Learning MBA Master Degree

TEACHER: Hello, Student. We will be discussing Strategic Marketing Planning in this and in the following Module.

Now... can you think of a few reasons why marketers must "plan"?

STUDENT: Sure, Teacher. They must think about the future in order to be able to continue meeting customer needs. They must plan to be ready to act when changes present problems and opportunities.

TEACHER: Very good. And as in any type of planning, goals must be set and it must be determined how to achieve those goals.

Planning helps managers and employees at all levels prioritize how to spend money and time and reduces the chances of making costly mistakes.

In many cases businesses, through luck or insight, "hit it" with a new product that generates great demand, like Xerox's photocopiers, Polaroid photography and Apple computers.

Naturally managers and business owners cannot trust to luck that they will always develop and market just the goods or services that individuals or organizations want to buy.

STUDENT: Also, competitors will try to do a better job of delivering the same or similar products. Xerox was a patented process and the company enjoyed many years of legal protection. But Apple soon had to find a way to survive when IBM launched the PC.

TEACHER: Right. Apple is a good example of the type of organizations that are successful over the long run by making use of strategic marketing, or marketing efforts aimed at the accomplishment of particular strategies.

STUDENT: Whenever I hear or read the word "strategy" I think of the military.

TEACHER: I guess it happens to everyone, because it is originally a military term to describe the way a nation uses its various forces to achieve particular goals in war.

STUDENT: Well, many people say marketing is a form of war!

TEACHER: Yes, there is a famous book about that. Let’s say that in the business world, managers devise strategies that draw on the organization's resources to achieve a high performance, especially relative to competitors.

STUDENT: Do you mean that using strategy to beat the competition is good enough?

TEACHER: Not in quality-driven organizations. Rather, the organization needs to turn the practice of strategic marketing to the task of pleasing its customers. The focus must be on the customer. Do you understand the difference?

STUDENT: I suppose that an organization seeking strategic quality wouldn't start with the goal of a 15 percent sales increase and then figure out what product changes would achieve it. Rather, the organization would think about what customers want or need, then ask what the potential increase in sales would be.

TEACHER: Correct. But marketing, while very important, is part of an organization. The most effective marketing strategies are those that enable the organization to achieve its overall strategies. Thus, the development of marketing objectives and strategies -a process called strategic marketing planning- should support organization-wide strategic planning.

You have probably already taken the Strategic Planning course and are therefore familiar with the concept. What can you tell me about this process?

STUDENT: At the level of the organization, strategic planning consists of developing a clear organizational mission, define organizational objectives, and devise strategies that enable the organization to achieve its objectives.

TEACHER: Not bad at all, Student. Strategic planning lays the foundation for other types of planning in the organization.

* Tactical planning is the creation of objectives and strategies aimed at attaining goals for specific divisions or departments over a medium-range time frame, such as one to five years.

The creation of marketing plans is a type of tactical planning.

You will probably recall the concept of a "Mission Statement". An organization's mission is its purpose -its reason for being. In effect, the mission statement answers two questions: (1) What is our business? and (2) What should it be?

This is a fragment of Johnson & Johnson’s "Credo" which acts as their mission statement, although it was developed some 50 years ago:

"We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices.
Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit" .... "Our final responsibility is to our stockholders. Business must make a sound profit.
We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched."

At an organization with a marketing orientation like J&J, the mission statement will focus on the needs of its markets. In developing such a mission statement, managers consider who the organization's current and desired customers are and what they value. The mission statement then addresses how the organization will serve those customers.

We will now list four Growth Strategies:

1. Market penetration strategies are strategies to grow by selling more of the organization's existing products to its existing customers. For example, makers of Knorr dehydrated bouillon succeeded in leading many people to buy the product not only to prepare a hot beverage, but also to add taste when cooking all types of meals.
2. Market development strategies are strategies to grow by selling existing products to new customers. Companies that seek international markets for their products are using a market development strategy.
3. Product development strategies are strategies to grow by developing new products to serve existing customers.
4. Diversification is the strategy to grow by serving new customers through the delivery of new products.

STUDENT: Can I assume that the previous list is the result of recent developments in management techniques?

TEACHER: Not exactly. In relation with growth strategy #2, "selling existing products to new customers", let me show you a "classic" example:
The text of this ad:

"You can reach more people than ever. More people can reach you.

Last year we added more than 10,000 new telephones every working day. We’re doing even better than that now.

More than 6,000,000 telephones –including many for your own particular friends and neighbors- have been added in the last two years.

Nowhere in the world do people get so much for their telephone dollar as right now in this country"
This "historical" add appeared in The Atlantic Monthly of February 1948. The then telephone monopoly in the US, AT&T’s Bell System, aimed at selling the existing phone service to more customers. Interesting to note, in spite of being a monopoly with zero competition, AT&T made intensive use of marketing, even stressing the supposedly very modern concept of "creating value for the customer" ("Bigger value every day").

And I will now describe a more recent example of #4, "strategy to grow by serving new customers through the delivery of new products". Let’s call it...

The Case of Absolut Vodka: How a state-owned enterprise successfully launched a non-existing product

It is highly possible that you have seen this or a very similar ad:In Sweden advertisement for liquor is restricted to matchboxes. Vodka is the national drink of Russia, not of Sweden. How could a Swedish state-owned company create one of the most successful spirits brands, Absolut Vodka, out of nothing?

Absolut is a striking example of how modern marketing and advertising can convince people that something that does no exist is a prestigious, high quality product. In this case, the normal order of activities to bring a product to the market was reversed.

Without any product to sell, the Swedish company started to build an image. The bottle came first: of clear glass, it reminded many people of a hospital serum bag. This broke the usual rule that a new product must be presented in a unique, attention drawing package.

The advertisement was also quite different from the usual liquor ads. It was simple, with total absence of a regional or national identity, as exemplified by the one showing just a bottle with at bow-tie. The endorsement of public personalities was an important part of the campaign; it appeared in a James Bond film with Roger Moore.

And what about the product itself? Well, this was the easiest part. A scientist was commissioned to develop a recipe. In a not exactly good example of "truth in advertising", the bottle stated that the recipe was "400 years old".

The surprising part of the story is that, in spite of all this unconventional development process, Absolut Vodka became a world-wide success., with annual sales of several billion dollars.

STUDENT: Amazing, and a striking example of the power of good marketing.

TEACHER: True, but timing was also very important. In 1980 the US market was beginning to adopt vodka especially in lieu of gin, mainly because vodka is odorless (actually, it is basically alcohol and water). Of course the "prestige" vodka countries were Russia and Poland, but the Cold War was still on. Maybe this helped a Swedish product to gain market share in the US.

The timing of strategies can be as important as their content. An organization can move too slowly and therefore allow competitors to preempt its plans. At the other extreme, a business that introduces a product before customers are ready to try it may waste many dollars in fruitless promotion. Often an organization's distinctive competencies -its strengths- match an opportunity for only a limited period of time. This time period is known as a strategic window. The organization's strategies should lead it to act when strategic windows are open.

STUDENT: I like these real-world cases. Have another one?

TEACHER: Well, the following is an example on how to sell a modified existing product to new customers adapting it to the local culture. Let’s call this case...

How to sell Macs to India’s 1 billion people

India is a huge market, no doubt about it. For McDonald’s, it is the last large frontier. The chain is present in more than 120 countries, in spite of differing tastes, languages and cultural beliefs. All that without changing the appearance of the stores or the basis of the menu: beef hamburgers.

So, McDonald's decided to conquer India’s ca. 1 billion people.

A few "small" problems with this plan:

* For Hindus, the majority of India’s population, cows are sacred.

* About 20% of Indians are Muslims; they do not eat pork

* A very large proportion of Indians are strictly vegetarian

* The Indian middle class is only 10 to 20% of the population, depending on how it is defined. The poor can not afford normal McDonald’s prices.

* Most people who can afford ‘fast food’ prices are very choosy; Kentucky Fried Chicken (KFC) abandoned India because the food they served was not widely accepted.

* Indian’s have strong traditions about food and many resent western styles and globalization of food producing methods.

STUDENT: I guess the dilemma of McDonald’s was something like "To be or not to be... in such a tempting but difficult market?"

TEACHER: Well, indeed, these difficulties should be enough to scare away a hamburger chain; but McDonald’s was not discouraged. The company opened its first stores in Delhi and Bombay and then scheduled a huge expansion including locations such as Pune, Ahmedabad, Baroda, Ludhiana, Jaipur and the Delhi-Mathura highway.

To discover McDonald’s marketing strategy, let’s walk into one of the Indian stores. We can choose; say between the one at Delhi’s Ansal Plaza and the one on the road between Delhi and Agra, aimed at travelers to and from the Taj Mahal.

The appearance of the stores is not too different from any of the others in the world; it would be impossible to realize that one is in India, except for a sign stating "No beef or beef products sold in this restaurant".

What can you offer to people who do not eat beef or pork? Well, obviously, chicken and fish. These are the ingredients of the Maharaja Mac, the chains core product.
You can also sell them Ice Cream and desserts, since Hindus drink milk. And beverages, of course.

For the middle class, McDonald’s cooks the higher priced McAloo Ticky Burger.

STUDENT: Seems that the difficulties of problems number 1 and 2 above are taken care of. Now, what about numbers 3 and 4, the fully vegetarians and the lower income sector?

TEACHER: For number 3, the answer was to offer a completely separate line of vegetarian products, including egg-less mayonnaise. McDonald's call it the McVeggie.STUDENT: And what about problem number 4, the low percentage of people able to afford the prices?

TEACHER: I call the answer to this problem "the CheapMac" (certainly not the official name!). The biggest mistake McDonald’s made at first, together with KFC, Domino’s Pizza and TGI Fridays, was to overestimate the size of India’s middle class.

The only answer to that is reducing prices dramatically: the price of a classic Domino’s pizza fell from ca. US$ 2.50 to 1.30. McDonald’s sells some of its burgers at bottom prices.

STUDENT: Nice strategies, but what about the fact that the middle class is choosy about food?

TEACHER: McDonald’s hopes that it will seduce potential customers with good quality "burgers" that appeal to their discerning tastes.

Organizations often are in more than one line of business. Johnson & Johnson has several lines of business as diverse as personal hygiene consumer products and medical devices. Thus, the organization has a "portfolio" of business units, much as an investor has a portfolio of stocks.

The executives of an organization with a portfolio of business units need to continually reevaluate how those units are performing and allocate resources to them accordingly.

The units of an organization's business that are considered the elements of its portfolio are called strategic business units.

A strategic business unit (SBU) is a part of the organization that has a distinct mission, has its own competitors, sells one product or a group of similar products, and can be planned for independently of other activities in the organization. Thus, the SBU should have its own management and its own means of obtaining resources. In one organization, management might define an SBU as the part of the organization handling a single product or brand. In another organization, an SBU might be a product line, a division, or even the whole company. The key to identifying SBUs is to look at the organization's activities, not just the formal lines of an organization chart.

Business Portfolio Analysis

The basic process for creating a portfolio plan is to rate the performance of each strategic business unit in the organization's portfolio, then determine how to allocate resources to each. Two of the most popular techniques for rating the SBUs in a business's portfolio are the Boston Consulting Group's growth/share matrix and General Electric's industry attractiveness/business strength matrix.

Boston Consulting Group’s Growth/Share Matrix

The Boston Consulting Group (BCG) has developed a matrix that classifies SBUs according to two measures: market growth rate (low or high) and relative market share (low or high). In the BCG matrix SBUs classified in the matrix are of four kinds:

1. Stars - These SBUs have a high share of a market with a high growth rate. Markets that are growing fast tend to attract a lot of competition, so the organization typically must spend heavily if it is to protect the market share of stars.
2. Cash cows - These SBUs have a high share of a market that is growing more slowly. The less intense competition coupled with the SBUs' market dominance means that these SBUs generate cash for the organization.
3. Dogs - These SBUs have a low share of a low-growth market. Sometimes they are serving a loyal group of customers who make the SBU profitable. However, they tend not to be a major source of cash for the organization, and if they are not generating profits, it is probably not worthwhile to continue funding them.
4. Question marks - These SBUs have a low share of a high-growth market. Building market share tends to be costly, but if the organization can do so profitably, these SBUs have great potential.


STUDENT: I think that the BCG technique can be applied also to individual products, not necessarily SBUs.

TEACHER: Right. I stated before that "a SBU might be a product line". Or an individual product, as you say. So from now when we mention the name SBU it may mean a product line, a division, or even the whole company.

The manager using the BCG growth/share matrix first uses it to classify the organization's SBUs. This step involves judgment on the marketer's part, as the model does not provide specific criteria for classifying SBUs. For example, is a high-growth market one that is growing at 10 percent a year or more or less? Industry history and expectations will be some guide, but the classification may ultimately be arbitrary.

Then, based on the classification, the manager selects an appropriate objective for each SBU:

* To turn a question mark into a star, the manager may decide to build market share. This might involve heavy use of marketing communication or low prices.

What do you think may be the probable result?

STUDENT: Such a strategy typically will reduce earnings in the short term, I guess.

TEACHER: Correct. Let’s go on.

* For a strong cash cow, the manager may decide to hold or preserve the existing market share. Thus, the tactics for pricing and marketing communications would be designed to retain customers but not necessarily attract a lot of new ones.
* For question marks and dogs, the manager may decide to harvest. This means increasing short-term cash flow without concern for the effect of this strategy on the products long-term performance. For example, the organization could raise the price.
* For business units that the organization cannot afford to finance for growth, the manager may decide to divest. This means the organization sells off the SBU or simply discontinues that line of business. This frees up funds for more attractive SBUs.

Now, please take another look at the BCG matrix and tell me what the focus of this analysis is.

STUDENT: I notice that the categories on the BCG matrix and the strategies for managing the SBUs focus on market share.

TEACHER: Very well. This focus has led to criticism of the BCG portfolio model. The model assumes that a large market share will lead to high profits. However, a large market share is not the only source of profits. That is because a firm may find that it can more profitably serve a smaller niche of the market or an organization can base a successful strategy on being a follower of or challenger to the market leader. The potential success of an SBU also depends on other factors, including patents, government regulations, and the organization's reputation.

Furthermore, labeling SBUs according to the four categories in the growth/share matrix may overly limit managers' thinking about the possible strategies for SBUs. The standard view is that a successful product goes from being a question mark to a star to a cash cow to a dog, then is discontinued. But there are other possibilities, and an SBU classed as a dog might not be at the end of its usefulness to the organization.

Well, Student, let’s call it a day. We will continue with Strategic Marketing Planning in the following Module.