Chapter 3: Strategic planning and marketing

CHAPTER OVERVIEW

This chapter provides an explanation of the need to develop long-term strategies to meet changing environment conditions. A premise within this chapter is that marketing has a synergistic relationship with the strategic function – marketing provides inputs to the strategic plan and strategic planning defines marketing’s role in the organisation. Emphasis is placed upon formal planning (particularly scenario planning to project the future) as a way of anticipating and responding to change and alerting managers to the need to reinvent the firm to remain competitive. These ideas are explored in Marketing Highlight 3.1, p.76. It is written in the context of creating value and different types of value are identified for the different levels of strategy – corporate strategy is concerned with the economic value derived from maximising synergy between business units; business strategy is concerned with business value built on competencies and synergy is sought across markets to capitalize on these synergies; marketing strategy is concerned with customer value and synergy between the marketing mix and the needs of the target market. The need for clear vision, mission and objectives is emphasised within this chapter and the different approaches for analysing and developing an appropriate business portfolio are discussed at length. These ideas are explored in Marketing Highlights 3.2, 3.3 and in the end of chapter Case Study. This chapter also provides an introduction to targeting consumers and developing a marketing mix. An important premise is that target consumers are central to the marketing process. A brief description is provided of the analysis of consumers and consumer markets, how marketers determine which markets to enter and how they enter those markets. The generation of customer value, and doing this better than competitors, is a theme that runs through this section and synergy within the marketing mix is emphasised.
CHAPTER OBJECTIVES
1. 2. 3. 4. Explain strategic planning and discuss how it relates to the company mission, objectives and goals. Identify and define methods for designing the business portfolio, developing growth strategies and planning functional strategies. Outline the marketing process, explaining the concepts of target consumers, using marketing strategies for competitive advantage and developing the marketing mix. Evaluate the relevance of electronic business to strategic planning and marketing.

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CHAPTER OUTLINE

All companies must look ahead and develop long-term strategies to meet the changing condition in their industries. Each company must find the game plan that makes the most sense, given its specific situation, opportunities, objectives and resources. The hard task of selecting an overall company strategy for long-run survival and growth is called strategic planning. Marketing plays an important role in strategic planning. It provides information and other inputs to help prepare the strategic plan. In turn, strategic planning defines marketing’s role in the organisation. Guided by the strategic plan, marketing works with other departments in the organisation to achieve overall strategic objectives.
Strategic planning

Most marketing organisations operate according to formal plan. Formal planning can yield many benefits for all types of companies, large and small, new and mature. It encourages management to think ahead systematically, sharpen its objectives and policies. Sound planning helps the company to anticipate and respond quickly to environmental changes, and prepare for sudden developments more effectively. To compete effectively, firms must not only continually improve their operations but they often need to reinvent themselves to remain differentiated and relevant. This has brought about a refocus of strategic planning the process of creating value – shareholder value and customer value. Figure 3.1 depicts a ‘value seesaw’. Scenario planning has recently experienced a resurgence to develop strategic foresight. It is used as a means of painting pictures of plausible futures that the firm may have to face; it is not to forecast the future but to envisage a possible future. Many leading international organisations such as Shell, Ericsson, Telstra and Fujitsu-ICL undertake scenario planning. The essential steps in scenario planning are: Familiarisation – understanding the organisation, key stakeholders, their needs and expectations. Discovery – gaining an understanding of current trends and events and anticipating possible future discontinuities in the international environment. Scenario building – developing and progressively upgrading a range of scenarios that reflect events, patterns and discontinuities which form possible operating environments of the future relevant to targeted overseas markets. Action and integration – developing appropriate business and marketing strategies that enable the organisation to operate effectively within the scenarios generated, also with blending the emerging business with the existing business. The significance of scenarios is that each has different implications for marketing strategies. The marketer’s task is to be on the leading edge of the industry in target markets as they develop. This will involve a number of components: Progressive scenario development which portrays realistic operating environments of the future globally and in target markets. Integrated business and marketing strategies which exploit the opportunities and identify the threats in the emerging scenarios.

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To ensure the process of change is driven by customer considerations rather than technology and internal processes. To ensure cultural and organisation changes are planned and managed efficiently to provide capability. At the operational level this may be viewed as the best case, worst case, and most likely scenario of outcomes.
Strategy Hierarchy

Companies usually prepare annual plans, long-range plans and strategic plans. The annual plan is a short-term marketing plan that describes the current marketing situation, company objectives, the marketing strategy for the year, the action program, budgets and controls. The long-range plan describes major factors and forces affecting the organisation during the next several years. It includes long-term objectives, the major marketing strategies that will be used to obtain them and the resources required, and is often updated yearly. Whereas the company’s annual and long-range plans deal with current businesses and how to keep them going, the strategic plan involves adapting the firm to take advantage of opportunities in its constantly changing environment. Strategic planning: ‘The process of developing and maintaining a strategic fit between the organisation’s goals and capabilities and its changing marketing opportunities. It relies on developing a clear company mission, supporting objectives, a sound business portfolio and coordinated functional strategies’ (p. 75). For the most complex organisations a hierarchy of strategies is required (see Figure 3.2). Corporate strategy At this level, decisions concentrate on the scope of the organisation, the portfolio of businesses now and for the future, and how resources are to be obtained and allocated. Corporate strategy is concerned with the economic value and financing requirements of the corporation, and the returns required by shareholders. At corporate level the focus is on developing strengths that maximise synergy between strategic business units in terms of technology, management experience, specific skills, research and development and distribution. Strategic business unit: ‘A unit of the company that has a separate mission and objectives and can be planned independently of other company businesses. An SBU can be a company division, a product line within a division or sometimes a single product or brand’. Figure 3.3 (p. 78) shows Woolworth’s SBUs. The role of corporate strategy is to provide a guiding vision that unifies the group and guides the development of core competencies. Core competencies represent the specific skills and abilities that enable a firm to deliver products or services to its customers. The characteristics of core competencies are threefold:

They provide access to a wide range of markets.

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They make a significant contribution to the perceived customer benefits of the end product. They are difficult for competitors to initiate.

Core competencies enable the firm to develop the core products from which entire product ranges evolve. For example, Canon’s core competencies have resulted in:

Camera core product – from competencies in precision mechanics and fine optics. Fax core product – from precision mechanics and microelectronics. Laser printer core product – from precision mechanics, fine optics and microelectronics.

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Business strategy In large organisations the different businesses are usually operated as separate SBUs. At this level the focus is on building, defending and maintaining competitive positions through the development and implementation of competitive marketing strategies. This requires an assessment of the capabilities of the business and how these best match the needs and wants of its target markets. Managers must evaluate and select the markets appropriate as primary targets. Defining its business in terms of scope and communicating the vision of the business, its objectives and market priorities are important elements of business strategy. The basis of its competitive strategy in terms of differentiation or cost advantages should also be addressed. At the business unit level synergies should be sought across market to capitalise on competencies and to maximise the effectiveness of resource allocation. Marketing strategy Marketing strategy requires the planning and coordination of marketing resources and the integration of the marketing mix to achieve a desired result in the markets selected for targeting. A company’s offers are tailored through marketing strategy in terms of product line, communication, distribution and pricing elements to match the perceptions of value of its target market.
Strategic Planning Steps

Strategic planning sets the stage for the planning in the firm. It relies on defining a clear company mission, setting supporting company objectives, designing a sound business portfolio and coordinating functional strategies as shown in Figure 3.4. At the corporate level the company first defines its overall purpose and mission. This mission is then turned into detailed supporting objectives that guide the whole company. Corporate head office then decides what portfolio is best for the company. Then each business and product unit must develop detailed marketing and other departmental plans that support the company wide plan.

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Defining the Company Mission An organisation exists to accomplish something. At first it has a clear purpose or mission, but over time it may become unclear. When management senses that the organisation is drifting it must renew its search for purpose. Many organisations develop formal mission statements: ‘a statement of the organisation’s purpose – what it wants to accomplish in the larger environment’ (p. 80). A clear mission statement acts as an ‘invisible hand’ that guides people in the organisation towards the overall goal. The mission statement should be market oriented, defining the mission in terms of satisfying basic customer needs. It should not be too narrow, nor too broad. Table 3.1 (p. 80) provides several examples of product – oriented versus marketoriented business definitions. Table 3.2 (p. 81) provides some examples of mission statements. The organisation should base its mission on its core competencies. It should also be motivating and not stated in terms of making more profits or sales. Missions are best when guided by a vision. A vision can portray a concise and motivating picture for all employees and gives a unifying sense of direction that is actionable. The company’s mission statement should provide a vision and direction for the company for the next five to ten years. Two key principles were identified as internal drivers of those companies built to last. First, it is of critical importance to preserve and protect the company’s core ideology. Second the company must have a relentless drive for progress. Collins and Porras found that long lasting companies are distinguished by:
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BHAG - Big Hairy Audacious Goals stimulate progress Cult-like culture Experimentation Home-grown management Good enough never is

Setting Company Objectives and Goals The company’s mission needs to be turned into detailed supporting objectives for each level of management. Each manager should have objectives and be responsible for reaching them. Information technology now plays a major part in reducing costs, improving efficiency of customer access and providing relevant information. Marketing strategies must be developed to support marketing objectives, to increase its market share. The company may increase its product’s availability by setting up an online presence, promotion and targeting. Increasing the product’s promotion may require more salespeople and advertising. The objectives should be as specific as possible, not to ‘increase our market share’ but to ‘increase our share by 30%’. An example of this hierarchy is show in Figure 3.5 (p. 84).

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Designing the business portfolio Guided by the company’s mission statement and objectives, management must now plan its business portfolio ‘the collection of businesses and products that make up the company’ (p. 85). The most effective business portfolio is the one that best fits the company’s strengths and weaknesses to opportunities in the environment. It must analyse its current business portfolio and decide where to invest more, less or none, and develop growth strategies for adding new products. Analysing the Current Business Portfolio Many companies operate several businesses. However, they often fail to define them carefully. The major activity in strategic planning is business portfolio analysis. Management’s first step is to identify the key businesses making up the company. These are called strategic business units. The next step calls for management to assess the attractiveness of its various SBUs and decide how much support each deserves. The purpose of strategic planning is to find ways in which the company can best use its strengths to take advantage of attractive opportunities in the environment. The Boston Consulting Group Approach: Using the Boston Consulting Group Approach (BCG), a company classifies all its SBUs according to the growth share matrix shown in Figure 3.6 (p. 87).

Question marks: ‘Low share business units in high-growth markets that require a lot of cash to hold their share or build into the stars’ (p. 86). These require a lot of cash and a company has to think hard about whether to keep pouring money into it. Stars: ‘High-growth, high-share businesses or products that often require heavy investment to finance their rapid growth’ (p. 86). Cash cows: ‘Low-growth, high-share businesses or products – established and successful units that generate cash, which the company uses to pay its bills and support other business units that need investment’ (p. 86). Dogs: ‘Low-growth, low-share businesses or products that may generate enough cash to maintain themselves, but do not promise to be large sources of cash (p. 87).

Once it has classified the SBUs (Figure 3.6) the company must determine what role it will play in the future. One of four strategies can be pursued for each SBU. The General Electric Approach: General Electric (GE) introduced a comprehensive portfolio-planning tool called a strategic business planning grid (Figure 3.7, p. 88). The GE approach considers many factors besides market growth rate as part of industry attractiveness. It uses an attractiveness index made up of market size, market growth rate, industry profit margin, amount of competition, seasonality and cyclicality of

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demand, and industry cost structure. Each is rated and combined in an index of attractiveness. For business strength, the GE approach again uses an index rather than a simple measure of relative market share. This includes factors such as relative market share, price comparativeness, product quality, customer and market knowledge, sales effectiveness and geographic advantages. The grid is divided into three different zones. Management would also plot the projected positions of the SBUs with and without changes in strategies. By comparing current and projected business grids, management can identify the major strategic issues and opportunities it faces. Problems with matrix approaches The BCG, GE and other formal methods revolutionised strategic planning. However, such approaches have limitations. They can be difficult, time consuming and costly to implement. They can classify current businesses but give little information about future states. They can also lead the company to place too much emphasis on market-share growth or growth through entry into attractive new markets. Another problem is that they do not address how value can be created across SBUs. In addition, the growthshare matrix fails to compare the competitive advantage a business receives from being owned by a particular company with the costs of owning it. Despite these and other problems, most large companies remain firmly committed to strategic planning.
Developing Growth Strategies

Beyond evaluating current business, designing the business portfolio involves finding future business and products the company should consider. The planning gap is what exists when comparing the expected sales based on no change to current strategies to potential sales based on an assessment of full market potential, as Illustrated in Figure 3.8.. Analysis shows that two gaps exist. Product/market expansion grid: ‘A portfolio planning tool for identifying company growth opportunities through market penetration, market development, product development or diversification’ (p. 90). Market penetration: ‘A strategy for promoting company growth by increasing sales of current products to current market segments without changing the product in any way’ (p. 90). Market development: ‘A strategy for promoting company growth by identifying and developing new market segments for current company products’ (p. 91). Product development: ‘A strategy for promoting company growth by offering modified or new products to current market segments; developing the product concept into a physical product in order to assure that the product idea can be turned into a workable product’ (p. 91). Diversification: ‘A strategy for promoting company growth by starting up or acquiring businesses outside the company’s current products and markets’ (p. 91). The strategic and relevant options will depend on the size of the gap and the competitive position in its markets. The product/market expansion grid provides 7

another point for the development of objectives and strategies. Figure 3.10 (p. 92) indicates alternative directions for growth. Depending on the firm and its environment, product development, market development to a higher-risk move to diversification may be pursued. Sometimes the gap analysis approach will show that the momentum of present strategies will take sales higher than is desirable, given the limited supply capabilities of the firm.
Strategic Implications

In general we find that companies have difficulty meeting demand during the rapid growth stage of the life cycle. The significance of these concepts is that market growth should be managed in line with capabilities to achieve realistic objectives. Gap analysis can be extended to identify the profit gap using the same approach. Profit generating strategies to close the gap must consider both product/market options. Although a simplification of the issues involved, the planning gap and product/market growth concepts are good starting points for identifying the strategic analysis task and providing broad indicators for strategic direction. The three main means of closing the gap are sales growth, productivity improvement and redeployment of capital resources by changing the firm’s asset base, see Figure 3.12 (p. 93). Technology driven environmental shifts like the Internet represent one of the most powerful forces changing the nature of competitive advantage. Today companies must broaden their strategic planning to encompass the migration of value, which is moving from physical marketing and delivery towards electronic marketing. It is quite possible that electronic marketing strategies can simultaneously affect market penetration and market development strategies, improve asset utilization through reduced inventories and speed of the cash cycle, as well as creating entirely new product ranges where information is a pivotal factor in creating value for customers.
Migration Planning

Today most firms must plan strategies based around their traditional market ‘place’ plus strategies to take them into market ‘space’ that is the virtual world of electronic business. Figure 3.13 (p. 97) depicts the task facing management, linking the physical and electronic components. This can present an enormous challenge to a business.
Planning Functional Strategies

The company’s strategic plan establishes what kinds of businesses the company will be in and its objectives for each. Within each business unit more detailed planning must take place. Each unit (marketing, finance, accounting, IT, etc.) must work together to accomplish strategic objectives. They must also work together in order to obtain the needed funds. The focus of each strategy level differs. Figure 3.14 (p. 97) shows the primary focus of corporate strategy is to add economic value to the organisation as reflected in shareholder value. Its responsibility is to enhance existing core competencies and to build new ones. At the business-unit level, adding economic value is measured in terms of return on investment or return on assets. The aim is to build the value of the business utilizing distinctive core competencies and developing competitive position and advantage. 8

Marketing’s role in strategic planning At the marketing strategy level the focus shifts to customer value, enhancing the utility of products and services. Marketing’s role is to lead and coordinate the process of customer value creation, maintenance and defence at the product and market level. Its focus is on developing market position and customer satisfaction. There is much overlap between overall company strategy and marketing strategy. Marketing looks at consumer needs and the company’s ability to satisfy them, the same factors that guide the company mission and objectives. Marketing plays a key role in several ways. First, marketing provides a guiding philosophy which suggests the company strategy should revolve around serving the needs of important consumer groups. Second, marketing provides inputs to strategic planners by helping to identify attractive market opportunities and assessing the company’s potential to take advantage of them. Finally, within the individual business units, marketing designs strategies for reaching the unit’s objectives. Marketing management must also determine the best way to help achieve strategic objectives in each business unit. This may not be just an increase in sales, but to retain current levels with a smaller marketing budget. Marketing and the other business functions Confusion persists about the exact role of marketing in a company. Enlightened marketers prefer to put the customer at the centre of the company. These marketers argue that the company cannot succeed without customers, so attracting and holding them is the crucial task. However, since actual consumer satisfaction is affected by the performance of other departments, all functions should work together. Marketing plays an integrative role to ensure they do. Conflict between departments Each business function has a different view about which interest groups and activities are most important. This often causes conflict, when one area is perceived to be more successful than others (such as when marketing use the achievement of their own aims as a benchmark for other departments). Marketers must get all departments to ‘think consumer’ and to put the consumer at the centre of company activity. DuPont has an ‘Adopt a Customer’ program which requires employees to keep in contact at least once a year with their customer. BHP also stays ‘close to the customer’ and include important people in BHP in meetings with the customers to help address their concerns. All of the departments must work together to meet the needs of the customer.
The marketing process

Marketing process: ‘the process of (1) analysing marketing opportunities; (2) selecting target markets; (3) developing the marketing mix; (4) managing the marketing effort’ (p. 102). Marketing’s role and activities in the organisation are shown in Figure 3.15 (p. 103). which summarises the entire marketing process. Target customers stand in the centre. The company identifies the total market, divides it into smaller segments, selects the 9

most promising segments, and focuses on serving and satisfying these segments. It designs a marketing mix of factors under its control – product, price, place and promotion. To find the best mix, the company engages in marketing analysis, planning, implementation and control.
Target Consumers

To succeed in today’s competitive marketplace, companies must be customer centred, winning customers from competitors by delivering greater value. Before it can satisfy consumers, a company must understand their needs and wants. Companies know they cannot satisfy all consumers in a market in the same way. Thus, each must divide the total market and choose the best segments and design strategies for them. This involves four steps: demand measurement and forecasting, market segmentation, market targeting and market positioning. Demand measurement and forecasting The company needs to make a careful estimate of the current and future size of the market and its various segments. Estimation of the current market size is important to determine whether the market is large enough to support another product profitably. Equally important is future growth. Growth potential may depend on many things: growth rate of certain age, income and nationality that use the product, economic conditions, the crime rate, and lifestyle changes. Market segmentation Market segmentation: ‘Dividing a market into direct groups of buyers who might require separate products or marketing mixes; the process of classifying customers into groups with different needs, characteristics or behavior’ (p. 104). If the demand forecast looks good, the company will need to decide how to enter the market. Consumers can be grouped in various ways by geographic factors, demographic factors, and behavioral factors. Every market has segments, but not all ways of segmenting are equally useful. Market segment: ‘A group of consumers who respond in a similar way to a given set of marketing stimuli’ (p. 104). Market targeting Market targeting: ‘Evaluating each market segment’s attractiveness and selecting one or more segments to enter’ (p. 104). A company should target segments in which it can generate the greatest customer value and sustain it over time. Most companies enter a new market by serving a single segment, and if this proves successful, they add segments. Large companies eventually seek full market coverage. Market positioning Market positioning: ‘Arranging for a product to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers; formulating competitive positioning for a product and creating a detailed marketing mix’ (p. 105). 10

After deciding which segments to pursue, a company must decide what ‘position’ it wants to occupy. If a product is perceived to be just like another product, consumers have no reason to buy it. In positioning a product, the company first identifies possible competitive advantages on which to build the position. Once the position has been chosen, the entire marketing program should support the chosen positioning strategy.
Marketing Strategies for Competitive Advantage

Marketing strategies must be geared to the needs of consumers and also to the strategies of competitors. Designing competitive marketing strategies begins with thorough competitor analysis. The company compares the value and customer satisfaction delivered by its products, prices channels and promotion with that of its close competitors. The company must be aware of who their competitors are, what strengths, weaknesses, objectives and strategies they have and how they react to the company. There are several types of strategies; market leader, market challenger, market follower and market niche are the most popular (discussed more in Chapter 19).
Developing the Marketing Mix

Marketing mix: ‘The set of controllable marketing variables that the company blends to produce the response it wants in the target market’ (p. 106). After deciding on its overall marketing strategy, a company is ready to begin planning the details of the marketing mix. This is everything the firm can do to influence the demand for its product. The four Ps, product, price, place and promotion are the four variables of the mix. Recently this has been extended (see Figure 3.16, p. 107), and is only meant to be shorthand for assisting marketing scientists and practitioners. Product – goods and services being offered to the market. Price – amount of money customers have to pay to obtain the product. Placement – the company logistics and marketing activities concerned with making and distributing the finished product to target consumers. Promotion – activities that communicate the merits of the product and persuade target customers to buy it. The extended marketing mix includes: People Process – not just the process of making the product, experience of using the product. Physical evidence – examining every aspect that customers use in their perceptual field to assess things. An effective marketing program blends all the marketing mix elements into a coordinated program. An expert suggests that companies should view the four Ps in terms of the customer’s four Cs. Four Ps Four Cs

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Product Price Placement Promotion

Customer needs and wants Cost to the customer Convenience Communication

The context of the marketing mix also requires consideration when operating in the electronic marketing environment.

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