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Summary Strategic Marketing
Linking marketing capabilities with profit growth
Morgan, Slotegraaf & Vorhies
Firms expend significant resources on building, maintaining, and leveraging marketing capabilities, and recent research has greatly enhanced knowledge concerning the link between marketing capabilities and firm performance. Growth is clearly a top priority for managers: profit growth in particular is viewed as being of fundamental important to investors and managers, not least because investors value firms on the basis of their expected future cash flows. This research examines how specific marketing capabilities can influence a firm’s profit growth.
Much of the research seeking to understand the financial impact of marketing is anchored in the resource-based view (RBV): heterogeneity in resources among firms is fundamental in explaining firm performance, with valuable, rare, inimitable, and non-substitutable resources considered most beneficial. The RBV has been criticized for its inability to explain how firm resources are developed and deployed to achieve competitive advantage. Dynamic capabilities (DC) theory posits that the most significant and enduring source of competitive advantage is constituted by the capability of firms to acquire, integrate, and deploy resources in ways that match each firm’s market environment. From this perspective, a firm’s capabilities involve complex, coordinated patterns of skills and knowledge that become embedded as routines over time and are distinguished from other organizational processes as they are performed better than those of their rivals. These capabilities are particularly difficult for rivals to compete away, since they are difficult to observe and embedded within the firm. This leads to competitive advantage. To achieve profit growth, firms can increase sales revenue, margins, or both. When operating within a munificent environment, demand may often exceed supply, creating the potential for simultaneous growth in sales revenue and margins. Absent strong market-level growth, a firm can grow its sales revenue/margins in only two ways: By growing its market share through some combination of increasing unit sales to current customers and acquiring new customers; By raising margins through some combination of raising prices realized for each unit of output sold and/or lowering costs.
There are often trade-offs between sales revenue and margins, such that they rarely increase simultaneously. Endogenous growth theory posits that market- and economy-level growth can be affected by firm and government actions that create and disperse ‘useful knowledge’. At the firm level, to the extent to which marketing capabilities can be used to create and disseminate useful knowledge and have the characteristics of value, inimitability, immobility, and non-substitutability, firms with stronger 1
Stuvia.com - The Marketplace to Buy and Sell your Study Material
marketing capabilities should be better positioned to create demand growth and appropriate the accompanying growth in economic rents. Marketing capabilities that are consistent with both Day’s marketing capability model and Srivastava et al.’s framework linking market-based assets with cash-flow growth: Market-sensing capability = a firm’s systematic, thoughtful, and anticipatory ability to learn about customers, competitors, and channel members in order to continuously sense and act on events and trends in present and prospective markets. This generates superior market knowledge, which is posited to be critical for any dynamic capability. CRM capabilities = a firm’s ability to create and manage close and strong customer relationships, which have been posited as a key market-based resource that should be linked with cash-flow growth. Brand management capabilities = the processes and activities that enable a firm to develop, support, and maintain strong brands, which in turn have been identified as another key resource linked with firms’ ability to grow cash-flows.
There is no evidence to suggest that market-sensing, CRM, and brand management capabilities have a significant effect on overall profit growth rates. The interaction effects capturing complementarities between the three marketing capability pairings have no significant effect on overall profit growth rates. Marketing-sensing capabilities have a significant, positive effect on revenue growth rate yet fail to affect margin growth rate. CRM capabilities have a significant, negative effect on revenue growth rate and a positive effect on margin growth rate. Brand management capabilities have a significant, positive effect on margin growth rate. Market-sensing and CRM capabilities do not generate a significant complementary effect on either revenue or margin growth rates. Market-sensing capabilities appear to elevate the positive effect of brand management capabilities on revenue growth rate and attenuate the negative effect of brand management capabilities on margin growth rate. CRM and brand management capabilities generate a significant complementary effect on margin growth rate, but there is no complementary effect between them on revenue growth rate. The three marketing capabilities and their complementarities do not directly influence profit growth rates, they do influence its underlying revenue and margin growth rate components. The results for revenue and growth and margin growth rates reveal opposing effects that likely mask the effects of the three marketing capabilities on a firm’s overall rate of profit growth. Even though the marketing capabilities have directionally differing effects on revenue growth and margin growth rates, their total effect on firm’s profit growth rates is still positive.
Discussion and implications
Marketing capabilities are connected with firm growth rates. There is a significant relationship, yet the effects are very different depending on the type of capability:
Not reasoning about rivals’ reactions might be perceived as harmless in the eyes of those who would contend that either: Such ‘nonstrategic’ behaviour would correct itself over time. 3 . maintain. yet is increasingly difficult in a dynamic environment. Firms with superior and complementary capabilities should be better positioned to garner the economic rents associated with demand growth (this supports the DC theory). Researchers should carefully considerate the selection of dependent variables when studying firm growth.Stuvia. Firm’s marketsensing capabilities are primarily valuable in determining financial growth via their complementary effect on firm’s CRM and brand management capabilities. While CRM and brand management capabilities can have important direct effects on growth rates in both revenues and margins. CRM and brand management capabilities have directionally opposing effects on revenue and margin growth rates. particularly their rivals’ reactions to their own decisions. market-sensing capabilities have a weaker direct effect on revenue growth rate and no direct effect on margin growth rate. The failure to recognize potential interactions over time: managers’ failure to anticipate competitors’ likely reactions.The Marketplace to Buy and Sell your Study Material - - - Firms’ marketing capabilities should create useful knowledge and thereby influence demand growth. The superior market knowledge that may result from strong market-sensing capabilities is primarily valuable in determining firm performance indirectly as an input to firms’ other value selection. Two strategic errors companies often fall prey to in the face of a dynamic business setting: The failure to anticipate competitors’ moves: managers’ failure to anticipate competitors’ likely actions.com . Reasoning about competitive reactions: evidence from executives Montgomery. and delivery processes. The link between such conjecturing and performance is ethereal at best. and use. Decision makers often do not effectively conjecture about their competitors’ future behaviour. Revenue growth and margin growth rates are significantly negatively correlated. However. Conclusions Marketing capabilities can explain significant variance in a firms’ revenue growth and margin growth performance. Moore & Urbany Introduction Thinking strategically is a foundation of modern business and competitive strategy. marketsensing capabilities do offer synergistic effects with brand management capabilities in influencing both revenue and margin growth rates. The precise route by which managers seek to achieve profit growth must be made explicit and should be well understood. creation. such that their direct effects on the rate of profit growth are masked. as it appears to have very important implications for the question of which marketing capabilities the firm should build. Both managers and researcher need to be much more aware of the trade-offs that may be implicit in single aggregate measures of performance.
The characteristics of the rival. greater attention will likely be paid to customer and internal decision factors. Profiling competitors’ past behaviour can be difficult and predicting their future behaviour is even more difficult. and poor organizational memory. Competition is only one of many factors managers must consider in strategic decision making. The characteristics of the action. To the extent that customer and internal company information are perceived by managers as more vivid. it can take three forms: Managers may study their competitors in a manger that results in a description of the competitor. more available. and less costly. Strategic competitive reasoning can require a great deal of cognitive effort and a significant amount of information about competitors that is often neither readily accessible nor routinely collected. Managers may specifically consider how their competitors are likely to react to their firm’s own decisions strategic competitive reasoning = stepping into the shoes of the competitor and predicting his reactions to one’s own moves. Many of the other factors. 4 . and how do experienced managers account for the answer to that question? Competitive reasoning Competitive reasoning = the assessment and consideration of competitors that serves as an input into the firm’s decision making. If it happens. competitors responses in a different market. but only about actions. do not suffer as severely from the information and inference problems associated with reasoning about competitors. It is explored whether practicing managers incorporate competitive behaviour. Three studies were done.Stuvia.com . not reactions.The Marketplace to Buy and Sell your Study Material To what extent do practicing managers consider competitors and their anticipated reactions when deciding on their own moves. into their own decision making in strategic marketing settings. Managers may make predictions about competitors’ behaviour. Purpose of this paper Literature generally characterizes the likelihood of competitive reactions to a firm’s action as a function of: The characteristics of the firm taking the action. short managerial tenures. more reliable. however. less debatable. Environmental characteristics. delays between action and reaction. particularly the prediction of future competitor reactions to their own moves. but stop short of making predictions about the competitor’s future actions. Managers may have greater confidence in internal information and information about customers may be more readily available. The insights into the competitor’s moves and countermoves and motives behind them may be difficult to obtain for a variety of reasons: limited move-countermove sequences.
or the time pressure associated with the decisions. o The need to justify one’s decisions internally. - - Factors reducing the perceived returns from competitive reasoning: Irresolvable uncertainty: when firms have limited information about competitors. high perceived costs: not only are factors associated with lowering value by lowering potential returns rank-order dominant. Other factors are more important: factors that can be assessed with greater certainty (typically internal factors) tend to receive more weight in decision. predicted with greater confidence. However. is easier to analyze. both past and present. o Competitor information about pricing is easier to gather because of its visibility. due to infrequent observations. o The difficulty of competitive analysis even if competitive information is available. we would expect there to be significant uncertainty about competitor behaviour. o Competitors information about pricing. This suggests that the rarity of strategic competitor reasoning is due more to a lack of potential returns than a concern for costs. but they are mentioned by a dramatically greater proportion of the executives than factors associated with perceived costs.com . o Accessibility of information about competitor behaviour. other decisions: four reasons why reasoning about potential customer reactions is more likely for pricing decisions: o The firm feels the impact of a competitor’s reaction to pricing more quickly and more obviously than in other areas. cognitive or time-related) costs of competitive reasoning: The difficulty of obtaining competitive information. o The greater appeal of factors that one can control. are felt to be more controllable. once gathered. Limited opportunity to actually learn about competitors. especially short-term ROI. there is likely to be uncertainty about their potential behaviour. 5 . and provide a stronger basis for justifying decisions within the organization.Stuvia. The culture of the firm: three potential explanations for the dominance of internal factors: o The firm’s focus on the short run.The Marketplace to Buy and Sell your Study Material Summary of the three studies While managers do report considering competitors in their decision making. Pricing vs. Factors raising the perceived (financial. competitive considerations focus primarily on competitors’ past or current behaviour rather than competitor reactions. the delay between an action and its reaction. Low perceived returns vs. There is a general tendency to weight more heavily decision inputs that can be assessed more easily. Risk aversion. Managers attend far less to future competitive reactions in their decision making than might be expected based upon traditional economic theory. even when information is available about competitors’ past and present behaviour. - - - - Discussion Low incidence of strategic competitive reasoning was found. Customer factors are more important than competitor-oriented factors.
Is market orientation a source of sustainable competitive advantage or simply the cost of competing? Jones. competitive actions. Leone & Venkatesan Dynamism in business environments caused by economic slowdown or growth. especially in the presence of rapid changes in market conditions. If. resulting in SCA. or is it a requirement that companies face when competing in today’s business environment? And how much is gained.com . A superior understanding of customer needs. and rapidfire product and technological innovations challenges top managers’ ability to sense and respond to market changes accurately. take time to provide returns. and how long can firms expect the advantages from developing a market orientation to hold? Market orientation and long-term performance Market orientation’s primary objective is to deliver superior customer value. How a tendency to favour more quantifiable. competitive intensity. globalization. It is critical that managers identify and understand strategic orientations that enable a firm to sustain performance. and market trends enables a market-oriented firm to identify and develop capabilities that are necessary for long-term performance. mergers and acquisitions. uncertain and ambiguous. Investments in capabilities. some that raise its perceived value and others that lower it. less ambiguous decision criteria may blind the management team to particularly diagnostic information. This implies that developing and improving on a firm’s market orientation may make a firm’s capabilities become more distinctive over the long run. market-oriented firms are well positioned to develop and organizational memory. and rapid sharing and dissemination of knowledge of the firm’s customers and competition. Through constant acquisition of information regarding customers and competition and the sharing of this information within an organization. which is based on knowledge derived from customer and competitor analyses and the process by which this knowledge is gained and disseminated throughout the organization. a key ingredient for developing a learning organization. The real value of strategic competitive reasoning to any firm will depend on a host of factors. 6 . they are not anticipating competitor reactions and should be. the possibility of their being blindsided by a competitor’s reactions to a decision that was (otherwise) a good decision looms large. A market orientation encourages a culture of experimentation and a focus on continuously improving the firm’s process and systems. Market orientation is a capability and the principal cultural foundation of learning organizations. by their nature. There has been little or no discussion of: How people may limit the ‘set’ of attributes or criteria on which they evaluate decisions. Does market orientation create a source of SCA. Managers who focus on competitor reactions when there is no need to do so may be wasting considerable time and effort. incorporation of the customer’s voice into every aspect of the firm’s activities.The Marketplace to Buy and Sell your Study Material The most significant reasons why expectations regarding competitive reactions may not be accounted for in decision making is that such predictions are.Stuvia. such as active information acquisition through multiple channels. however.
competitors can develop their own system and culture of being market oriented and can potentially change the market structure as well. but this moderating effect diminishes over time. Market turbulence strengthens the relationship between market orientation and profit. - - Effect of competition Firms investing in developing a market orientation want to know the advantages obtained from being the first to adopt a market orientation in an industry. However. However. but this moderating effect diminishes over time. it should give a greater lift to profit than to sales. The gains from better customer and competitive research intelligence among market-oriented firms in the presence of market turbulence and competitive intensity take time to improve business 7 . Furthermore. Early adopters of market orientation can obtain insights into customer needs before the competition. Competitive intensity strengthens the effect of market orientation on business performance in both the short and the long run.The Marketplace to Buy and Sell your Study Material There are also reasons to believe that market orientation may not provide an SCA: It may lead a firm to narrowly focus its efforts on current customers and their stated needs. Analyses in this study indicate that market orientation has a positive effect on business performance in both the short and the long run. Technological turbulence weakens the relationship between market orientation and sales and between market orientation and profit. It is widely accepted that a firm’s only sustainable advantage is its ability to learn and anticipate market trends faster than the competition.Stuvia. They gained more in sales and profit. rarely is a product or service safe from imitation by competition. However. Competitive intensity is a moderator in a market orientation-business performance relationship. Environmental turbulence moderates the relationship between market orientation and performance in both the short and the long run. Discussion and implications A market orientation can help organizations navigate through turbulent times. a tacit knowledge base is developed only if firms adopt a broader and more proactive approach to market orientation. thus restricting a market orientation’s capability to provide an SCA. This could lead to market-oriented firms not anticipating threats from non-traditional sources. Responding to these customer insights through the development of product or service innovations can provide firms with improved business performance. A market orientation positions an organization for better performance because top management and other employees have both information on customers’ implicit and expressed needs and competitors’ strengths and a strong motivation to achieve superior customer satisfaction.com . the sustained advantage in business performance from having a market orientation is greater for the first (early) adopters in an industry. These capabilities can be transformed into an SCA when a firm uniquely has the information and uses the market information efficiently and effectively as part of a process. It can provide long-term performance benefits if it is not imitable by the competition. Because market orientation focuses a firm’s efforts on customer retention rather than on acquisition. Conceptual background Market orientation = the generation and dissemination of organization wide information and the appropriate responses related to customer needs and preferences and the competition.
Another fruitful extension of a market orientation strategy would be augmenting the general strategic emphasis on customers. the performance benefits of market orientation are more difficult to capture and keep. Those gain more in sales and profit than firms that are late to develop a market orientation. and best sources of solutions. The competitive advantage from having a market orientation is greater for the early adopters in the industry. and therefore profits increase more than sales. As competition also becomes market oriented. To have a unique advantage. Market orientation has a greater influence on profit than sales in both the short and the long run. being market oriented has become more of a failure preventer than a success producer. Given the globalization of brands and services. are found in the evolution of the internet and the shrinking costs of communication. It is possible for market-oriented firms to achieve and protect gains in sales and profitability. with a rigorous focus on profitable individual customer relationships and interactions. Because more companies have become market oriented during the past years. with rapidly changing technology. This implies that having a market orientation makes organizations focus more on retention than acquisition. The effect of market orientation in a certain year has an influence on business performance for about three years. Given that the benefits of market orientation take time to become fully realized.Stuvia. Closing the marketing capabilities gap Day There is a widening gap between the accelerating complexity of markets and the capacity of most marketing organizations to comprehend and cope with this complexity. Real-time market information generation and dissemination is necessary. Yet the positive influence of market orientation on business performance is enhanced under high competitive intensity. and as more firms become market oriented. early entrants fail to enhance their competitive advantage because the late adopters learn from the early ones.The Marketplace to Buy and Sell your Study Material performance. companies need to investigate how to incorporate multicultural dimensions into their general market orientation philosophy. When a firm operations in a business environment of constant flux. Firms that adopt a market orientation also realize the benefit of a bonus in the form of sales and profit lift due to a carryover effect that lasts up to three periods. a market orientation is especially critical for staying in tune with customers’ preferences. as interaction orientation suggests. The challenge for firms and marketers is to seize the opportunity 8 . albeit at a diminishing rate. and all else being equal. the importance of top management both emphasizing and supporting a market-oriented culture is paramount. However. The forces behind the widening gap. The adoption of a market orientation is important in generating both sales and profit. firms can transform sales gains from their market orientation into higher profit over time. a competitive advantage can diminish under conditions of high technological turbulence. companies must continuously identify new dimensions of this construct to distinguish themselves. Early adopters with regard to implementing a market orientation strategy also enjoy similar benefits as first movers in terms of the introduction of a product or service innovation. Perhaps a market orientation can facilitate proactive and reactive tactics.com .
- - 9 . now they struggle to keep up with floods of feedback. most organizations have trouble keeping pace. a long period of success can blind the organization to discrepant signals that the capability no longer fits the market. Whereas marketers once had to exert significant effort to gain feedback from customers. The deluge of data has run up against the barrier of the limited ability of people and organizations to process it. Structural insularity: weak signals of the need for change revealed by competitive moves or emerging technologies may reach one silo but not be appreciated or shared further. which eventually limits other possible approaches and. and exploration that is the essence of a dynamic capability. it must work in a reliable and replicable way in a variety of contexts. Inertia and complacency: for a process such as media selection to qualify as a capability. At the extreme. Traditional communication vehicles are being augmented with social media. Absent any breakthroughs in human beings’ ability to process data. This gets in the way of adaptation to new circumstances. The mechanisms of preservation subvert exploration and impede innovation. When the relentless reduction in the cost of search is combined with similar cuts in the cost of distribution. Why? Organizational rigidities: Path dependency and lock-in: a capability emerges from a series of path-dependent learning experiences. locks the organization into a dominant approach. Successful experiences are reinforcing and repeated. at the extreme.Stuvia. the proliferation of microsegments. During periods of technological disruption. ubiquitous communication technologies on the habits and behaviours of consumers and the creation of new business models for reaching these markets. product placements. The tendencies toward inertia and sclerotic decision making are fed by lag effects and organizational rigidities = when an organization masters a capability. A widening gap The forces of market fragmentation and rapid change are everywhere. the convergence of industries that intensifies competition.com . Mastering the exploitation of an existing activity often crowds out the necessary sensing experimentation. These niches represent an astonishing variety of potential opportunities for profit. The volume of inbound data and the proliferation of channels is going to continue for the foreseeable future.The Marketplace to Buy and Sell your Study Material for advantage out of the confusion created by accelerating market complexity. The convergence of these forces means that the amount of data collected by companies has turned from a rain shower into a deluge. and viral marketing. Other approaches are viewed with scepticism because they lack a track record. it is likely to keep doing it long past the point of obsolescence. the gap will continue to grow. unless new tools and approaches are adopted. No single silo can master the new skills and disciplines or afford to acquire them on its own. Their ability to do so will shape the future role and influence of marketing within the organization. A whole industry has been born in the past few years to help firms track and understand what is being said about them. Changes in customer search and choice behaviour. their products. This is true of the effect of the internet and cheap. There is an increasing use of digital and interne technologies. the result is that many mass markets are becoming a mass of niches. and the growing power of channels are gathering strength. event marketing. and their competitors in user-generated content and social media channels.
The ‘fit’ of the strategic resources with the environment both dictates the survival prospects of the firm and explains relative economic performance. Even if a firm can overcome the organizational rigidities.com . searching. It is proposed that resources heterogeneity is a meaningful common theme for comparing organizational capacity and environmental complexity. All these problems are exacerbated by an insufficient pipeline of high potential talent to fill the key positions. Resource-based or capabilities theories presume that firms within an industry are heterogeneous with respect to the strategic resources they control. or modify the resource base.The Marketplace to Buy and Sell your Study Material Despite the benefit of specialization and focus. They are not ad hoc solutions to a problem but repeatable and deeply embedded sets of skills and knowledge exercised through a process. hard-to-duplicate resources the firm has developed. so heterogeneity can be a long lasting source of competitive advantage. Selecting the organizational configuration and business model for delivering value to customers and then capturing the economic profit. But even if talent were available. and thus slows adaptation.Stuvia. the early static formulation of resources has evolved to become more dynamic but is still not sufficient to cope with contemporary market realities. and then mobilize a coalition to act. and keep relevant the stock of capabilities. it takes time to absorb new information. the marketing capabilities at most firms are not growing at the same pace as the challenge. By the time a new marketing initiative is finally launched. The capability approach to strategy locates the sources of a defensible competitive advantage in the distinctive. Dynamic versus static capabilities Both static and dynamic capabilities theories are attempts to explain sustainable differences in the performance of competitive firms. These are the capabilities that enable organizational fitness. as well as help shape the environment advantageously. and exploring across markets and technologies. Dynamic capabilities theory focuses on how an organization acquires and deploys its resources to better match the demands of the market environment. A dynamic capability = the capacity of an organization to purposefully create. Because these resources take a long time to develop. by scanning. the market has moved forward to a new state. 10 . interpret its meaning. the greater the capability gap. and organization with silos limits the sort of cross-functional dialogue and learning that creates novel ideas. Whereas competitive advantage can flow at a point in time from scarce capabilities. The greater the mismatch between the increasingly granular and fluctuating demands of the market and the relatively immobile and homogeneous resources available to the firm. adjust. extend. sustainable advantages require dynamic capabilities to create. Many skill sets are in short supply. Responding to the changes by combining and transforming available resources in new and different ways or adding new resources through partnerships or acquisition. Main functions: Sensing environmental changes that could be threats or opportunities. they are also difficult to duplicate. Diagnosing the gap The best way to understand and begin to close the gap is through the application of capabilities theories.
This requires selecting and developing loyal customers. diverse. Strategic market planning as often practiced is more likely to be an extended budgeting exercise within accepted market definitions than an imaginative rethinking of the business model and served market boundaries that prepares the business for alternative scenarios. dissemination. which are essential to comprehending complex.The Marketplace to Buy and Sell your Study Material Are marketing capabilities dynamic? The familiar capabilities of the marketing mix formulation are almost entirely static. The second imperative is to innovate new value for customers. It interacts strongly with marketing capabilities to enable the firm to better align its resource deployments with the market than rivals. and then leveraging the asset beyond the core business. Customer value and innovation benefit the firm when they are transformed into valuable customer and brand assets.Stuvia. and the optimal allocation of marketing budgets. The third imperative is to capitalize on the customer as an asset. Four elements that are strategic imperatives for the organization: The first imperative is to be a customer value leader with a distinct and compelling customer value proposition. and responsiveness to market intelligence is best suited to helping firms respond to fast-changing markets after clear signals have been received. Market orientation has a liberating effect on capabilities. and how the organization will deliver value that is superior to competition. Strong brands attract and retain customers and thus need to be explicitly managed. what value it will offer its target customers. Although market orientation and dynamic capabilities theories are powerful tools for helping firms navigate dynamic markets. they are simply not sufficient for what might be appropriately called the chaotic market environments today. and fast-changing markets. A business strikes the right balance between the short and long run by maintaining its customer value leadership and then investing in a portfolio of innovations that will deliver results in the medium and long run. This requires the disciplined choice of where the firm will stake a claim in the market. Thus. 11 . protecting it against dilution and erosion. The standard processes for market strategy development and execution also have a static flavour in that they emphasize segmentation. The fourth imperative is to capitalize on the brand as an asset. which makes the firm more dynamic. and then leveraging it fully to capture new opportunities. An information processing approach to market orientation that emphasizes the generation. A strategic perspective on marketing as a general management responsibility broadens the domain to comprise the capabilities for creating customer value. protecting them from competitive attacks.com . Everyone in these firms is sensitized to listen to latent problems and opportunities. targeting. The capabilities for implementing the marketing mix are inherently limited by their functional and tactical bias. the new product development capability involves new products that exploit research and development investments but does not extend to imagining new ways for delivering customer value or reaching the market through new channels. - - - The superior execution of these strategic capabilities is enabled through deep market insights. Market-driven organizations stand out in their ability to continuously sense and act on emerging trends and events in their markets. This means strengthening the brand with coherent investments.
and the task of management is to improve and fully exploit these resources.Stuvia. The inside-out stance of the dynamic capabilities limits the ability of the firm to anticipate rapid market shifts and become more 12 . The management team steps outside the boundaries of the company and looks first to the market. In contrast. it is subtly susceptible to an exploitative mind-set in practice. and then constantly morph to stay on top. A new way of thinking about the necessary capabilities Disadvantage dynamic capabilities theory: an inherent inside-out perspective. management systems. Dynamic capabilities fall to the exploratory end of the spectrum. This suggests two dimensions for thinking about capabilities: whether the orientation is from the inside-out or the outside-in and whether the function is primarily to exploit existing resources or to explore new possibilities. This is what it takes to address the marketing capabilities gap. which begins with the firm and looks outward from that vantage point rather than starting with the market. Inherent in exploitation is the quest for efficiency. The essence of the RBV is that scarce. enable it to execute on new opportunities. This leads to an emphasis on internal efficiency improvements and short-term cost reductions. and outside-in approach begins with the market. Disadvantage market orientation: although the starting point is the customer and opportunities for advantage. and organizational designs that will keep the organization alert to opportunities and threats. The dynamic capabilities (inside-out) approach is also susceptible to implicit inside-out shortsightness. and predictability of processes and routines. replicability. Sensing and scanning should emphasize the need to define managerial traits. inimitable.com . What gets lost is sensitivity to weak signals of impending changes and a willingness to experiment. these actions are initiated by mindful scanning activities mounted by the firm. The RBV is exploitative.The Marketplace to Buy and Sell your Study Material Enhanced capabilities are needed for anticipating trends and events before they are fully apparent and then adapting effectively. However. and valuable resources exist to be used. As a starting point for strategic thinking this is short-sighted and anchors the dialogue prematurely. This perspective expands the strategy dialogue and opens up a richer set of opportunities for competitive advantage and growth.
Stuvia.The Marketplace to Buy and Sell your Study Material resilient in the face of increasing volatility and complexity. decisions are driven by current customer requests and behaviour and signals about their changing needs. Defending against individual and organizational biases that inhibit real insight. The familiar marketing mix capabilities must become more dynamic and supportive of an adaptive strategy. work hard to bring together different perspectives on an issue. Adaptive capabilities are needed to augment and extend the existing dynamic capabilities so that rapid adjustments can be made. they have cultivated a vigilant learning capability that helps them see sooner.com . Surfacing the insights and overcoming organizational filters. Market-driven approaches to capabilities are biased toward an exploitative mindset. characterized by curiosity. Questions: What new marketing capabilities will be needed? How will they be built? How will they help make the entire organization more adaptive? Answers: Organizations need to acquire or enhance their adaptive marketing capabilities. The marketdriven approach to marketing capabilities was too hesitant about the exploratory side of the market learning process. The role of a market orientation was to shift the organization toward an explicit outside-in orientation by making market sensing and customer linking into distinctive capabilities. Knowing how to ask the right questions to identify what they don’t know. 13 . and a willingness to act on partial information. alertness. Adaptive marketing capabilities The advance toward adaptive marketing capabilities is driven by necessity and enabled by technology advances. Adaptive processes in an organization require balancing exploration of new possibilities and exploitation of old certainties. These capabilities have greater leverage when they are used by an adaptive business model and housed in a supportive organization that has a robust market orientation and is structured to be aligned with the market. Vigilance = a heightened state of awareness. Vigilant organizations are distinguished from their followers by: A robust market orientation which sensitizes them to making decisions from the outside-in. The behaviour of the firm must shift from a reactive to a sense-and-respond approach. Triangulating with multiple inquiry methods to clarify ambiguous signals and then probing deeply to learn more about promising patterns and signals. - Vigilant market learning How can an organization learn to make sense out of an increasingly unpredictable market? Complexity theory = all successfully adapting systems transform apparent noise into meaning faster than the apparent noise comes at them.
accountability. Intelligent application of advanced technology tools will ready the organization to act ahead of its rivals. Through a web of partners. Adaptive organizations Those organizations best equipped to adapt to the volatility and complexity of their market will be more resilient. and learn to profit from the greater uncertainty of the new market reality.com . and past customers and observe how they process data and respond to the social networking and social media space. An open network model is more flexible and inherently more responsive to changing market requirements: an open system allows for information flow across previously hard boundaries within and outside the firm. Organizations can adapt to unprecedented change only when they can address it with a clear strategic framework. precursors. Adaptive market experimentation The adaptability of all learning processes is impeded when there is a limited repertoire of recognized patterns of customer behaviour or strategic responses for responding to diversity and fragmentation. the vertical organization of silos is being steadily unbundled. The talent needed to manage these networks is still scarce. and network partners to learn from their experience. share key activities with network partners. Without an expansive map of the possibilities. 14 . and open network provides access to a deeper set of resources and specialized skill sets than a closed model. including monitoring. concepts. Market learning is not fully realized until the findings are accurately interpreted and adequately shared throughout the organization. and conflicts of interest. Disadvantages: more than half of all alliances and joint ventures disappoint. An ability to sense and act on weak signals from the periphery.The Marketplace to Buy and Sell your Study Material Vigilant market learning requires: A willingness to be immersed in the lives of current. it is difficult to properly appreciate new media. Imagination and necessity will encourage initiatives to leverage networks and ‘open’ up the marketing organization. An open-minded approach to latent needs. Codify and share insights and successful practices across the organization. In the spirit of increasing the variety of approaches. without a preconceived point of view. coordination. Conditions: Nurture an experimental mind-set. and pattern recognition technologies. prospective. Open marketing With advances in knowledge sharing. There are control and coordination problems to overcome. and formulations that are working or failing.Stuvia. and less hidebound. - it is the difference between testing copy versions with controlled experiments and continuously trolling the market for ideas. They will embrace just-in-time decision making. Complex markets also harbour a great deal of strategic dead ends. free-flowing. systematically tap a wider array of peer companies. The best answer is to invest in small experiments that can generate new insights. This puts a premium on relational capabilities that extend the firm’s resources beyond the firm boundaries and enable access to the resources of the partners.
there will still be uncertainty in the responses of customers and competitors to new marketing initiatives. Managers’ mental models help make sense of the environment. but when change is rapid. branding. A high degree of biological diversity ensures that no matter what particular future unfolds there will be at least some organisms that are well suited to the new circumstances. and acting on information from diverse sources. the enabling business model. Strategic foresight: probing for second-order effects. they stand in the way of deep understanding. Two examples of business model designs that offer potential to sharply improve adaptability to fast-changing market signals: Sense and respond: organizations can modularize their activities and processes to create combinations that are responsive to a much wider spectrum of unpredictable customer requests. sharing. This goal requires changes in the culture.Stuvia. The first step to increasing adaptability is to diversify the talent pool with people that are not wedded to old and unquestioned assumptions. and resource allocation. It is 15 - . Enabling exploration: creating a culture of discovery. Even if they could make the transformation. The problem is exacerbated when everyone in the organization shares the same mind-set. and apply tools such as scenario planning and dynamic monitoring. and skill sets. which may be beyond the reach of many management teams. Three necessary conditions for organizations in which adaptive marketing capabilities are likely to flourish: There is a vigilant leadership team. Three primary qualities distinguish vigilant leadership teams with an outside-in orientation from those that strive primarily for operational excellence and adopt an inside-out orientation: External focus: openness to diverse perspectives. Vigilant leadership Vigilant leadership teams nurture a supportive climate for gathering. Flexible backbone: hybrid approach providing low-cost support and messaging for some customers and deep collaboration and precise tailoring of offers for other customers. - Adaptive business models A business model describes how a business creates the value it provides customers and then captures economic profits. The organization structure is aligned to the market. The goal is to build an organization that can make timely adjustments to market shifts while ensuring consistency in pricing. employ a more flexible approach to strategy that incorporates diverse inputs.com . They use a longer time horizon. The business model is responsive to fast-changing market signals. A clean-sheet approach. which aims simultaneously to maintain discipline while enabling adaptability.The Marketplace to Buy and Sell your Study Material Responding adaptively A decentralized approach leads to the enthusiastic but uncoordinated pursuit of fast-moving and diverse opportunities. poses difficult implementation challenges.
consumers are taking greater control.com . Because they are moving down the learning curve ahead of rivals they can keep experimenting and extracting new insights that will help them stay ahead. Infuse the strategy dialogue with deep market insights that help comprehend the new market reality of accelerating complexity. to customer managers. ranging from cross-functional segment teams. sales. Adaptive implementation activities In an adaptive firm. The appropriate organizing principle for dissolving entrenched organizational boundaries is to align the organization around customers.Stuvia.The Marketplace to Buy and Sell your Study Material built with a flexible cost-efficient backbone for common marketing. technology continues to advance. rather than around products. Closing the marketing capabilities gap The marketing capabilities gap does not have to continue to widen at its present pace. Next practice companies are learning how to become more vigilant and build adaptability into their marketing capabilities. A variety of transitional designs are feasible. These are necessary conditions for outside-in strategies. and order fulfilment activities that all customers require. The prototypical outside-in organization with the requisite adaptability will operate as a porous entity held together by sophisticated knowledge-sharing networks and able to forge seamless partnerships with customers. Ensure clear accountability for the total experience of the customer. A more realistic and achievable goal is to close the gap faster than rivals. There will always be a sizable residual capabilities gap because events in markets are moving at internet time. all in the service of a compelling customer value proposition. adaptive experimentation and open marketing. channels. They require clever investments in technologies and a willingness to open up the business model. They will be far better coordinated and actually deliver on the promise of being mixed to maximize their joint efforts. Mastery of a set of mutually reinforcing adaptive marketing capabilities confers a sustainable first-mover advantage: Adaptive capabilities employ a great deal of difficult-to-copy tacit knowledge. 16 . The practice of adaptive experimentation will reveal the effects of intricate combinations of marketing mix activities. to front-back hybrid models. in which marketing activities are guided by vigilant learning. or brands. Aligning the organization to the market The challenges are to: Overcome the entrenched silos that impede a coherent view of the customer and slow decision making. suppliers and information resources. the marketing mix will be taken to a new level: The four p’s will be dispersed across the partner network and will play a supportive role as befits their tactical status. and the decision processes of even the most nimble companies cannot keep up.
17 . Homogeneity exists only among leaders in the same value discipline. after-sale service. dependability. Companies have become champions in one discipline while meeting industry standards in the other two. thereby making rivals’ goods obsolete. Customer intimacy = segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches. not broadening it. Industry leaders completely align their operating model to serve one discipline. They focus on delivering their products or services to customers at competitive prices and with minimal inconvenience.com . regardless of their industry. They have adopted automated inventory replenishment and invoice less payments and have integrated formerly disparate logistics systems.The Marketplace to Buy and Sell your Study Material Summary There is the pressing necessity to respond to the accelerating complexity of markets which stresses organizations and potentially places them at a competitive disadvantage. They also have built their operations around information systems that emphasize integration and low-cost transaction processing. Operational excellence Operational excellence = a specific strategic approach to the production and delivery of products and services. Companies that have taken leadership positions in their industries in the last decade typically have done so by narrowing their business focus. They have focused on delivering superior customer value in line with one of three value disciplines: Operational excellence = providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience.Stuvia. In the past. There is a real and expanding gap between the demands of markets and the ability of firms to address the complexity and velocity of change in their markets. Customer intimacy and other value disciplines Treacy & Wiersema Customers define value in many markets. to reduce transaction and other ‘friction’ costs. they judged the value of a product or service on the basis of some combination of quality and price. Companies pursuing operational excellence are indefatigable in seeking ways to minimize overhead costs. to eliminate intermediate production steps. Companies that pursue the same value discipline have remarkable similarities. mediocre performers are not distinctive enough to look like anything except other mediocre performers in their own industries. and to optimize business processes across functional and organizational boundaries. Vigilant firms will see opportunities sooner and put in place the capabilities to respond to whatever direction the market moves. They have reengineered the process that begins with order entry and ends with product or service delivery in a way that emphasizes efficiency and reliability. The objective of a company following this strategy is to lead its industry in price and convenience. Now they have an expanded concept of value that includes convenience of purchase. Product leadership = offering customers leading-edge products and services that consistently enhance the customer’s use or application of the product. etc.
They are their own fiercest competitors: they continually cross a frontier. Managers make decisions quickly. and quality. They continually look for new ways to shorten their cycle times. The specific characteristics of the product or they way the service is delivered is far more important to them than any reasonable price premium or purchase inconvenience they might incur. depending on what they are buying. which means recognizing and embracing ideas that usually originate outside the company. They have to be adept at rendering obsolete the products and services that they have created because they realize that if they do not develop a successor. Typically they look at the customer’s lifetime value to the company. Product leaders avoid bureaucracy at all costs because it slows commercialization of their ideas. This is why employees in these companies will do almost anything to make sure that each customer gets exactly what he wants. Product leadership Companies that pursue product leadership strive to produce a continuous stream of state-of-the-art products and services. Reaching that goal requires them to challenge themselves in three ways: They must be create. nor do they spend much time on detailed analysis. then break more new ground. Companies excelling in product leadership do not plan for events that may never happen. Their strength lies in reacting to situations as they occur. The third category of customers want new. They must commercialize their ideas quickly. They must relentlessly pursue new solutions to the problems that their own latest product or service has just solved. Choosing disciplines or choosing customers? The choice of value discipline and customer category is a single choice: One set of customers defines value within a matrix of price. since it is often better to make a wrong decision than to make one late or not at all. They are willing to spend now to build customer loyalty for the long term. - - The same people can be found in all three customer categories. 18 . another company will. and unusual products. They also possess the infrastructure and management systems needed to manage risk well. Value discipline: product leadership.The Marketplace to Buy and Sell your Study Material Customer intimacy Companies pursuing a strategy of customer intimacy continually tailor and shape products and services to fit an increasingly fine definition of the customer. They want high-quality goods and services cheaply and easily. Value discipline: customer intimacy. Value discipline: operational excellence. Their infrastructures facilitate multiple modes of producing and delivering products or services. convenience. not the value of any single transaction. These companies have designed operating models that allow them to address each customer or small sub segment of their market individually.com . They will define value differently as it applies to different goods and services. different. Such companies understand well the difference between profit or loss on a single transaction and profit over the lifetime of their relationship with a single customer. The second set of customers is more concerned with obtaining precisely what they want or need. They are primarily interested in fashion and trends.Stuvia.
Many companies falter simply because they lose sight of their value discipline. they pursue initiatives that have merit on their own but are inconsistent with the company’s value discipline. The importance of this expectation setting is evident every quarter when companies’ earnings announcements are followed by sometimes drastic stock price adjustments when the actual earnings deviate from expectations. It is important to understand how managerial actions translate into the consensus forecast of financial health and. However. These companies often appear to be aggressively responding to change. in particular. Individuals executive compensation packages are often tied to stock price.Stuvia. managerial actions may be influenced by past movements in share price. methods. Progress in these 19 . these individuals will be preparing their companies to set new industry standards. Companies that sustain value leadership within their industries will be run by executives who not only understand the importance of focusing the business on its value discipline but also push relentlessly to advance the organization’s operating model. Marketing and firm value: metrics. but the management of a company that’s a value leader must stay alert. much of good marketing is building the intangible assets of the firm. findings. The key to gaining and sustaining value leadership is focus. industry experts publish their own earnings expectations. Demand creation is arguably the most important and challenging aspect of management strategy. In reality they are diverting energy and resources away from advancing their operating model. the task would be simply because investors are known to react quickly and fully to earnings surprises. and future directions Hanssens & Srinivasan Investors trade companies’ shares because their expectations of these companies’ future earnings differ. to develop the internal consistency. processes. to redefine what is possible. The greater challenge is to sustain that focus. Its critical importance stems from the notion that customers have become the ultimate scarce resource. By leading the effort to transform their organizations. The operating model that elevated the company to value leadership is superior and worth exploiting only until a better one comes along. and attitudes that prevent them from achieving excellence in the discipline they have chosen. This results in a share price that represents the valuation of these companies. Reacting to marketplace and competitive pressures. what influences the consensus formation. To aid in this process. Consequently. They will personally lead the company’s drive to develop new capabilities and to change the imbedded work habits. and when stock prices do not trend upward. and to confront radical change.com . to drive that strategy relentlessly through the organization.The Marketplace to Buy and Sell your Study Material Sustaining the lead Becoming an industry leader requires a company to choose a value discipline that takes into account its capabilities and culture as well as competitors’ strengths. and to forever change the terms of competition. this is perceived as a failure of management strategy. which are based in part on meetings with senior company executives that focus on strategies and business plans for the foreseeable future. If marketing’s contributions were readily visible in quarterly changes in sales and earnings.
Thus. firm profitability. Improvements in brand equity have a significant. Customer satisfaction effects: there is a strong link among customer satisfaction. brand attitude. Levels of customer satisfaction are significantly related to firm value. Customer satisfaction partially mediates the relationship between corporate social responsibility and firm market value. Investors may be influenced by persuasive communication by company executives or stock analysts. and investors appear to consider brand value in their stock evaluation. Both tangible and intangible impact routes need to be considered. Findings Marketing assets and investor response Brand equity effects: brands are viewed as assets that generate future cash flows. perceived quality. A corporate branding strategy offers higher returns than either a house-of-brands strategy or a mixed-branding strategy. Higher levels of customer dissatisfaction harm a firm’s future idiosyncratic stock returns. Customer equity 20 . they may wrongly evaluate the impact of a marketing driver on future cash flows.com . Finance theory supports the value relevance of marketing through its effect on the firm’s cash needs. insofar as marketing drives product-market performance. Marketing research on the link between brand-related intangible assets and firm value has assessed stock market reaction to the changing of a company’s name. because different nonfinancial performance metrics are used and because the financial outcomes can be substantially delayed. new marketing developments could be value relevant. Brand are intangible assets of a firm. new product announcements. positive impact on firm valuation. There are two reasons accurate investor response to marketing developments is inherently difficult to assess: Because investors are not necessarily marketing experts. rewarding firms with higher stock price as information perceived as ‘good news’ becomes available. However. this effect provides yet another source for stock price appreciation. while news about changes in customer satisfaction may not result in an immediate change in firm valuation. it helps determine the firm’s working capital requirements. Firms with highly satisfied customers usually generate positive returns. Customer equity effects: customer equity and market valuation are intrinsically related because they are two versions of the principle of the present value of a stream of expected future cash flows. the study of marketing’s impact on valuation proceeds by way of its impact on cash flows. According to the efficient markets hypothesis (EMH).The Marketplace to Buy and Sell your Study Material areas is not readily visible from quarterly earnings. brand extensions. Thus. Strong brands not only deliver greater stock returns than a relevant benchmark portfolio but also do so with lower risk. these investor reactions fully and accurately incorporate any new information that has value relevance. Investors react quickly. Because cash flow volatility affects the firm’s cost of capital. This connection helps make marketing more financially relevant and accountable. it is not clear a priori that the investor reaction mechanism will always be complete and accurate. and market value. as the EMH predicts. Given that marketing affects the shape of the probability distribution of future sales revenues. and customer mind-set brand metrics. and vice versa.Stuvia.
ostensibly for customer marketing purposes. However. In contrast. has been found to enhance firm value. and R&D and product quality are all linked to firm value. investor reactions is a poor predictor of the eventual commercial success of new product introductions. customer equity. which is predominantly in the positive zone. in combination with value appropriation. Marketing communication productivity has a positive influence on shareholder value. The short-term success of promotions makes it attractive for managers to continue using them. R&D and product quality effects: value creation. are significantly related to firm value. their impact on firm value is more ambiguous. 21 . Marketing mix and investor response Advertising effects: a firm’s advertising directly affects stock returns. Price promotions may also signal desperation. Firm innovativeness is predominantly positively related to firm value and potentially unfolds over time. indicating that financially useful information unfolds in the first two months after product launch. Firms that decrease their leverage through increased equity financing advertise more aggressively than firms whose debt financing has increased. these beneficial effects are short-lived for all but top-line performance because both long-term bottom-line and firm value elasticities are negative. Changes in perceived quality are associated with changes in stock returns. New product introductions increase long-term financial performance and firm value. These are slow-moving performance metrics that are not immediately visible. However. Improvements in consumer appraisal in terms of perceived quality.Stuvia. immediate. Communicating the added value created by product innovation to consumers yields higher firm value effects of these innovations. this eventually erodes profit margins. beyond the indirect effect of advertising through lifting sales revenues and profits. but because they are not outcome variables. Moreover. This practice may increase the firm’s risk in the long run. It takes innovation and quality assessment to improve stock performance.The Marketplace to Buy and Sell your Study Material maximization can imply a narrowing of the customer base because the firm concentrates its efforts on the most profitable customers. which is strong. New product introduction effects: new product announcements generate small excess stock market returns for a few days. and bottom-line performance and firm value suffer in the long run. product innovation affects firm value more when it is accompanied by higher advertising support. especially for pioneering innovations. Advertising affects intangible firm value and lowers systematic market risk. customer satisfaction. and positive. foretelling decreased earnings. and thus investors view the quality signal as providing useful information about the futureterm prospects of the firm. Investor reaction to new product introduction occurs over time. can spill over onto investors and increase the firm’s salience with individual investors.com . who typically prefer holding stocks that are well know or familiar to them. However. but with a preference for new market entries over minor innovations. research supports that brand equity. but promotions do not. Price promotions are negatively related to firm value in the long run. particularly for new products. It takes more than merely introducing new products to improve stock performance. Improvements in customer equity are significantly related to firm value. The intangible equity that advertising attempts to create. marketing initiatives are typically immediately observable. Overall. The stock performance impact shows a U-shaped relationship to innovation level. Price promotion effects: investor reaction mirrors consumer reaction to incentive programs.
changes in firm value may drive some marketing actions. Investors are subject to loss-aversion bias. In operations and quality management. and do so differently depending on whether the information is ‘good news’ or ‘bad news’. Depending on how quality is defined. Preliminary evidence supports reverse causality. Getting return on quality: revenue expansion. An unexpected decline in a firm’s stock price has been shown to lower managers’ subsequent marketing and R&D spending. investors perceive that the expected gains of the added channel will outweigh the costs. managers tend to reduce marketing expenditures at the time of seasoned equity offerings. One of the challenges associated with making strategic decisions about quality is that its conceptualization varies by discipline. Using such approaches as economic value added. it tends to mean the efficiency and reliability of internal processes. quality tends to mean quality as perceived by the customer. either by companies themselves or by stock analysts. Biases in investor response to marketing actions Given stock market reaction to marketing changes. Managers look to stock returns for information. there are several reasons investors may find it difficult to evaluate the impact of marketing actions. However. This trend has also affected marketing managers. negative stock returns are observed for established firms that may be hurt by internet channel cannibalization. Moorman & Rust Firms increasingly pay attention to the financial return obtained from strategic initiatives. cost reduction. firms assess the extent to which strategic initiatives increase net operating profits compared with the opportunity cost of capital. the opening of new distribution channels is positively related to firm value.The Marketplace to Buy and Sell your Study Material Channels of distribution effects: on average. How does stock price influence marketing actions? Investors interpret many marketing initiatives. even if those are invisible to the customer. and therefore marketers may want to incorporate investor behaviour in their actions. In an effort to inflate current-term earnings to give the appearance of improved long-term business prospects (and thus enhance stock price). actively respond to that information. 22 . Specifically. Investor familiarity bias occurs because investors are cognitively unable to apply the same level of expertise across an entire universe of stocks.Stuvia. Investors may be influenced by persuasive communication. Even those with long-term investment horizons are tempted to change course at the prospect of short-term losses. In marketing. Preliminary evidence indicates that there are biases in investor response to marketing actions. leading to deviations from the standard EMH model: Investor overconfidence bias is well documented. or both? Dickson. managers of firms with underperforming stocks react more aggressively with changes to their product portfolio and distribution than managers of firms with high-performing stocks. who must focus on the financial implications of their decision making and on conceptualizing marketing expenditures as investments. On average. that is.com .
Customer satisfaction affects revenue-generating behaviour and business performance outcomes. and efforts to improve the efficiency of internal processes tend to increase profits through cost reduction. Combining computing power with a wide-ranging communication network over the internet enables firms to listen to customers. They find that market cultures that place the customer’s interests first are the most profitable. customer retention. low customer/high competitor. they are likely to have different pathways to profitability. making it easier to address specific customer needs. and low customer/low competitor). Though a customer focus and a market orientation are necessary conditions for the revenue emphasis. Although some quality improvements may increase revenues and decrease costs simultaneously. and most important. market scope. and innovation.com . programs emphasize improving quality by addressing the issues that have the greatest impact on overall customer satisfaction. Customer-oriented models positively affect a firm’s financial performance. and respond to them with ever-greater customization. because the path from customer perceptions to financial results is indirect and must be modelled statistically. Successful 23 . whereas a customer model builds revenue through superior customer service. but more often costs rise as the firm delivers a higher level of quality that meets customer needs. Farley. measuring customer satisfaction. Day and Nedungadi show that senior managers tend to adopt one of four types of competitive advantage models (high customer/high competitor. Firms that have a market orientation perform better than firms that do not. The revenue emphasis A revenue emphasis focuses externally on customer perceptions and attitudes that will lead to more sales.Stuvia. The cost emphasis The cost emphasis focuses on the efficiency of the firm’s processes. but quality efforts that reduce costs always do. The pathways from customer satisfaction to revenue include customer attraction. Advocates of quality profitability programs that emphasize revenues argue that profitability improvements associated with quality efforts will come primarily through serving customer needs that trigger satisfaction and retention.The Marketplace to Buy and Sell your Study Material different kinds of quality improvement efforts are likely to be appropriate. A competitor model of strategic emphasis is on low costs through low-cost processing and lowest delivered cost. Therefore. Approaches include measurement of customer-perceived service quality. and measuring the disconfirmation of customer expectations. The hierarchical culture is found to be the least profitable. Deshpandé. store and process their preferences. Documenting the impact of customer satisfaction and retention on revenues is somewhat more difficult than documenting cost reductions. high customer/low competitor. These programs may occasionally lower costs. and word of mouth. and Webster define four types of organizational cultures that emphasize the customer to various degrees. efforts to improve customer-perceived quality usually increase profits through revenue expansion. they are not sufficient. Argument for the revenue emphasis: The capabilities of information technology: computational power facilitates the storage and processing of customer data. competitor-oriented models the contrary. General cost reduction efforts do not necessarily improve efficiency.
Quality improvement involves both cost cutting and revenue expansion through satisfying and retaining customers. research indicates that one will tend to dominate the culture and systems because of the natural tensions between the two approaches. Advocates of programs that emphasize increasing efficiency and productivity by eliminating defects and unnecessary effort hold that profitability improvements associated with quality efforts will come primarily through cost reduction. which creates a higher customer perception of quality and lower costs because of less rework. If the quality improvement budget is fixed yet both revenue expansion and cost reduction are attempted. The dual emphasis Why it should be effective: The dual emphasis tries to implements tenets of both the revenue building and cost reduction approaches simultaneously. which lowers morale among employees 24 . it is possible that neither effort will receive enough resources to reach ‘critical mass’. information technology. These improvements can be incremental or discontinuous. Although it is theoretically possible and desirable for exploitation and exploration to coexist in an organization. To some extent. technologies. strategies. Doubts: Organizations are bundles of learning routines focused to various degrees on the exploration of new goals. strategies. Improved business processes will inevitably result in both lower costs and more-satisfied customers.com . This has resulted in a measurable profit impact from the implementation of quality principles and programs. through such results as increased reliability or lower prices. and other communication networks have also increased efficiencies by making business faster and easier in general. System dynamics examine the recursive relationships among various activities. the internet. In one dynamic. Computational advances have enabled widespread use of statistical quality control techniques. and processes. in either case the focus is internal and the goal is to reduce costs. Improved business processes will result in fewer defects. technologies. Cost of quality programs = methods of quantifying cost reductions. thus implying that a company should emphasize both approaches simultaneously. It has been argued that simultaneous pursuit of several competitive advantages can lead to a stronger position in the market than focusing on a single competitive advantage. the implementation of a cost emphasis might have the tendency to initiate firings and loss of benefits and perks.The Marketplace to Buy and Sell your Study Material programs tend to increase the productivity of quality efforts by reducing the input required to produce a unit of output. because a firm that is strong in multiple areas is more difficult for competitors to attack. which result in cost reductions that follow from the operating efficiencies produced by increased sale. Looking from this view. Customer satisfaction improvements are sought only indirectly. including negative and positive feedback effects.Stuvia. and processes or on the exploitation of existing goals. thereby increasing companies’ abilities to improve operating efficiencies and cut costs. it seems reasonable to suggest that the customer model is more exploration based and the cost emphasis is more exploitation based. The dual emphasis might also fail simply because of limited budgets. Improved quality drives market share improvements directly through improved customer perceptions. Cost reduction programs thus transfer their savings to the bottom line directly.
and sales. This means that the dual emphasis should produce the best results with respect to profitability. Companies should clearly determine their emphasis. Although it might appear possible to double the benefit by using both approaches simultaneously.Stuvia. reducing costs through efficiency improvements should also increase revenues. and actions of consumers. Proponents of the dual emphasis believe that because the road to satisfying customers is improving efficiency. customer retention and loyalty programs. Conclusion How a firm should attempt to derive financial benefits from quality might vary depending on the functional perspective it takes. Leone.The Marketplace to Buy and Sell your Study Material who operate at the market interface. McAlister. There are many different 25 . the findings suggest that firms can achieve greater financial returns from quality improvements by emphasizing revenue generation solely. The cost emphasis and dual emphasis have no effect on performance. Marketing tends to address the problem from a revenue perspective and operations from a cost reduction or efficiency perspective. Furthermore. creating a vicious circle. a company may have different emphases with respect to quality. A dual emphasis may also not be possible because many firms have not developed organizational structures that link areas of the firm involving customers and costs. A revenue emphasis may be the most effective quality profitability emphasis for organizations. through simultaneously increasing revenues and decreasing costs. positive impact on financial performance and customer relationship performance.com . and customer equity programs but should allocate fewer resources to quality programs that are designed to improve efficiency and reduce costs. They are distinct and affect firm performance differently. along with its underlying focus on customer satisfaction and retention. Firms should allocate more resources to initiatives such as customer satisfaction programs. brand equity can be thought of as the added value endowed to a product in the thoughts. dependability. learned. Linking brand equity to customer equity Keller. The revenue emphasis has a significant. functional differences often reduce the effectiveness of existing structures. and reliability. These non-reinforcing dynamics mean that the combination is ineffective and that neither approach works as well as it might alone. Moreover. and felt about the brand over time. customer loyalty. This may lower customer service. Discussion Firms adopting a revenue emphasis to manage quality profitability may reap the greatest rewards. Luo. Revenue expansion through customer satisfaction and cost reduction are not two sides of the same coin. words. which leads to further cost cutting. The results from such an emphasis exceed those arising from a focus on costs alone or from attempts to balance a dual emphasis on both revenues and costs. Doubts exist about the efficacy of the dual emphasis because of the tensions among various processes and dynamics as well as the lack of structures within organizations for integrating the two approaches. Rao & Srivastava The relationship between brand and customer equity Brand equity: the power of a brand lies in the minds of consumers and what they have experienced.
perceptions. its name. Increased marketing communication effectiveness. etc. feelings. Direct approach: measures customer-based brand equity more directly by assessing the actual impact of brand knowledge on customer response to different elements of the marketing program. Less vulnerability to competitive marketing actions and crises. brand awareness. These assets provide various benefits and value to the firm. Brand image = customer perceptions of an preferences for a brand. brand associations. and symbol that add to or subtract from the value provided by a product or service to a firm or to that firm’s customers. and unique brand associations are essential as sources of brand equity to drive customer behaviour. or both. Whereas these benefits enhance short-run cash flow metrics. Strong. Larger margins. 26 .Stuvia.com . Greater loyalty. other factors such as brand longevity and reduced risk result in higher levels of brand value as determined by discounted cash flow methods. These categories are brand loyalty. perceived quality. Keller: customer-based brand equity = the differential effect that customer knowledge about a brand has on their response to marketing activities and programs for that brand. As strong brands reduce risk.The Marketplace to Buy and Sell your Study Material ways that this added value can be created for a brand. favourable. Important components of brand knowledge: Brand awareness = the strengths of the brand node or trace in memory as reflected by customers’ ability to recall or recognize the brand under different conditions. Two complementary approaches to measuring brand equity: Indirect approach: assesses potential sources of customer-based brand equity by identifying and tracking customers’ brand knowledge structures. The marketing advantages that result from the differential effects include: Improved perceptions of product performance. their long-term cash flows can be discounted at lower rates. More elastic (inelastic) customer response to price decreases (increases). Aaker: brand equity = a set of five categories of brand assets and liabilities linked to a brand. imagines. and other proprietary assets (patents.). An ability to negotiate a lower cost of distribution. as reflected by the various types of brand associations held in customers’ memory. experiences and so on that become linked to the brand in the minds of customers. resulting in higher valuations. Expanded growth opportunities from brand extensions and licenses. and there are also many different ways the value of a brand can be manifested or exploited to benefit the firm. trademarks. Greater trade cooperation and support. Brand knowledge is all the thoughts. All of these types of information can be thought of in terms of a set of associations to the brand in customer memory.
8. Invest in highest-value customers first. Brand value is the net present value of the forecasted brand earnings. Consider how add-on sales and cross-selling can increase customer equity. whether as a long-standing leader or as a pioneer in innovation. the latter two brand stature. 7. relevance. performance. Rust. esteem. The proportion of intangible earnings attributable to the brand is measured by the Role of Branding Index by identifying the various drivers of demand for the branded business and then determining the degree to which each driver is directly influenced by the brand. Interbrand’s model to formally estimate the dollar value of a brand: 1. 4. Track customer equity gains and losses against marketing programs. Levels (ascending order): presence. and knowledge. Guidelines as a means of maximizing customer equity: 1. Consider writing separate marketing plans for acquisition and retention efforts. Zeithaml. Identification: the closeness customers feel for a brand and how well they feel the brand matches their personal needs. 3. 2. relevance. Customer equity: the sum of lifetime values of all customers. the emotional and intangible benefits of a brand: Authority: the reputation of a brand. and crossselling. Research International’s equity engine delineates three key dimensions of brand affinity. advantage. Leadership brands excel on both. It is made up of three components and their key drivers: 27 . and Lemon: customer equity = the discounted lifetime values of a firm’s customer base. 2. The first two combined form a measure of brand strength.The Marketplace to Buy and Sell your Study Material Young and Rubicam’s BrandAsset Valuator (BAV) model profiles brand according to four key dimensions: differentiation. Millward Borwn’s Brand Dynamics model adopts a hierarchical approach to determine the strength of relationship a customer has with a brand.com . and bonding. discounted by the brand discount rate. Monitor the intrinsic retainability of your customers. Look for ways to reduce acquisition costs. Customer lifetime value (CLV) is affected by revenue and cost considerations related to customer acquisition.Stuvia. Identify and forecast revenues and earnings from intangibles generated by the brand. Transform product management into customer management. Relate branding to customer equity. 3. 6. 5. A specific brand that reflects the risk profile of its expected future earnings is then derived via a brand strength score. Approval: the way a brand fits into the wider social matrix and the intangible status it holds for experts and friends. Blattberg and Deighton: customer equity = the optimal balance between what is spent on customer acquisition versus what is spent on customer retention. retention. 4.
6. above and beyond its objectively perceived value. and knowledge-building programs. Builds brands around customer segments. 4. and convenience. Take no heroic measures to try to save ineffective brands.and medium-CLV customers for future targeting. Customer-centered brand management: 1. special recognition and treatment programs. not the other way around. Encouraging single channel customers to become multichannel customers. 8. Selecting the high. Efficient customer management strategy is about: 1. Develop the capability and the mind-set to hand of customers to other brands in the company.com . Knowing your customers well enough to deliver superior value while maximizing profitability for the firm. Selling the right product to the right customer at the right time. customer brand attitudes. Relationship equity = customers’ tendency to stick with the brand. Brand equity = customers’ subjective and intangible assessment of the brand. 7. Drivers are loyalty programs. Make brand decisions subservient to decisions about customer relationships. Allocating the optimal marketing budget across different customers/distributors based on their future revenue potential. Drivers are customer brand awareness. 2. community-building programs. 6. Minimizing churn of your high-value customers/distributors. 3. Relationship of customer equity to brand equity Both brand equity and customer equity emphasize the importance of customer loyalty to a brand. Balancing acquisition resources and retention resources and focusing on the optimal spend. price. The customer equity perspective puts much focus on the bottom-line financial value extracted from customers. Drivers are quality. Adopting a forward-looking metric such as the CLV for superior decision making and customer management strategies. It’s clear benefit is the quantifiable measures of financial performance it provides. 5. 2. In its calculations the customer 28 . 4. above and beyond objective and subjective assessments of the brand. 5. not component similarities. Change how you measure brand equity to make individual-level calculations. 3.Stuvia. Kumar and colleagues: customers who are selected on the basis of their lifetime value provide higher profits in future periods than do customers selected on the basis of several other customer-based metrics. But its perspective is limited in its guidance for go-to-market strategies.The Marketplace to Buy and Sell your Study Material - - - Value equity = customers’ objective assessment of the utility of a brand based on perceptions of what is given up for what is received. 7. and customer perception of brand ethics. Plan brand extensions based on customer needs. Make your brands as narrow as possible. These are aimed at maximizing CLV. Both concepts are also consistent with the notion that value is created by having as many customers as possible pay as high of a price as possible.
customized marketing programs for individual customers. In such cases. such as the ability of a strong brand to attract higher quality employees. Brand equity tends to put more emphasis on strategic issues in managing brands and how marketing programs can be designed to create and leverage brand awareness and image with customers. the brand becomes an essential component in dealing with both channel partners and competitors: Brand clout and corresponding cross-price elasticity asymmetries enable dominant brands to ‘manage’ competitive relationships. It does not always fully account for competitive response and the resulting moves and countermoves. insights. 29 .Stuvia. To the extent that companies tap both traditional and direct channels in their go-to-market strategies. elicit stronger support from channel and supply chain partners. Brand equity approaches could benefit from sharper segmentation schemes afforded by customer-level analyses. Stronger brands are better able to negotiate favourable distribution costs because they are more effective ‘bait’ for retailers to use as they craft strategies for drawing shoppers to their stores. create growth opportunities through line and category extensions and licensing. customer equity approaches can overlook the ‘option value’ of brands and their potential to impact revenues and costs beyond the current marketing environment. managers do not always develop detailed customer analyses in terms of the brand equity they achieve with specific customers or groups of customers and the resulting long-term profitability that is created. Brands serve as the ‘bait’ that retailers and other channel intermediaries use to attract customers from whom they extract value. not competitive.com . Customer equity approaches more easily relate to marketing philosophies like one-to-one marketing and permission marketing. There may also be less consideration of how to develop personalized. and cross-selling. However. WOM. and c2c recommendations. customer equity and brand equity management perspectives provide complementary. and so on. Most product offerings have to be marketed with at least some level of participation from an external channel. The two concepts can have an interactive effect such that marketing actions to improve customer equity can also improve brand equity and vice versa. not does it fully account for social network effects. Customers serve as the tangible profit engine for brands to monetize their brand value. There are generally fewer financial considerations put into play with brand equity as compared to customer equity. The customer equity perspective is somewhat weak in capturing the nature of marketing tasks that deal with managing the channel and managing competitors. Both brand equity and customer equity matter.The Marketplace to Buy and Sell your Study Material equity perspective largely ignores some of the important advantages of creating a strong brand. Customer equity can exist without brand equity and vice versa. The customer equity perspective also tends to be less prescriptive about specific marketing activities beyond general recommendations toward customer acquisition. retention. Thus. It provides much practical guidance for specific marketing activities.
and they are clearly inextricably linked. Brand equity tends to put more emphasis on the ‘front end’ of marketing programs and intangible value potentially created by marketing programs. and it is a mistake to ignore its important role in developing long-term profit streams for firms. Customers drive the success of brands. but brands are the necessary touch point that firms have to connect with their customers. The higher price premiums and increased levels of loyalty engendered by brands generates incremental cash flows.Stuvia. whether they are manufacturers or retailers. the two concepts go hand in hand: customers need and value brands. 30 . Effective brand management is critical.The Marketplace to Buy and Sell your Study Material Conclusions Both customer equity and brand equity can be expanded to incorporate the other point of view. Customer-based brand equity maintains that brands create value by eliciting differential customer response to marketing activities. Customer equity and brand equity are complimentary notions in that they tend to emphasize different considerations. customer equity tends to put more emphasis on the ‘back end’ of marketing programs and the realized value of marketing activities in terms of value. However. but a brand is only as good as the customer it attracts.com .
Stuvia. How a firm chooses to position itself and/or its offerings is central to the creation of marketing strategy and dictates the implementation of advertising and marketing communications practices in the short. reinforcement. Overall firms objectives have no significant relationship with any of the predictive variables (top of the range. attractiveness. intangible factors gain importance whereby the management of reputation and manipulation of consumer perceptions and the positioning of the firm and its offerings in the marketplace become important. Conclusions Sales. Advertising and positioning are inextricably geared toward creating value for any firm and its offerings. value for money. But how to think about the considerable range of potential differences between consumers? A new taxonomy is presented of differences between customers. A taxonomy of differences between consumers for market segmentation Bock & Uncles Differences between consumers are of fundamental interest to marketers. Contemporary advertisements and promotions have as their objective. reliability. Marketing has changed significantly to the extent that as features of offerings become less distinctive. The existence of these differences suggests a need for the development of market segmentation strategies – in the belief that it is more profitable to treat certain types of consumers in different ways than to treat them all the same. and consumer perceptions are impacted by positioning strategies. profits. Ming-Sung Cheng & Hadjicharalambous The concept of positioning is recognized as one of the important components of advertising and modern marketing theory and practice. 31 . market share. or modification of the positioning of an offering in the consumer’s mind. brand name & selectivity). and long term. company image. country of origin. a firm’s offering must be well positioned in the marketplace. Five generic types are postulated. Positioning = a complex multidimensional construct that attempts to positively adjust the tangible characteristics of the offering and the intangible perceptions of the offering in the marketplace. the higher the financial and competitive rewards attainable. The employment of positioning strategies that leads to creating a position in the marketplace is undertaken over time through deployment of marketing practices. services. the establishment. the basis of evaluating the effectiveness of offerings’ positions in the marketplace and justification for advertising budget/spend ought to be the examination of whether the desired positioning strategies being pursued actually impact firm performance. The greater the emphasis on the implementation of positioning strategies. To be successful over the long term. in that they enhance firm performance and reduce systematic risk. medium. Kalafatis. Other things being equal.com .The Marketplace to Buy and Sell your Study Material Impact of positioning strategies on corporate performance Blankson. ROI.
rather. and destroyed.Stuvia. Product benefit preferences and consumer interaction effects are generally viewed as intrinsic characteristics of consumers that may not be easily changed by the marketed. Diffusion theory = if innovators are targeted. these differences provide a justification for segmentation. firms should segment consumers according to whether many of the people with whom they wish to connect are in the network. choice barriers can be created. and appropriately consider these factors when purchasing products (= not realistic!). Two differences that primarily relate to the question of how attractive customers are to the firm: Bargaining power: where consumers differ in terms of their ability to negotiate reduced prices. Choice barriers Irrational passion for dispassionate reality = consumers have a perfect knowledge of the available products and other consumers. firms cannot view the marketing problem as being about establishing one-to-one dialogues with consumers. the existence of consumer interaction effects requires that marketers recognize the interrelationships between consumers. When consumer interaction effects exist in a market. which are always relevant when a firm is considering how to segment the market: Preferences for product benefits: where consumers differ in terms of the product benefits that they seek. Consumer interaction effects There are a large number of circumstances in which it is useful for marketers to recognize that our preferences for products and product attributes are a direct consequence of the attitudes and behaviors of others. The different roles of people in the decision-making processes are highly relevant when segmenting markets. Rather than providing an opportunity for better meeting consumers’ needs. Theory of network effects = in markets where the value provided by a product or service is determined by the number of users.com . however. reinforced. other consumers may emulate their behavior. Choice barriers = factors that constrain ‘homo-economicus’ from maximizing his utility. 32 . dictating the number of segments and how differences between the segments need to be taken into account. consumer interaction effects can present a constraint on marketing strategy. Preferences for product benefits If consumers differ in terms of the relative importance they attach to different benefits provided by products and services. Profitability: where consumers provide different levels of profit to the firm. Consumer interaction effects: where the ways in which consumers interact determine the products they purchase.The Marketplace to Buy and Sell your Study Material A taxonomy of generic differences between customers Ways/utility functions in which consumers may differ. weakened. Choice barriers: which prevent consumers from making the choices that would maximize their utility in a material sense.
The available new information technology enables this customization of the marketing mix. referent or lead-user status. in response to differing preferences. Then it may not be appropriate to segment by the profitability of consumers before consideration of the strategies that will be targeted at the various consumers. When implementing one-to-one strategies. Structural position = the propensity of a consumer to exercise his bargaining power in demanding lower prices and intrinsic bargaining power. The taxonomy is believed to offer a reasonably complete categorization of variables that need to be considered when segmenting markets. network membership.Stuvia.The Marketplace to Buy and Sell your Study Material Bargaining power Heterogeneity in bargaining power = where one consumer can obtain the same product as another consumer but at a lower price. Profit heterogeneity itself may be a function of other differences between consumers. While the most common cause is the level of competition. Two circumstances where heterogeneity in profitability can be considered a relevant type of heterogeneity in its own right: Where the profitability of a particular consumer is determined by factors other than the above four generic types of differences between consumers. or where there is potential for this. Profitability Where one consumer provides a greater amount of profit to a firm than another. In some situations. Segmentation and customization have become very effective in industries where customer retention is a primary goal. and government legislation. this will be a consequence of one of the previously described types of differences. other causes include social advantage. to greater profitability: one-to-ne marketing does not preclude segmentation. Qualitative differences between the five types require that organizations employ a variety of analytic tools when aggregating consumers into segments. attributable to the desires of customers for more precise satisfactions of their varying wants. Introduction to the special issue on market segmentation Wedel & Kamakura Market segmentation = viewing a heterogeneous market as a number of smaller homogeneous markets. target and reach segments using their own customers transaction databases. profile. Assessing and using the taxonomy Each type of difference is seen as conceptually distinct.com . It is a conceptual model of the way a manager wishes to view a market. The opportunity to market one-to-one leads potentially. but not necessarily. Where it is a more cost-effective approach to segmentation. firms currently first develop a limited number of marketing mixes targeted to market segments and the personalize some of their components to each member of these target segments. being a shareholder. 33 . The relative bargaining power of retail customers encourages manufacturers to treat these customers in different ways. as these strategies will themselves impact upon the profitability. profitability heterogeneity exists in the market. so that firms can identify.
investigate. Globalization and segmentation Companies cannot ignore global trends.Stuvia. testified by a growth in the number of mergers in various industries. Is segmentation history? Wedel New media and new marketing Development of internet and other electronic media opened up routes for one-to-one marketing. affluent. This enables the implementation of database marketing (DBM) = organizing. companies need to have access to up-to-date and detailed customer transactions data. with the purposes of identifying the right offer for the right customers at the right time and directing and social marketing efforts more efficiently at each individual customer or customer networks. Disadvantage of market segmentation: it would lead to an overly restrictive partition of the continuous distribution into homogeneous segments. search engine marketing and social media marketing. mobile. and demanding consumers.com . Several current trends in developed countries determine the future of marketing: the rapid rise of the information economy converging industries. supplementing and analyzing databases. In order to apply new approaches to marketing. Anywhere in between those extremes lies the identification and targeting of market segments. increasingly adaptive and flexible organizations. transaction data are made accessible and enriched with information from marketing research. developing a global marketing mix where possible and tailoring its components to cross national market segments.g. but groupings created by managers to help them develop strategies that better meet consumer needs at the highest expected profit for the firm. The marketing engineering approach = an approach that is based on data and models to support strategic and tactical marketing decisions. communications and distribution). and more connected. which is particularly useful to support one-toone marketing approaches.The Marketplace to Buy and Sell your Study Material Many companies have successfully implemented mass marketing strategies by targeting consumer populations across the globe with some standardized components of the marketing mix. This has set off increases in the scale of companies. Maintaining a broad assortment of products with relatively low average turnover does add to profitability for those companies: product differentiation decreases 34 . while assuming a continuous mixing distribution allows individual level estimates of model parameters to be easily obtained. and even companies that decide not to extent their business internationally suffer increased competition in their home market since more and more companies market products across their country’s borders. In applying models to segmentation problems. Risk: not all companies can afford to market their products globally. but with customized implementations of the other components (e. To increase their worth for marketing. Consumers in different countries often have more in common with each other than with other consumers in the same country. Companies have started to recognize. Companies that operate globally identify and target cross-national segments. and exploit various possible levels of aggregation of their markets. Market segments are not real entities naturally occurring in the marketplace. considering their marketing strategies and implementing marketing instruments on a continuum that ranges from mass marketing to one-to-one marketing. Brands in many categories now receive worldwide acceptation. one should recognize that every model is at best a workable approximation of reality.
Although national markets may seem to fragment. Today’s marketers must identify those market segments and reach them cost effectively with products and marketing programs that address their needs. market segmentation is a potentially profitable strategy. responsive to marketing effort and stable over time. Advantages of scale can potentially be realized in each step in the value chain from purchase to production to marketing. resulting in increases in the scale of markets. segments of consumers with homogeneous preferences expand beyond traditional geographic boundaries.The Marketplace to Buy and Sell your Study Material and advantages of scale ensue. 35 . and production. Targeting customers individually leads to greater revenue because of customers’ willingness to pay for products and services that better meet their individual needs. Anywhere in between these two extremes is the territory of identifying and targeting market segments. mass or segment marketing will improve profitability. but need not be exploited. and propagation of mass media has reduced costs of marketing communications for products and services. identifying and targeting them is effective. Market segmentation is a particularly effective strategy for those firms and markets because it presupposes that one ma distinguish relatively homogeneous groups of customers. Companies should consider and evaluate their marketing strategy and the operation of marketing control instruments on a scale that ranges from aggregate (mass marketing) to disaggregate (one-to-one). Strategy and profitability The opportunity to produce and market one-to-one leads potentially. A consumer oriented approach is critical to the success of company segmentation strategy. Increases flexibility in production processes of consumer goods has reduced the costs of fabrication of differentiated products.Stuvia. sizable. it is profitable to target customers individually. If so. For markets and companies for which substantial advantages of scale exist. distribution and communication processes are flexible. in particular in global markets. but not necessarily to greater profitability: new technology may. Technology and market information enable companies to make the strategic choice to target their market at any level between mass and one-to-one. Where advantages of scale arise. If advantages of scale are small. who can be targeted similarly because they share needs and preferences.com . Segments should be homogeneous.
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