends somewhat on which individual or group can make the problem, as they see it, count. But all management stakeholders in a company are influenced by believable arguments and so true technical expertise usually succeeds. Hopefully, it must for if the wrong problem is addressed, the wrong decisions are made and this can be more wasteful of resources than solving the right problem in an inefficient way. Although we hesitate to acknowledge it, the fact is that once we move away from some pure deductive system like mathematics, we are in the realm of persuasion where persuasive rhetoric is crucial so that a dramatic description of what is considered to be the problem can emotionally compel attention and often our assent (Hollensen, 2006). Source: Adapted from Hollensen, 2003, modified Past Future Target projection (e.g. required profits) Reference projection (following existing strategy) PLANNING GAP Time (years) t3 Time of forecast t0 Figure 3.1: Illustration of the ‘planning gap’ Kapitel_3.indd 115 03.08.2010 12:47:55 Uhr 3. Strategy Formulation in the Marketing Planning Process116 3.1.4 The Search for Strategy Alternatives for Closing Planning Gap The strategic options for closing the planning gap should not only fit the challenging situation and take account of trends and competition but should also take advantage of the firm’s core competencies and strengths. Where the solution is other than a crisis one, there is time for more reflective planning, guided by: The situation as revealed by the performance gap;• The perceived problem;• The strengths, weaknesses, opportunities and threats identified in the historical re-• view/situation analysis; Current strategies and policies;• Existing capabilities or competencies.• The strategy search process should always allow for the possibility of inspiration, which may beat anything arrived at by systematic analysis. It is not uncommon for someone to come up with an idea that is instantly recognizable as being the right answer. The inspired solution is thus accepted, not because it saves time but because it is perceived to be advanced and effective. This said, the identification of appropriate strategies rests on having the requisite experience and the content of the strategy, not procedure, is allimportant. Where the requisite experience is lacking, the search for strategies becomes opaque (Hollensen, 2006). 3.1.5 Ansoff’s Generic Strategies for Growth One aspect of strategic management is the development of precise strategies for achieving company objectives. Strategies must respond to the environment and provide specific guidelines for decision-making. Because companies face unique combinations of internal and external factors, the strategies developed by any one organisation are unlikely to be entirely adaptable to any other organisation. At a more general level, however, it is possible to discern recurring patterns in the strategies adopted by organisations. These recurring patterns are called generic strategies. So if we elaborate on the ‘planning’ gap in Figure 3.1 we get what is illustrated in Figure 3.2 where the ‘gap’ is filled up with Ansoff’s expansion-strategies: Market Penetration Organisations seeking to grow by gaining a larger market share in their current industry or market follow a penetration strategy. Following alternatives are available: Increase market share on current markets with current products• Increase product share (Increase frequency of use, increase quantity used, new ap-• plications) The most basic method of gaining market penetration in existing markets with current products is by winning competitor’s customers. This may be achieved by more effective use of the marketing mix, e.g. by more valuable promotion, distribution, or by cutting prices. The launch of the 3G iPhone is an example of Apple using price policy to achieve market penetration. The price of $ 199 was considerably cheaper than that of the 2G iPhone, which was priced at $ 399, and yet offered more benefits including faster mobile internet access (Webb, 2008). Kapitel_3.indd 116 03.08.2010 12:47:55 Uhr 3.1 Strategic Marketing Planning 117 Figure 3.2: Filling the ‘planning gap’ with Ansoff’s strategies t -1 t 0 t 1 Sales Diversification New markets New products Market penetration Objective (target projection) Forecast (following existing strategy) Gap to be filled Time Source: Adapted from Hollensen, 2006, modified Current products New products Current markets Market penetration strategies ? Increase market share ? Increase product share ? Increase frequency of use ? Increase quantity used ? New applications Product development strategies ? Product improvements ? Product-line extensions ? New products for same market New markets Market development strategies ? Expand markets for existing products ? Geographic expansion ? Target new segments/customer groups Diversification strategies ? Vertical integration ? Diversification into related businesses (concentric diversification) ? Diversification into unrelated businesses (conglomerate diversification) Kapitel_3.indd 117 03.08.2010 12:47:55 Uhr 3. Strategy Formulation in the Marketing Planning Process118 Other strategic options in terms of market penetration involve buying competitors and to protect the penetration already gained by discouraging competitive entry. Market entry barriers (MEB) can be created by cost advantages (lower labour costs, access to raw materials, economies of scale), high switching costs (the costs of changing from an existing supplier to a new supplier, for example), high marketing expenditures and displaying aggressive tendencies to retaliate (Kotler and Armstrong, 2009). Penetration strategies can be very successful when the company has a technological or production advantage that allows it to take market share away from competitors while still operating profitably. However, such strategies can also be very costly, if they rely primarily on setting prices below those of competing products. Product Development Strategies Organisations can also remain within their established industries or markets and seek extension by introducing new products or services in current markets. This is also called a technology development strategy. The strategy may take the following forms: Product-line extensions• Product improvements• New products for same market• In the case of product-line extensions customers are given greater choice. For example, the original iPod has been followed by the launches of the iPod nano, shuffle and touch, giving its target market of young music lovers greater choice in terms of size, price and capacity. When new features are added trading up may occur, with customers buying the enhanced-value product. However, when the new products are cheaper than the original (as in the case with the iPod) the danger is cannibalization of sales of the core offer. Product replacement strategies involve the replacement of old brands/products with new ones, often based on technology change. The company thus replaces an old product with an innovation although both may be marketed side by side for a time (Jobber, 2010). Product development strategies are in peril if competitors can easily copy the new product being introduced by using lower manufacturing or delivery costs. They can be at risk if the products are not different enough from existing products to inspire demand. Market Development Strategies Market development entails the promotion of new uses of existing products to new customers, or the marketing of existing products and their current uses to new market segments. The strategy involves the following strategic possibilities: Geographic expansion (new countries/regions)• New segments/customer groups• For example, Tesco the UK supermarket chain, practiced market development by marketing existing grocery products, which were sold in large out-of-town supermarkets and superstores, to a new market segment – convenience shoppers – by opening smaller shops in town centres and next to petrol stations. Market development is also feasible through entering new segments by involving the search for overseas opportunities. The growth of markets in China, India, Russia and Kapitel_3.indd 118 03.08.2010 12:47:55 Uhr 3.1 Strategic Marketing Planning 119 Eastern Europe is providing major market development opportunities for all sorts of business (Jobber, 2010). Diversification Strategies Pursuing a growth strategy by introducing new products or technologies in new markets or industries is called diversification. The following alternatives are available: Vertical integration• (forward integration or backward integration) Diversification into related businesses (• concentric/horizontal diversification) Diversification into unrelated businesses (• conglomerate/lateral diversification) The term ‘diversification’ is frequently associated with expansion into areas unrelated to the company’s current operations in order to offset cyclical downturns in one area with cyclical growth in other areas. Diversification was popular with many large companies in the 1970s and gave rise to legendary conglomerates (Hollensen, 2006). The entry into new markets is the most risky option, especially when the entry strategy is not based on the core competencies of the business. However, it can also be highly rewarding, as exemplified by Honda’s move from motorcycles to cars based on its core competences in engines (Jobber, 2010). Another way of illustrating the ‘planning gap’ and moving the company towards the desired curve (or position in the market) is to look at the existing company sales and compare it with total served market and the market potential (Figure 3.3). The single firm is mainly able to increase the market share by filling up the ‘4Ps gaps’, by using one P or more Ps in combination. However, unless the firm is a major player in the industry it will not be able to influence the size of the unserved market or the degree of market penetration (We will look at the 4Ps in more detail in later chapters). Market Potential The most difficult estimate to make is probably that of ‘market potential’ in the whole market, including all segments. In the B-t-C market it is often achieved by determining the maximum potential individual usage, and then extrapolating this by the maximum number of potential consumers (in the B-t-B market it would be the maximum number of firms). The maximum potential individual usage, or at least the maximum attainable average usage, will usually be determined from market research figures. For guidance one can look at the numbers using similar products. Alternatively, a marketer can look at what has occurred in other countries. It has often been suggested that Europe follows patterns set in the United States, but with a certain time lag (Hollensen, 2006). 3.1.6 Porter’s Three Generic Strategies According to Porter (1985), forging successful strategy begins with understanding of what is happening in one’s industry and deciding which of the available competitive niches one should attempt to dominate. For example, a company may discover that the largest competitor in an industry is aggressively pursuing cost leadership, that others are trying the differentiation route, and that no one is attempting to focus on some small specialty market. On the basis of this information, the firm might sharpen its efforts to distinguish its product from others or switch to a focus approach. As Porter states, the idea is to position the firm ‘so it won’t be slugging it out with everybody else in the Kapitel_3.indd 119 03.08.2010 12:47:55 Uhr 3. Strategy Formulation in the Marketing Planning Process120 industry; if it does it right, it won’t be directly toe-to-toe with anyone’. The objective is to mark out a defensible competitive position – defensible not just against rival companies but also against the forces driving industry competition. What it means is that the give-and-take between firms already in the business represents only one such force. Others are the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the threat of new entrants (Porter’s five-forces model). Combining the dimensions of distinctive advantage and business cope (broad versus narrow) in a matrix, results in the strategic typology illustrated in Figure 3.4.: differentiation, cost leadership, differentiation focus, and cost focus. Universal market (more usage) Product gap Firm sales Promotion gap Distribution gap Price gap Market potential Total (served) market Competitors total sales Firm’s sales 001 %erahs Market x Total (served) market mriF selas= 001 %x potentialMarket Total (served) marketoitartenep neergeD fo tekram = Source: Adapted from Hollensen, 2006, modified Figure 3.3: Levels of gaps in the market Kapitel_3.indd 120 03.08.2010 12:47:56 Uhr 3.1 Strategic Marketing Planning 121 Differentiation Strategy A differentiation strategy involves the selection of one or more choice criteria that are used by many customers in an industry. The company aims at uniquely positioning itself to meet these criteria better than the competition. The goal is usually to differentiate in a way that leads to a price premium in excess of the cost of differentiating. Differentiation gives customers a reason to prefer one product or service over another. Nokia, for example, became market leader in mobile phones by being the first to realize that they were fashion items and to deign stylish phones to differentiate the brand from its competitors (Jobber, 2010). Hewlett-Packard adopted this strategic orientation when the market for handheld calculators was in the early stages. Hewlett-Packard calculators were more expensive than Texas Instruments products, but their technology and performance were superior. In later years, Texas Instrument matched the performance and technological features of Hewlett- Packard calculators Source: Adapted from Porter, 1985, modified Focused differentiation Focused cost advantage Differential advantageCost leadership Focus NARROW BROAD BUSINESS SCOPE DISTINCTIVE ADVANTAGE LOW COST HIGH COST Figure 3.4: The three (four) generic strategies Example 3: Mercedes-Benz pursues a differentiation strategy with its premium priced products Kapitel_3.indd 121 03.08.2010 12:47:56 Uhr 3. Strategy Formulation in the Marketing Planning Process122 while retaining its cost leadership, forcing Hewlett-Packard to reduce its prices (Hollensen, 2006). Cost Leadership A cost leadership strategy involves the achievement of the lowest cost position in an industry. The company serves segments in the industry and directs great importance to minimizing costs on all fronts. Heinz is believed to be a cost leader in its industry. The firm markets acceptable products at reasonable prices, which implies that their low costs result in above-average profits. Wal-Mart is also a cost leader, which allows the company the option of charging lower prices than its competitors to achieve higher sales and yet achieve comparable profit margins, or to match competitor’s prices and attain higher profit margins (Jobber, 2010). Differentiation Focus With the focused differentiation strategy, a company aims to differentiate within one or a small number of target segments. The specific needs of the particular segment suggest that there is an opportunity to differentiate the product offering from the competition’s, which may be targeting a broader group of customers. For example, Ritz-Carlton focuses on the top 5 percent of corporate and leisure travellers (Kotler and Armstrong, 2009). Company’s pursuing this approach must ensure that the needs of their target group differ from those of the broader market in order to have a basis for differentiation. Cost Focus Within the framework of a cost focus strategy, a company seeks a cost advantage with one or a small number of target market segments. Examples of cost focusers are easy Jet and Ryanair, who focus on short-haul flights with a basic product trimmed to reduce costs (Jobber, 2010). The essence of corporate success, then, is to choose a generic strategy and pursue it consistently. Below-average performance results in a stuck-in the-middle position. Sears and Holiday Inn encountered difficult times because they did not stand out as the lowest in cost, highest in perceived value, or best in serving some specific market segment. (Kotler and Armstrong, 2009). In most situations differentiation and cost leadership are incompatible as differentiation is usually achieved through higher costs. However, there are circumstances Example 4: Stihl is pursuing a differentiation focus promoting the superior quality of their power tools positioning themselves as the world’s leading chainsaw brand Kapitel_3.indd 122 03.08.2010 12:47:56 Uhr 3.1 Strategic Marketing Planning 123 when both can be achieved simultaneously. For example, a differentiation strategy may lead to market share domination, which lowers costs through economies of scale and learning curve effects; or a highly differentiated company may pioneer a major process innovation that significantly reduces manufacturing costs leading to a cost-leadership position (Jobber, 2010). Treacy and Wiersema (1993) offered a new and contemporary classification of competitive strategies that a company may use: (a) operational excellence, (b) product leadership, and (c) customer intimacy: Operational excellence: • The company provides superior value by leading its industry in price and convenience. It works to reduce costs and to create a lean and efficient value-delivered system. The company serves consumers who want reliable, goodquality products or services, but who want them cheaply and easily. Examples include Wal-Mart and Southwest Airlines. Customer intimacy: • With this strategy the company provides superior value by precisely segmenting its markets and tailoring its products or services to match exactly the needs of targeted customers. It thereby specializes in satisfying unique customer needs through a close relationship with and intimate knowledge of the customer. Customer-intimate companies serve customers who are willing to pay a premium to get precisely what they want. Businesses following this strategy do not pursue onetime transactions; they cultivate relationships. They specialize in satisfying unique needs, which often only they recognize, through a close relationship with and intimate knowledge of the customer. Examples include Ritz-Carlton, Sony and Lexus. Product leadership:• The firm provides superior value by offering a continuous stream of leading-edge products and services. Product leaders are open to innovations and ideas, relentlessly pursue new solutions, and work to get new products to the market instantly. They serve consumers who want state-of-the-art products and services, regardless of the costs in terms of price. Although the emphasis of the strategy is on product in order to make an integrated marketing decision, appropriate changes may have to be made in price, promotion, and distribution areas. The strategic perspectives in these areas may be called supporting strategies. Examples include Intel and Microsoft. Although companies may successfully pursue more than one value discipline at the same time, few firms can be best at more than one of these disciplines. Treacy and Wiersema have found that leading companies focus on and excel at a single value discipline, while meeting industry standards at the other two (Kotler and Armstrong, 2009). Classifying competitive strategies as value disciplines is appealing as it defines marketing strategy in terms of the single-minded pursuit of delivering superior value to consumers. Each value discipline defines a specific way to build sustainable customer relationships which again is at the core of RM. Example 5: Zeiss emphasizes the superior product quality in their ads Kapitel_3.indd 123 03.08.2010 12:47:56 Uhr 3. Strategy Formulation in the Marketing Planning Process124 3.1.7 The BCG Portfolio Matrix Model A major activity in strategic planning is business portfolio analysis, whereby management evaluates the products and business units making up the company. The firm aims at putting strong resources into its more profitable businesses and phase down or drop its weaker ones. The first step within the process is to identify the key strategic business units. A strategic business unit (SBU) is a unit of the company that has a separate mission and objectives and that can be planned independently from other company businesses. An SBU can be a company division, a product line within a division, or a single product, service or brand (Kotler and Armstrong, 2009). The next step in business portfolio analysis is to assess the attractiveness of its various SBUs and decide how much support each one deserves. A good planning system must guide the development of strategic alternatives for each of the company’s current businesses and new business possibilities. It must also provide for management’s review of these strategic alternatives and for corresponding resource allocation decisions. The result is a set of approved business plans that, taken as a whole, represent the direction of the firm. This process starts with, and its success is largely determined by, the creation of sound strategic alternatives. The top management of a multi-business firm cannot generate these strategic alternatives. It must rely on the managers of its business ventures and on its corporate development personnel. However, top management can and should establish a conceptual framework within which these alternatives can be developed. The best-known portfolio planning tool as such a framework is the portfolio matrix associated with the Boston Consulting Group (BCG). Briefly, the portfolio matrix is used to establish the best mix of businesses in order to maximize the long-term earnings growth of the company. The portfolio matrix represents a real advance in strategic planning in several ways (Hollensen, 2006): It encourages top management to evaluate the prospects of each of the company’s • businesses individually and to set tailored objectives for each business based on the contribution it can realistically make to corporate goals. It stimulates the use of externally focused empirical data to supplement managerial • judgment in evaluating the potential of a particular business. It explicitly raises the issue of cash flow balancing as management plans for expan-• sion and growth. It gives managers a potent new tool for analyzing competitors and for predicting com-• petitive responses to strategic moves. It provides not just a financial but also a strategic context for evaluating acquisitions • and divestitures. The portfolio matrix approach has given top management the tools to evaluate each SBU in the context of both its environment and its unique contribution to the goals of the company as a whole and to weigh the entire array of business opportunities available to the company against the financial resources required to support them. The portfolio matrix concept addresses the issue of the potential value of a particular business for the company. This value has two variables: first, the potential for generating attractive earnings levels now; second, the potential for growth or, in other words, for significantly increased earnings levels in the future. The portfolio matrix concept holds that these two variables can be quantified. Current earnings potential is measured by Kapitel_3.indd 124 03.08.2010 12:47:57 Uhr 3.1 Strategic Marketing Planning 125 comparing the market position of the business relative to that of its competitors. Empirical studies have shown that profitability is directly determined by relative market share. Relative market share is shown on the horizontal axis and refers to the market share of each product relative to its largest competitor. It acts as a proxy for competitive strength. The division between high and low market share is usually 1. Above this figure a product line has a market share greater than its largest rival. Growth potential is measured by the growth rate of the market segment in which the business operates. Clearly, if the segment is in the decline stage of its life cycle, the only way the business can increase its market share is by taking volume away from competitors. Within this framework, market growth rate is used as a proxy for market attractiveness (Jobber, 2010). Figure 3.5 shows a matrix with its two sides labelled market growth rate and relative market share. The area of each circle represents sales. The market share position of each circle is determined by its horizontal position. Each circle’s product sales growth rate (corrected for inflation) in the market in which it competes is shown by its vertical position. With regard to the two axes of the matrix, relative market share is plotted on a logarithmic scale in order to be consistent with the experience curve effect, which implies that profit margin or rate of cash generation differences between two competitors tends Source: Adapted from Hollensen, 2003, modified A C D F Star Question mark Divestment Desired or expected position Present position High Low Cash Cow Dog M ar ke t g ro w th ra te % Relative market share (Share relative to largest competitors) LowHigh 1 B E Figure 3.5: The BCG-model Kapitel_3.indd 125 03.08.2010 12:47:57 Uhr 3. Strategy Formulation in the Marketing Planning Process126 to be proportionate to the ratio of their competitive positions. A linear axis is used for growth for which the most generally useful measure is volume growth of the business concerned; in general, rates of cash use should be directly proportional to growth (Hollensen, 2006). Classification of BCG Boxes Using the two dimensions discussed here in Figure 3.5, one can classify businesses and products into four basic categories. Businesses in each category, exhibit different financial characteristics and offer different strategic choices. Stars High-growth market leaders are called stars. They are likely to be profitable because they are market leaders but require substantial investment to finance growth and to meet competitive challenges. Overall, cash flow is therefore likely to be roughly in balance. Thus star products represent probably the best profit opportunity available to a company, and their competitive position must be maintained. If a star is allowed to fall because of cutbacks in investment and rising prices (creating an umbrella for competitors) the star will ultimately become a – poor – dog. The appropriate strategic objective is to build sales and/or market share. Resources should be invested to maintain/increase the leadership position and competitive challenges should be repelled. The ultimate value of any product or service is reflected in the stream of cash it generates net of its own reinvestment. For a star, this stream of cash lies in the future. To obtain real value, the stream of cash must be discounted back to the present at a rate equal to the return on alternative opportunities. It is the future payoff of the star that counts, not the present reported profit. Stars are the cash cows of the future and need to be protected. For GE, the plastics business is a star in which it keeps investing. As a matter of fact, the company even acquired Thomson’s plastics operations (a French company) to further strengthen its position in the business (Hollensen, 2006). Cash Cows Cash cows are market leaders in mature (low-growth) markets. High market share leads to high profitability and low market growth means that investment – in new production facilities – is minimal. This leads to a large positive cash flow. As a result, these businesses generate cash surpluses that help to pay dividends and interest, provide debt capacity, supply funds for research and development, meet overheads, and also make cash available for investment in other products. Consequently, cash cows are the foundation on which everything else depends. These products must be protected. Technically speaking, a cash cow has a return on assets that exceeds its growth rate. Only if this is true will the cash cow generate more cash than it uses. Consequently, the appropriate strategic objective is to hold sales and market share. The excess cash that is generated should be used to fund stars, question marks that are being built, and research and development for new products. Question Marks Question marks are low-share business units in high-growth markets. Because of growth, these products require more cash than they are able to generate on their own. If nothing is done to increase market share, a question mark will simply absorb large amounts of Kapitel_3.indd 126 03.08.2010 12:47:57 Uhr 3.1 Strategic Marketing Planning 127 cash in the short run and later, as the growth slows down, become a – poor – dog. Thus, unless something is done to change its perspective, a question mark remains a cash loser throughout its existence and ultimately becomes a cash trap. Against this background, the company faces a fundamental choice: to increase investment (building strategy) to attempt to turn the question marks into stars. Because the business is growing, it can be funded to dominance. It may then become a star and later, when growth slows down, a cash cow. This strategy is a costly one in the short run. An abundance of cash must be poured into a question mark in order for it to win a major share of the market, but in the long run this strategy is the only way to develop a sound business from the question mark stage. Another strategy is to withdraw support by either harvesting (raising price while lowering marketing expenditure) or divesting (dropping or selling it). In a few cases it may be viable to find a small market segment (niche strategy) where dominance can be achieved. Unilever, for example, identified its specialty chemicals business as a question mark. It realized that it had to invest heavily or exit the market. Unilever’s decision was to sell and invest the billions raised in predicted future winners such as personal care and dental products (Jobber, 2010). Dogs Products with low market share positioned in low-growth situations are called – poor – dogs. Their insufficient competitive position condemns them to poor profits. Because growth is low, dogs have little potential for gaining sufficient share to achieve viable cost positions. Usually they are net users of cash. Their earnings are low, and the reinvestment required just to keep the business together consumes cash inflow. The business, therefore, is likely to regularly absorb cash unless further investment is rigorously avoided. For those products that achieve second or third position in the market place (cash dogs) a small positive cash flow may result, and for a few others it may be possible to reposition the product into a defendable niche. But for the bulk of dogs the appropriate strategic objective is to harvest to generate positive cash flow for a time, or to divest, which allows resources to be allocated elsewhere (Jobber, 2010). GE’s consumer electronics business had been in the dog category, maintaining only a small percentage of the available market in a period of slow growth, when the company decided to unload the business (including the RCA brand acquired in late 1985) to Thomson, France’s stateowned, leading electronics manufacturer (Hollensen, 2006). Table 3.1 summarizes the investment, earning, and cash flow characteristics of stars, cash cows, question marks, and dogs. Also shown are viable strategy alternatives for products in each category. In a typical company, products could be scattered in all four quadrants of the portfolio matrix. The appropriate strategy for products in each cell is given briefly in Table 3.1. In summary, the portfolio matrix approach provides for the simultaneous comparison of different products. It also underlines the importance of cash flow as a strategic variable. Thus, when continuous long-term growth in earnings is the objective, it is necessary to identify high-growth product/market segments early, develop businesses, and pre-empt the growth in these segments. If necessary, short-term profitability in these segments may be forgone to ensure achievement of the dominant share. Costs must be managed to meet scale-effect standards. The appropriate point at which to shift from an earnings focus to a cash flow focus must be determined and a liquidation plan for Kapitel_3.indd 127 03.08.2010 12:47:57 Uhr 3. Strategy Formulation in the Marketing Planning Process128 cash flow maximization established. A cash-balanced mix of businesses should be maintained (Hollensen, 2006). The simplicity, ease of use and importance of the issues tackled by the BCG matrix saw its adoption by many companies that wanted to get a handle on the complexities of strategic resource allocation. The portfolio matrix approach, however, is not a panacea for strategy development. The following list draws together some of the points raised by critics (Day and Wensley, 1983; Jobber, 2010) The assumption that cash flow will be determined by a product’s position in the ma-• trix is weak. For example, some stars will show a healthy positive cash flow. The preoccupation of focusing on market share and market growth rate distracts manage-• rial attention from other aspects such as attaining a sustainable competitive advantage. Treating the market growth rate as a proxy for market attractiveness, and relative • market share as an indicator of competitive strength is over simplistic as many other factors have to be taken into account when measuring market attractiveness (e.g. market size, strengths and weaknesses of competitors) and competitive strengths (e.g. potential cost advantages). Since the position of a product in the matrix depends on market share, this can lead to • an unhealthy preoccupation with market share gain. The matrix ignores interdependencies between products. For example, a – poor – dog • may need to be marketed because it complements a star or cash cow. Table 3.1: Characteristics and strategy implications of products in the strategy quadrants Quadrant Investment characteristics Earning characteristics Cash Flow characteristics Strategy implication Stars Recurrent • expenditures for capacity expansion Pipeline • filling with cash Low to high Negative cash flow (net cash user) Continue to increase market share Cash cows Capacity • maintenance expenditures High Positive cash flow (net cash contributor) Maintain share and leadership Question marks Intense initial • capacity expenditures High R&D • costs Negative to low Negative cash flow (net cash user) Assess chances of controlling segment: if positive, go after share; if negative, redefine business or withdraw Dogs Increasingly • deplete capacity High to low Neutral/positive cash flow If not required in portfolio plan withdrawal so as to maximize cash flow Source: Adapted from Hollensen, 2006, modified Kapitel_3.indd 128 03.08.2010 12:47:57 Uhr 3.1 Strategic Marketing Planning 129 Marketing objectives are greatly dependent on an assessment of what competitors are • likely to plan. How will they react to price changes, for example. This is not considered in the matrix. The matrix is vague regarding the market definition. Should a company take the • whole market (e.g. confectionary) or just the market segment that it operates in (e.g. expensive boxed chocolates)? The matrix is also vague when defining the dividing line between high- and low-growth markets. Furthermore, over what period do we define market growth? 3.1.8 The GE-Matrix Multifactor Portfolio Matrix The BCG-model discussed above provides a useful approach for reviewing the roles of different products in a company. As stated above, however, the matrix approach leads to many difficulties. Stimulated by this success and some of the weaknesses of the model (particularly the criticism of its over simplicity) McKinsey & Co developed a more wideranging Market Attractiveness-Competitive Position (MA-CP) model in conjunction with General Electric (GE) in the USA. Instead of using market growth rare alone, a range of market attractiveness criteria were used, such as market size, market growth rate, beatable rivals, market entry barriers, social, political and legal factors. Similarly, instead of using only the relative market share as a measure for competitive strength, a number of factors were used, such as relative market share, reputation, distribution capability, market knowledge, service quality, innovation capability and cost advantages. The framework discussed here may be applied to either a product/market or an SBU. As a matter of fact, it may be equally applicable to a much higher level of aggregation in the organisation, such as a division or a group. Management is permitted to decide which criteria are applicable for their products. After depicting the criteria, management’s next task is to agree upon a weighting system for each set of criteria, with those factors that are most important having a higher weighting, for example ten points to be shared. Next management assesses the particular market for the product under examination on each of the factors, for example, on a scale from 1-10. By multiplying each weighting by its corresponding rating, and then summing, a total score indicating the overall attractiveness of the particular market for the product under examination is obtained. The same kind of process is then applied in the framework of the competitive strength assessment. Finally, the market attractiveness and competitive strength scores for the product under appraisal can now be plotted on the MA-CP matrix. The process is repeated for each product under investigation. Each product position is given by a circle, the size of which is in proportion to its sales. Like in the BCG model, for an individual business, the recommendations for setting strategic objectives are dependent on the product’s position. Figure 3.7 provides an overview of the appropriate strategies. In general, there can be four strategic objectives (Jobber, 2010): Zone 1 • (dark area of Figure 3.6): Build – manage for sales and market share growth as the market is attractive and competitive strengths are high (equivalent to the stars in the BCG model) Kapitel_3.indd 129 03.08.2010 12:47:57 Uhr 3. Strategy Formulation in the Marketing Planning Process130 Zone 2 • (medium-dark area of Figure 3.6): in the lower left-hand area where competitive strength is medium/high and market attractiveness is medium/low a hold strategy is appropriate: manage for profits consistent with maintaining market share as the market is not very attractive but competitive strengths are high (equivalent to cash cows in the BCG model). In the upper right-hand area where competitive strength is medium/low and market attractiveness is medium/high a build/hold/harvest strategy is appropriate: with reference to the BCG model this can be called the question-mark zone. Where competitors are rather weak or passive, a build strategy may be used. In the face of fierce competition a hold strategy will be more appropriate, or harvesting where commitment to the product is lower. The proponents of the GE portfolio model argue that the analysis is much richer than the BCG analysis as more factors are taken into account. However, it is more difficult to use since it requires agreement on which factors to use, their weightings and scoring. In Figure 3.6: The McKinsey Market Attractiveness-Competitive Position Model Source: Adapted from Hollensen, 2006, modified 5.00 3.67 2.33 3.67 5.00 Strong Medium Weak M ed iu m Lo w H ig h 1.002.33 Business strength Flexible diaphrams Hydraulic pumps Clutches Relief valves Fuel pumps Aerospace fittings Joints Zone 1: Invest/grow Zone 2: selectivity/earnings Zone 3: Harvest/divest ? Overall market size ? Annual market growth rate ? Historical profit margin ? Competitive intensity ? Technological requirements ? Inflationary vulnerability ? Energy requirements ? Environmental impact Determining factors: Determining factors: ? Market share ? Share growth ? Product quality ? Brand reputation ? Distribution network ? Promotional effectiveness ? Productive capacity ? Productive efficiency ? Unit costs ? Material supplies ? R&D performance ? Managerial personnel = projection of future position Kapitel_3.indd 130 03.08.2010 12:47:57 Uhr 3.1 Strategic Marketing Planning 131 addition to that, the flexibility of the model also provides ample opportunity for managerial bias to enter the analysis. 3.1.9 A New Product Portfolio Approach Portfolio approaches provide a valuable tool for strategists. Granted, these approaches have limitations, but these limitations can be prevailed with a proactive and sophisticated approach. The genuine concern about the portfolio approach is that its elegant simplicity often tempts managers to believe that all problems of corporate choices and resource allocation can be unravelled. Although the portfolio approach is a powerful tool for helping the strategist to select from a variety of available opportunities, it is no tool that can provide an option-generating capability. Using these approaches, many companies plunged into unrelated and new high-growth markets that they did not know how to manage – with bad results. At the same time, these companies were often too quick to abandon, sell, or milk their healthy mature businesses. In the end, only creative thinking about the company’s environment, its business, customers, and competitors can facilitate success (Kotler and Armstrong, 2009). For a successful introduction of the portfolio framework, Hollensen (2006) suggests to pay attention to the following aspects in the framework of portfolio management: Figure 3.7: The generic strategies of the McKinsey Market Attractiveness-Competitive Position Model Protect position ß Invest to grow at maximum digestible rate ß Concentrate effort on maintaining strength Invest to build ß Challenge for leadership ß Build selectively on strengths ß Reinforce vulnerable areas Build selectively ß Specialize around limited strengths ß Seek ways to overcome weaknesses ß Withdraw if indications of sustainable growth are lacking Build selectively ß Invest heavily in most attractive segments ß Build up ability to counter competition ß Emphasize profitability by raising productivity Selectivity/manage for earnings ß Protect existing program ß Concentrate investments in segments where profitability is good and risk is relatively low Limited expansion or harvest ß Look for ways to expand without high risk; otherwise, minimize investment and rationalize investment Protect and refocus ß Manage for current earnings ß Concentrate on attractive strengths ß Defend strengths Manage for earning ß Protect position in most profitable segments ß Upgrade product line ß Minimize Investment Divest ß Sell at time that will maximize cash value ß Cut fixed costs and avoid investment meanwhile Strong Medium Weak Medium High Low Market attractiveness Business strength Kapitel_3.indd 131 03.08.2010 12:47:58 Uhr 3. Strategy Formulation in the Marketing Planning Process132 1. Once introduced, move quickly to establish the legitimacy of the portfolio analysis. 2. Educate line managers in its relevance and use. 3. Redefine SBUs explicitly because their definition is the ‘genesis and nemesis’ of adequately using the portfolio framework. 4. Use the portfolio framework to seek the strategic direction for different businesses without haggling over the fancy labels by which to call them. 5. Make top management acknowledge SBUs as portfolios to be managed. 6. Seek top management time for reviewing different businesses using the portfolio framework. 7. Rely on a flexible, informal management process to differentiate influence patterns at the SBU level. 8. Tie resource allocation to the business plan. 9. Consider strategic expenses and human resources as explicitly as capital investment. 10. Plan explicitly for new business development. 11. Make a clear strategic commitment to a few selected technologies or markets early. 3.1.10 Strategy Evaluation and Selection The time required to develop resources is so extended, and the timescale of opportunities so brief and momentary, that a company has to carefully delineate and appraise its strategy in the framework of a sophisticated strategy evaluation. The adequacy of a strategy may be evaluated using the following criteria (Hollensen, 2006): 1. Suitability – Is there a sustainable advantage? 2. Validity – Are the assumptions realistic? 3. Feasibility – Do we have the skills, resources, and commitments? 4. Internal consistency – Does the strategy hang together? 5. Vulnerability – What are the risks and contingencies? 6. Workability – Can we retain our flexibility? 7. Appropriate time horizon. Re. 1: Suitability Strategy should offer some sort of competitive advantage. In other words, strategy should lead to a future advantage or an adaptation to forces eroding current competitive advantage. The subsequent steps may be followed to judge the competitive advantage a strategy may provide: (a) review the potential threats and opportunities to the business, (b) assess each alternative in light of the capabilities of the business, (c) anticipate the likely competitive reaction to each option, and (d) modify or eliminate unsuitable options. Re. 2: Validity (Consistent with the Environment) Strategy should be consistent with the assumptions about the external product/market environment. At a time when an increasing number of women are seeking jobs, a strategy assuming traditional roles for women (e.g. raising children and staying home) would be inconsistent with the environment. Kapitel_3.indd 132 03.08.2010 12:47:58 Uhr 3.1 Strategic Marketing Planning 133 Re. 3: Feasibility (Appropriateness in Light of Available Resources) Capital, competence, and physical facilities are the crucial resources a manager should be aware of in finalizing strategy. A resource may be examined in two different ways: as a constraint limiting the achievement of goals and as an opportunity to be exploited as the basis for strategy. It is desirable for a strategist to make correct estimates of assets available without being excessively optimistic about them. Further, even if resources are available in the company, a particular product/market group may not be able to lay claim to them. Re. 4: Internal Consistency Strategy should be in tune with the different policies of the corporation and the product/ market arena. For example, if the corporation decided to limit top 5-customers’ business of any unit to 40 percent of total sales, a product/market strategy emphasizing greater than 40 percent reliance on the Top 5-customers would be internally incoherent. Re. 5: Vulnerability (Satisfactory Degree of Risk) The degree of risk may be determined on the basis of the perspectives of the strategy and available resources. A relevant question here is: Will the resources be available as planned in appropriate quantities and for as long as it is necessary to implement the strategy? The overall amount of resources committed to a venture becomes a factor to be reckoned with: the greater these quantities, the greater the degree of risk. Re. 6: Workability The workability of a strategy should be sensibly evaluated with quantitative data. Sometimes, however, it may be difficult to undertake such objective analysis. In that case, other indications may be used to assess the contributions of an approach. One such indication could be the degree of consensus among key executives about the viability of the strategy. Identifying ahead of time alternate strategies for achieving the goal is another sign of the workability. Finally, establishing resource requirements in advance, which eliminates the need to institute crash programs of cost reduction or to seek reduction in planned programs, also substantiates the workability of the strategy. Re. 7: Appropriate Time Horizon A feasible strategy has a time frame for its realization. The time horizon of a strategy should allow implementation without creating disorder in the organisation or missing market availability. For example, in introducing a new product to the market, enough time should be allotted for market testing, training of salespeople, and so on. But the time frame should not be so long that a competitor could enter the market first and skim the cream off the top. Strategy Selection After information on trade-offs between different strategies has been gathered as discussed above, a preferred strategy should be chosen for recommendation to top management. Once a core strategy has been selected, supporting strategies should be delineated. Core and supporting strategies should fit the needs of the marketplace, the skills of the company, and the vagaries of the competition. Reformulation of current strategy may range from making slight modifications in existing perspectives to coming out with an entirely different strategy. Kapitel_3.indd 133 03.08.2010 12:47:58 Uhr 3. Strategy Formulation in the Marketing Planning Process134 How much examination and review a product/market strategy requires depends on the nature of the strategy (in terms of the change it seeks from existing perspectives) and the resource commitment necessary. Another point to remember in developing core strategy is that the emphasis should always be placed on searching for new ways to compete. The marketing strategist should develop strategy around those key factors in which the business has more freedom than its competitors have. 3.1.11 Estimating Financial Consequences Most forms of corporate strategic analysis have to include not only a financial evaluation of the current position but also an evaluation of the financial impact of future strategic choices. Such a financial evaluation often relies on the management and financial accounting information systems within the company, but more recently a number of key conceptual issues have been raised. Most important has been the development of so-called ABC (‘Activity Based Costing’) which, generally, attempts to shift the focus of cost analysis towards individual elements in the various business activities or processes involved in the development and delivery of products and services. This follows on from earlier developments in management accounting, which looked at ways of constructing management accounts so that financial performance could be measured along various dimensions (such as product groups, sales territories, and key customers) as a form of strategic diagnosis. In interpreting financial data for strategic purposes it is inevitable that two fundamental conceptual issues almost constantly occur at some stage: the nature of opportunity cost and the distinction between fixed and variable costs. For financial accounting purposes, it is a well-established principle that the ‘cost’ of a particular activity should be based on adjusted, ‘real’, historic costs. It is also understandable that for strategic management accounting purposes, the costs should be an ‘opportunity’ cost based on alternative possible uses of the assets concerned. This unavoidably leads to the difficult position that the cost of any specified activity depends on the cost of other alternatives. In fact strong advocates of developments in ‘Strategic Management Accounting’ would argue that even this cost should be compared with one’s competitors’ costs rather than treated as an absolute figure. In terms of the variability of costs, the simple principle is that whilst in the short run almost all costs are fixed, strategic analysis with its focus on the longer term tends towards a situation in which, to paraphrase the famous Keynes Dictum: ‘In the long run, all costs are variable’. The problem with much strategic financial analysis is therefore to ensure that assumptions about what is fixed and what is variable which are built into the financial analysis are consistent with the actual resource choices that the firm or organisation faces (Hollensen, 2006). Kapitel_3.indd 134 03.08.2010 12:47:58 Uhr 3.2 Market Segmentation, Targeting and Positioning 135 3.2 Market Segmentation, Targeting and Positioning Markets consist of buyers, who differ in one or more ways, for example, in their wants, resources, buying attitudes, and locations. The technique that is used by marketers to get grips with the diverse nature of markets is called market segmentation. Through market segmentation, companies divide large, heterogeneous markets into smaller homogenous segments that can be targeted more efficiently and effectively with products and services that match their unique needs and wants. The objective is to identify groups of customers with similar requirements so that they can be served effectively while being of a sufficient size for the product or service to be supplied efficiently. Usually, especially in consumer markets, it is not possible to create a marketing mix that satisfies every individual’s specific requirements precisely. Market segmentation, by grouping together customers with similar needs, provides a commercially viable way of serving these consumers (Jobber, 2010). The first step within the process of market segmentation involves the identification of the best ways to segment a market and then pin down the characteristics of each group (this second step is called profiling). Next, the company must evaluate the attractiveness of the segments and select the most appropriate target markets. Finally, the business organisation needs to position the product or service relative to competitive offerings within the chosen market segments. 3.2.1 The Benefits and Underlying Premises of Market Segmentation There are a number of significant benefits that can be derived from segmenting a market, which can be summarized in the following terms: Segmentation is a particularly useful approach to marketing for small and medium-• sized enterprises (SMEs). It allows target markets to be matched to company competencies (see also Chapter 2) and makes it more probable that smaller companies can create a defendable niche in the market. Market segmentation facilitates the identification of gaps in the market, i.e. unserved • or underserved segments. These may serve as targets for new product development or extension of the existing product or service range. In mature or declining markets it may be possible to identify explicit segments that • are still in growth. Concentrating on growth segments when the overall market is declining is a key approach in the later stages of the product life cycle. Segmentation enables the marketer to match the product or service more directly to • the needs of the target market. In this way a stronger competitive position can be developed and maintained. The threat of not segmenting the market when competitors do so must also be em-• phasized: The competitive advantages stated above can be lost to competitors if the company fails to take advantage of them. A company practicing a mass marketing strategy in a plainly segmented market against competitors operating a focused strategy can find itself to be ‘stuck in the middle’. In order to get an overview of segmentation issues it is important to first consider the underlying requirements for market segmentation (Hooley et al., 2004). To be useful, market segments have to be: Kapitel_3.indd 135 03.08.2010 12:47:58 Uhr