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Marketing Strategy
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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EIGHTH EDITION
Marketing Strategy TEXT AND CASES
O.C. Ferrell Auburn University
Michael D. Hartline Florida State University
Bryan W. Hochstein University of Alabama
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Marketing Strategy: Text and Cases, Eighth Edition O.C. Ferrell; Michael D. Hartline; Bryan W. Hochstein SVP, Higher Education & Skills Product: Erin Joyner VP, Higher Education & Skills Product: Michael Schenk
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Printed in the United States of America Print Number: 01 Print Year: 2021
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To my wife, Linda O.C. Ferrell To the amazing women in my life, Marsha, Meghan, Madison, and Mallory Michael D. Hartline To my family who support and encourage me: Susan, Rachel, and Matthias Bryan W. Hochstein
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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Brief Contents PART 1 Setting the Stage for Marketing Strategy CHAPTER 1
Marketing in Today’s Economy 1
CHAPTER 2
Strategic Marketing Planning 27
PART 2 Discovering Market Opportunities CHAPTER 3
Collecting and Analyzing Marketing Information 53
CHAPTER 4
Developing Competitive Advantage and Strategic Focus 83
PART 3 Developing Marketing Strategy CHAPTER 5
Customers, Segmentation, and Target Marketing 113
CHAPTER 6
The Marketing Program 145
CHAPTER 7
Branding and Positioning 187
PART 4 Putting Strategy into Action CHAPTER 8
Ethics and Social Responsibility in Marketing Strategy 211
CHAPTER 9
Marketing Implementation and Control 237
CHAPTER 10
Developing and Maintaining Long-Term Customer Relationships 263
PART 5 Cases
CASE 1
Tesla Races Ahead With Nontraditional Marketing Strategy 291
CASE 2
Businesses Sink or Swim in the Face of COVID-19 Crisis 301
CASE 3 Gainsight Provides a Data-Driven Customer Relationship Platform to
Retain Subscription Customers 311
CASE 4 Apple Bites Back
319
CASE 5 Uber: The Opportunities and Challenges of Market Disruption
333
CASE 6 Social Responsibility Is the Key Ingredient at New Belgium Brewing CASE 7 Bayer Grows With Monsanto Acquisition
345
355
CASE 8 Netflix Fights to Stay Ahead of a Rapidly Changing Market
367
CASE 9 From the Outside In: Corporate Social Responsibility at Patagonia
CASE 10 Google Searches for Solution to Privacy Issues
CASE 11 IndyCar: Seeking a Return to Motorsports’ Fast Lane
CASE 12 Mattel Gives Its Marketing Strategy a Makeover
CASE 13 Starbucks Perfects Its Blend
375
381 399
409
419 vii
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viii Brief Contents CASE 14 Zappos Finds the Perfect Fit
431
CASE 15 Gillette’s Razor-Sharp Innovation May Not Be Enough CASE 16 TOMS Kicks the One for One Model to the Curb
451
CASE 17 Herbalife Manages Risks for Long-Term Success
461
CASE 18 Walmart Dominates With World-Class Supply Chain CASE 19 E-commerce Soars With Shopify
441
477
487
CASE 20 Mini Case: Cutting Edge Quality at Cutco
497
CASE 21 Mini Case: The Cocoa Exchange Finds a Sweet Spot in the Supply
Chain 503
Appendix Marketing Plan Worksheets 507 Glossary 517 Index 525
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Contents PART 1 Setting the Stage for Marketing Strategy CHAPTER 1
Marketing in Today’s Economy 1 Introduction 1
Beyond the Pages 1.1 The Future of Marketing 2 The Challenges and Opportunities of Marketing in Today’s Economy 3 Power Shift to Customers 3 Changes in Products and Selection 4 Audience and Media Fragmentation 5 Changing Value Propositions 6 Shifting Demand Patterns 6 Privacy, Security, and Ethical Concerns 7 Unclear Legal Jurisdiction 8
Basic Marketing Concepts 8 What Is a Market? 9 What Is Exchange? 10 What Is a Product? 11 Beyond the Pages 1.2 The A-to-z of Amazon’s Marketing Strategy 14 Major Marketing Activities and Decisions 14 Strategic Planning 14 Research and Analysis 15 Developing Competitive Advantage 16 Marketing Strategy Decisions 16 Social Responsibility and Ethics 18 Implementation and Control 19 Developing and Maintaining Customer Relationships 20 Beyond the Pages 1.3 A Perfect Fit: Strategy at Zappos 21 Taking on the Challenges of Marketing Strategy 21 Lessons from Chapter 1 23 CHAPTER 2
Strategic Marketing Planning 27 Introduction 27
Beyond the Pages 2.1 Escaping the Commodity Trap 28 The Strategic Planning Process 29 Organizational Mission Versus Organizational Vision 30 Corporate or Business-Unit Strategy 33 Beyond the Pages 2.2 Johnson & Johnson Strengthens Its Credo 34 Functional Goals and Objectives 35 Functional Strategy 35 Implementation 35 Evaluation and Control 36
The Marketing Plan 36 Marketing Plan Structure 37 Using the Marketing Plan Structure 42 Purposes and Significance of the Marketing Plan 44 Organizational Aspects of the Marketing Plan 44 ix Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
x Contents
Maintaining Customer Focus and Balance in Strategic Planning 45 Customer-Focused Planning 45 Balanced Strategic Planning 47 Beyond the Pages 2.3 Spotify Eyes the Next Generation 47 Lessons from Chapter 2 49
PART 2 Discovering Market Opportunities CHAPTER 3
Collecting and Analyzing Marketing Information 53 Introduction 53
Beyond the Pages 3.1 Big Data, Big Marketing Analytics 54 Conducting a Situation Analysis 55 The Human Element 55 Data, Analytics, and Insights Are Not the Same 56 Situation Analysis Should Be Used Strategically 56
The Internal Environment 58 Review of Current Objectives, Strategy, and Performance 59 Availability of Resources 59 Organizational Culture and Structure 60 The Customer Environment 61 Who Are Our Current and Potential Customers? 61 What Do Customers Do With Our Products? 61 Where Do Customers Purchase Our Products? 63 When Do Customers Purchase Our Products? 64 Why (and How) Do Customers Select Our Products? 64 Beyond the Pages 3.2 Cleaning Up E-waste 65 Why Do Potential Customers Not Purchase Our Products? 66 The External Environment 66 Competition 68 Economic Growth and Stability 69 Political Trends 70 Legal and Regulatory Issues 70 Technological Advancements 71 Sociocultural Trends 72 Collecting Marketing Data and Information 75 Secondary Information Sources 75 Beyond the Pages 3.3 Instagram Uses Big Data to Discover Trends 76 Primary Data Collection 78 Overcoming Problems in Data Collection 79 Lessons from Chapter 3 80 CHAPTER 4
Developing Competitive Advantage and Strategic Focus 83 Introduction 83
Beyond the Pages 4.1 Why Innovative Companies Succeed 84 Modern Relevance of SWOT Analysis 86
Making SWOT Analysis Productive 86 Stay Focused 87 Search Extensively for Competitors 87 Collaborate With Other Functional Areas 87 Examine Issues From the Customers’ Perspective 88 Look for Causes, Not Characteristics 89 Separate Internal Issues From External Issues 90 Adopt a Disruptive Mindset 91
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Contents xi
SWOT-Driven Strategic Planning 92 Strengths and Weaknesses 93 Opportunities and Threats 94 The SWOT Matrix 95 Developing and Leveraging Competitive Advantages 98 Establishing a Strategic Focus 102 Beyond the Pages 4.2 Kroger Goes Digital for Grocery Growth 102 Developing Marketing Goals and Objectives 105 Beyond the Pages 4.3 Diving Into Blue Ocean Strategy 105 Developing Marketing Goals 106 Developing Marketing Objectives 108 Moving Beyond Goals and Objectives 110 Lessons from Chapter 4 110
PART 3 Developing Marketing Strategy CHAPTER 5
Customers, Segmentation, and Target Marketing 113 Introduction 113
Beyond the Pages 5.1 How Social Media Segmentation Impacts Strategy 114 Buyer Behavior in Consumer Markets 115 The Consumer Decision Journey 115 Factors That Affect the Consumer Purchase Decision Journey 122
Buyer Behavior in Business Markets 124 Unique Characteristics of Business Markets 125 The Business Buying Process 126 Market Segmentation 128 Traditional Market Segmentation Approaches 128 Beyond the Pages 5.2 The Opportunities in Multicultural Marketing 129 Individualized Segmentation Approaches 130 Criteria for Successful Segmentation 132 Identifying Market Segments 133 Beyond the Pages 5.3 Strategies Pop in the Beverage Industry 133 Segmenting Consumer Markets 134 Segmenting Business Markets 138 Target Marketing Strategies 139 Lessons from Chapter 5 140 CHAPTER 6
The Marketing Program 145 Introduction 145
Beyond the Pages 6.1 Tesla Veers Away From Traditional Marketing Strategy 146 Product Strategy 147 Strategic Issues in the Product Portfolio 147 The Challenges of Service Products 149 Developing New Products 151
Pricing Strategy 152 Key Issues in Pricing Strategy 153 Beyond the Pages 6.2 Clearance Pricing Is Unclear 153 Base Pricing Strategies 160 Adjusting the Base Price 161 Supply Chain Strategy 162 Strategic Supply Chain Issues 164 Trends in Supply Chain Strategy 167
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xii Contents Beyond the Pages 6.3 Walmart Dominates Supply Chain Management 169 Integrated Marketing Communications 171 Strategic Issues in Integrated Marketing Communications 172 Advertising 173 Public Relations 175
Personal Selling and Sales Management 176 Sales Promotion 179 Lessons from Chapter 6 181 CHAPTER 7
Branding and Positioning 187 Introduction 187
Beyond the Pages 7.1 Is It Really Made in USA? 188 Strategic Issues in Branding 189 Basic Branding Decisions 190 Strategic Brand Alliances 193 Brand Value 193 Packaging and Labeling 195 Beyond the Pages 7.2 Barbie Gets a Makeover 196 Differentiation and Positioning 196 Bases for Differentiation 198 Positioning Strategies 200
Mananging Brands Over Time 201 Development Stage 202 Introduction Stage 203 Growth Stage 204 Maturity Stage 205 Decline Stage 205 Beyond the Pages 7.3 Nintendo Bets Big on the Switch 206 Lessons from Chapter 7 207
PART 4 Putting Strategy into Action CHAPTER 8
Ethics and Social Responsibility in Marketing Strategy 211 Introduction 211
Beyond the Pages 8.1 Salesforce Adopts a Stakeholder Orientation 212 Ethics and Social Responsibility in Marketing Strategy 213 Dimensions of Social Responsibility 213 Sustainability 216 Beyond the Pages 8.2 It’s Not Easy Being Green 217 Marketing Ethics and Strategy 218 Ethics and Social Responsibility Challenges 219
Ethical Issues in the Marketing Program 221 Product-Related Ethical Issues 222 Pricing-Related Ethical Issues 222 Supply Chain-Related Ethical Issues 224 Promotion-Related Ethical Issues 225 Managing and Controlling Ethical Issues 226 Regulating Marketing Ethics 226 Beyond the Pages 8.3 Evrnu Changes Fashion 226 Ethics Dilemmas Related to Technology 227 Codes of Conduct 227 Ethical Leadership 228
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Contents xiii
Relationship to Marketing and Financial Performance 229 Stakeholder Orientation 230 Marketing Financial Performance 230 Incorporating Ethics and Social Responsibility into Strategic Planning 231 Lessons from Chapter 8 232 CHAPTER 9
Marketing Implementation and Control 237 Introduction 237
Beyond the Pages 9.1 Managing Risk Through Culture 238 Strategic Issues in Marketing Implementation 239 The Link Between Planning and Implementation 239 The Elements of Marketing Implementation 241
Approaches to Marketing Implementation 245 Implementation by Command 245 Beyond the Pages 9.2 Microsoft: Embracing the Competition 246 Implementation Through Change 246 Implementation Through Consensus 247 Implementation as Organizational Culture 248 Internal Marketing and Marketing Implementation 250 The Internal Marketing Approach 250 The Internal Marketing Process 250 Evaluating and Controlling Marketing Activities 252 Formal Marketing Controls 253 Informal Marketing Controls 257 Scheduling Marketing Activities 258 Beyond the Pages 9.3 Harnessing the Power of AI for Marketing Success 258 Lessons from Chapter 9 260 CHAPTER 10
Developing and Maintaining Long-Term Customer Relationships 263 Introduction 263
Beyond the Pages 10.1 1-800-Flowers Focuses on Customers 264 Managing Customer Relationships 265 Developing Relationships in Consumer Markets 266 Developing Relationships in Business Markets 269
Quality and Value: The Keys to Developing Customer Relationships 270 Understanding the Role of Quality 270 Delivering Superior Quality 273 Understanding the Role of Value 274 Beyond the Pages 10.2 Using AI to Enhance Customer Service 274 Competing on Value 277 Customer Satisfaction: The Key to Customer Retention 278 Understanding Customer Expectations 278 Satisfaction Versus Quality Versus Value 281 Beyond the Pages 10.3 Dealing With Declining Customer Loyalty 282 Customer Satisfaction and Customer Retention 283 Customer Satisfaction Measurement 284 Lessons from Chapter 10 286
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xiv Contents
PART 5 Cases CASE 1
Tesla Races Ahead With Nontraditional Marketing Strategy 291
CASE 2
Businesses Sink or Swim in the Face of COVID-19 Crisis 301
CASE 3
ainsight Provides a Data-Driven Customer Relationship Platform to Retain G Subscription Customers 311
CASE 4
Apple Bites Back 319
CASE 5
Uber: The Opportunities and Challenges of Market Disruption 333
CASE 6
Social Responsibility Is the Key Ingredient at New Belgium Brewing 345
CASE 7
Bayer Grows With Monsanto Acquisition 355
CASE 8
Netflix Fights to Stay Ahead of a Rapidly Changing Market 367
CASE 9
From the Outside In: Corporate Social Responsibility at Patagonia 375
CASE 10
Google Searches for Solution to Privacy Issues 381
CASE 11
IndyCar: Seeking a Return to Motorsports’ Fast Lane 399
CASE 12
Mattel Gives Its Marketing Strategy a Makeover 409
CASE 13
Starbucks Perfects Its Blend 419
CASE 14
Zappos Finds the Perfect Fit 431
CASE 15
Gillette’s Razor-Sharp Innovation May Not Be Enough 441
CASE 16
TOMS Kicks the One for One Model to the Curb 451
CASE 17
Herbalife Manages Risks for Long-Term Success 461
CASE 18
Walmart Dominates With World-Class Supply Chain 477
CASE 19
E-commerce Soars With Shopify 487
CASE 20
Mini Case: Cutting Edge Quality at Cutco 497
CASE 21
Mini Case: The Cocoa Exchange Finds a Sweet Spot in the Supply Chain 503
Appendix Marketing Plan Worksheets 507 Glossary 517 Index 525
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Preface Marketing strategy is interesting, challenging, and important because (1) it is inherently peopledriven, and (2) it is never stagnant. A distinct blend of art and science, marketing strategy is about people (inside an organization) finding ways to deliver exceptional value by fulfilling the needs and wants of other people (customers, shareholders, business partners, society at large) as well as the needs of the organization itself. Marketing strategy draws from psychology, sociology, and economics to better understand the basic needs and motivations of these people—whether they are the organization’s customers (typically considered the most critical), its employees, or its stakeholders. In short, marketing strategy is about people serving people. Marketing strategy is interesting because it is never stagnant. The simple fact is that people change. A strategy that works today might not work tomorrow. Products that are popular today are forgotten next week. These truisms are important because truly understanding marketing strategy means accepting the fact that there are few concrete rules for developing and implementing marketing activities. Given the constant state of change in the marketing environment, it is virtually impossible to say that any given marketing mix (product, price, promotion, and distribution) will produce the best results. Marketing simply doesn’t work that way. The lack of concrete rules and the ever-changing economic, sociocultural, competitive, technological, and political/ legal landscapes make marketing strategy a terribly fascinating subject. This also means that marketing strategy is incredibly challenging. A perfect marketing strategy that is executed flawlessly can still fail. Sometimes, organizations are lucky and have success despite having a terrible strategy and/or execution. The nature of marketing can make marketing planning quite frustrating. Finally, the importance of marketing strategy is undeniable. No other business function focuses on developing relationships with customers—the lifeblood of all organizations (even nonprofits). This statement does not diminish the importance of other business functions, as they all are necessary for an organization to be successful. In fact, coordination with other functions is critical to marketing success. However, without customers, and marketing programs in place to cultivate customer relationships, no organization can survive.
Our Focus Marketing Strategy: Text and Cases, 8th Edition teaches students to think and act like marketers and disruptors in a dynamic and fast-paced environment. Strategic marketing management is presented in the context of the social, economic, and technological arenas in which businesses function today. The contents of this book are integrated with current events and examples that illustrate the need for marketers to think proactively and anticipate change. Students learn a systematic process for developing long-term, customer-oriented marketing strategies and marketing plans. This practical approach to analyzing, planning, and implementing effective marketing strategies is based on applying marketing concepts to the development and implementation of marketing strategy. Our approach in Marketing Strategy: Text and Cases, 8th Edition is also grounded in the development and execution of the marketing plan. Throughout the text, we provide a comprehensive planning framework based on conducting sound background research, developing market capabilities and competitive advantages, designing integrated marketing programs, and managing customer relationships for the long term. We also emphasize the need for integrity in the strategic planning process as well as the design of marketing programs that are both ethical and socially responsible. We also stress the integration and coordination of marketing decisions with other functional business decisions as the key to achieving an organization’s overall mission and vision. Throughout the text, we offer examples of successful planning and implementation to illustrate how firms face the challenges of marketing strategy in today’s economy. We also provide marketing plan worksheets to assist students in writing a formal marketing plan. xv Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xvi Preface
Purpose We view strategic marketing planning not only as a process for achieving organizational goals but also as a means of building long-term relationships with customers. Creating a customer orientation takes imagination, vision, and courage, especially in today’s rapidly changing economic and technological environments. To help meet these challenges, our text approaches marketing strategy from both traditional and disruptive practices. We cover topics such as segmentation, creating a competitive advantage, marketing program development, and the implementation process with a solid grounding in traditional marketing, but also with an eye toward new practices. Lessons learned from emerging technology, new business models, and the COVID-19 pandemic illustrate the importance of balancing the traditional and emerging practices of marketing strategy. Our text never loses sight of this balance. Although our approach allows for the use of sophisticated research and decision-making processes, we have employed a practical perspective that permits marketing managers in any sized organization to develop and implement a marketing plan. We have avoided esoteric, abstract, and highly academic material that does not relate to typical marketing strategy decisions in most organizations. The marketing plan framework that we utilize throughout the text has been used by a number of organizations to successfully plan their marketing strategies. Many companies report great success in using our approach partially due to the ease of communicating the plan to all functional areas of the business.
Target Audience Our text is relevant for a number of educational environments, including undergraduate, graduate, and corporate training courses. At the undergraduate level, our text is appropriate for the capstone course or any upper-level integrating course such as “Marketing Management,” “Marketing Strategy,” or “Marketing Policy.” At this level, the text provides an excellent framework to use with our included text-based cases, live-client cases, or a computer simulation. At the graduate level, our text is appropriate for MBA core marketing courses, strategic planning, competitive marketing strategies, or as a supplement for any simulation-based course. The text is effective in a core MBA marketing course with students that have not had an undergraduate course in marketing. The text provides enough background on marketing, but it is placed in a strategy planning framework. The cases and marketing planning project are also useful in online courses. Each of the 21 cases included in our text describes the strategic situations of real-world, identifiable organizations. Because these cases feature real situations, instructors have the option of using the case material as published, or they may give students the opportunity to update the cases by conducting research to find the latest information. Additional instructor resources for this product are available online. Instructor assets include an Instructor’s Manual, Case Notes, PowerPoint® slides, and a test bank powered by Cognero®. Sign up or sign in at www.cengage.com to search for and access this product and its online resources.
Acknowledgments Throughout the development of this text, several extraordinary individuals provided their talent and expertise to make important contributions. A number of individuals have made many useful comments and recommendations as reviewers of this text. We also deeply appreciate the assistance of several individuals who played a major role in developing cases or other materials. Specifically, we thank the following individuals: Noushin Laila Ansari, University of New Mexico Harper Baird, University of New Mexico Jordan Burkes, Auburn University Linda Ferrell, Auburn University John Fraedrich, Southern Illinois University–Carbondale
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Preface xvii
Bernadette Gallegos, University of New Mexico Sederick Hood, University of New Mexico Danielle Jolley, University of New Mexico Callie Kyzar, Auburn University Tri Nix, Auburn University Christian Otto, University of New Mexico Don Roy, Middle Tennessee State University Crawford Rummel, Auburn University Jennifer Sawayda, University of New Mexico Beau Shelton, University of New Mexico Debbie Thorne, Texas State University Jacqueline Trent, University of New Mexico Lecia Weber, University of New Mexico Caleb Yarbrough, Auburn University Zachary Youngstrom, Auburn University We greatly appreciate the efforts of Kelsey Reddick for managing the chapter revisions, supporting in the revision of textbook supplements, and coordinating much of the new case development in this edition. The editorial, production, and marketing staff at Cengage cannot be thanked enough. With a deep sense of appreciation, we thank Anubhav Kaushal, Jennifer Zeigler, and Sheila Moran. Finally, we express appreciation for the support and encouragement of our families and friends, and our colleagues at Auburn University, Florida State University, and the University of Alabama.
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About the Authors O.C. Ferrell, Ph.D. Auburn University O.C. Ferrell (Ph.D., Louisiana State University) is the James T. Pursell Sr. Eminent Scholar Chair in Ethics and Director of the Center for Ethical Organizational Cultures in the Raymond J. Harbert College of Business, Auburn University. He was formerly Distinguished Professor of Leadership and Business Ethics at Belmont University and University Distinguished Professor at the University of New Mexico. He has also taught at University of Wyoming, Colorado State University, University of Memphis, Texas A&M University, Illinois State University, and Southern Illinois University. He is past president of the Academic Council of the American Marketing Association and chaired the American Marketing Association Ethics Committee that developed the AMA Code of Ethics and the AMA Code of Ethics for Marketing on the Internet. Dr. Ferrell is immediate past president of the Academy of Marketing Science. He is also a member of the Academy of Marketing Science Board of Governors and is a Society of Marketing Advances and Southwestern Marketing Association Fellow and an Academy of Marketing Science Distinguished Fellow. He served for nine years as the vice president of publications for the Academy of Marketing Science. In 2010, he received a Lifetime Achievement Award from the Macromarketing Society and a special award for service to doctoral students from the Southeast Marketing Doctoral Consortium. He received the Harold Berkman Lifetime Service Award from the Academy of Marketing Science and, more recently, the Cutco Vector Distinguished Marketing Educator Award from the Academy of Marketing Science. Dr. Ferrell has coauthored 20 books and more than 100 articles and papers in journals such as Journal of Marketing Research, Journal of Marketing, Journal of Business Ethics, Journal of Business Research, Journal of the Academy of Marketing Science, and Journal of Public Policy & Marketing.
Michael D. Hartline, Ph.D. Florida State University Michael D. Hartline (Ph.D., University of Memphis) is Dean and Charles A. Bruning Professor of Business Administration in the College of Business at Florida State University. Prior to becoming dean in 2015, Dr. Hartline served the FSU College of Business as associate dean from 2011 to 2015 and chair of the Department of Marketing from 2006 to 2011. Dr. Hartline has authored or coauthored numerous books and articles, including several publications in premier journals. He has served on the editorial review boards of several academic journals, made numerous presentations to industry and academic audiences, and co-chaired two international conferences for the American Marketing Association. He is the former vice president of development for the Academy of Marketing Science. He has won numerous teaching and research awards, taught MBA courses in marketing strategy and corporate reputation management, and taught undergraduate courses in services marketing and retailing. He also has served as a consultant to several for-profit and nonprofit organizations in the areas of marketing plan development, market feasibility analysis, customer satisfaction measurement, customer service training, and pricing policy. His research interests include customer-contact issues in service delivery, service quality and productivity, new service development, and non-ownership consumption.
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About the Authors xix
Bryan W. Hochstein, Ph.D. University of Alabama Bryan W. Hochstein (Ph.D., Florida State University) is an Assistant Professor of Marketing in the Culverhouse College of Business, University of Alabama. Prior to his role at the University of Alabama, Dr. Hochstein worked in industry as a sales executive at Time Warner Media. In his current role, he conducts research on sales topics and the emerging area of customer success management. Dr. Hochstein specializes in advancing academic research on emerging topics and regularly facilitates academic/industry discussions via thought leadership forums, industry conferences, and through more than 500 interviews of salespeople and executives. This research appears in the Journal of Marketing, Journal of the Academy of Marketing Science, Journal of Service Research, Industrial Marketing Management, Journal of Retailing, Journal of Personal Selling and Sales Management, Journal of Business Research, Marketing Letters, and other leading outlets. Dr. Hochstein teaches master-level courses designed to bring real-world topics to the classroom. Students of his courses engage with industry partners that help develop job-relevant skills and professional networks that lead to quality employment opportunities. In his free time, Dr. Hochstein applies his knowledge of sales and marketing to mentor and help various nonprofit organizations.
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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 1 Marketing in Today’s Economy 1.1 INTRODUCTION As noted in the opening Beyond the Pages 1.1 story, changes in marketing are dynamic and fast-paced, requiring companies to think outside the box in an effort to anticipate disruptions and new technology-enabled competition. To remain relevant and responsive, organizations—both for-profit and nonprofit—require effective planning and a sound marketing strategy. Without these efforts, organizations would not be able to plan for changes that allow them to satisfy customers or meet the needs of other stakeholders. For example, having an effective marketing strategy allows Apple to develop popular products, such as the iPhone, iPad, Apple Watch, and its MacBook line of computers, and stay ahead of the competition. Further, effective planning and strategy allows CocaCola to continue its leadership in soft drinks, make key acquisitions, and continue its expansion into the lucrative sparkling water and energy drink markets. These and other organizations use sound marketing strategy to leverage their strengths and capitalize on opportunities that exist in the market. Every organization—from your favorite local restaurant to giant multinational corporations; from city, state, and federal governments; to charities such as Habitat for Humanity and the American Red Cross—develops and implements marketing strategies. How organizations plan, develop, and implement marketing strategies is the focus of this book. To achieve this focus, we provide a systematic process for developing customer-oriented marketing strategies and marketing plans that match an organization to its internal and external environments with a focus on adaptation to market, technology, and consumer changes. Our approach focuses on real-world applications and practical methods of marketing planning, including the process of developing a marketing plan. The chapters of this book focus on the steps of this process. Our goal is to give the reader
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2 Part 1: Setting the Stage for Marketing Strategy
a deeper understanding of marketing planning, the ability to organize the vast amount of information needed to complete the planning process, and an actual feel for the development of marketing plans. In this first chapter, we review some of the major challenges and opportunities that exist in planning marketing strategy in today’s economy. We also review the nature and scope of major marketing activities and decisions that occur throughout the planning process. Finally, we look at some of the major challenges involved in developing marketing strategy.
BEYOND THE PAGES 1.1
The Future of Marketing 1 Are you aware of the dynamic changes in marketing today? Most businesses are developing plans and adjusting to technology disruptions because new technology and innovation are altering the way consumers and businesses make decisions. Recent disruptive technologies include Internet marketing (Amazon), ride-sharing apps (Uber), blockchain (IBM), and artificial intelligence (Microsoft). According to the Technology Visions Consumer survey, 52 percent of consumers feel that these new technologies play a key role in or strongly impact their daily lives. Globally, consumers spend an average of six hours a day online as smartphones have become an extension of one’s existence and self-concept. Going forward marketers will be required to rethink core assumptions and theories about how to interact, serve, and satisfy consumers. This next generation of marketing strategies and implementations is based on adapting to the dynamic changes in the environment of marketing. Looking at top trends that will shape the future of marketing provides a guide to addressing innovations. According to Gartner, Inc., trends are centered around “people-centric smart spaces.” Artificial intelligence (AI) in the form of machine learning is driving the innovation that will impact consumers and marketers the most. AI is changing all touchpoints with consumers, including organizational interfaces and interactions. AI-enabled robotics and drones are providing services that make marketing more efficient. AI analyzes and interprets large amount of data using algorithms to make decisions, often exceeding the ability of frontline employees. AI is used by McDonald’s to dynamically change its drive-thru menu board, by Starbucks throughout its supply chain including inventory management and scheduling of baristas, and by Domino’s Pizza, which has created a multi-touchpoint platform to include smart speaker communications, driverless vehicle delivery, and robots that deliver food. All of this makes it easy, low cost, and low effort for consumers to obtain products.
Supply chain management—the coordination of all activities related to the flow of goods and services to the consumer—is becoming more important to create a spiderweb of interorganizational relationships to direct products to consumers. Marketing consists of both supply and demand, and the supply chain plays an important role for retailers such as Home Depot, Walmart, and Amazon. Omnichannel, which embraces the integration of all the places and ways consumers and retail firms manage the flow of communications and products, is disrupting traditional thinking about what is a marketing channel. This approach permits consumers to have multiple touchpoints to purchase via apps, from a computer, smartphone, or tablet, as well as in-store purchases and return of products. The integrated consumer experience across all retail platforms is empowering consumers and retailers to change how products are purchased. Consumer-centric technology augmentation can increase cognitive and physical experiences. The Internet of Things (IoT) provides a system of interrelated computing devices that connects smartphones, computers, and almost every thing to the Internet. This makes applications and services more accessible to consumers. For example, Amazon Alexa allows users to easily adjust and monitor IoT devices in their home such as smart plugs and smart lights. Finally, blockchain—a ledger that stores immutable records of data “blocks” over time—is changing marketing. An important aspect of blockchain technology is that the data is locked into the system without central control, making it secure and accurate. Walmart uses blockchain systems to trace produce and livestock from the field to the store shelf to provide an audit trail to manage supply chains and improve food safety. These advances in technology are changing how consumers buy and pay for things. Streaming services deliver content via Internet connection to the subscriber’s device. This content is often priced on a subscription basis, which is a pricing strategy increasingly common to both consumer continued
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Chapter 1: Marketing in Today’s Economy 3
and business markets. Streaming services have disrupted traditional music and entertainment delivery. For example, Netflix, Disney+, Amazon Prime, and Hulu rival traditional television networks with their streamed, on-demand content. The use of the Internet to provide any form of content to any device—when and where consumers want it—has fundamentally changed the way businesses and consumers access and consume a growing number of products that are now digitally delivered. These technology advances are reshaping the environment for marketing strategy and enabling marketers to better serve consumers. However, these changes also create challenges and opportunities for marketing. Technology
shifts power to consumers, enabling them to access products and have more knowledge about product selection. Media fragmentation has put consumers in greater control of what they watch or listen to at their convenience. The omnichannel approach provides multiple touchpoints, making shopping and product purchase an ongoing journey that permeates daily life and activities. Given these changes, marketing must deal with new paradigms and social risks related to privacy, security, and ethical concerns. All of this is changing value propositions to consumers and shifting demand patterns. These trends are discussed throughout the remainder of this chapter and book.
1.2 THE CHALLENGES AND OPPORTUNITIES OF MARKETING IN TODAY’S ECONOMY The advent of the Internet in the mid-1990s changed traditional ideas about marketing strategy. As the Internet became more useful, companies emerged to serve new demands, many of which failed in the dot-com recession in the late 1990s and the historic collapse of the worldwide economy in 2008 known as the Great Recession. The powerhouse companies of the past have weakened and lost relevance in an economy marked by constant change and consumer skepticism. In their place, new and disruptive companies have utilized new technologies and strategies to change how we travel (Airbnb, Uber, and Kayak), shop for daily needs (Instacart), and even how we get food (Uber Eats, HelloFresh, and Grubhub). Consider the examples in Exhibit 1.1 and the changes they have introduced into how marketers and businesses operate.
1.2a Power Shift to Customers Changes in how consumers access information and how marketers gather and utilize data affect the buyer-seller power dynamic. Perhaps the single most important change during the last two decades is the shift in power from marketers to consumers. Individual consumers and business customers have gained power via technology that allows easy comparison shopping and broader choices of where to purchase products. Using a smartphone and the Amazon app, customers can walk Target’s aisles, scan bar codes to check prices on Amazon, and order items for two-day delivery while in the store, or even same-day delivery in select markets. In fact, 71 percent of consumers report using a mobile device in stores.2 This is the reason that retailers such as Target and Best Buy price match Amazon and other online competitors. However, most consumers now begin product searches online, often keeping them from even entering a retail store.3 Thus, in many cases consumers have more power, yet marketers are regaining power via increasingly sophisticated data analytics. In the past, understanding consumer needs and preferences was a difficult and costly task for marketers. Today, every click, swipe, and geolocation tag provides data points that can be used to better anticipate and serve customer needs. The topics of big data and analytics permeate marketing—and this book—because marketers now have growing insight into what is driving customers to purchase (or not). Advances in how marketers can process and understand consumer patterns has returned some power to the seller, yet the customer is still king in most marketing situations, driving pricing, promotional, and experience strategies of marketers. Marketers must ensure that their products and the experience they offer are unique and of high quality, thereby giving customers a reason to purchase their products, provide positive reviews, and remain loyal to them.
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4 Part 1: Setting the Stage for Marketing Strategy
EXHIBIT 1.1 Fundamental Changes to Marketing Change Category
Market Change
Implications
Power Shift to Customers
Online consumer reviews
Marketers need to be concerned with delivering a highquality experience with limited problems or they risk immediate, damaging consumer reviews. Good experiences also lead to better reviews and better sales, so marketers have become very responsive to online consumer content.
Changes in Products and Selection
Digitization of products
One problem for retailers is lack of products to sell. The digitization of books, music, maps, and calendars, plus the addition of flashlights, cameras, video, and alarm clocks into smartphones (among thousands of other things), leaves retail giants such as Walmart with fewer products to sell.
Audience and Media Fragmentation
Online content streaming
For decades advertisers relied on spreading their messages through mass media outlets such as television. Today, audiences are spread across platforms, making it difficult to deliver marketing messages to potential customers.
Changing Value Propositions
Subscriptionbased services
Changes to payment via monthly subscription requires marketers to continually provide and ensure the consumer is getting value. An example is the difference of purchasing a movie digitally (you own it) versus subscribing to Netflix (you pay to access it). If no new content is added to Netflix, you will quickly change to a different service, but, once you own a movie, you cannot swap it for a different one.
Shifting Demand Patterns
Sharing services
The advent of Uber and Airbnb has greatly altered the way that travelers move around and where they stay. This change has reduced the need for taxis and created an oversupply of hotel rooms.
Privacy, Security, and Listening Ethical Concerns technology
The introduction of smart speakers such as Amazon’s Echo and Apple’s HomePod has allowed companies to gain access to our most personal and private space, our home. This change introduces many questions of what these companies should be listening to and how they should use the information they gather.
Unclear Legal Jurisdiction
As companies have tried to compete with Amazon, many have been able to avoid charging state sales tax in states where they do not have a physical presence. This practice causes a disadvantage for local retailers and questions of legal jurisdiction for problems, warranties, and tax authorities.
Online ordering
1.2b Changes in Products and Selection The variety and assortment of goods and services offered for sale on the Internet and in tradi tional stores is staggering. Companies that have followed a digital-first strategy, such as ColourPop Cosmetics, are often able to undercut prices of established retail brands and introduce new products more quickly.4 Increased transaction efficiency allows customers to fulfill their needs more easily and conveniently than ever before. Furthermore, the vast amounts of information available online has changed the way we communicate, read the news, and entertain ourselves. Customers have the news delivered to them automatically via smartphone apps that pull from hundreds of sources. According to Pew Research Center, 20 percent of U.S. adults read the news via social media.5 This radical increase in product selection and availability has exposed marketers to inroads by competitors from every corner of the globe. In addition, the ways that products are delivered have eliminated the need for thousands of products, changing how marketers create a mix for retail and online stores. The smartphone and mobile technology have reduced
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Chapter 1: Marketing in Today’s Economy 5
or replaced entire sections of retail stores (e.g., CDs/DVDs, books, maps, audio components, magazines, cameras), making the focus of most marketing efforts on consumable and household goods not easily replaced by digital and technology-enabled products. Thus, changes to products, availability of them, and increases to varieties available provide challenges to marketers.
1.2c Audience and Media Fragmentation Changes in media usage and the availability of new media outlets have forced marketers to rethink the way they communicate with potential customers. Television audiences have also been a favorite for marketing messages on broadcast networks such as ABC, CBS, and NBC and cable networks such as ESPN, HGTV, Nickelodeon, and the Discovery Channel. However, today most visual content is delivered via these traditional means and also through online streaming. In addition to visual content, traditional radio audiences have transitioned to streaming services, such as Spotify, Pandora, or YouTube, greatly reducing large audience concentrations based on geographic locations and demographic listenership. These changes make it increasingly difficult for marketers to reach a true mass audience. Media audiences have become fragmented due to (1) the sheer number of media choices we have available today and (2) the limited time we have to devote to any one medium. As shown in Exhibit 1.2, consumers spent significantly more time with digital media (e.g., podcasts, streaming, websites) than traditional media, such as newspapers and magazines. However, despite the challenge of reaching mass audiences today, media fragmentation does have a big advantage: It is easier to reach small, highly targeted audiences who are more receptive to specific marketing messages. Thus, for some marketing situations, opportunities exist with small audiences (e.g., products focused on specific customers, such as wind surfers or rock climbers), but for others it has become increasingly difficult to spread messages to a large audience (e.g., political campaigns desiring to reach the entire U.S. population).
EXHIBIT 1.2 Time Spent with Media
Digital
TV*
Newspapers*
Magazines*
2%
Radio*
1%
11%
30%
56%
*Excludes digital Note: Adults age 18+; time spent with each medium includes all time spent with that medium, regardless of multitasking.
Source: Mark Dolliver, “US Time Spent With Media 2019,” eMarketer, May 30, 2019, https://www.emarketer .com/content/us-time-spent-with-media-2019 (accessed February 25, 2020).
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6 Part 1: Setting the Stage for Marketing Strategy
1.2d Changing Value Propositions Even before the Great Recession, consumers and business buyers were already facing increasing costs associated with energy, food, building materials, and other essentials. Then, as the economy weakened, buyers were forced to tighten their belts and look for other ways to lower expenses. For example, instead of using travel agents, consumers can use Expedia, and instead of hiring a real estate agent, they can sell their own house on Redfin. Consequently, many marketers learned a tough lesson: In situations where customers see goods and services as commodities, they will turn to the most convenient, least-expensive alternative. Though the economy recovered from the recession, this and other economic hardships, such as the recession caused by the COVID-19 pandemic, have forced consumer and business buyers to rethink value propositions and focus on the importance of frugality and value. The effects on business have been dramatic. Long-established retailers such as Pier 1 Imports and Forever 21 have filed for bankruptcy protection in the face of a highly commoditized market and stiff competition from online retailers such as Amazon. A similar shakeout happened in the book retailing segment. Barnes & Noble, formerly the dominant book retailer in the United States, was sold to a hedge fund amid declining book sales as online retailers lured its shoppers away.6 Likewise, the prevalence of e-books and digital downloads have had a profound impact on traditional book publishing. Because books have become highly commoditized, consumers typically search for the lowest prices, convenience, and selection found online versus the static inventories offered by traditional bookstores. This same trend is common across other entertainment categories, such as movie theaters, sporting events, and even music concerts, with many opting for in-home, digital delivery at lower costs in the convenience of their homes.
1.2e Shifting Demand Patterns
Manuel Esteban/Shutterstock.com
In some cases, changes in technology have shifted customer demand for certain product categories. News is one well-known example, where traditional newspapers are slowly disappearing while online and mobile news continues to grow. Now, many newspaper companies have failed, some are on the brink of closing, while others have cut publication to only a few days per
Hollywood film studios have consolidated as streaming platforms such as Netflix and Amazon Prime Video release an increasing amount of original content.
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Chapter 1: Marketing in Today’s Economy 7
week. Another example is the explosive growth in the digital distribution of music and video. The success of Apple Music, YouTube, Spotify, Netflix, and Disney+, along with the continuing integration of television and computers, has dramatically shifted demand for the music and movie industries. The direct-to-consumer streaming model has irreversibly altered the entertainment industry on a global scale.7 Recently, pharmacies have fallen prey to changes in demand. The increasingly competitive pharmaceutical business has led to delivery of prescriptions and a few major pharmacy chains dominating the market. Local, independent, and even grocery store pharmacies are closing at a rapid pace as insurance providers and consumer preferences drive new supply pressures and demand changes.8 This trend is not expected to reverse as banks, grocery stores, malls, and specialty stores all struggle to address changing consumer demands for how and where they buy products.
1.2f Privacy, Security, and Ethical Concerns Changes in technology have made our society much more open than in the past. As a result, these changes have forced marketers to address real concerns about security and privacy, both online and offline. Further, businesses have always collected routine information about their customers. Now, customers are much more attuned to these efforts and the purposes for which the information will be used. Though customers appreciate the convenience of e-commerce and mobile access to information, they want assurances that their information is safe and confidential. Concerns over privacy and security are especially acute with respect to online businesses such as Facebook, Google, Amazon, mobile banking, and mobile devices that can track every move we make, literally. In an in-home example, Amazon has responded to concerns over the information collected by its Echo devices that monitor sounds in the home, waiting to hear voice commands. In response to consumer privacy concerns, Amazon has improved the ability of consumers to discover what is monitored and limit what is recorded. New features include easy viewing and deletion of audio transcripts.9 These same concerns are also critical with respect to children. For example, many well-known and respected companies such as YouTube have been fined for violating the standards of the Children’s Online Privacy Protection Act (COPPA), which can be reviewed in Exhibit 1.3. Overall, privacy, security, and ethical concerns are of great importance to not only consumers but also marketers.
EXHIBIT 1.3 Six Steps to Children’s Online Privacy Protection Act (COPPA) Compliance The Children’s Online Privacy Protection Act applies to operators of commercial websites and online services that attempt to collect personal information from children under the age of 13. The law explains what must be included in the firm’s privacy policy, when and how to seek verifiable consent from a parent or guardian, and the firm’s responsibilities to protect children’s privacy and safety. Firms cannot evade the law’s provisions by claiming that children under 13 cannot visit their sites, nor can they make information optional or ask the visitor’s age. In implementing the provisions of COPPA, the FTC issued the Children’s Online Privacy Protection Rule, which is designed to give parents control over the information that is collected from their children. The rule requires website operators to: 1. Determine if their company is a website or online service that collects personal information from kids under 13. 2. Post a privacy policy that complies with COPPA. 3. Notify parents directly before collecting personal information from their kids. 4. Get parents’ verifiable consent before collecting information from their kids. 5. Honor parents’ ongoing rights with respect to information collected from their kids. 6. Implement reasonable procedures to protect the security of kids’ personal information. Source: Adapted from United States Federal Trade Commission, “Children’s Online Privacy Protection Rule: A Six-Step Compliance Plan for Your Business,” https://www.ftc.gov/tips-advice/business-center/guidance/childrens-online-privacy-protection-rule-six-step-compliance (accessed February 27, 2020).
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8 Part 1: Setting the Stage for Marketing Strategy
1.2g Unclear Legal Jurisdiction When a company does business in more than one country (as many Internet-based firms do), that company often faces a dilemma with respect to differing legal systems. Today, this difference is especially important for firms that do business in both the United States and China. Google, for example, faces a difficult situation in dealing with the Chinese government’s censorship demands. The company worked with the Chinese government on a secret project called Dragonfly to censor aspects of some of their sites to enter the market. Though Dragonfly was ultimately terminated, Google’s vice president of public policy would not commit to the U.S. Senate to not engage in censorship in China in the future.10 Doing business in China is also an issue with respect to protection of intellectual property rights, where Chinese laws do not offer the same protections found in the United States. For example, Chinese piracy costs the U.S. economy $225 to $600 billion each year. Most of this is in the information sector, with high-tech and manufacturing also showing sizable losses due to infringements of intellectual property rights by Chinese firms.11 Another important legal issue involves the collection of sales tax for online transactions. In the early days of e-commerce, most online merchants did not collect sales taxes for online transactions—giving them a big advantage against store-based merchants. A 1992 U.S. Supreme Court decision exempted out-of-state retailers from collecting sales taxes in states where they had no physical presence. A 2018 decision took a different stance, ruling that states have the ability to require online retailers to collect sales tax.12 Although the full effect of these challenges will not be recognized for some time, circumstances have forced businesses to move ahead by adjusting their marketing activities at both the strategic and tactical levels. As we review the major marketing concepts and activities in this chapter, we will look at how today’s challenges have affected strategic planning in these areas.
1.3 BASIC MARKETING CONCEPTS Marketing is many different things. Many people, especially those not employed in marketing, see marketing as a function of business. From this perspective, marketing parallels other business functions such as production/operations, research, management, human resources, and accounting. As a business function, the goal of marketing is to connect the organization to its customers by promoting a customer-centric view that places the customer at the heart of all strategy and decision making. Other individuals, particularly those working in marketing jobs, tend to see marketing as a process of managing the flow of products from the point of conception to the point of consumption. The field’s major trade organization, the American Marketing Association (AMA), has changed the definition of marketing over time to reflect changes in the economic and business environments. From 1985 until 2005, the AMA defined marketing this way:
Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.13 Note how this definition focuses on the four Ps, or the marketing mix (product, price, place, and promotion). In 2005, the AMA changed the definition to better reflect the realities of competing in the marketplace:
Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.14 This definition shifts the focus away from the marketing mix and toward value creation for customers. In 2007, the AMA changed the definition of marketing again:
Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.15
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Chapter 1: Marketing in Today’s Economy 9
Notice that the changes in the definition are not merely cosmetic in nature. The older definitions focused on the process of marketing to deliver value and manage customer relationships. The most recent definition shifts from “value” to “offerings that have value.” Also, the notion of stakeholders is made more explicit. Why would the AMA make these changes? First, breaking free from commodity status means finding ways to differentiate the offering. The new definition recognizes that differentiation can come from any part of the offering, whereas older conceptualizations of marketing placed the burden of differentiation on the product itself. The second reason has to do with marketing’s broader role in today’s corporation. Firms don’t just sell products; they sell the firm as a whole. Corporate relationships with partners, media, government, investors, employees, and society are every bit as important as relationships with customers. These types of relationships—which grow and thrive on exceptional value—are an absolute necessity in the commodity-driven status of many product markets. While the older definitions of marketing had a decidedly transactional focus, the new definition emphasizes long-term relationships that provide value for both the firm and its stakeholders. A final way to think about marketing relates to meeting human and social needs. This broad view links marketing with our standard of living, not only in terms of enhanced consumption and prosperity but also in terms of society’s well-being. Through marketing activities, consumers can buy cars from South Korea and wines from South Africa; organizations can earn a viable profit, making both employees and shareholders happy. However, marketing must also bear responsibility for any negative effects it may generate. This view demands that marketers consider the social and ethical implications of their actions, and whether they practice good citizenship by giving back to their communities. Firms can successfully meet human and social needs through socially responsible marketing and business practices. This view is becoming increasingly accepted, as illustrated by a recent statement issued by the Business Roundtable, a nonprofit association of nearly 200 top executives, that states the purpose of a corporation should be more than the interests of its shareholders. The group adds that corporations must also invest in their employees, protect the environment, and deal fairly and ethically with their suppliers.16 Let’s take a closer look at several basic marketing concepts. As we will see, ongoing changes in today’s economy have forever altered our way of thinking about these foundational aspects of marketing.
1.3a What Is a Market? At its most basic level, a market is a collection of buyers and sellers. We tend to think of a market as a group of individuals or institutions that have similar needs that can be met by a particular product. For example, the housing market is a collection of buyers and sellers of residential real estate, while the automobile market includes buyers and sellers of automotive transportation. Marketers or sellers tend to use the word market to describe only the buyers. This basic understanding of a market has not changed in a very long time. What has changed, however, is not so much the “what” but the “where” of a market, that is, the location of the buyers and sellers. In both consumer markets (like housing and automobiles) and business markets (like replacement parts and raw materials), the answer to the “where” question is quickly becoming “anywhere” as markets become less defined by geography. Increasingly, the market is a virtual market, spanning borders and boundaries via online platforms. Online markets such as Etsy and those created by pictures and experiences (often linked through sites such as Pinterest or Instagram) provide places where like-minded consumers can congregate, compare, exchange, and promote products and ideas—the essence of a market. Until recently, marketers have considered a marketplace to be a physical location where buyers and sellers meet to conduct transactions. Although those venues (e.g., grocery stores, malls, flea markets) still exist, technology mediates some of the fastest growing markets. Early in the beginning of the dot-com era, the term marketspace was coined to describe these electronic marketplaces unbound by time or space.17 Today, we refer to these electronic marketplaces as online markets or e-commerce. In e-commerce, physical goods, services, and information are exchanged through the Internet. Amazon has become the e-commerce equivalent of a shopping mall as
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10 Part 1: Setting the Stage for Marketing Strategy
the company sells virtually all products, including groceries, shoes, apparel, jewelry, beauty aids, and sporting goods in addition to its traditional offerings of books and electronics. E-commerce also exists in the business-to-business realm. The shift from physical to electronic marketplaces has significant ramifications for marketers. The fact that customers can shop, place orders, and exchange information 24/7 means that these businesses must be capable of operating in that same time frame. In effect, online markets never take a break at closing time because they never close. It also means that firms lose some control over the information that is disseminated about their company or products. Through blogs, discussion forums, or even Twitter, customers can exchange information about an online merchant outside the merchant’s website. Furthermore, the substitution of technology for human interaction can be both a blessing and a curse. Some sites, such as CarsDirect, are successful because they eliminate the hassle of dealing with another human in the buying process. Many customers, however, are less interested in online markets because they lack the human element. In these cases, the design and implementation of the online experience is a serious challenge for online firms. Finally, the wealth of information available through e-commerce not only makes customers more educated than ever before, but it also gives customers increased power through comparison shopping and price negotiation.
1.3b What Is Exchange? Closely related to the concept of a market, our ideas about exchange have changed in recent years. Exchange is traditionally defined as the process of obtaining something of value from someone by offering something in return; this usually entails obtaining products for money. For exchange to occur, five conditions must be met:
1. There must be at least two parties to the exchange. Although this has always been the case, the exchange process today can potentially include an unlimited number of participants. Online travel sites such as Expedia provide a good example. Customers who browse for flights may see messages that there are only so many tickets available at a displayed price. Ticket prices update dynamically based on how many people are actively viewing and booking. 2. Each party has something of value to the other party. Exchange would be possible, but not very likely, without this basic requirement. The Internet has exposed us to a vast array of goods and services that we did not know existed previously. Today, not only can we buy a television or stereo receiver from a local merchant, we also have access to hundreds of online merchants. Furthermore, the ability to comparison shop products and their prices allows customers to seek out the best value. 3. Each party must be capable of communication and delivery. The advantages of today’s communication and distribution infrastructure are amazing. We can find and communicate with potential exchange partners anywhere and anytime via telephone, computers, interactive television, and smartphones. We can also conduct arm’s-length transactions in real time, with delivery of exchanged items occurring in a matter of hours if necessary. For example, in many markets, Amazon Prime Now delivers a wide selection of products within two hours of when the order is placed, bringing the store to your door when and where you need products. 4. Each party must be free to accept or reject the exchange. In the online world, this condition of exchange becomes a bit more complicated. Customers have grown accustomed to the ease with which they can return items to local merchants. Easy return policies are among the major strengths of traditional offline merchants; however, online retailers are becoming more competitive. For example, UPS stores accept returns for Amazon with a simple scan of a QR code, and FedEx is a drop-off and return center for Walmart. 5. Each party believes it is desirable to exchange with the other party. Customers typically have a great deal of information about, or even a history with, offline merchants. In online exchange, customers often know nothing about the other party. To help resolve this issue, a number of third-party firms have stepped in to provide ratings and opinions about online merchants. Services such as Trustpilot not only provide these ratings but also provide product ratings and serve as shopping portals. eBay and Amazon go one step further by allowing
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Chapter 1: Marketing in Today’s Economy 11
buyers and sellers to rate each other. This gives both parties to the exchange process some assurance that reputable individuals or organizations exist on the other side of the transaction. The bottom line is that exchange has become all too easy in today’s economy. Opportunities for exchange bombard us virtually everywhere we go. Customers don’t even have to trouble themselves with giving credit cards or completing forms for shipping information. Most online merchants will remember this information for us if we let them. For example, Amazon’s “Buy Now” single-click ordering feature allows customers to purchase products with a single click or tap.18 The ease with which exchange can occur today presents a problem in that individuals who do not have the authority to exchange can still complete transactions. This is especially true for underage customers.
1.3c What Is a Product? It should come as no surprise that the primary focus of marketing is the customer and how the organization can design and deliver products that meet customers’ needs. Organizations create essentially all marketing activities as a means toward this end; this includes product design, pricing, promotion, and distribution. In short, an organization would have no reason to exist without customers and a product to offer to them. But what exactly is a product? A simple definition is that a product is something that can be acquired via exchange to satisfy a need or a want. This definition permits us to classify a broad number of “things” as products: ●●
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Goods. Goods are tangible items ranging from canned food to fighter jets, from sports memorabilia to used clothing. The marketing of tangible goods is arguably one of the most widely recognizable business activities in the world. Services. Services are intangible products consisting of acts or deeds directed toward people or their possessions. Banks, hospitals, lawyers, package delivery companies, airlines, hotels, repair technicians, nannies, housekeepers, consultants, and taxi drivers all offer services. Services, rather than tangible goods, dominate modern economies like the U.S. economy. Today, most services involve some digital component, such as Uber’s use of the consumer’s smartphone to connect with a driver and identify their intended route. Ideas. Ideas include issues aimed at promoting a benefit for the customer. Examples include cause-related or charitable organizations such as the Red Cross, the American Cancer Society, and Mothers Against Drunk Drivers. Information. Marketers of information include websites, magazine and book publishers, schools and universities, research firms, churches, and charitable organizations. Examples include Wikipedia, YouTube, and the popular TED Talks. In the digital age, the production and distribution of information has become a vital part of our economy. Digital Products. Digital products such as software, music, and movies are among the most profitable in our economy. Advancements in technology have also wreaked havoc in these industries because pirates can easily copy and redistribute digital products in violation of copyright law. Digital products are interesting because content producers grant customers a license to use them, rather than outright ownership.19 People. The individual promotion of people, such as athletes or celebrities, is a huge business around the world. The exchange and trading of professional athletes takes place in a complex system of drafts, contracts, and free agency. Other professions, such as politicians, actors, professional speakers, and news reporters, also engage in people marketing. Places. When we think of the marketing of a place, we usually think of vacation destinations such as Rome or Orlando. However, the marketing of places is quite diverse. Cities, states, and nations all market themselves to tourists, businesses, and potential residents. Experiences and Events. Marketers can bring together a combination of goods, services, ideas, information, or people to create one-of-a-kind experiences or single events. Examples include theme parks such as The Wizarding World of Harry Potter, sporting events like the Daytona 500 or the Super Bowl, or stage and musical performances like Hamilton or a concert by Billie Eilish.
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12 Part 1: Setting the Stage for Marketing Strategy
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Real or Financial Property. The exchange of stocks, bonds, and real estate, once marketed completely offline via real estate agents and investment companies, now occurs increasingly online. For example, Realtor.com is one of the largest real estate listing service in the United States. Organizations. Virtually all organizations strive to create favorable images with the public— not only to increase sales or inquiries but also to generate customer goodwill. In this sense, General Electric is no different than the United Way: Both seek to enhance their images in order to attract more people (customers, volunteers, and clients) and money (sales, profit, and donations).
We should note that the products in this list are not mutually exclusive. For example, firms that sell tangible goods almost always sell services to supplement their offerings, and vice versa. Charitable organizations simultaneously market themselves, their ideas, and the information that they provide. To effectively meet the needs of their customers and fulfill organizational objectives, marketers must be astute in creating products and combining them in ways that make them unique from other offerings. A customer’s decision to purchase one product or group of products over another is primarily a function of how well that choice will fulfill their needs and satisfy their wants. Economists use the term utility to describe the ability of a product to satisfy a customer’s desires. Customers usually seek out exchanges with marketers who offer products that are high in one or more of these five types of utility:
Form Utility. Products high in form utility have attributes or features that set them apart from the competition. Often these differences result from the use of high-quality raw materials, ingredients, or components, or from the use of highly efficient production processes. For example, Ruth’s Chris Steakhouse, considered by many to be one of the nation’s top chain restaurants, provides higher form utility than other national chains because of the quality of beef they use. Chipotle even stresses form utility in its slogan “Food with Integrity.”
Action Sports Photography/Shutterstock.com
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Special events like the Daytona 500 combine people (drivers), a place (Daytona), an event (the race), organizations (sponsors), and goods (souvenirs) to create a memorable and unique experience for race fans.
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Chapter 1: Marketing in Today’s Economy 13
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In many product categories, higher priced product lines offer more form utility because they have more features or bells and whistles. Luxury cars are a good example. Time Utility. Products high in time utility are available when customers want them. Typically, this means that products are available now rather than later. Grocery stores, restaurants, and other retailers that are open around the clock provide exceptional time utility. Often the most successful restaurants around college campuses are those that are open 24/7. Many customers are also willing to pay more for products available in a shorter time frame (such as overnight delivery via FedEx) or for products available at the most convenient times (such as midmorning airline flights). Place Utility. Products high in place utility are available where customers want them, which is typically wherever the customer happens to be at that moment (such as grocery delivery to a home) or where the product needs to be at that moment (such as florist delivery to a workplace). Home delivery of any product, convenience stores, vending machines, and e-commerce are examples of good place utility. Products that are high in both time and place utility are exceptionally valuable to customers because they provide the utmost in convenience. Possession Utility. Possession utility deals with the transfer of ownership or title from marketer to customer. Products higher in possession utility are more satisfying because marketers make them easier to acquire. Marketers often combine supplemental services with tangible goods to increase possession utility. For example, furniture stores that offer easy credit terms and home delivery enhance the possession utility of their goods. In fact, any merchant that accepts credit cards enhances possession utility for customers that do not carry cash or checks. Expensive products, like a home or a new factory, require acceptable financing arrangements to complete the exchange process. Psychological Utility. Products high in psychological utility deliver positive experiential or psychological attributes that customers find satisfying. Sporting events often fall into this category, especially when the competition is based on an intense rivalry. The atmosphere, energy, and excitement associated with being at the game can all create psychological benefits for customers. Conversely, a product might offer exceptional psychological utility because it lacks negative experiential or psychological attributes. For example, a vacation to the beach or the mountains might offer more psychological utility to some customers because it is seen as less stressful than a vacation to Disney World.
The strategic and tactical planning of marketing activities involves the important basic concepts we have explored in this section. Marketers often struggle with finding and reaching the appropriate markets for their products. In other cases, the market is easily accessible, but the product is wrong or does not offer customers a compelling reason to purchase it. The ability to match markets and products in a way that satisfies both customer and organizational objectives is truly an art and a science. Doing so in an environment of never-ending change creates both opportunities and challenges for even the strongest and most respected organizations. The process of planning marketing activities to achieve these ends is the focus of this book. As we turn our attention to an overview of major marketing activities and decisions, we also want to lay out the structure of the text. The chapters roughly coincide with the major activities involved in developing marketing strategy and writing a marketing plan. Although our approach is orderly and straightforward, it provides a holistic representation of the marketing planning process from one period to the next. As we will see, marketing planning is an evolving process that has no definite beginning or ending point.
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14 Part 1: Setting the Stage for Marketing Strategy
BEYOND THE PAGES 1.2
THE A-TO-Z of Amazon’s Marketing Strategy 20 Jeff Bezos came up with the idea for an online bookstore nearly 30 years ago. In 1994, before Google or eBay rose to popularity, Bezos quit his job in finance and created Amazon. When books proved to be a successful product, he asked some of his customers what else he should sell on the site. The response was overwhelming. Bezos realized Amazon met a customer need that was greater than books: He discovered that Amazon’s product was convenience. As consumer behavior continues to evolve, Amazon’s products and services have evolved as well. The site is now the source of original, award-winning shows and movies as part of its Amazon Prime offering. Groceries, household goods, and even pet food can now be easily purchased online or via Amazon’s Echo device. Amazon also highlights “Amazon Choice” products, allowing customers an easy way to identify quality good products across categories. Bezos attributes Amazon’s success to its focus on the customer instead of the competition. For example, to maintain and build an exchange relationship with its customers, Amazon offers an “A-to-z Guarantee” that protects against damaged goods and late deliveries. In addition to online shopping, Amazon is now moving brick-and-mortar innovation forward with Amazon Go Grocery. This untraditional, traditional store is a checkout-free,
cashierless supermarket that uses cameras and sensors to automatically charge customers for their purchases via an app. The company sells its technology, called “Just Walk Out,” to other businesses such as convenience stores, airport kiosks, and sports arenas. The company has also integrated various aspects of Whole Foods, Prime Now two-hour delivery, and AmazonFresh grocery delivery to explore new ways to meet customer needs. Amazon always has its eye on the future. For example, with its sights on securing loyal Generation Z shoppers, the company introduced a feature that allows users to create supervised accounts for their teenagers so they can make parent-approved purchases. In another move to become an indispensable part of every household, Amazon has continued to evolve the Amazon Echo, a voice-controlled digital assistant. Through the Echo, users can check the weather, get news alerts, play games, control connected smart home devices, order household goods, and more. Prime users, roughly two-thirds of U.S. households, can also order prime-eligible items that ship at no extra charge with quick and convenient delivery. With a focus on growth and new market opportunities, Amazon continues to be one of the world’s most innovative companies.
1.4 MA JOR MARKETING ACTIVITIES AND DECISIONS Organizations must deal with a number of activities and decisions in marketing their products to customers. These activities vary in both complexity and scope. Whether the issue is a local restaurant’s change in copy for a newspaper ad or a large multinational firm launching a new product in a foreign market, all marketing activities have one thing in common: They aim to give customers a reason to buy the organization’s product. In this section, we briefly introduce the activities and decisions that will be the focus of the remaining chapters of this book.
1.4a Strategic Planning If an organization is to have any chance of reaching its goals and objectives, it must have a game plan or road map for getting there. A strategy, in effect, outlines the organization’s game plan for success. Effective marketing requires sound strategic planning at a number of levels in an organization. At the top levels of the organization, planners concern themselves with macro issues such as the corporate mission, management of the mix of strategic business units, resource acquisition and assignments, and policy decisions. Planners at the middle levels, typically a division or strategic business unit, concern themselves with similar issues but focus on those that pertain to their particular product/market. Strategic planning at the lower levels of an organization is much more tactical in nature. Here, planners concern themselves with the development of marketing plans—more specific game plans for connecting products and markets in ways that satisfy both organizational and customer objectives.
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Chapter 1: Marketing in Today’s Economy 15
Although this book is essentially about strategic planning, it focuses on tactical planning and the development of the marketing plan. Tactical planning addresses specific markets or market segments and the development of marketing programs that will fulfill the needs of customers in those markets. The marketing plan provides the outline for how the organization will combine product, pricing, distribution, and promotion decisions to create an offering that customers will find attractive. The marketing plan also addresses the implementation, control, and refinement of these decisions. To stand a reasonable chance for success, marketing plans should be developed with a keen appreciation of how they fit into the strategic plans of the middle and upper levels of the firm. In Chapter 2, we discuss the connection among corporate, business-unit, and marketing planning as well as how marketing plans must be integrated with the plans of other functions in the organization (financial plans, production plans, etc.). We also discuss the structure of the marketing plan and some of the challenges involved in creating one.
1.4b Research and Analysis Strategic planning depends heavily on the availability and interpretation of information. Without this lifeblood, strategic planning would be a mindless exercise and a waste of time. Thankfully, today’s planners are blessed with an abundance of information due to improving technology and the Internet. However, the challenge of finding and analyzing the right information remains. As many marketing planners have found, having the right information is just as important as having the right product. Marketers are accustomed to conducting and analyzing research, particularly with respect to the needs, opinions, and attitudes of their customers. Although customer analysis is vital to the success of the marketing plan, the organization must also have access to three other types of information and analysis: internal analysis, competitive analysis, and environmental analysis. Internal analysis involves the objective review of internal information pertaining to the firm’s current strategy and performance, as well as the current and future availability of resources. Analysis of the competitive environment, increasingly known as competitive intelligence, involves analyzing the capabilities, vulnerabilities, and intentions of competing businesses. Analysis of the external environment, also known as environmental scanning, involves the analysis of economic, political, legal, technological, and cultural events and trends that may affect the future of the organization and its marketing efforts. Some marketing planners use the term situation analysis to refer to the overall process of collecting and interpreting internal, competitive, and environmental information. Across all aspects of the situation analysis, data analytics plays an increasingly prominent role in firm strategic planning. Throughout the chapters of this book, the importance of data and the ability to interpret it will become clear, as it is central to successful marketing programs. For strategic purposes, large amounts of data are compiled across diverse sources to drive higher-level metrics and dashboards that help managers to assess markets and opportunities. Internal analysis focuses on sales, production, logistic, and other data points that identify the firm’s ability to operate and compete effectively. Competitive intelligence can include a variety of inputs, including AI scanning of customer reviews of competitors, detailed investigation of competitor products, and even feedback from current customers that use products of other firms. Environmental scanning also includes inputs from social media, news sources, and commissioned research. These diverse data points are then analyzed via human, machine, and AI systems to provide data-driven insights that offer a view of short-, medium-, and long-term situations facing the firm and its products. The development of a sound marketing plan requires the analysis of information on all fronts. In Chapter 3, we address the collection and analysis of internal, customer, competitive, and environmental information. We also discuss the challenges involved in finding the right information from an overwhelming supply of available information. The uncertainty and continual change in the external environment also create challenges for marketers (as the Internet boom and bust have shown us). As we will see, this type of research and analysis is perhaps the most difficult aspect of developing a marketing plan.
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16 Part 1: Setting the Stage for Marketing Strategy
1.4c Developing Competitive Advantage To be successful, a firm must possess one or more competitive advantages that it can leverage in the market in order to meet its objectives. A competitive advantage is something that the firm does better than its competitors that gives it an edge in serving customers’ needs and/or maintaining mutually satisfying relationships with important stakeholders. Competitive advantages are critical because they set the tone, or strategic focus, of the entire marketing program. When these advantages are tied to market opportunities, the firm can offer customers a compelling reason to buy their products. Without a competitive advantage, the firm and its products are likely to be just one more offering among a sea of commoditized products. For example, Tesla’s investments in the development and production of its batteries have given it a sizeable competitive advantage over other electric vehicle (EV) automakers.21 In Chapter 4, we discuss the process of developing competitive advantages and establishing a strategic focus for the marketing program. Competitive advantage typically comes from one or more sources, including relationships, legal, organization capabilities, human resources (people), product, and/or pricing. Somewhat intertwined in these sources of competitive advantage is the ability of an organization to adapt to change, utilize technology in new ways, and effectively analyze and interpret data inputs. We also address the role of SWOT analysis (strengths and weaknesses, opportunities and threats) as a means of tying the firm’s strengths or internal capabilities to market opportunities. Further, we discuss the importance of developing goals and objectives. Having good goals and objectives is vital because these become the basis for measuring the success of the entire marketing program. For example, Hampton Inn has a goal of 100 percent customer satisfaction. Customers do not have to pay for their stay if they are not completely satisfied.22 Goals like these are not only useful in setting milestones for evaluating marketing performance; they also motivate managers and employees. This can be especially true when marketing goals or objectives help to drive employee evaluation and compensation programs.
1.4d Marketing Strategy Decisions An organization’s marketing strategy describes how the firm will fulfill the needs and wants of its customers. It can also include activities associated with maintaining relationships with other stakeholders, such as employees, shareholders, or supply chain partners. Stated another way, marketing strategy is a plan for how the organization will use its strengths and capabilities to match the needs and requirements of the market. A marketing strategy can be composed of one or more marketing programs; each program consists of two elements—a target market or markets and a marketing mix (sometimes known as the four Ps: product, price, place, and promotion). To develop a marketing strategy, an organization must select the right combination of target market(s) and marketing mix(es) to create distinct competitive advantages over its rivals.
Market Segmentation and Target Marketing The identification and selection of one or more target markets is the result of the market segmentation process. Marketers engage in market segmentation when they divide the total market into smaller, relatively homogeneous groups or segments that share similar needs, wants, or characteristics. When a marketer selects one or more target markets, they identify one or more segments of individuals, businesses, or institutions toward which the firm’s marketing efforts will be directed. Marketers increasingly use online social networking as a way to target specific markets. Advances in technology have created some interesting changes in the ways that organizations segment and target markets. Marketers can now analyze customer-buying patterns in real time via point-of-purchase data collected from sales transactions and credit card usage, as well as by analyzing clickstream data in online transactions. This allows organizations to target specific segments with product offers or promotional messages. Furthermore, technology now gives marketers the ability to target individual customers through direct mail and e-mail campaigns. This saves considerable time and expense by not wasting efforts on potential customers who may not be interested in the organization’s product offering. However, these new opportunities for marketers come at a price: Many potential buyers resent the ability of marketers to reach them
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Chapter 1: Marketing in Today’s Economy 17
individually. Consequently, customers and governmental authorities have raised major concerns over privacy and confidentiality. Chapter 5 discusses the issues and strategies associated with market segmentation and target marketing. In that discussion, we will examine different approaches to market segmentation and look at target marketing in both consumer and business markets. Effective segmentation and target marketing set the stage for the development of the product offering and the design of a marketing program that can effectively deliver the offering to targeted customers.
Marketing Program Decisions As we will address in Chapter 6, successful marketing programs depend on a carefully crafted blend of the four major marketing mix elements (i.e., product, price, distribution, and promotion). Earlier in the chapter, we discussed the many different types of products that can be offered to customers. Since the product and its attributes fulfill the basic needs and wants of the customer, it is no surprise that the product and the decisions that surround it are among the most important parts of the marketing program. This importance hinges on the connection between the product and the customers’ needs. Even large corporations fail to make this connection at times. McDonald’s, for example, spent more than $100 million in 1996 to launch the Arch Deluxe—a hamburger designed for adult tastes. Considered one of the worst product failures in history, the Arch Deluxe failed miserably because it was designed for older customers (who are not McDonald’s core market), was expensive, and had a very high calorie content. McDonald’s customers avoided the Arch Deluxe and the sandwich was eventually discontinued.23 As this example illustrates, marketing is unlikely to be effective unless there is a solid linkage between a product’s benefits and customers’ needs. Pricing decisions are important for several reasons. First, price is the only element of the marketing mix that leads to revenue and profit. All other elements of the marketing mix, such as product development and promotion, represent expenses. Second, price typically has a direct connection with customer demand. This connection makes pricing the most overmanipulated element of the marketing mix. Marketers routinely adjust the price of their products in an effort to stimulate or curb demand. Third, pricing is the easiest element of the marketing program to change. There are few other aspects of marketing that can be altered in real time. This is a huge plus for marketers who need to adjust prices to reflect local market conditions, or for online merchants who want to charge different prices for different customers based on total sales or customer loyalty. Finally, pricing is a major quality cue for customers. In the absence of other information, customers tend to equate higher prices with higher quality. Supply chain issues have typically been among the least apparent decisions made in marketing, particularly with customers. However, today the supply chain is critical to marketers as they produce, sell, and deliver products in new and innovative ways. The goal of distribution and supply chain management is essentially to get the product to the right place, at the right time, in the right quantities, at the lowest possible cost. Supply chain decisions involve a long line of activities—from the sourcing of raw materials, through the production of finished products, to ultimate delivery to final customers. Most of these activities, which customers take for granted, take place behind the scenes. Traditionally, few customers would contemplate how their favorite cereal ends up on their grocer’s shelf or how Dell can have a made-to-order computer at your door in days. Customers just expect these things to happen. In fact, most customers never consider these issues until something goes wrong. Suddenly, when the grocer is out of an item or an assembly line runs low on component parts, distribution and supply chain factors become quite noticeable. Today, in many settings, the supply chain is becoming more obvious to consumers, as companies such as Amazon capitalize on faster and more innovative ways to deliver products directly to the customer. Same-day delivery of products via drones, driverless cars, drop-off points, and traditional means have become topics of interest to many and are possible for Amazon because of the revolutionary approach to managing the supply chain.24 One key example of how Amazon has transformed supply chain management is their approach to locating distribution facilities near large population centers to allow more efficient delivery from a larger set of distribution points (instead of a large number of retail stores, like Walmart). Thus, the supply chain is becoming more obvious to customers as it becomes integral to product availability and swift delivery to our doors.
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18 Part 1: Setting the Stage for Marketing Strategy
Modern marketing has replaced the term promotion with the concept of integrated marketing communication (IMC), or the coordination of all promotional activities (media advertising, social media, direct mail, personal selling, sales promotion, public relations, packaging, store displays, website design, personnel) to produce a unified, customer-focused message. Here, the term customers not only refers to customers in the traditional sense but also includes employees, business partners, shareholders, the government, the media, and society in general. IMC rose to prominence in the 1990s as businesses realized that traditional audiences for promotional efforts had become more diverse and fragmented. IMC can also reduce promotional expenses by eliminating the duplication of effort among separate departments (marketing, sales, advertising, public affairs, and information technology) and by increasing efficiencies and economies of scale.
Branding and Positioning When you think about a company such as Southwest Airlines, what comes to mind? Most people will likely say low fares and “bags fly free.” Others may think of limited routes and destinations. As we will see in Chapter 7, what customers think about a company and its offerings is the focus of branding and positioning strategy. To understand branding, the marketer must have a clear understanding of how the elements of the marketing program work together to create the brand. While product decisions (such as design, style, and features) play a prominent role in branding, so do other program elements such as price/value, availability/ exclusivity, and image/reputation of both the firm and its offerings. Marketers must also make decisions regarding package design, trademarks, and warranties or guarantees. Product positioning involves establishing a mental image, or position, of the product offering relative to competing offerings in the minds of target buyers. The goal of positioning is to distinguish or differentiate the firm’s product offering from those of competitors by making the offering stand out among the crowd. As Southwest has shown us, even something as simple as “no bag fees” can be successful in setting the firm apart from the competition. Another example is the battle between Walmart and Target. The mental image that most customers have of Walmart is associated with everyday low prices. Target has a slightly different position, one that emphasizes value with a stronger sense of style and quality. 1.4e Social Responsibility and Ethics The role of social responsibility and ethics in marketing strategy has come to the forefront of important business issues in today’s economy. Our society still reverberates from the effects of corporate scandals at Enron, Volkswagen, and Wells Fargo, among others. Although these scandals make for interesting reading, many innocent individuals have suffered the consequences from these companies’ unethical behavior. Social responsibility refers to an organization’s obligation to maximize its positive impact on society, while minimizing its negative impact. In terms of marketing strategy, social responsibility addresses the total effect of an organization’s marketing activities on society. A major part of this responsibility is marketing ethics, or the principles and standards that define acceptable conduct in marketing activities. Ethical marketing can build trust and commitment and is a crucial ingredient in building long-term relationships with all stakeholders. Another major component of any firm’s impact on society is the degree to which it engages in philanthropic activities. Many firms now make philanthropy a key strategic activity. In Chapter 8, we discuss the economic, legal, ethical, and philanthropic dimensions of social responsibility, along with the strategic management of corporate integrity in the marketing planning process. Although there are occasional lapses, most firms understand their economic and legal responsibilities. However, social and ethical responsibilities, by their nature, are not so clearly understood. Many firms see social responsibility not only as a way to be a good corporate citizen but also as a good way to build their brands. For example, the (RED) brand—created by Bono in 2006—has been marketed successfully by firms such as Dannon, Durex, and Beats by Dre. These and other companies market (RED) versions of their products with the aim to donate up to 50 percent of their profits to the Global Fund to fight AIDS in Africa.25
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Chapter 1: Marketing in Today’s Economy 19
1.4f Implementation and Control Once a marketing strategy has been selected and the elements of the marketing mix are in place, the marketer must put the plan into action. Marketing implementation, the process of executing the marketing strategy, is the “how” of marketing planning. Rather than being an add-on at the end of the marketing strategy and marketing plan, implementation is actually a part of planning itself. That is, when planning a marketing strategy, the organization must always consider how the strategy will be executed. Sometimes, the organization must revisit the strategy or plan to make revisions during the strategy’s execution. This is where marketing control comes into play. Adequate control of marketing activities is essential to ensure that the strategy stays on course and focused on achieving its goals and objectives. In the past, assessment of marketing activities was a “backward-looking” activity that assessed what happened with relation to what we expected to happen. Today, with the advent of increasing customer-generated data and sophisticated data analytics initiatives, marketers are able not only monitor and measure “real-time” results of marketing activities but also assess “forwardlooking” results through accurate predictive measures of expected performance. Thus, marketers can now assess, adjust, and implement as product launches and campaigns are in progress, not after they are completed. The implementation phase of marketing strategy calls into play the fifth P of the marketing program: people. As we will learn in Chapter 9, many of the problems that occur in implementing marketing activities are “people problems” associated with the managers and employees on the frontline of the organization who have responsibility for executing the marketing strategy. Many organizations understand the vital link between people and implementation by treating their employees as indispensable assets. Hyatt, for example, has been named seven consecutive years by Fortune magazine to its list of the “100 Best Companies to Work for in America.” The company has developed a corporate culture that focuses on caring for employees and providing for their needs.26 Exhibit 1.4 highlights the top 10 best companies to work for, according to Fortune. Increasingly, to aid their people with implementation, marketers are utilizing AI systems and machine learning to use past experience to improve current implementation. In one example, a call-center employee talking to a customer is also joined by an AI bot that listens, learns, and applies knowledge from past interactions to prompt potential solutions and new products that might help the customer.27 Thus, the people implementing marketing activities now have additional help to do their jobs more effectively.
EXHIBIT 1.4 Fortune’s 10 Best Companies to Work For Rank
Company
1
Hilton
2
Ultimate Software
3
Wegmans Food Markets
4
Cisco
5
Workday
6
Salesforce
7
Edward Jones
8
Stryker
9
American Express
10
Kimpton Hotels & Restaurants
Source: “100 Best Companies to Work For,” Fortune, 2020, https://fortune.com/best-companies/ (accessed February 28, 2020).
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20 Part 1: Setting the Stage for Marketing Strategy
1.4g Developing and Maintaining Customer Relationships Over the last two decades, marketers have come to the realization that they can learn more about their customers, and earn higher profits, if they develop long-term relationships with them. This requires that marketers shift away from transactional marketing and embrace a relationship marketing approach. The goal of transactional marketing is to complete a large number of discrete exchanges with individual customers. The focus is on acquiring customers and making the sale, not necessarily on attending to customers’ needs and wants. In relationship marketing, the goal is to develop and maintain long-term, mutually satisfying arrangements where both buyer and seller focus on the value obtained from the relationship. As long as this value stays the same or increases, the relationship is likely to deepen and grow stronger over time. Exhibit 1.5 illustrates the basic characteristics of transactional versus relationship marketing. Relationship marketing promotes customer trust and confidence in the marketer, who can then develop a deeper understanding of customers’ needs and wants. This puts the marketer in a position to respond more effectively to customers’ needs, thereby increasing the value of the relationship for both parties. The principles and advantages of relationship marketing are the same in both businessto-business and consumer markets. Relationship marketing activities also extend beyond customers to include relationships with employees and supply chain partners. The newest relationship-building activities include a focus on helping customers to use products more effectively, making sure they receive the value that is available in the product. This process, called customer success management, is illustrated at a consumer level via Netflix’s ability to utilize data and offer suggestions, special programming, and easier-to-use categories to help its customers have a better experience. In Chapter 10, we discuss these and other aspects of relationship marketing in greater depth. Long-term relationships with important stakeholders will not materialize unless these relationships create value for each participant. This is especially true for customers faced with many different alternatives among firms competing for their business. Since the quality and value of a marketer’s product offering typically determine customer value and satisfaction, Chapter 10 will also discuss the role of quality, value, and satisfaction in developing and maintaining customer relationships. Issues associated with quality, value, and satisfaction cut across all elements of the marketing program. Hence, we discuss these issues in our final chapter as a means of tying all of the marketing program elements together. EXHIBIT 1.5 Major Characteristics of Transactional and Relationship Marketing Transactional Marketing
Relationship Marketing
Marketing Focus
Customer Acquisition
Customer Retention
Time Orientation
Short-Term
Long-Term
Marketing Goal
Make the Sale
Mutual Satisfaction
Relationship Focus
Create Exchanges
Create Value
Customer Service Priority
Low
High
Customer Contact
Low to Moderate
Frequent
Commitment to Customers
Low
High
Characteristics of the Interaction
Adversarial, Manipulation, Conflict Resolution
Cooperation, Trust, Mutual Respect, Confidence
Source of Competitive Advantage
Production, Marketing
Relationship Commitment
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Chapter 1: Marketing in Today’s Economy 21
BEYOND THE PAGES 1.3
A Perfect Fit: Strategy at Zappos 28 In 2000 Tony Hsieh became the CEO of the Zappos online shoe retailer at age 26. Hsieh saw opportunity to create value for customers by using its resources to provide a stellar customer service experience to shoppers. Zappos strives to make the shopping experience easy and enjoyable, providing a 100 percent Satisfaction Guaranteed Return Policy to build and maintain strong customer relationships. Recognizing the hesitancy of many shoppers to purchase shoes online, Zappos encourages customers to order several styles and return items if needed. This strategy may seem expensive but tends to work in Zappos’s favor and satisfies a customer’s needs in ways that many retailers do not. It also allows customers to feel confident when shopping with the company as they are able to return unwanted products easily. Additionally, the company tends to avoid promotions,
instead giving customers added value with loyalty programs and other customer service perks. The company has disrupted the way consumers traditionally purchased shoes from department and specialty shoe stores. Zappos’s customer-centric strategy focuses on building customer relationships through human interaction. For example, if a customer experiences a problem with an order or has a question about a product, Zappos responds honestly, authentically, and in a timely manner. In the past, the company has used customer success stories in its ads to highlight Zappos’s ability to satisfy its customers. Thus, Zappos’s competitive advantage comes from being an expert at relationship marketing. The company builds satisfying, long-term customer relationships and increases customer lifetime value as happy customers make repeat purchases.
1.5 TAKING ON THE CHALLENGES OF MARKETING STRATEGY One of the greatest frustrations and opportunities in marketing is change—customers change, competitors change, technology changes, and even the marketing organization changes. Strategies that are highly successful today will not work tomorrow. Customers will buy products today that they will have no interest in tomorrow. These are truisms in marketing. Although frustrating, challenges like these also make marketing extremely interesting and rewarding. Today, more than ever, life as a marketer is never dull. Another fact about marketing strategy is that it is inherently people-driven. Marketing strategy is about people (inside an organization) trying to find ways to deliver exceptional value by fulfilling the needs and wants of other people (customers, shareholders, business partners, society at large), as well as the needs of the organization itself. Marketing strategy draws from psychology, sociology, and economics to better understand the basic needs and motivations of these people—whether they are the organization’s customers (typically considered the most critical), its employees, or its stakeholders. Marketing also draws from data on people to better understand how its products are used, viewed, and experienced to continually improve value and experience offerings. In short, marketing strategy is about people understanding and serving people. The combination of continual change and the people-driven nature of marketing makes developing and implementing marketing strategy a challenging task. A perfect strategy that is executed perfectly can still fail. This happens because there are few rules for how to do marketing in specific situations. In other words, it is impossible to say that given “this customer need” and these “competitors” and this “level of government regulation,” Product A, Price B, Promotion C, and Distribution D should be used. Even with excellent data, and resources to analyze and interpret the data, the “formula” approach doesn’t always work. Sometimes, an organization can get lucky and be successful despite having a terrible strategy and/or execution, and sometimes a great
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22 Part 1: Setting the Stage for Marketing Strategy
strategy and product can fail. The lack of rules and the ever-changing and disruptive economic, sociocultural, competitive, technological, and political/legal landscapes make marketing strategy a terribly fascinating subject that is new every day. Most of the changes that marketers have faced in the twenty-first century deal with the basic evolution of marketing and business practice in our society. One of the most basic shifts involves the increasing demands of customers. Today, customers have high expectations about basic issues such as quality, performance, price, and availability. This expectation of better and more useful things is an outcome of successful marketing. In essence, marketers have trained customers to expect more and quickly. American customers in particular have a passion for instant gratification that marketers struggle to fulfill. The American Customer Satisfaction Index, computed by the National Quality Research Center at the University of Michigan, indicates that customer satisfaction has recovered since the Center first computed the index in 1994. As shown in Exhibit 1.6, the airline and personal computer industries have experienced an overall upward trend in customer satisfaction. Customers have become much less brand loyal than in previous generations. Today’s customers are price sensitive, especially in commoditized markets where products lack any real means of differentiation (such as airlines). Consequently, customers constantly seek the best value and thrive on their ability to compare prices among competing alternatives. Customers are also quite cynical about business in general and are not that trusting of marketers. In short, today’s customers not only have more power; they also have more attitude. This combination makes them a formidable force in the development of contemporary marketing strategy. Marketers have also been forced to adapt to shifts in markets and competition. In terms of their life cycles, most products compete today in mature markets. Many firms also compete in markets where product offerings have become commoditized by a lack of differentiation (e.g., customers perceive competing offerings as essentially the same). Some examples include airlines, wireless phone service, department stores, laundry supplies, and household appliances. Product commoditization pushes margins lower and reduces brand loyalty even further. To meet
EXHIBIT 1.6 American Customer Satisfaction Index 90 85 80 75 70 65 60 01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
Overall
Airlines
Personal Computers
Internet Retail
Automobiles
Health Insurance
18
19
Source: American Customer Satisfaction Index, http://www.theacsi.org (accessed February 27, 2020).
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Chapter 1: Marketing in Today’s Economy 23
this challenge, U.S. firms have moved aggressively into foreign markets in an effort to increase sales and find new growth opportunities. At the same time, however, foreign firms have moved into U.S. markets to meet the challenges of maturing markets in their own countries. Finally, many industries have fallen to competition they didn’t even see coming. For example, the taxi industry has lost considerable market share to Uber and Lyft, both products that were never anticipated until it was too late. In addition, these car-sharing services threaten demand for other products such as public transportation, automotive, and even insurance as consumers forgo inconvenient transportation or costly ownership by just calling an Uber or Lyft. In the face of increasing competition and maturing markets, businesses have been forced to cut expenses to remain competitive. Some businesses do this by eliminating products or product lines. Honda, for example, discontinued its Honda Clarity Electric due to low demand.29 Others have maintained their product mix but have aggressively sought ways to lower their distribution costs. The growth in direct distribution (manufacturer to end user) is a result of these efforts. Still other firms have been forced to take drastic measures, such as downsizing and laying off employees to trim expenses. Needless to say, developing a viable and effective marketing strategy has become extremely challenging. Even the most admired marketers in the world like McDonald’s, Procter & Gamble, Anheuser-Busch, and Toyota occasionally have problems meeting the demands of the strategic planning process and developing the “right” marketing strategy. Our goal in this book is not to teach you to develop the “right” strategy. Rather, our approach will give you a framework for organizing the planning process and the ability to see how all of the pieces fit together. Think of it as a mindset or way to think about marketing strategy. The remainder of this text dedicates itself to these goals.
LESSONS FROM CHAPTER 1
●●
The challenges and opportunities of marketing in today’s economy include: ●●
●●
●●
●● ●●
●● ●●
in many cases consumers have more power, yet marketers are regaining power via increasingly sophisticated data analytics changes to products, availability of them, and increases to varieties available provide challenges to marketers greater audience and media fragmentation as customers spend more time with new media outlets and less time with traditional media changing customer perceptions of value and frugality shifting demand patterns for certain product categories, especially those delivered digitally and direct-toconsumer increasing concerns over privacy, security, and ethics unclear legal jurisdictions, especially in global markets
Marketing: ●●
is parallel to other business functions such as production, research, management, human resources, and accounting; the goal of marketing is to connect the organization to its customers by promoting a customer-centric view that places the customer at the heart of all strategy and decision making
●●
●●
is defined as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large has changed in focus over time; today, marketing stresses value and customer relationships, including relationships with all potential stakeholders is linked with our standard of living, not only in terms of enhanced consumption and prosperity but also in terms of society’s well-being
Basic marketing concepts include: ●● ●●
●●
●●
market—a collection of buyers and sellers marketplace—a physical location where buyers and sellers meet to conduct transactions marketspace—an electronic marketplace not bound by time or space exchange—the process of obtaining something of value from someone by offering something in return, which usually involves obtaining products for money; there are five conditions of exchange: 1. 2. 3. 4. 5.
There must be at least two parties to the exchange. Each party has something of value to the other party. Each party must be capable of communication and delivery. Each party must be free to accept or reject the exchange. Each party believes it is desirable to exchange with the other party.
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24 Part 1: Setting the Stage for Marketing Strategy
●●
●●
product—something that can be acquired via exchange to satisfy a need or a want; this definition permits us to classify a broad number of “things” as products: goods, services, ideas, information, digital products, people, places, experiences and events, real or financial property, organizations utility—the ability of a product to satisfy a customer’s needs and wants; the five types of utility provided through marketing exchanges are form utility, time utility, place utility, possession utility, and psychological utility
Major marketing activities and decisions include: ●● ●● ●●
●●
●● ●● ●●
strategic and tactical planning research and analysis developing competitive advantages and a strategic focus for the marketing program marketing strategy decisions, including decisions related to market segmentation and target marketing, as well as the marketing program (i.e., product, pricing, distribution, and promotion) and branding/ positioning social responsibility and ethics implementing and controlling marketing activities developing and maintaining long-term customer relationships, including a shift from transactional marketing to relationship marketing
Some of the challenges involved in developing marketing strategy include: ●●
●● ●●
●●
●● ●●
●●
●●
●●
●●
●●
unending change—customers change, competitors change, and even the marketing organization changes the fact that marketing is inherently people-driven the lack of rules for choosing appropriate marketing activities the basic evolution of marketing and business practice in our society the increasing demands of customers an overall decline in brand loyalty and an increase in price sensitivity among customers increasing customer cynicism about business and marketing activities competing in mature markets with increasing commoditization and little real differentiation among product offerings increasing expansion into foreign markets by U.S. and foreign firms many industries have fallen to competition they didn’t even see coming aggressive cost-cutting measures in order to increase competitiveness
ENDNOTES 1. Michael Cooney, “Gartner Top 10 Strategic Technology Trends for 2020,” Network World, October 21, 2019, https://www.gartner.com /smarterwithgartner/gartner-top-10-strategic-technology-trends-for-2020/ (accessed February 26, 2020); Thomas Davenport, Abhijit Guha, Dhruv Grewal, and Timna Bressgott, “How Artificial Intelligence Will Change the Future of Marketing,” Journal of the Academy of Marketing Science, 48(1), 24–42 (2020), https://doi.org/10.1007/s11747-019-00696-0; Dhruv Grewal, John Hulland, Praveen K. Kopalle, and Elena Karahanna, “The Future of Technology and Marketing: A Multidisciplinary Perspective,” Journal of the Academy of Marketing Science, 48(1), 1–8 (2020), https://doi.org/10.1007 /s11747-019-00711-4; Arun Rai, “Explainable AI: From Black Box to Glass Box,” Journal of the Academy of Marketing Science, 48(1), 137–141 (2020), https://doi.org/10.1007/s11747-019-00710-5 2. Dan Alaimo, “87% of Shoppers Now Begin Product Searches Online,” Retail Dive, August 15, 2018, https://www.retaildive.com/news/87-of -shoppers-now-begin-product-searches-online/530139/ (accessed February 28, 2020). 3. Ibid. 4. Sheila Marikar, “How ColourPop Is Putting a New Face on the Online Cosmetics Business,” Fast Company, April 17, 2017, https://www .fastcompany.com/40400780/how-colourpop-is-putting-a-new-face-on -the-online-cosmetics-business (accessed February 27, 2020). 5. Pew Research Center, “Social Media Outpaces Print Newspapers in the U.S. as a News Source,” December 10, 2018, https://www.pewresearch .org/fact-tank/2018/12/10/social-media-outpaces-print-newspapers-in-the -u-s-as-a-news-source/ (accessed February 28, 2020). 6. Michelle Chapman, “Barnes & Noble, with Sales Falling, Is Sold to Hedge Fund,” ABC News, June 7, 2019, https://abcnews.go.com/Lifestyle /wireStory/book-selling-giant-barnes-noble-sold-hedge-fund-63551908 (accessed February 28, 2020). 7. Cynthia Littleton and Elaine Low, “Adapt or Die: Why 2020 Will Be All About Entertainment’s New Streaming Battleground,” Variety, 2019, https://variety.com/2019/biz/features/streaming-2020-disney-plus-netflix -hbo-max-apple-tv-amazon-1203439700/ (accessed February 28, 2020). 8. Sharon Terlep and Jaewon Kang, “The Pharmacist Is Out: Supermarkets Close Pharmacy Counters,” The Wall Street Journal, January 27, 2020, https://www.wsj.com/articles/the-pharmacist-is-out-supermarkets -close-pharmacy-counters-11580034600 (accessed March 12, 2020). 9. Katie Conner, “Have Amazon Echo Privacy Fears? Here’s What You Can Do,” CNET, October 24, 2019, https://www.cnet.com/how-to/have -amazon-echo-privacy-fears-heres-what-you-can-do/ (accessed March 12, 2020). 10. Jeb Su, “Confirmed: Google Terminated Project Dragonfly, Its Censored Chinese Search Engine,” Forbes, July 19, 2019, https://www.forbes .com/sites/jeanbaptiste/2019/07/19/confirmed-google-terminated -project-dragonfly-its-censored-chinese-search-engine/#11e98ac57e84 (accessed February 28, 2020). 11. Yukon Huang and Jeremy Smith, “China’s Record on Intellectual Property Rights Is Getting Better and Better,” Foreign Policy, October 16, 2019, https://foreignpolicy.com/2019/10/16/china-intellectual-property-theft -progress/ (accessed February 28, 2020). 12. Kelly Phillips Erb, “New Sales Tax Rules Take Effect This Week in More Than A Dozen States,” Forbes, October 2, 2019, https://www .forbes.com/sites/kellyphillipserb/2019/10/02/new-sales-tax-rules-take -effective-this-week-in-more-than-a-dozen-states/#1fad48065cfb (accessed February 28, 2020). 13. American Marketing Association, “Definitions of Marketing,” https://www.ama.org/the-definition-of-marketing-what-is-marketing/ (accessed February 28, 2020).
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Chapter 1: Marketing in Today’s Economy 25 14. Ibid. 15. Ibid. 16. David Gelles and David Yaffe-Bellany, “Shareholder Value Is No Longer Everything, Top C.E.O.s Say,” The New York Times, August 19, 2019, https://www.nytimes.com/2019/08/19/business/business-roundtable -ceos-corporations.html (accessed March 12, 2020). 17. Jeffrey F. Rayport and Bernard J. Jaworski, e-Commerce (Boston: McGraw-Hill/Irwin, 2001), p. 3. 18. Amazon, “About 1-Click Ordering,” https://www.amazon.com /gp/help/customer/display.html?nodeId=201889620 (accessed February 28, 2020). 19. Scott D. Roberts and Kathleen S. Micken, “Marketing Digital Offerings Is Different: Strategies for Teaching About Digital Offerings in the Classroom,” Journal of Education for Business, 90(2), 96–102 (2015). 20. Sebastian Herrera and Aaron Tilley, “Amazon Opens Cashierless Supermarket in Latest Push to Sell Food,” The Wall Street Journal, February 25, 2020, https://www.wsj.com/articles/amazon-opens-cashierless -supermarket-in-latest-push-to-sell-food-11582617660?mod=djemwhatsnews (accessed February 27, 2020); Catherine Clifford, “How Amazon Founder Jeff Bezos Went from the Son of a Teen Mom to the World’s Richest Person,” CNBC, October 27, 2017, https://www.cnbc.com/2017/10/27/how -amazon-founder-jeff-bezos-went-from-the-son-of-a-teen-mom-to-the -worlds-richest-person.html (accessed February 27, 2020); Caroline Cakebread, “Amazon Launched 22 Years Ago This Week—Here’s What Shopping on Amazon Was Like Back in 1995,” Business Insider, July 20, 2017, http:// www.businessinsider.com/amazon-opened-22-years-ago-see-the-business -evolve-2017-7 (accessed February 27, 2020); Charisse Jones, “Amazon Wants Your Teen to Spend Your Money But Parents Have the Final Say,” USA Today, October 11, 2017, https://www.usatoday.com/story/money/2017/10/11 /amazon-let-parents-hand-over-shopping-keys-kids/751594001/ (accessed February 27, 2020); Daniel Keyes, “Amazon Prime May Be Reaching Saturation in the U.S.,” Business Insider, December 18, 2017, http://www .businessinsider.com/amazon-prime-may-be-reaching-saturation-in-the -us-2017-12 (accessed February 27, 2020); Amazon, “About A-to-z Guarantee,” Amazon.com, https://www.amazon.com/gp/help/customer /display.html?nodeId=201889410 (accessed February 27, 2020); Alison Griswold, “Amazon Just Explained How Whole Foods Fits Into its Plan for World Domination,” Quartz, October 27, 2017, https://qz.com/1113795 /amazon-amzn-just-explained-how-whole-foods-fits-into-its-plan-for -world-domination/ (accessed February 27, 2020); Ry Crist, “After a Busy 2017, Alexa Is Still on Top—and Still Evolving,” CNET, December 20, 2017, https://www.cnet.com/news/after-a-busy-2017-alexa-is-still-on-top-and -still-evolving/ (accessed February 27, 2020).
21. Michael Sheetz, “Wall Street Bear Concedes Tesla Is Way Ahead of Others in One Key Area of Electric Vehicles,” CNBC, December 16, 2019, https://www.cnbc.com/2019/12/16/credit-suisse-tesla-way-ahead-in -batteries-for-electric-vehicles.html (accessed February 28, 2020). 22. Hampton by Hilton, https://hamptoninn3.hilton.com/en/about /index.html (accessed February 28, 2020). 23. These facts are from Mark Kassof and Company, “McDonald’s Arch McFlop,” Research Insights: Lessons From Marketing Flops, Summer 1997. 24. Rick Leblanc, “How Amazon Is Changing Supply Chain Management,” The Balance Small Business, October 15, 2019, https://www.thebalancesmb .com/how-amazon-is-changing-supply-chain-management-4155324 (accessed March 12, 2020). 25. (RED), https://www.red.org/ (accessed February 28, 2020). 26. Hyatt, “Hyatt Named to 2020 Fortune ‘100 Best Companies to Work For®’ List by Great Place to Work® for Seventh Consecutive Year,” February 18, 2020, https://newsroom.hyatt.com/2020_best_companies_to_work_for (accessed February 28, 2020). 27. Daniel Saaristo, “AI Sheds Light on How to Improve Your Call Center’s Performance,” Forbes, February 27, 2019, https://www.forbes.com /sites/nvidia/2019/02/27/ai-sheds-light-on-how-to-improve-your-call -centers-performance/#32ce6f5748f3 (accessed March 12, 2020). 28. Tabitha Cassidy, “Customer Service Drives Loyalty for AmazonOwned Zappos,” Digital Commerce 360, February 18, 2020, https://www .digitalcommerce360.com/2020/02/18/customer-service-drives-loyalty -for-amazon-owned-zappos/ (accessed February 27, 2020); Zappos.com, “Company Statement from Zappos.com,” YouTube, April 1, 2016, https:// www.youtube.com/watch?v=3zieP6NUWL8 (accessed February 27, 2020); “Steve Olenski, “Customer Relationships: Creating a Foundation for Successful Marketing Partnerships,” Forbes, November 18, 2015, https://www .forbes.com/sites/steveolenski/2015/11/18/customer-relationships -creating-a-foundation-for-successful-marketing-partnerships/ (accessed February 27, 2020); Gabriel Beltrone, “Zappos Turned True Customer Stories Into Charming Low-Budget Ads,” Adweek, November 7, 2017, http:// www.adweek.com/creativity/zappos-turned-true-customer-stories-into -charming-low-budget-ads/ (accessed February 27, 2020); Micah Solomon, “Tony Hsieh Reveals the Secret to Zappos’ Customer Service Success in One Word,” Forbes, June 12, 2017, https://www.forbes.com/sites/micahsolomon /2017/06/12/tony-hsieh-spills-the-beans-the-one-word-secret-of-zappos -customer-service-success/#7fb208401acc (accessed February 27, 2020). 29. Sean Szymkowski, “Honda Clarity Electric Quietly Discontinued for 2020,” CNET, March 10, 2020, https://www.cnet.com/roadshow /news/honda-clarity-electric-discontinued-availability/ (accessed March 12, 2020).
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CHAPTER 2 Strategic Marketing Planning 2.1 INTRODUCTION The process of strategic marketing planning can either be quite complex or relatively straightforward. As noted in Beyond the Pages 2.1, competing in today’s economy means finding ways to break out of commodity status to meet customers’ needs better than competing firms. Strategic planning in today’s market often requires partnering with other firms and carefully planning for the actions of others, such as supply sources or competitors. Whether a multinational corporation, such as Ford Motor Company, or a sole proprietorship, such as a local bakery, the planning process is the same in many ways. Ultimately, the goals and objectives can be quite similar. Large or small, all marketers strive to meet the needs of their customers while meeting their own business and marketing objectives. The marketing planning process typically requires the coordination of broad-based decisions at the top of the corporate hierarchy with more narrowly defined actions at the bottom. At the top are important corporate decisions dealing with the firm’s mission, vision, goals, and the allocation of resources among business units. Planning at this level also involves decisions regarding the purchase or divestment of the business units themselves. Disney’s acquisition of 21st Century Fox, Facebook’s sale of Oculus Medium, and Pier 1 Import’s bankruptcy filing are good examples of the decision-making complexity that is often typical of major corporate decisions. These decisions trickle down the corporate structure to the business-unit level, where planning focuses on meeting goals and objectives within defined product markets. Planning at this level must take into account and be consistent with decisions made at the corporate level. However, in organizations having only one business unit, corporate and business unit strategy are the same. The most specific planning and decision making occurs at the bottom of the structure. It is at this level where organizations make and implement tactical decisions regarding marketing strategy (target markets and the marketing program) as well as marketing plans. 27 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
28 Part 1: Setting the Stage for Marketing Strategy
In this chapter, we examine the planning process at different points. We begin by discussing the overall process and considering the hierarchy of decisions that must be made in strategic marketing planning. Next, we introduce the marketing plan and look at the marketing plan framework used throughout the text. We also discuss the role and importance of the marketing plan in marketing strategy. Finally, we explore other advances in strategic planning such as strategy mapping and the ESG (environmental, social, governance) framework.
BEYOND THE PAGES 2.1
Escaping the Commodity Trap 1 Surprisingly, many firms develop products that do not have a competitive advantage. To be competitive, it is important to have a marketing strategy and plan that provides a product with a distinct difference from the viewpoint of the consumer. Without a competitive advantage, a firm may find itself in the “commodity trap.” This is when the product is just one more in a sea of similar products. Unfortunately for companies, when customers begin to see all competing products as offering roughly the same benefits, price becomes increasingly important. Examples include gasoline, airlines, some automobiles, ride-sharing services, food, and beverages such as bottled water. The objective is to develop a strategy to get out of the commodity trap. A competitive advantage can be developed with product differentiation, promotion, price, or distribution. Any of these decision variables could provide an advantage. Many firms in these product categories have developed strategies to provide the benefits consumers desire. Commoditization is a consequence of mature industries where slowing innovation, extensive product assortment, excess supply, and frugal consumers force margins to the floor. Consider the airline industry. Notwithstanding a few minor differences, most air travelers see all airlines as being roughly the same. They all get passengers from Point A to Point B while offering the same basic customer services. This makes price the driving force in consumer decision making and allows discount airlines such as Allegiant and Frontier to lure customers away from traditional full-service carriers. Success stories include Southwest, Dollar Shave Club, and Tesla. Southwest, a pioneer in the low-cost airline carrier space, succeeds because of its low-cost, on-time flights accompanied by superior customer service. Dollar Shave Club is famous for disrupting the shaving realm with its low-cost razor subscription model, taking valuable market share from razor giant Gillette. Tesla has outpaced its competitors with nonstop innovation, and, despite facing more competition than ever before, Tesla is growing substantially.
Firms in the commodity trap must spend a great deal on promotion to attract new customers. Companies, including small businesses, can use social media to advertise to customers. By being active on platforms that customers are checking frequently throughout the day—such as Snapchat, Facebook, Instagram, and Twitter—businesses increase the exposure of their current deals and products offered. Small businesses often use stories to post time-sensitive content such as daily deals or low-stock products to increase sales and keep their customers engaged. Even TikTok, a videosharing social networking app with 800 million monthly active users, is used to advertise. By creating videos that relate to the culture of TikTok, companies can make their product more visible than competitors. For example, Urban Decay Cosmetics challenged its fans to create their own videos promoting the company’s All Nighter Setting Spray using the hashtag #allnighterlegend. The company’s original video only accrued 63,000 views, but videos uploaded by users to the branded hashtag earned more than 33 million views cumulatively. This highlights the importance of harnessing the power of social media. Some firms avoid commodity status through the most basic of marketing tactics: brand building. Here, firms break free from commodity status by developing a distinctive brand position that separates them and their products from the competition. By offering compelling reasons for consumers to buy products, brand building allows firms to increase margins. Starbucks sells one of the most commoditized, ubiquitous products of all time: coffee. Starbucks has long positioned itself as a “third place” to hang out (with home and work being the first and second places, respectively). Through this mentality, Starbucks offers its customers much more than coffee, including wireless Internet access, music, food, and relaxation while supporting its mission to “inspire and nurture the human spirit.” Also, Starbucks invests heavily in innovation, testing new product ideas, continued
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Chapter 2: Strategic Marketing Planning 29
pro cesses, and technologies in its Seattle-based Tryer Center. Many innovations it tests relate to improving the customer experience, which sets apart Starbucks from other coffee shops. Supply chain management is becoming more important in marketing. Two-day delivery from online purchases has evolved into one-day or even same-day delivery. This is possible because of artificial intelligence with supply chain modeling digitally rendered to integrate sourcing and distribution. When consumers create demand spikes, firms are able to use analytics to anticipate, respond, and automate operations to provide a strategic advantage.
Getting out of the commodity trap is not an easy feat. To do so, firms must give consumers a compelling reason to buy their products over competing products. Ultimately, winning the commodity game is all about innovation. Consider the firms that top Fast Company ’s list of the World’s Most Innovative Companies: Meituan Dianping, Grab, NBA, The Walt Disney Company, Stitch Fix, Sweetgreen, Apeel Sciences, Square, Oatly, and Twitch. Each of these companies offers innovative products, processes, or experiences that stand apart from the competition, yet many compete in mature industries known for commoditization. These companies prove that innovation and good marketing strategy are antidotes for the commodity trap.
2.2 THE STRATEGIC PLANNING PROCESS Whether at the corporate, business unit, or functional level, the planning process begins with an in-depth analysis of the organization’s internal and external environments—sometimes referred to as a situation analysis. As we will discuss in Chapter 3, this analysis focuses on the firm’s resources, strengths, and capabilities vis-à-vis competitive, customer, and environmental issues. Based on an exhaustive review of these relevant environmental issues, the firm establishes its mission, goals, and/or objectives, its strategy, and several functional plans. As indicated in Exhibit 2.1, planning efforts within each functional area will result in the creation of a strategic EXHIBIT 2.1 The Strategic Planning Process Corporate Situation Analysis Corporate Mission, Goals, and Objectives
Business-Unit Situation Analysis Business-Unit Mission, Goals, and Objectives
Business-Unit Strategy
Marketing Goals and Objectives
Production Goals and Objectives
Financial Goals and Objectives
Human Resource Goals and Objectives
Other Functional Goals and Objectives
Marketing Strategy
Production Strategy
Financial Strategy
Human Resource Strategy
Other Functional Strategies
Implementation
Implementation
Implementation
Implementation
Implementation
Evaluation and Control
Evaluation and Control
Evaluation and Control
Evaluation and Control
Evaluation and Control
Marketing Plans
Production Plans
Financial Plans
Human Resource Plans
Other Functional Plans
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30 Part 1: Setting the Stage for Marketing Strategy
plan for that area. Although we emphasize the issues and processes concerned with developing a customer-oriented marketing strategy and marketing plan, we should stress that organizations develop effective marketing strategies and plans in concert with the organization’s mission and goals, as well as the plans from other functional areas. Senior management must coordinate these functional plans in a manner that will achieve the organization’s mission, goals, and objectives. In this text, we are interested in a particular type of functional plan: the marketing plan. A marketing plan is a written document that provides the blueprint or outline of the organization’s marketing activities, including the implementation, evaluation, and control of those activities. The marketing plan serves a number of purposes. For one, the marketing plan clearly explains how the organization will achieve its goals and objectives. This aspect of marketing planning is vital—not having goals and objectives is like driving a car without knowing your destination. In this sense, the marketing plan serves as the “road map” for implementing the marketing strategy. It instructs employees as to their roles and functions in fulfilling the plan. It also provides specifics regarding the allocation of resources and includes marketing tasks, responsibilities of individuals, and the timing of all marketing activities. Finally, many firms include contingency planning in their marketing plans to keep a focus on the unknown or disruptive, new challenges and opportunities that must be addressed in real time as the marketing plan is implemented and adapted over time. Although our focus is on marketing planning and strategy, we cannot emphasize enough that marketing decisions must be made within the boundaries of the organization’s overall mission, goals, and objectives. The sequencing of decision stages outlined in the following sections begins with broad decisions regarding the organizational mission, followed by a discussion of the corporate or business-unit strategy. It is within these contexts that marketing goals/objectives and marketing strategies must be developed and implemented.
2.2a Organizational Mission Versus Organizational Vision To adequately address the role of the organizational mission in strategic planning, we must first understand the differences between the organization’s mission and its vision. A mission, or mission statement, seeks to answer the question “What business are we in?” It is a clear and concise statement (a paragraph or two at most) that explains the organization’s reason for existence. By contrast, a vision or vision statement seeks to answer the question “What do we want to become?” AT&T’s mission is to “inspire human progress through the power of communication and entertainment.”2 This mission statement concretely expresses what the company does in its business operations. In contrast, vision statements tend to be more nebulous and are often future-oriented. IKEA’s vision is to “create a better everyday life for the many people.”3 This statement provide an overall end goal for the company but is less specific in how IKEA might achieve that end goal. Vision statements typically outline where the organization is headed and where it wants to go. If you ask many business executives, “What is your reason for existence?” their response is likely to be “to make money.” Although that may be their ultimate objective, it is not their raison d’être (main reason for conducting business operations). Profit has a role in this process, of course, but it is a goal or objective of the firm, not its mission or vision. The mission statement identifies what the firm stands for and its basic operating philosophy. Profit and other performance outcomes are ends, and thus are out of place and confuse the mission of the firm.
Elements of the Mission Statement A well-devised mission statement for any organization, unit within an organization, or single-owner business should answer the same five basic questions. These questions should clarify the mission for the firm’s stakeholders (especially employees): 1. Who are we? 2. Who are our customers? 3. What is our operating philosophy (basic beliefs, values, ethics, etc.)? 4. What are our core competencies or competitive advantages? 5. What are our responsibilities with respect to being a good steward of our human, financial, and environmental resources?
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Chapter 2: Strategic Marketing Planning 31
EXHIBIT 2.2 Mission Statement Examples Company
Mission Statement
Patagonia
Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.
American Express
We work hard every day to make American Express the world’s most respected service brand.
Warby Parker
To offer designer eyewear at a revolutionary price, while leading the way for socially conscious businesses.
Honest Tea
To create and promote great-tasting, healthy, organic beverages.
Nordstrom
To give customers the most compelling shopping experience possible.
Prezi
To reinvent how people share knowledge, tell stories, and inspire their audiences to act.
Source: Lindsay Kolowich, “17 Truly Inspiring Company Vision and Mission Statement Examples,” Hubspot, February 17, 2020, https://blog.hubspot.com/marketing/inspiring-company-mission-statements (accessed March 4, 2020).
A mission statement that delivers a clear answer to each of these questions installs the cornerstone for the development of the marketing plan. If the cornerstone is weak, or not in line with the foundation laid in the preliminary steps, the entire plan will have no real chance of long-term success. Exhibit 2.2 shows several effective mission statements. As you read these statements, consider how well they answer these five questions. The mission statement is the one portion of the strategic plan that should not be kept confidential. It should tell everyone—customers, employees, investors, competitors, regulators, and society in general—what the firm stands for and why it exists. Mission statements facilitate public relations activities and communicate to customers and others important information that can be used to build trust and long-term relationships. The mission statement should be included in annual reports and major press releases, promoted on the firm’s website, and personally understood by every employee of the organization. Goals, objectives, strategies, tactics, and budgets are not for public viewing. A mission statement kept secret, however, is of little value to the organization.
Mission Width and Stability In crafting a mission statement, management should be con-
cerned about the statement’s width. If the mission is too broad, it will be meaningless to those who read and build upon it. A mission to “make all people happy around the world by providing them with entertaining products” sounds splendid but provides no useful information. Overly broad missions can lead companies to establish plans and strategies in areas where their strengths are limited. Such endeavors almost always result in failure. Though not yet clear, some would suggest that Amazon’s investment in brick-and-mortar retail (e.g., Amazon Go, Amazon Books, and its purchase of Whole Foods) is too far from its mission “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.”4 A well-designed mission statement should not stifle an organization’s creativity; it must help keep the firm from moving too far from its core competencies. Overly narrow mission statements that constrain the vision of the organization can prove just as costly. Early in this century, the railroads defined their business as owning and operating trains. Consequently, the railroad industry had no concerns about the invention of the airplane. After all, they thought, the ability to fly had nothing to do with trains or the railroad business. Today, we know that firms such as Delta Airlines, Southwest Airlines, UPS, and FedEx, rather than Burlington, Union Pacific, or Santa Fe, dominate the passenger and time-sensitive
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32 Part 1: Setting the Stage for Marketing Strategy
freight business. The railroads missed this major opportunity because their missions were too narrowly tied to railroads, as opposed to a more appropriate definition encompassing the transportation business. Mission stability refers to the frequency of modifications in an organization’s mission statement. Of all the components of the strategic plan, the mission should change the least frequently. It is the one element that will likely remain constant through multiple rounds of strategic planning. Goals, objectives, and marketing plan elements will change over time, usually as an annual or quarterly event. When the mission changes, however, the cornerstone has been moved and everything else must change as well. The mission should change only when it is no longer in sync with the firm’s capabilities, when competitors drive the firm from certain markets, when new technology changes the delivery of customer benefits, or when the firm identifies a new opportunity that matches its strengths and expertise. As we discussed in Chapter 1, the growth of the Internet and electronic commerce has affected many industries. The importance and role of travel agents, stockbrokers, and car dealers has changed dramatically as customers changed the way they shop for travel, financial products, and automobiles. Organizations in these and other industries have been forced to refocus their efforts by redefining their mission statements.
Customer-Focused Mission Statements In recent years, firms have realized the role that mission statements can play in their marketing efforts. Consequently, mission statements have become much more customer oriented. People’s lives and businesses should be enriched because they have dealt with the organization. A focus on profit in the mission statement means that something positive happens for the owners and managers of the organization, not necessarily for the customers or other stakeholders. For example, a focus on customers is one of the leading reasons for the long-running success of Southwest Airlines. The company’s mission has not changed since 1988:
Rocky Grimes/Alamy Stock Photo
The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.5
Amazon’s mission—to be Earth’s most customer-centric company—is at the center of the company’s innovative products and services from cashierless grocery stores to its Alexa virtual assistant.
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Chapter 2: Strategic Marketing Planning 33
The mission statement of cultural icon Ben & Jerry’s Ice Cream consists of three interrelated parts and is a good example of how an organization can work to have a positive impact on customers and society:
Product Mission: To make, distribute and sell the finest quality ice cream and euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the environment. Economic Mission: To operate the company on a sustainable financial basis of profitable growth, increasing value for our stakeholders and expanding opportunities for development and career growth for our employees. Social Mission: To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally and internationally.6 Customer-focused mission statements are the norm for charities and humanitarian organizations. These nonprofit organizations—just like their for-profit counterparts— strive to fulfill their missions through effective marketing programs. For instance, the mission of the American Red Cross reads:
The American Red Cross prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.7 Unlike other charitable organizations, the American Red Cross holds a key competitive advantage: its Congressional charter. This gives the American Red Cross the authority needed to respond no matter the nature or complexity of the crisis. It also requires the Red Cross to carry out responsibilities delegated to it by the federal government.8 However, while it can and often does receive federal funding, the vast majority of the Red Cross’ funding comes from private donors.
2.2b Corporate or Business-Unit Strategy All organizations need a corporate strategy, the central plan for utilizing and integrating resources in the areas of production, finance, research and development, human resources, and marketing to carry out the organization’s mission and achieve the desired goals and objectives. In the strategic planning process, issues such as competition, differentiation, diversification, coordination of business units, and environmental issues all tend to emerge as corporate strategy concerns. In small businesses, corporate strategy and business-unit strategy are essentially the same. Although we use both terms, corporate and business-unit strategy apply to all organizations, from large corporations to small businesses and nonprofit organizations. Larger firms often find it beneficial to devise separate strategies for each strategic business unit (SBU), subsidiary, division, product line, or other profit center within the parent firm. Business-unit strategy determines the nature and future direction of each business unit, including its competitive advantages, the allocation of its resources, and the coordination of the functional business areas (marketing, production, finance, human resources, etc.). Many organizations manage their differing SBUs in ways that create synergies by providing customers a single-branded solution across multiple markets. Sony, for example, has a number of SBUs including game and network services, music, pictures, electronics products and solutions, imaging and sensing solutions, financial services, and a number of other divisions.10 An important consideration for a firm determining its corporate or business-unit strategy is the firm’s capabilities. When a firm possesses capabilities that allow it to serve customers’ needs better than the competition, it is said to have a competitive, or differential, advantage. Although a number of advantages come from functions other than marketing—such as human resources, research and development, or production—these functions often create important competitive advantages that can be exploited through marketing activities. Walmart’s long-running strategic investments in logistics allow the retailer to operate with lower inventory costs than its competitors—an advantage that translates into lower prices at retail. The company has
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34 Part 1: Setting the Stage for Marketing Strategy
BEYOND THE PAGES 2.2
Johnson & Johnson Strengthens Its Credo 9 While many organizations have only recently developed ethics initiatives, Johnson & Johnson (J&J) was a pioneer in developing a code of ethics. Robert Wood Johnson, chairman of J&J from 1932 to 1963, developed the Credo of values in 1943 before Johnson & Johnson became a publicly traded company. J&J recognized that a set of company morals would not only maintain an ethical corporate culture but also help to ensure business success. The company regularly enhances its Credo with feedback from its employees. The J&J Credo emphasizes putting the consumer first. The J&J Credo begins by addressing the groups they see as their most important stakeholder, the consumer. The Credo seeks to serve consumers by keeping costs low and promptly and accurately servicing customer orders. Access to medicines and medical care is also an issue that J&J is addressing with a goal to impact one billion people through their programs. The company is conducting studies to research a universal prevention tool to prevent the spread of tuberculosis and HIV. The second section of the Credo addresses J&J employees. To address the needs of their employees, the Credo maintains that J&J will provide a sense of job security, fair and adequate compensation, and clean and safe working conditions. To create a more open workplace environment, employee suggestions and complaints are encouraged. Internally, J&J operates numerous programs that seek to help the physical and mental well-being of their employees. For example, J&J offers employee assistance programs that help employees in matters pertaining to mental health. J&J’s Credo goes on to address itself within the community. To improve communities, J&J places a special emphasis on environmental and disaster relief initiatives. Reviewed and
updated every five years since 1990, J&J’s environmental goals seek to reduce the company’s environmental footprint. J&J works with various stakeholders, including government officials, environmental groups, and academic leaders, to achieve their goals, which are organized into categories such as energy use, product stewardship, and external manufacturing. The last section of the J&J Credo addresses stockholders. J&J emphasizes the importance of innovation in generating a fair return for stockholders. To develop new ideas, J&J is committed to conducting research and developing new programs, purchasing new equipment and facilities to aid in launching new products, and creating reserves for protection in adverse times. A small, but significant, section of the Credo states that mistakes must be paid for. Case in point, J&J took its Credo seriously when someone tampered with bottles of Tylenol, killing several people. The company immediately recalled more than $100 million in product, offered to replace consumer product, distributed warnings to retailers and hospitals, and offered a reward to anyone who could help identify the perpetrator. After their successful handling of the poisoning crisis of 1982, J&J was largely acknowledged as an industry leader in business and ethics. It would appear that J&J has slipped some in their careful handling of product development and consumer safety considering the number of recent crises it has faced, from talcum powder lawsuits to its involvement in the opioid crisis. These developments demonstrate that ethics is an ongoing process necessary for all companies, and it is a process that begins upstream. Even companies like J&J who have gained a reputation for ethically sound management must work hard to ensure the integrity of their products and operations.
maintained its competitive advantage by investing in new disruptive technology such as blockchain and robotics. For example, Walmart filed a patent that suggested the company is investing in automated delivery drones with a blockchain-based authentication network, which could result in direct delivery to consumers that is fast, reliable, and secure.11 Blockchain is a decentralized record-keeping technology that stores an immutable record of data blocks over time. It offers many opportunities for businesses and society to utilize technology in improving the security of consumer goods and services. Competitive advantages cannot be fully realized unless targeted customers see them as valuable. The key issue is the organization’s ability to convince customers that its advantages are superior to those of the competition. Walmart has been able to convey effectively its low-price advantage to customers by adhering to an everyday low-price policy. Interestingly, Walmart’s prices are not always the lowest for a given product in a given geographic area. However, Walmart’s perception of offering low prices translates into a key competitive advantage for the firm.
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Chapter 2: Strategic Marketing Planning 35
2.2c Functional Goals and Objectives Marketing and all other business functions must support the organization’s mission and goals, translating these into objectives with specific quantitative measurements. For example, a corporate or business unit goal to increase return on investment might translate into a marketing objective to increase sales, a production objective to reduce the cost of raw materials, a financial objective to rebalance the firm’s portfolio of investments, or a human resources objective to increase employee training and productivity. All functional objectives should be expressed in clear, simple terms so that all personnel understand what type and level of performance the organization desires. In other words, objectives should be written so that their accomplishment can be measured accurately. In the case of marketing objectives, units of measure might include sales volume (in dollars or units), profitability per unit, percentage gain in market share, sales per square foot, average customer purchase, percentage of customers in the firm’s target market who prefer its products, or some other measurable achievement. It is also important for all functional objectives to be reconsidered for each planning period. Perhaps no strategy arose in the previous planning period to meet the stated objectives. Or perhaps the implementation of new technology allowed the firm to greatly exceed its objectives. In either case, realism demands the revision of functional objectives to remain consistent with the next edition of the functional area plan.
2.2d Functional Strategy Organizations design functional strategies to provide a total integration of efforts that focus on achieving the area’s stated objectives. In production, this might involve strategies for procurement, just-in-time inventory control, or warehousing. In human resources, strategies dealing with employee recruitment, selection, retention, training, evaluation, and compensation are often at the forefront of the decision-making process. In marketing strategy, the process focuses on selecting one or more target markets and developing a marketing program that satisfies the needs and wants of members of that target market. AutoZone, for example, targets do-it-yourself car owners by offering an extensive selection of automotive replacement parts, maintenance items, and accessories at low prices. Functional strategy decisions do not develop in a vacuum. The strategy must (1) fit the needs and purposes of the functional area with respect to meeting its goals and objectives, (2) be realistic given the organization’s available resources and environment, and (3) be consistent with the organization’s mission, goals, and objectives. Within the context of the overall strategic planning process, each functional strategy must be evaluated to determine its effect on the organization’s sales, costs, image, and profitability.
2.2e Implementation Implementation involves activities that actually execute the functional area strategy. One of the more interesting aspects of implementation is that all functional plans have at least two target markets: an external market (i.e., customers, suppliers, investors, potential employees, the society at large) and an internal market (i.e., employees, managers, executives). This occurs because functional plans, when executed, have repercussions both inside and outside the firm. Even seemingly disconnected events in finance or human resources can have an effect on the firm’s ultimate customers—the individuals and businesses that buy the firm’s products. For a functional strategy to be implemented successfully, the organization must rely on the commitment and knowledge of its employees—its internal target market. After all, employees have a responsibility to perform the activities that will implement the strategy. Current plans for implementation also include how artificial intelligence and robotics will aid employees in their efforts to carry out the marketing plan. For this reason, organizations often execute internal marketing activities designed to gain employee commitment and motivation to implement functional plans via the most current technologies available.
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36 Part 1: Setting the Stage for Marketing Strategy
2.2f Evaluation and Control Organizations design the evaluation and control phase of strategic planning to keep planned activities on target with goals and objectives. In the big picture, the critical issue in this phase is coordination among functional areas. For example, timely distribution and product availability almost always depend on accurate and timely production. By maintaining contact with the production manager, the marketing manager helps to ensure effective marketing strategy implementation (by ensuring timely production) and, in the long run, increased customer satisfaction. The need for coordination is especially important in marketing where the fulfillment of marketing strategy always depends on coordinated execution with other functional strategies. Advances in across-firm data interfaces and connectivity of various departmental reporting has greatly improved the activity of evaluation and control. Firms now can monitor real-time operations via integrated dashboards that report key performance indicators (KPIs) in an easy-to-interpret way. KPIs are measures of performance to evaluate success. Much like an airplane’s avionics panel, a dashboard indicates trends and changes in measured outcomes, such as units produced, employee productivity, customer use of products via sensors, and even customer satisfaction via analysis of consumer reviews. These inputs have always been important, but improvements in data analysis, interpretation, and connectivity provide up-tothe-minute insight that helps marketers assess the effectiveness of ongoing operations. The key to coordination is to ensure that functional areas maintain open lines of communication at all times. Although this can be quite a challenge, it is helpful if the organizational culture is both internally and externally customer oriented. Maintaining a customer focus is extremely important throughout the strategic planning process, but especially so during the implementation, evaluation, and control phases of the process. Functional managers should have the ability to see the interconnectedness of all business decisions and act in the best interests of the organization and its customers. In some ways, the evaluation and control phase of the planning process is an ending and a beginning. On the one hand, evaluation and control occur after a strategy has been implemented. In fact, the implementation of any strategy would be incomplete without an assessment of its success and the creation of control mechanisms to provide and revise the strategy or its implementation—or both if necessary. On the other hand, evaluation and control serve as the beginning point for the planning process in the next planning cycle. Because strategic planning is a never-ending process, managers should have a system for monitoring and evaluating implementation outcomes on an ongoing basis.
2.3 THE MARKETING PLAN The result of the strategic planning process described in the first portion of this chapter is a series of plans for each functional area of the organization. For the marketing department, the marketing plan provides a detailed formulation of the actions necessary to carry out the marketing program. Think of the marketing plan as an action document—it is the handbook for marketing implementation, evaluation, and control. With that in mind, it is important to note that a marketing plan is not the same as a business plan. Business plans, although they typically contain a marketing plan, encompass other issues such as business organization and ownership, operations, financial strategy, human resources, and risk management. Although business plans and marketing plans are not synonymous, many small businesses will consolidate their corporate, business-unit, and marketing plans into a single document. A good marketing plan requires a great deal of information from many different sources. An important consideration in pulling all of this information together is to maintain a big-picture view while simultaneously keeping an eye on the details. This requires looking at the marketing plan holistically rather than as a collection of related elements. Unfortunately, adopting a holistic perspective is rather difficult in practice. It is easy to get deeply involved in developing marketing strategy only to discover later that the strategy is inappropriate for the organization’s resources or marketing environment. The sign of a well-developed marketing plan is its ability to achieve its stated goals and objectives based on organizational realities.
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Chapter 2: Strategic Marketing Planning 37
In the following sections, we explore the marketing plan in more detail, including the structure of a typical marketing plan. This structure matches the marketing plan worksheets and the sample marketing plan available online. As we work through the marketing plan structure, keep in mind that a marketing plan can be written in many different ways. Marketing plans can be developed for specific products, brands, target markets, or industries. Likewise, a marketing plan can focus on a specific element of the marketing program, such as a product development plan, a promotional plan, a distribution plan, or a pricing plan.
2.3a Marketing Plan Structure All marketing plans should be well organized to ensure that all relevant information is considered and included. Exhibit 2.3 illustrates the structure or outline of a typical marketing plan. We say EXHIBIT 2.3 Marketing Plan Structure I. Executive Summary a. Synopsis b. Major aspects of the marketing plan II. Situation Analysis a. Analysis of the internal environment b. Analysis of the customer environment c. Analysis of the external environment III. SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats) a. Strengths b. Weaknesses c. Opportunities d. Threats e. Analysis of the SWOT matrix f. Developing competitive advantages g. Developing a strategic focus IV. Marketing Goals and Objectives a. Marketing goals b. Marketing objectives V. Marketing Strategy a. Primary (and secondary) target market b. Overall branding strategy c. Product strategy d. Pricing strategy e. Distribution/supply chain strategy f. Integrated marketing communication (promotion) strategy VI. Marketing Implementation a. Structural issues b. Tactical marketing activities VII. Evaluation and Control a. Formal controls b. Informal controls c. Implementation schedule and timeline d. Marketing audits
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38 Part 1: Setting the Stage for Marketing Strategy
this outline is “typical,” but there are many other ways to organize a marketing plan. Although the actual outline used is not that important, most plans will share common elements described here. Regardless of the specific outline you use to develop a marketing plan, you should keep in mind that a good marketing plan outline is: ●●
●●
●●
●●
Comprehensive. Having a comprehensive outline is essential to ensure that there are no omissions of important information. Every element of the outline may not be pertinent to the situation at hand, but at least each element receives consideration. Flexible. Although having a comprehensive outline is essential, flexibility should not be sacrificed. Any outline you choose must be flexible enough to be modified to fit the unique needs of your situation. Because all situations and organizations are different, using an overly rigid outline is detrimental to the planning process. Consistent. Consistency between the marketing plan outline and the outline of other functional area plans is an important consideration. Consistency may also include the connection of the marketing plan outline to the planning process used at the corporate- or business-unit levels. Maintaining consistency ensures that executives and employees outside of marketing will understand the marketing plan and the planning process. Logical. Because the marketing plan must ultimately sell itself to top managers, the plan’s outline must flow in a logical manner. An illogical outline could force top managers to reject or underfund the marketing plan.
The marketing plan structure that we discuss here has the ability to meet all four of these points. Although the structure is comprehensive, you should freely adapt the outline to match the unique requirements of your situation.
Executive Summary The executive summary is a synopsis of the overall marketing plan,
with an outline that conveys the main thrust of the marketing strategy and its execution. The purpose of the executive summary is to provide an overview of the plan so the reader can quickly identify key issues or concerns related to his or her role in implementing the marketing strategy. Therefore, the executive summary does not provide detailed information found in the following sections, or any other detailed information that supports the final plan. Instead, this synopsis introduces the major aspects of the marketing plan, including objectives, sales projections, costs, and performance evaluation measures. Along with the overall thrust of the marketing strategy, the executive summary should also identify the scope and time frame for the plan. The idea is to give the reader a quick understanding of the breadth of the plan and its time frame for execution. Individuals both within and outside of the organization may read the executive summary for reasons other than marketing planning or implementation. Ultimately, many users of a marketing plan ignore some of the details because of the role they play. The CEO, for example, may be more concerned with the overall cost and expected return of the plan, and less interested in the plan’s implementation. Financial institutions or investment bankers may want to read the marketing plan before approving any necessary financing. Likewise, suppliers, investors, or others who have a stake in the success of the organization sometimes receive access to the marketing plan. In these cases, the executive summary is critical, as it must convey a concise overview of the plan and its objectives, costs, and returns. Although the executive summary is the first element of a marketing plan, it should always be the last element to be written because it is easier and more meaningful to write after the entire marketing plan has been developed. There is another good reason to write the executive summary last: It may be the only element of the marketing plan read by a large number of people. As a result, the executive summary must accurately represent the entire marketing plan.
Situation Analysis The next section of the marketing plan is the situation analysis, which summarizes all pertinent information obtained about three key environments: the internal environment, the customer environment, and the firm’s external environment. The analysis of the firm’s internal environment considers issues such as the availability and deployment of human resources, the age and capacity of equipment or technology, the availability of financial resources, and the power and political struggles within the firm’s structure. In addition, this section
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Chapter 2: Strategic Marketing Planning 39
summarizes the firm’s current marketing objectives and performance. The analysis of the customer environment examines the current situation with respect to the needs of the target market (consumer or business), anticipated changes in these needs, and how well the firm’s products presently meet these needs. Finally, the analysis of the external environment includes relevant external factors—competitive, economic, social, political/legal, and technological—that can exert considerable direct and indirect pressures on the firm’s marketing activities. A clear and comprehensive situation analysis is one of the most difficult parts of developing a marketing plan. This difficulty arises because the analysis must be both comprehensive and focused on key issues in order to prevent information overload—a task actually made more complicated by advances in information technology. The information for a situation analysis may be obtained through the firm’s internal data systems, or it may have to be obtained externally through primary or secondary marketing research. Either way, the challenge is often having too much data and information to analyze rather than having too little. This problem of too much data is what drives the push toward integrated data analytics as a resource of a company. Companies that can better handle the large volume of customer, internal, market, and even competitor data and use it as the basis of planning are the ones best positioned to remain competitive and sustainable as markets continue to evolve and change at a rapid pace.
SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis SWOT analysis
focuses on the internal factors (strengths and weaknesses) and external factors (opportunities and threats)—derived from the situation analysis in the preceding section—that give the firm certain advantages and disadvantages in satisfying the needs of its target market(s). These strengths, weaknesses, opportunities, and threats should be analyzed relative to market needs and competition. This analysis helps the company determine what it does well and where it needs to make improvements. SWOT analysis has gained widespread acceptance because it is a simple framework for organizing and evaluating a company’s strategic position when developing a marketing plan. However, like any useful tool, SWOT analysis can be misused unless one conducts the appropriate research to identify key variables that will affect the performance of the firm. A common mistake in SWOT analysis is the failure to separate internal issues from external issues. Strengths and weaknesses are internal issues unique to the firm conducting the analysis. Opportunities and threats are external issues that exist independently of the firm conducting the analysis. Another common mistake is to list the firm’s strategic alternatives as opportunities. However, alternatives belong in the discussion of marketing strategy, not in the SWOT analysis. To illustrate, think about the music-streaming platform Spotify. Spotify is an online streaming service that serves more than 270 million users with music and other audio content.12 Like any business, Spotify has all aspects of SWOT and must determine how to best address them as they plan for their marketing efforts. The following examples help to illustrate the differences in SWOT elements and how companies identify and address them. ●●
●● ●● ●●
Strength: Strong brand awareness and adoption based on an easy-to-use and comprehensive audio collection popular with subscribers Weakness: High costs of rights to resell music in its collection Opportunity: Diversification to include new products for its subscriber base Threat: Competition with major technology platforms (e.g., Apple, Amazon, and Pandora)
At the conclusion of the SWOT analysis, the focus of the marketing plan shifts to address the strategic focus and competitive advantages to be leveraged in the strategy. The key to developing strategic focus is to match the firm’s strengths with its opportunities to create capabilities in delivering value to customers. The challenge for any firm at this stage is to create a compelling reason for customers to purchase its products over those offered by competitors. It is this compelling reason that then becomes the framework or strategic focus around which the strategy can be developed. For Spotify, utilizing SWOT with the examples could work as follows. To match the strength of a strong brand with the opportunity of adding new products, Spotify should consider products complimentary to its subscriber base. While many options exist, targeting a new service
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40 Part 1: Setting the Stage for Marketing Strategy
that sells concert tickets might make sense because different music concert types could easily be marketed to listeners of related online content. For example, listeners to classical content might be contacted concerning symphony performances, while those who listen to electronic dance music (EDM) might be more interested in upcoming raves in their area. The weakness of high-cost licensing rights and threat of strong competition should be addressed by potentially purchasing competitors in an effort to become the dominant streaming music provider, developing a position that allows negotiation of lower fees to feature a comprehensive collection of popular music.
Marketing Goals and Objectives Marketing goals and objectives are formal statements of
the desired and expected outcomes resulting from the marketing plan. Goals are broad, simple statements of what will be accomplished through the marketing strategy. The major function of goals is to guide the development of objectives and to provide direction for resource allocation decisions. Marketing objectives are more specific and are essential to planning. Marketing objectives should be stated in quantitative terms to permit reasonably precise measurement. The quantitative nature of marketing objectives makes them easier to implement after the development of the strategy. This section of the marketing plan has two important purposes. First, it sets the performance targets that the firm seeks to achieve by giving life to its strategic focus through its marketing strategy (i.e., what the firm hopes to achieve). Second, it defines the parameters by which the firm will measure actual performance in the evaluation and control phase of the marketing plan (i.e., how performance will actually be measured). At this point, it is important to remember that neither goals nor objectives can be developed without a clearly defined mission statement. Marketing goals must be consistent with the firm’s mission, while marketing objectives must flow naturally from the marketing goals.
Marketing Strategy This section of the marketing plan outlines how the firm will achieve its marketing objectives. In Chapter 1, we said that marketing strategies involve selecting and analyzing target markets and creating and maintaining an appropriate marketing program (product, distribution, promotion, and price) to satisfy the needs of those target markets. It is at this level where the firm will detail how it will gain a competitive advantage by doing something better than the competition: Its products must be of higher quality than competitive offerings, its prices must be consistent with the level of quality (value), its distribution methods must be as efficient as possible, and its promotions must be more effective in communicating with target customers. It is also important that the firm attempts to make these advantages sustainable. Thus, in its broadest sense, marketing strategy refers to how the firm will manage its relationships with customers in a manner that gives it an advantage over the competition. Marketing Implementation The implementation section of the marketing plan describes
how the marketing program will be executed. This section of the marketing plan answers several questions with respect to the marketing strategies outlined in the preceding section:
1. What specific marketing activities will be undertaken? 2. How will these activities be performed? 3. When will these activities be performed? 4. Who is responsible for the completion of these activities? 5. How will the completion of planned activities be monitored? 6. How much will these activities cost? Without a good plan for implementation, the success of the marketing strategy is seriously jeopardized. For this reason, the implementation phase of the marketing plan is just as important as the marketing strategy phase. You should remember, too, that implementation hinges on gaining the support of employees: Employees implement marketing strategies, not organizations. As a result, issues such as leadership, employee motivation, communication, and employee training are critical to implementation success. To better ensure that implementation of the marketing
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Chapter 2: Strategic Marketing Planning 41
program occurs, firms use systems to assign responsibility for planned action. One simple system used to make sure that responsibility is assigned is the RACI (Responsible, Accountable, Consulted, Informed) Chart. RACI is designed to offer a quick visual overview that clearly identifies the key players in each action to be implemented. In most plans, some person or department is responsible to conduct the work needed to accomplish the task. Typically, a higher level is held accountable to make sure the task is completed. Additional internal employees and departments may also need to be consulted to gain cooperation with the task or informed about updates on the changes that are taking place. Utilizing a process, like RACI, is a good way to clearly identify who will accomplish the actual work of the plan and who else is a part of the overall process of implementation.
Evaluation and Control The final section of the marketing plan details how the results of the marketing program will be evaluated and controlled. Marketing control involves establishing performance standards, assessing actual performance by comparing it with these standards, and taking corrective action if necessary to reduce discrepancies between desired and actual performance. Performance standards should be tied back to the objectives stated earlier in the plan. These standards can be based on increases in sales volume, market share, or profitability, or even advertising standards such as brand name recognition or recall. Regardless of the standard selected, all performance standards must be agreed on before the results of the plan can be assessed. The financial assessment of the marketing plan is also an important component of evaluation and control. Estimates of costs, sales, and revenues determine financial projections. In reality, budgetary considerations play a key role in the identification of alternative strategies. Exhibit 2.4 shows that the percent of revenue spent on marketing varies widely by industry. The financial realities of the firm must be monitored at all times. For example, proposing to expand into new geographic areas or alter products without financial resources is a waste of time, energy, and opportunity. Even if funds are available, the strategy must be a “good value” and provide an acceptable return on investment to be a part of the final plan. EXHIBIT 2.4 Percent of Revenue Spent on Marketing by Industry
Energy Manufacturing Transportation Banking/finance/insurance Retail wholesale Healthcare/pharmaceuticals Education Service consulting Mining/construction Communications/media Tech software/biotech Consumer services Consumer packaged goods 0%
5%
10%
15%
20%
25%
30%
Percent of Revenue Source: Ben Hallman, “What Percent of Revenue Do Publicly Traded Companies Spend on Marketing and Sales?” Vital Design, 2020, https://vtldesign.com/digital-marketing/content-marketing-strategy/percent-of-revenue-spent-on-marketing-sales/ (accessed March 4, 2020).
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42 Part 1: Setting the Stage for Marketing Strategy
Finally, should it be determined that the marketing plan has not lived up to expectations, the firm can use a number of tools to pinpoint potential causes for the discrepancies. One such tool is the marketing audit—a systematic examination of the firm’s marketing objectives, strategy, and performance. The marketing audit can help isolate weaknesses in the marketing plan and recommend actions to help improve performance. The control phase of the planning process also outlines the actions that can be taken to reduce the differences between planned and actual performance. The marketing plan is a forward-looking document that sets goals and benchmarks. For most companies, the marketing plan will cover a duration of one to at most three years. Evaluation and control must be addressed throughout the period covered by the marketing plan through inclusion of analytic analysis of ongoing results. Much of the real-time evaluation of the planned activities occurs at a more tactical level, such as through use of software like Google Analytics to monitor and measure online advertising results from specific campaigns or Lexalytics or SentiGeek to employ AI technology that interprets customer sentiment from review comments. However, the marketing plan itself should include specific milestones that can be assessed as the plan is in effect, allowing adjustments and changes due to new information and data that alter any part of the plan. This is true for all parts of the plan, from situation analysis to implementation—in a fast-paced and changing marketplace it is imperative to be nimble and responsive as internal and external conditions evolve with new technologies, competition, and customer demands.
2.3b Using the Marketing Plan Structure In this book’s appendix and on our text’s website, you will find marketing plan worksheets that expand the marketing plan structure into a comprehensive framework for developing a marketing plan. These worksheets are designed to be comprehensive, flexible, and logical. The consistency of this framework with other planning documents will depend on the planning structure used in other functional areas of an organization. However, this framework is certainly capable of being consistent with the plans from other functional areas. Although you may not use every single portion of the worksheets, you should at least go through them in their entirety to ensure that all important information is present. You should note that the sample marketing plan provided on our website uses this same framework. However, this plan does not match the framework exactly because the framework was adapted to match the characteristics of a unique planning situation. Before we move ahead, we offer the following tips for using the marketing plan framework to develop a marketing plan: ●●
●●
●●
●●
●●
Plan ahead. Writing a comprehensive marketing plan is time consuming, especially if the plan is under development for the first time. Initially, most of your time will be spent on the situation analysis. Although this analysis is demanding, the marketing plan has little chance for success without it. Revise, then revise again. After the situation analysis, you will spend most of your time revising the remaining elements of the marketing plan to ensure that they mesh with each other. Once you have written a first draft of the plan, put it away for a day or so. Then, review the plan with a fresh perspective and fine-tune sections that need changing. Because the revision process always takes more time than expected, it is wise to begin the planning process far in advance of the due date for the plan. Be creative. A marketing plan is only as good as the information it contains and the effort and creativity that go into its creation. A plan developed half-heartedly will collect dust on the shelf. Use common sense and judgment. Writing a marketing plan is an art. Common sense and judgment are necessary to sort through all of the information, weed out poor strategies, and develop a sound marketing plan. Managers must always weigh any information against its accuracy, as well as their own intuition, when making marketing decisions. Think ahead to implementation. As you develop the plan, you should always be mindful of how the plan will be implemented. Great marketing strategies that never see the light of
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Chapter 2: Strategic Marketing Planning 43
●●
●●
day do little to help the organization meet its goals. Good marketing plans are those that are realistic and doable given the organization’s resources. Update regularly. Once the marketing plan has been developed and implemented, it should be updated regularly with the collection of new data and information. Many organizations update their marketing plans on a quarterly basis to ensure that the marketing strategy remains consistent with changes in the internal, customer, and external environments. Under this approach, you will always have a working plan that covers 12 months into the future. In some cases, especially when technology and competition are changing rapidly, the marketing plan may need to be updated as regularly as every month to address change and adapt plans accordingly. In all cases, the marketing plan should be looked at as a living document that provides a roadmap that sometimes requires detours to achieve overall goals. Communicate to others. One critical aspect of the marketing plan is its ability to communicate to colleagues, particularly top managers who look to the marketing plan for an explanation of the marketing strategy, as well as for a justification of needed resources, like the marketing budget.13 The marketing plan also communicates to line managers and other employees by giving them points of reference to chart the progress of marketing implementation. A survey of marketing executives on the importance of the marketing plan revealed that “. . . the process of preparing the plan is more important than the document itself . . . . A marketing plan does compel attention, though. It makes the marketing team concentrate on the market, on the company’s objectives, and on the strategies and tactics appropriate to those objectives. It’s a mechanism for synchronizing action.”14
Research indicates that organizations that develop formal, written strategic marketing plans tend to be more tightly integrated across functional areas, more specialized, and more decentralized in decision making. The end result of these marketing planning efforts is improved financial and marketing performance.15 Given these benefits, it is surprising that many firms do not develop formal plans to guide their marketing efforts. A survey from Outbound Engine of small business owners found that only half had a formal marketing plan.16 Crisis management is the process of handling a high-impact event characterized by ambiguity and the need for swift action to access and respond to potential damage. In most cases, the crisis will not be handled in a completely effective or ineffective manner because of uncertainty. A crisis usually leads to both success and failure outcomes and provides experiences and information that can be used to make improvements to future crisis management. A crisis in marketing can disrupt marketing plans and implementation. Therefore, a recovery plan to respond to a disaster is important. The COVID-19 (coronavirus) world outbreak in 2020 caused major disruptions to the economy. Travel bans were issued, malls and shopping centers were closed, and major events were cancelled. This meant that consumers were not going to stores and marketing plans were disrupted. Supply chains were stressed and some products from China were in limited supply. Similarly, when Hurricane Michael, a category 5 hurricane, hit Florida in 2018, it caused a staggering amount of damage to not only the state but the economy as well. It completely upset the economic infrastructure, especially retail and supply chains. Marketing strategy continuity planning is essential to effectively anticipate, prevent, mitigate, and survive crises such as natural disasters, data loss, pandemics, accidents, and deliberate malevolent acts. Continuity planning refers to the strategies, systems, and procedures that help ensure that a firm’s policies are in place and operating (with all necessary redundancies, backup checks and balances, safeguards, monitoring, etc.). Such planning must go beyond normal planning and reactivity policies to address disasters. Planning can be initiated for continuity through decision making, designing and developing measures of continuity, implementing actions and programs for continuity, testing and strengthening continuity programs, and revising and updating continuity plans. It is important to undergo a thorough review and examination of the various alternatives to prepare for the possibility of a crisis.17
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44 Part 1: Setting the Stage for Marketing Strategy
2.3c Purposes and Significance of the Marketing Plan The purpose of a marketing plan is to set the parameters of how a firm will conduct its marketing activities. To define the details and expectations of marketing activities, a good marketing plan will fulfill the following five purposes in detail:
1. It explains both the present and future situations of the organization. This includes the situation and SWOT analyses and the firm’s past performance. 2. It specifies the expected outcomes (goals and objectives) so that the organization can anticipate its situation at the end of the planning period. 3. It describes the specific actions that are to take place so that the responsibility for each action can be assigned and implemented. 4. It identifies the resources that will be needed to carry out the planned actions. 5. It permits the monitoring of each action and its results so that controls may be implemented. Feedback from monitoring and control provides information to start the planning cycle again in the next time frame. These five purposes are important to various persons in the firm. Line managers have a particular interest in the third purpose (description of specific actions) because they are responsible for ensuring the implementation of marketing actions. Middle-level managers have a special interest in the fifth purpose (monitoring and control), as they want to ensure that tactical changes can be made if needed. These managers must also be able to evaluate why the marketing strategy does or does not succeed. The most pressing concern for success, however, may lie in the fourth purpose: identifying needed resources. The marketing plan is the means of communicating the strategy to top executives who make the critical decisions regarding the productive and efficient allocation of resources. Sound marketing plans can prove unsuccessful if implementation of the plan is not adequately funded. It is important to remember that marketing is not the only business function competing for scarce resources. Other functions such as finance, research and development, and human resources have strategic plans of their own. It is in this vein that the marketing plan must sell itself to top management.
2.3d Organizational Aspects of the Marketing Plan Who writes the marketing plan? In many organizations, the marketing manager, brand manager, or product manager writes the marketing plan. Some organizations develop marketing plans through committees. Others will hire professional marketing consultants to write the marketing plan. However, in most firms, the responsibility for planning lies at the level of a marketing vice president or marketing director.18 The fact that top managers develop most marketing plans does not necessarily refute the logic of having the brand or product manager prepare the plan. However, except in small organizations where one person both develops and approves the plan, the authority to approve the marketing plan is typically vested in top-level executives. At this stage, top managers usually ask two important questions:
1. Will the proposed marketing plan achieve the desired marketing, business unit, and corporate goals and objectives? 2. Are there alternative uses of resources that would better meet corporate or business-unit objectives than the submitted marketing plan? In most cases, final approval actually lies with the president, chairperson, or CEO of the organization.19 Many organizations also have executive committees that evaluate and screen marketing plans before submission to the approving executive. In the end, regardless of who writes the marketing plan, the plan must be clear and persuasive to win the approval of the decision makers who make the evaluation. It is also critical that these individuals make efficient and timely decisions with respect to the marketing plan. To give the plan every chance for success, little time should elapse between the completion of the plan and its implementation. Once a marketing plan has been approved, it still faces many obstacles before its marketing programs can come to fruition. Exhibit 2.5 reveals major barriers for marketing innovation execution and effectiveness according to a Gartner survey. One major hurdle involves organizational resistance to risk. Unfortunately, this mindset can play havoc on many marketing activities. Consequently, many firms will shift strategies “midstream” rather than wait for results to emerge. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 2: Strategic Marketing Planning 45
EXHIBIT 2.5 Major Barriers Marketers Face Around Innovation
Organizational resistance to risk Inability to measure Innovation impact Limited human resources with necessary skills Limited technology to support innovation Limited or lack of budget/funding Lack of innovation culture Insufficient leadership vision/strategic focus None 0%
25%
50%
Source: Gartner, “Gartner Reveals the Top Three Barriers to Innovation in Marketing,” November 11, 2019, https://www.gartner .com/en/newsroom/press-releases/2019-11-11-gartner-reveals-the-top-three-barriers-to-innovation- (accessed March 4, 2020).
2.4 MAINTAINING CUSTOMER FOCUS AND BALANCE IN STRATEGIC PLANNING In the past two decades, many firms have changed the focus and content of their strategic planning efforts and marketing plans. Of these changes, two stand out: (1) renewed emphasis on the customer and (2) the advent of balanced strategic planning. These changes require shifting focus from the company’s products to the unique requirements of specific target market segments. Firms have also had to become more astute at linking marketing activities to other functional areas.
2.4a Customer-Focused Planning Focusing on the customer has not been the hallmark of strategic planning throughout history. Early in the twentieth century, planning focused on production ideals such as efficiency and quality. Automobile pioneer Henry Ford has long been credited with the statement that customers could have any color car that they wanted, as long as it was black. This mentality, though it worked well in its day, meant that strategic planning proceeded with little regard for customer needs and wants. Today, cars, trucks, and SUVs come in an array of colors that Henry Ford would have never contemplated. By the middle of the twentieth century, strategic planning focused on selling products to customers rather than making products for customers. Marketing strategies during this time concentrated on overcoming customer resistance and convincing them to buy products whether they needed them or not. The cornerstone of marketing thought and practice during the mid- to late twentieth century was the marketing concept, which focused on customer satisfaction and the achievement of the firm’s objectives. Having a market or customer orientation meant putting customers’ needs and wants first. This shift in thinking led to the growth of marketing research to determine unmet customer needs and systems for satisfying those needs. Today’s twenty-first-century marketing organizations move one step beyond the marketing concept to focus on long-term, value-added relationships with customers, employees, suppliers, and other partners. The focus has shifted from customer transactions to customer relationships, from customers to all stakeholders, and from competition to collaboration. For example, Amazon has created a series of relationships with smart home-device companies, app developers, and other third parties in the creation of its Alexa ecosystem. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
46 Part 1: Setting the Stage for Marketing Strategy
Market-oriented firms are those that successfully generate, disseminate, and respond to market information. These firms focus on customer analysis, competitor analysis, and integrating the firm’s resources to provide customer value and satisfaction, as well as long-term profits.20 To be successful, the firm must be able to focus its efforts and resources toward understanding customers in ways that enhance the firm’s ability to generate sustainable competitive advantages.21 By creating organizational cultures that put customers first, market-oriented firms tend to perform at higher levels and reap the benefits of more highly satisfied customers. Exhibit 2.6 depicts the difference between a traditional and market-oriented organizational structure. Where traditional structures are authoritative, with decision-making authority emanating from the top of the hierarchy, market-oriented structures decentralize decision making. In a market-oriented organization, every level of the organization has its focus on serving customer needs. Each level serves the levels above it by taking any actions necessary to ensure that each level performs its job well. In this case, the role of the CEO is to ensure that his or her employees have everything they need to perform their jobs well. This same service mentality carries through all levels of the organization, including customers. Thus, the job of a frontline manager is to ensure that frontline employees are capable and efficient. The end result of the market-oriented design is a complete focus on customer needs. In today’s business environment, an orientation toward customers also requires that the organization’s suppliers and even competitors be customer oriented as well. Though competing firms can continue to serve customers separately, customers can also be served through cooperative efforts that place market needs ahead of competitive interests. For example, Microsoft, the creator of Xbox, and Sony, the creator of PlayStation, announced a partnership to develop cloud solutions for game and content streaming to ward off competition such as Google, which introduced a cloud gaming service called Stadia.22 Companies at the cutting edge of analytics can get even closer to their customers by seeing themselves through how their products are used. Marketers have always been interested in what the customer thinks, as evidenced by decades of focus-group research and customer-satisfaction
EXHIBIT 2.6 Traditional Versus Market-Oriented Organizational Structures
TRADITIONAL STRUCTURE CEO
CEO
Middle Managers
Competition
Frontline Employees
Middle Managers Frontline Employees
Customers
MARKET-ORIENTED STRUCTURE Customers and Other Stakeholders
Frontline Employees Middle Managers CEO
Frontline Employees Cooperative Alliances
Middle Managers CEO
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Chapter 2: Strategic Marketing Planning 47
and use studies. However, technology is once again changing how companies can know more about their customers and product usage through the advent of sensors, cloud-based storage, and analytics of online activity (e.g., click streams, visual recognition, and use patterns). We term this practice synthetic customer vision, as marketers can now see their products from the virtual eyes of the customer by analyzing multiple data sources to create a holistic view of customer perceptions and use of products. We use the term synthetic in reference to technology available to pilots that creates a virtual view of the outside world when no view is available through the cockpit windows (e.g., darkness, fog, or clouds obscure the view). For GE, its engineers, planners, and marketers can see the world through sensors across jet engines that report information used to monitor, assess, and improve products.23 Insights into customer product use are everywhere, as GM cars monitor virtually all performance metrics of newer vehicles on the road (e.g., alerting drivers to low tire pressure or a need for an oil change via text message), and Google Maps keeps track of drivers and traffic, allowing it to provide real-time traffic and detour updates to users. As analytics continue to improve, marketers expect even clearer synthetic vision of how customer use, interact, and identify areas for product improvements and updates.
2.4b Balanced Strategic Planning The shift to balanced strategic planning was borne out of necessity. Modern companies realize that assets—such as customer relationships, data, processes, human resources, innovation, social responsibility, and environmental awareness—are increasingly important to business success, but they are not captured by traditional financial measures. One solution to this problem was the development of a system to monitor environmental, social, and governance aspects of the firm, called ESG.25 The three dimensions of ESG are the following: ●●
●●
●●
Environmental considerations include issues related to climate change, natural resources, pollution, and waste. Social considerations include how you treat key stakeholders (human capital), product liability, potential stakeholder opposition, and varying social opportunities. Governance considerations relate to corporate governance and corporate positive (business ethics program, transparency) and negative behavior (anti-competitive behavior and corruption).
BEYOND THE PAGES 2.3
Spotify Eyes the Next Generation 24 Spotify, the world’s most popular audio streaming service, sees its mission as supporting human creativity by giving recording artists an opportunity to make money while giving fans access to music. With more than 270 million users already under its belt, Spotify is now eying the next generation of audio consumers to expand its customer base. A kid-friendly version of its app, Spotify Kids offers a stripped-down design with fewer features to navigate between, making the app friendly for small hands and young minds. Spotify recognized a need in the market for a music streaming app for children under 13. By becoming a pioneer in this segment, Spotify is also fostering a relationship with what it hopes will become long-term customers. Spotify is not the first company to take this strategic approach. Amazon, for example, has made its Echo line of Alexa devices family friendly with features and accessories to turn the devices into effective household communication
tools, complete with child safety settings. Data protection for children is an important concern for tech companies. By creating Spotify Kids, the company can reassure both parents and regulators that data collection is compliant with the Children’s Online Privacy Protection Act (COPPA). This type of customer-focused planning is what has made Spotify a household name. Currently, Spotify has more than 35 percent of the global music-streaming market. But, with competition from Pandora, Apple Music, YouTube Music, and Amazon Music, among others, Spotify will need to innovate to maintain this lead. Spotify’s strategy has been to draw in customers on its free, ad-supported level, and then convert them into paying premium subscribers. Apple Music has more paying users than Spotify, and Amazon introduced a free version of Amazon Music that stands to pull from Spotify’s free user base.
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48 Part 1: Setting the Stage for Marketing Strategy
The ESG framework provides a lens for companies to evaluate priorities in these three areas relative to their industry, investor priorities, peer comparisons, and cultural/leadership priorities of the organization. The ESG framework is often related to investment products that are assessed to be ethical and socially responsible. Using the ESG framework can help avoid investing in companies who have engaged in unethical or illegal behavior, so firms use it as a risk management tool. Many stock analysts use this index to make wise investment decisions. Perhaps ESG is best used to benchmark performance against peer or aspirational companies within an industry. Bloomberg evaluates companies with ESG Data Service based on an annual basis collecting public ESG information disclosed by the firm’s sustainability reports, annual reports, and other public sources. The ESG framework is assessed based on multiple data points that return an overall rating. Given concerns over how companies operate within their markets as responsible corporate citizens, the ESG rating is used to alert internal raters of areas for company improvement and external stakeholders (e.g., investors, insurers, and employees) of good and bad qualities of a company’s social responsibility. In Exhibit 2.7, the Russell stock index ESG metric is illustrated. The overall ESG rating calculated by Russell is comprised of more than 300 individual indicators for each company analyzed. Thus, an ESG rating is a simple way to gain perspective on most issues that face companies and their stakeholders as they operate across diverse markets and cultures.
EXHIBIT 2.7 ESG Framework Example
Tax Transparency
Gover na n
En
ce
ESG Ratings
ental onm vir
Corporate Governance
Climate Change
al nment viro : En ain Ch ly pp Su
Biodiversity Risk Management
Pollution & Resources
Water Security
AntiCorruption
Labor Standards
Social Human Rights & Community
Customer Responsibility Health & Safety
Supply Chain: Social Source: FTSE Russel, “ESG Ratings,” https://www.ftserussell.com/data/sustainability-and-esg-data/esg-ratings (accessed March 12, 2020).
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Chapter 2: Strategic Marketing Planning 49
LESSONS FROM CHAPTER 2
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Strategic marketing planning:
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begins with broad decisions, then flows into more specific decisions as the process proceeds through subsequent planning stages involves establishing an organizational mission, corporate or business-unit strategy, marketing goals and objectives, marketing strategy, and ultimately a marketing plan; many firms include contingency planning in their marketing plans to keep a focus on the unknown or disruptive, new challenges and opportunities that must be addressed in real time as the marketing plan is implemented and adapted over time must be consistent with the organization’s mission and the corporate or business-unit strategy must be coordinated with all functional business areas to ensure that the organization’s goals and objectives will be considered in the development of each functional plan, one of which is the marketing plan establishes marketing-level goals and objectives that support the organization’s mission, goals, and objectives develops a marketing strategy, which includes selecting and analyzing target markets and creating and maintaining an appropriate marketing program to satisfy the needs of customers in those target markets ultimately results in a strategic market plan that outlines the activities and resources required to fulfill the organization’s mission and achieve its goals and objectives
The organizational mission: ●● ●●
●●
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Corporate or business-unit strategy: ●●
●● ●●
●●
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is not the same as the organization’s vision, which seeks to answer the question “What do we want to become?” should not be too broad or too narrow, thereby rendering it useless for planning purposes should be customer oriented; people’s lives and businesses should be enriched because they have dealt with the organization should never focus on profit; a focus on profit in the mission means that something positive happens for the owners and managers of the organization, not necessarily for the customers or other stakeholders
is the central plan for utilizing and integrating resources in the areas of production, finance, research and development, human resources, and marketing to carry out the organization’s mission and achieve the desired goals and objectives may be different for each strategic business unit (SBU) is associated with developing a competitive, or differential, advantage where the firm leverages its capabilities to serve customers’ needs better than the competition determines the nature and future direction of each business unit, including its competitive advantages, the allocation of its resources, and the coordination of functional business areas (marketing, production, finance, human resources, etc.) is essentially the same as corporate strategy in small businesses
The marketing plan: ●●
●●
answers the broad question “What business are we in?” identifies what the firm stands for and its basic operating philosophy by answering five basic questions: 1. Who are we? 2. Who are our customers? 3. What is our operating philosophy (basic beliefs, values, ethics, etc.)? 4. What are our core competencies or competitive advantages? 5. What are our responsibilities with respect to being a good steward of our human, financial, and environmental resources?
●●
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must be owned and supported by employees if the organization has any chance of success should not be kept secret but instead communicated to everyone—customers, employees, investors, competitors, regulators, and society in general should be the least changed part of the strategic plan
provides a detailed explanation of the actions necessary to execute the marketing program and thus requires a great deal of effort and organizational commitment to create and implement should be well organized to ensure that it considers and includes all relevant information; the typical structure or outline of a marketing plan includes these elements: ●● ●● ●●
●● ●● ●● ●●
●●
●●
executive summary situation analysis SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) marketing goals and objectives marketing strategies marketing implementation evaluation and control
should be based on an outline that is comprehensive, flexible, consistent, and logical fulfills five purposes: ●●
●● ●●
●●
●●
explains both the present and future situations of the organization specifies expected outcomes (goals and objectives) describes the specific actions that are to take place and assigns responsibility for each action identifies the resources needed to carry out the planned actions permits the monitoring of each action and its results so that controls may be implemented
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
50 Part 1: Setting the Stage for Marketing Strategy
●●
●●
●●
●●
serves as an important communication vehicle to top management and to line managers and employees is an important document, but not nearly as important as the knowledge gained from going through the planning process itself is most often prepared by the director or vice president of marketing but is ultimately approved by the organization’s president, chairman, or CEO is a forward-looking document that sets goals and benchmarks
Crisis management: is the process of handling a high-impact event characterized by ambiguity and the need for swift action to access and respond to potential damage calls for continuity planning—the strategies, systems, and procedures that help ensure that a firm’s policies are in place and operating (with all necessary redundancies, backup checks and balances, safeguards, monitoring, etc.) ●●
●●
Customer-focused strategic planning: requires that organizations shift focus from products to the requirements of specific target market segments, from customer transactions to customer relationships, and from competition to collaboration puts customers’ needs and wants first and focuses on long-term, value-added relationships with customers, employees, suppliers, and other partners must be able to focus its efforts and resources toward understanding customers in ways that enhance the firm’s ability to generate sustainable competitive advantages instills a corporate culture that places customers at the top of the organizational hierarchy finds ways to cooperate with suppliers and competitors to serve customers more effectively and efficiently is easier for companies at the cutting edge of analytics that can get even closer to their customers by seeing themselves through how their products are used ●●
●●
●●
●●
●●
●●
Balanced strategic planning: was borne out of necessity since modern companies realize that assets—such as customer relationships, data, processes, human resources, innovation, social responsibility, and environmental awareness—are increasingly important to business success, but they are not captured by traditional financial measures is supported by a system to monitor environmental, social, and governance aspects of the firm, called ESG; the three dimensions of ESG include: ●●
●●
●●
●●
Environmental considerations include issues related to climate change, natural resources, pollution, and waste. Social considerations include how you treat key stakeholders (human capital), product liability,
●●
potential stakeholder opposition, and varying social opportunities. Governance considerations relate to corporate governance and corporate positive (business ethics program, transparency) and negative behavior (anti-competitive behavior and corruption).
ENDNOTES 1. Kate Taylor, “Starbucks Has a New Innovation Lab That Developed More than 130 Projects in under a Year, Including Tech Updates, Instagramworthy Drinks, and Soup-Making Equipment,” Business Insider, June 13, 2019, https://www.businessinsider.com/starbucks-tryer-center-innovation -lab-tour-2019-6 (accessed March 5, 2020); Starbucks, “Use of the Third Place Policy,” May 19, 2018, https://stories.starbucks.com/stories/2018/use -of-the-third-place-policy/ (accessed March 5, 2020); “The World’s 50 Most Innovative Companies,” Fast Company, 2019, https://www.fastcompany.com /most-innovative-companies/2019 (accessed March 5, 2020); Marc Levinson, “’Billion Dollar Brand Club’ Review: Clicking the ‘Disrupt’ Button,” The Wall Street Journal, February 3, 2020, https://www.wsj.com/articles/billion -dollar-brand-club-review-clicking-the-disrupt-button-11580773644 (accessed March 4, 2020); Keith Biondo, “What’s the Word?” Inbound Logistics, 39(12), 6 (December 2019); Karen Kroll, “Hunger Games: Managing Food Logistics Challenges When Demand Spikes,” Inbound Logistics, 39(12), 40–43 (December 2019); Urban Decay, “Legends Never Fade with All Nighter Setting Spray,” TikTok, https://www.tiktok.com/@urbandecaycosmetics/video /6778148122058067205 (accessed March 5, 2020). 2. AT&T, “AT&T Corporate Profile,” https://about.att.com/pages /corporate_profile (accessed March 5, 2020). 3. IKEA, “About the IKEA Group,” https://www.ikea.com/ms/en_JP /about_ikea/the_ikea_way/our_business_idea/index.html (accessed March 3, 2020). 4. Spencer Soper, “Amazon’s Grocery Push Keeps Stumbling after Whole Foods Purchase,” Bloomberg, December 20, 2018, https://www .bloomberg.com/news/articles/2018-12-20/amazon-s-grocery-push-keeps -stumbling-after-whole-foods-purchase (accessed March 12, 2020); Amazon, “Come Build the Future with Us,” https://www.amazon.jobs/en/working /working-amazon (accessed March 12, 2020). 5. Southwest, “About Southwest,” https://www.southwest.com/html /about-southwest/index.html (accessed March 3, 2020). 6. Ben & Jerry’s, “Our Values,” http://www.benjerry.com/values (accessed March 4, 2020). 7. American Red Cross, “Mission & Values,” https://www.redcross. org/about-us/who-we-are/mission-and-values.html (accessed March 4, 2020). 8. American Red Cross, “Our History,” https://www.redcross.org /about-us/who-we-are/history.html (accessed March 4, 2020). 9. “The Johnson & Johnson Tylenol Controversies,” IBS Center for Management Research, http://www.icmrindia.org/casestudies/catalogue /Business%20Ethics/BECG015.htm (accessed March 4, 2020); Johnson & Johnson, “Our Credo Values,” http://www.jnj.com/connect/about-jnj /jnj-credo/ (accessed March 4, 2020); Johnson & Johnson, “What We Do,” August 1, 2018, https://www.careers.jnj.com/business-structure-and-mission -page (accessed March 4, 2020); Peter Loftus and Sara Randazzo, “J&J Offers $4 Billion Opioid Litigation Settlement,” The Wall Street Journal, October 16, 2019, https://www.wsj.com/articles/j-j-offers-4-billion-opioid-litigation -settlement-11571247596 (accessed March 4, 2020); Johnson & Johnson, “To Our Shareholders,” March 13, 2019, https://www.jnj.com/letter-from-our -chairman-and-ceo-2018 (accessed March 4, 2020). 10. Sony, “Organization Data,” August 1, 2019, http://www.sony.net /SonyInfo/CorporateInfo/Data/organization.html (accessed March 4, 2020).
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Chapter 2: Strategic Marketing Planning 51 11. Shobhit Seth, “Walmart Patents Blockchain System for Automated Delivery Drones,” Investopedia, June 25, 2019, https://www.investopedia .com/news/walmart-patents-blockchain-system-automated-delivery -drones/ (accessed March 4, 2020). 12. Spotify, “Spotify Reports Fourth Quarter and Full Year 2019 Earnings,” February 5, 2020, https://newsroom.spotify.com/2020-02-05/spotify -reports-fourth-quarter-and-full-year-2019-earnings/ (accessed March 12, 2020). 13. Howard Sutton, The Marketing Plan in the 1990s (New York: The Conference Board, Inc., 1990). 14. Ibid. 15. Cindy Claycomb, Richard Germain, and Cornelia Droge, “The Effects of Formal Strategic Marketing Planning on the Industrial Firm’s Configuration, Structure, Exchange Patterns, and Performance,” Industrial Marketing Management, 29(May 2000), 219–234. 16. Matt Southern, “50% of Small Businesses Do Not Have a Marketing Plan,” Search Engine Journal, May 20, 2019, https://www.searchenginejournal .com/50-of-small-businesses-do-not-have-a-marketing-plan/308777/#close (accessed March 4, 2020). 17. Lynn Brewer, Robert C. Chandler, and O. C. Ferrell, Managing Risks for Corporate Integrity: How to Survive an Ethical Misconduct Disaster (Mason, OH: Thomson, 2006). 18. Sutton, The Marketing Plan in the 1990s, p. 16. 19. Sutton, The Marketing Plan in the 1990s, p. 17. 20. Bernard J. Jaworski and Ajay K. Kohli, “Market Orientation: Antecedents and Consequences,” Journal of Marketing, 57 (July 1993), 53–70.
21. Ibid.; Stanley F. Slater and John C. Narver, “Market Orientation and the Learning Organization,” Journal of Marketing, 59 (July 1995), 63–74. 22. Tom Warren, “Microsoft and Sony Are Teaming up for the Future of Gaming,” The Verge, May 20, 2019, https://www.theverge .com/2019/5/20/18632374/microsoft-sony-cloud-gaming-partnership -amazon-google (accessed March 4, 2020). 23. GE, “Getting More Air Time: This Software Helps Emirates Keep Its Planes Up and Running,” February 20, 2019, https://www.ge.com/reports /getting-air-time-software-helps-emirates-keep-planes-running/ (accessed March 12, 2020). 24. Spotify, “Company Info,” https://newsroom.spotify.com/company -info/ (accessed March 5, 2020); Darryn King, “Spotify Builds a Music Experience for Children,” The Wall Street Journal, March 2, 2020, https://www.wsj .com/articles/spotify-builds-a-music-experience-for-children-11583168401 (accessed March 5, 2020); Danny Vena, “Look Out, Spotify: Amazon’s Gunning for Your Free Subscribers,” The Motley Fool, November 19, 2019, https://www.fool.com/investing/2019/11/19/look-out-spotify-amazon-gunning -free-subscribers.aspx (accessed March 5, 2020); Sarah Perez, “Amazon Echo Gets More Family-Friendly,” TechCrunch, September 25, 2019, https:// techcrunch.com/2019/09/25/amazon-echo-gets-more-family-friendly/ (accessed March 5, 2020). 25. “ESG Reports and Ratings: What They Are, Why They Matter,” Harvard Law School Forum on Corporate Governance, July 27, 2017, https://corpgov.law.harvard.edu/2017/07/27/esg-reports-and-ratings-what -they-are-why-they-matter/ (accessed March 12, 2020).
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CHAPTER 3 Collecting and Analyzing Marketing Information 3.1 INTRODUCTION In this chapter, we begin the process of developing a marketing plan by examining key issues in collecting and structuring marketing information to assist in the formulation of marketing strategies. Managers in all organizations, large and small, devote a major portion of their time and energy to developing plans and making decisions. Today, managers have unprecedented access to and ways to gather data—offering new insights into consumers of their products and more. This type of data, often called big data, is good as continuous tracking of the buying preferences of target consumers over time is critical. Big data—large data sets from massive structured and unstructured sources—can be analyzed and used to support strategic decisions. However, the usefulness of big data requires not only access to the data but also proper analysis of it to generate actionable information in a timely manner. Staying abreast of trends in the marketing environment is but one of several tasks performed by marketing managers. However, it is perhaps the most important task as practically all planning and decision making depends on how well this analysis is conducted. Thus, this chapter integrates concepts of big data and current examples of its opportunities and challenges for marketers. Traditionally, one of the most widely used approaches to the collection and analysis of marketing information is the situation analysis. The purpose of the situation analysis is to describe current and future issues and key trends as they affect three key environments: the internal environment, the customer environment, and the external environment. As shown in Exhibit 3.1, there are many issues to be considered in a situation analysis. Adding big data to a situation analysis is one way to gain more complete insights that lead to better planning and strategy decisions. When viewed together, the specific data collected during the situation analysis and ongoing insights give the organization a 53 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
54 Part 2: Discovering Market Opportunities
BEYOND THE PAGES 3.1
Big Data, Big Marketing Analytics 1 The field of marketing research is changing because companies have access to more customer data than ever before. Marketers can use big data to uncover insights and make strategic decisions. With insights gleaned from big data, companies can create more effective advertising, predict purchase behavior, better serve customers, and show return on investment in a more efficient way. Big data presents an opportunity to use marketing analytics to assist in making decisions. Data is generated by many sources, including mobile devices, Internet searches, credit card transactions, beacons, and behavioral observations. Marketers want to use this data to create competitive advantages that will help them discover new insights into customer behavior. Companies of all sizes have unprecedented access to business trends, customer preferences, and buying behavior forecasts—which improves understanding of the marketing environment and marketing research capabilities. According to Deloitte’s CMO Survey, marketing analytics contributes to company performance more than social media and mobile marketing. Diageo, the maker of Johnnie Walker whiskey and Tanqueray gin, uses predictive analytics to increase both profitability and efficiency by improving its advertising and coupon efforts with real-time forecasts. As technology advances, consumers expect a personalized shopping experience. By predicting consumer behavior and investing in new innovations based on consumer preferences, companies can stay competitive in the fast-paced digital world. As companies collect big data, many turn to analytical service providers to help sort through all of the data. LatentView Analytics, Loginworks Softwares, and Indium Software are but a few analytics companies available to businesses today. These companies are experts in turning large sets of data into useful insights that drive innovation, increased performance, and customer satisfaction. The amount of data generated in a day is increasing at an incredible rate, and marketers are often faced with an overload of data. Walmart handles 250 million customer transactions every week. For this reason, companies have turned
to artificial intelligence (AI) that can be used to process big data more quickly and efficiently than humans can on their own. AI and machine learning can be used for many marketing activities including predictive analytics, content personalization, and customer targeting decisions. One example is JPMorgan Chase & Co., which uses a tool from software company Persado Inc. to improve marketing messages in its direct response e-mails and online display ads. The software rewrites copy written by humans using AI and machine learning to optimize the text based on how customers respond to various words and phrases. The increase in data available to businesses comes with a new set of challenges. One of these is data quality. Inaccurate, outdated, or duplicate data could lead to unreliable insights and poor business decisions. A second concern is that marketers should not use unstructured data for undefined purposes. It is always important to have a specific purpose in mind, otherwise it’s easy to get lost in the data. Additional concerns include the ethical collection and use of data. In a case of ethical data use, the FTC imposed a $5 billion civil penalty against Facebook—the largest ever imposed for violating consumer privacy laws—for misrepresenting how much control users had around the privacy and use of their personal data. The positive impact that big data has had upon marketing is undeniable. Unlike other forms of marketing research, using big data can reveal specific details about consumers that would be hard to discover in other ways. With careful integration, proper maintenance, and effective analysis, a company can use its data to better understand its consumers and tailor its products and services accordingly. For example, the use of sophisticated data helps to improve the allocation of salespeople, advertising, sales promotion, product mix, and all other components of the marketing strategy by looking at the past, present, and future insights provided by predictive data analysis. As companies find more efficient and effective ways to gather and interpret data, it is expected that marketing decision making will continue to improve.
big picture of the issues and trends that affect its ability to deliver value to stakeholders. These efforts drive the development of the organization’s competitive advantages and strategic focus as discussed in the next chapter. In this chapter, we examine several issues related to conducting a situation analysis, the components of a situation analysis, and the collection of marketing data and
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Chapter 3: Collecting and Analyzing Marketing Information 55
EXHIBIT 3.1 Issues to Be Considered in a Situation Analysis The Internal Environment Review of current objectives, strategy, and performance Availability of resources Organizational culture and structure The Customer Environment Who are our current and potential customers? What do customers do with our products? Where do customers purchase our products? When do customers purchase our products? Why (and how) do customers select our products? Why do potential customers not purchase our products? The External Environment Competition Economic growth and stability Political trends Legal and regulatory issues Technological advancements Sociocultural trends
information to facilitate strategic marketing planning. Although situation analysis has traditionally been one of the most difficult aspects of market planning, recent advances in technology have made the collection of market data and information much easier and more efficient. This chapter examines the different types of marketing data and information needed for planning, as well as many sources where such data may be obtained.
3.2 CONDUCTING A SITUATION ANALYSIS Before we move forward in our discussion, it is important to keep in mind three important issues regarding situation analysis and its role in organizational decision making on marketing and other topics. We highlight that (1) the human element—especially with big data—is critical; (2) data, analytics, and insights are not the same things; and (3) situation analysis is not always appropriate and offers many challenges to organizations.
3.2a The Human Element Although it is true that a comprehensive situation analysis can lead to better planning and decision making, data analysis itself is not enough. Put another way, a situation analysis is a necessary, but insufficient, prerequisite for effective strategic planning. The analysis must be combined with intuition and judgment to make the results useful for planning purposes. Situation analysis
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56 Part 2: Discovering Market Opportunities
should not replace the manager in the decision-making process. Its purpose is to empower the manager with information for more effective decision making. The so-called human element is critical to data analytics and insights because it requires people to dig deeper into what the data is saying.2 This step should not be discounted because not all data insights represent useful or advisable input to strategy development. The human element of situation analysis involves taking things apart, whether it’s a customer segment (to study the heavy users), a product (to understand the relationship between its features and customers’ needs), or competitors (to weigh their strengths and weaknesses against your own). The purpose of taking things apart is to understand why people, products, or organizations perform the way they do. After this dissection is complete, the manager can then synthesize the information to gain a big-picture view of the complex decisions to be made—often acting on some data insights while discounting others. This approach leads to better decisions that reflect information and intuition that cannot be detected in numbers, trends, and analysis or by artificial intelligence (AI) alone.
3.2b Data, Analytics, and Insights Are Not the Same Throughout the planning process, managers regularly face the question, “How much data and information do I need?” The answer sounds simple, but in practice it is not. Today, there is no shortage of data. In fact, it is virtually impossible to know everything about a specific topic. Thankfully, the cost of collecting and storing vast amounts of data has dropped dramatically over the past decade. Cloud-based marketing information systems and data warehouses are commonplace and affordable. These data sources offer real-time data, web-based access, and easy data-sharing between systems and functions. While having lots of data sounds optimal, the bottom line is that managers are more likely to be overwhelmed with data as it becomes easier to gather and store. According to a Clicktale survey, one-third of marketers don’t know what to do with their data.3 The volume and complexity of data available now are unprecedented and often require advanced software to analyze effectively. Having too much data or lacking the ability to filter and manage data is often referred to as data saturation.4 While the vast amount of available data is an issue to be resolved, the real challenge is that good, useful insights are not the same as data. Simply put, data is the facts and details of customers, product use, and/or user inputs. Analytics is the discovery of trends and patterns within the data via analysis techniques. Insights represent the value of data and analytics, as these outcomes identify useable information that helps to improve operations and performance of marketing activity. Data is easy to collect and store, but insights are not as easy to come by. For example, the fact that your firm’s sales are up 20 percent is not an insight until you compare it with the industry’s growth rate of 40 percent, or your main competitor’s growth rate of 60 percent. In this case, 20 percent growth, which seems good, is actually lagging severely behind both the industry and competition. Thus, marketers must be careful to combine and analyze data properly to create insights that depict a clear and complete picture of what the data is indicating with regard for related situational and environmental factors.
3.2c Situation Analysis Should Be Used Strategically Situation analysis is one of the most difficult tasks in developing a marketing plan. Managers have the responsibility of assessing the quality, adequacy, and timeliness of the data used for analysis and insights. It is important that any effort at situation analysis be well-organized, systematic, and supported by sufficient resources (e.g., people, equipment, information, and budget). However, the most important aspect of the analysis is that it should be an ongoing effort. The analysis should not only take place in the days and weeks immediately preceding the formation of strategies and plans; the collection, creation, analysis, and dissemination of pertinent marketing data and insights must be ingrained in the culture of the organization. While this is not an easy task,
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Chapter 3: Collecting and Analyzing Marketing Information 57
if the organization is going to be successful with customers and competitors, it must have the ability to assess its current situation in real time. However, even the best organizations encounter situation analysis challenges. Managers often think that if a question can be investigated then it should be. However, situation analysis is valuable only to the extent that it improves the quality of the resulting marketing plan. For example, data that costs $4,000 to acquire, but that improves the quality of the decision by only $3,999, should not be part of the analysis process. To assess when situation analysis should be used, managers must constantly ask questions such as “Where do I have knowledge gaps?”; “How can these gaps be filled?”; “What are the costs of filling these gaps?”; “Should this knowledge gap be filled, or are others more important?”; and “How much improvement in decision making will be gained by acquiring this information?” By asking these questions, managers can find a balance between the information they can get and the information most important to them. Analyzing too much data can lead to so-called paralysis by analysis, so it is important to investigate only the most important questions that are most likely to be acted upon. A final challenge is the task of tracking all three environments (internal, customer, external) simultaneously. Although the rapid pace of disruptive change in today’s economy is one cause of this difficulty, the relationship among all three environments creates challenges as well. As shown in Exhibit 3.2, the internal, customer, and external environments do not exist independently. Changes in one portion of the external environment can cause subsequent shifts in the customer environment or the internal environment. As we turn our attention to the three major components of the situation analysis, keep in mind that data and insights about these environments will come from both internal and external sources. Even information about the firm’s internal environment can be collected via external sources such as third-party analysis and ratings, financial commentaries, customer reviews, or customer opinion ratings. Finally, it is important to remember that the type of data and information source is not as important as having ready access to a wide variety of sources.
EXHIBIT 3.2 The Relationship Among the Internal, Customer, and External Environments
External Environment: Economy
External Environment: Competition Customer Environment: Who?
External Environment: Legal
Customer Environment: Why?
Internal Environment
Customer Environment: When?
External Environment: Technology
Customer Environment: What?
External Environment: Politics
Customer Environment: Where?
External Environment: Sociocultural
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58 Part 2: Discovering Market Opportunities
3.3 THE INTERNAL ENVIRONMENT The first aspect of a situation analysis involves the critical evaluation of the firm’s internal environment with respect to its objectives, strategy, performance, allocation of resources, structural characteristics, and political climate. In Exhibit 3.3, we provide a framework for analyzing the internal environment.
EXHIBIT 3.3 A Framework for Analyzing the Internal Environment Review of Current Marketing Objectives, Strategy, and Performance 1. What are the current marketing goals and objectives? 2. Are the marketing goals and objectives consistent with the corporate or businessunit mission, goals, and objectives? Are they consistent with recent changes in the customer or external environments? Why or why not? 3. How are current marketing strategies performing with respect to anticipated outcomes (e.g., sales volume, market share, profitability, communication, brand awareness, customer preference, customer satisfaction)? 4. How does current performance compare to other organizations in the industry? Is the performance of the industry as a whole improving or declining? Why? 5. If performance is declining, what are the most likely causes? Are marketing objectives inconsistent? Is the strategy flawed? Was the strategy poorly implemented? 6. If performance is improving, what actions can be taken to ensure that performance continues to improve? Is the improvement in performance due to a better-than-anticipated environment or superior planning and implementation? Review of Current and Anticipated Organizational Resources 1. What is the state of current organizational resources (e.g., financial, human, experience, relationships with key suppliers or customers)? 2. Are these resources likely to change for the better or worse in the near future? How? 3. If the changes are for the better, how can these added resources be used to better meet customers’ needs? 4. If the changes are for the worse, what can be done to compensate for these new resource constraints? Review of Current and Anticipated Cultural and Structural Issues 1. What are the positive and negative aspects of the current and anticipated organizational culture? 2. What issues related to internal politics or management struggles might affect the organization’s marketing activities? 3. What is the overall position and importance of the marketing function as seen by other functional areas? Are key executive positions expected to change in the future? 4. How will the overall market or customer orientation of the organization (or lack thereof) affect marketing activities? 5. Does the organization emphasize a long- or short-term planning horizon? How will this emphasis affect marketing activities? 6. Currently, are there positive or negative issues with respect to motivating employees, especially those in frontline positions (e.g., sales and customer service)?
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Chapter 3: Collecting and Analyzing Marketing Information 59
3.3a Review of Current Objectives, Strategy, and Performance First, the marketing manager must assess the firm’s current marketing objectives, strategy, and performance. A periodic assessment of marketing objectives is necessary to ensure that they remain consistent with the firm’s mission and the changing customer and external environments. In today’s fast-changing marketplace, marketers typically review their situation quarterly and monitor it on a daily or weekly basis via metrics and dashboards. Metrics are measurable indicators of company objectives, such as sales performance, market share, and/or growth rate. Marketers identify multiple metrics that they can monitor via a dashboard that visually represents real-time results for each metric across multiple levels and markets (e.g., across SBUs or geographic regions). This real-time monitoring doesn’t negate the need for more formal situation analysis to assess if the goals and metrics reflect the right targets. Thus, it is necessary to reassess the firm’s marketing goals to identify out-of-date or ineffective metrics that should be updated to better reflect new market conditions and disruptive competitive threats that should be factored into the evolving situation analysis. Specifically, the marketing manager evaluates metrics via a dashboard by brand, product line, market, business unit, division, and so on. This broad review is important to analyze the marketing strategy relative to overall industry performance. Poor or declining performance may be the result of (1) holding on to marketing goals or objectives inconsistent with the current realities of the customer or external environments, (2) a flawed marketing strategy, (3) poor implementation, (4) changes in the customer or external environments beyond the control of the firm, and (5) anticipating disruptive changes due to technology and changing consumer sentiments. The causes for poor or declining performance must be pinpointed so new strategies can be developed to correct the situation before it is too late, often measured in months rather than years in today’s dynamic business climate. For example, in the mid-1990s Pepsi was locked in a seemingly endless market share battle with Coca-Cola. By all accounts, the battle was not going well for Pepsi: Its profits trailed Coke’s by 47 percent, while its market value was less than half of its chief rival.5 But losing out to Coke in the cola wars was just the kick that Pepsi needed to regroup. Forced to look outside of the soft drink industry for new growth opportunities, PepsiCo, Inc. moved aggressively into noncarbonated drinks, sports beverages, food, and snacks. Today, PepsiCo’s Aquafina bottled water and Gatorade are dominant over Coke’s Dasani bottled water and Powerade in their respective markets.6 After more than 130 years of rivalry, Coke has continued to focus on its beverage portfolio (e.g., Honest Tea, Costa Coffee, Topo Chico) while Pepsi has continued to grow its snacks division (e.g., Imagine Snacks, Sun Chips, Miss Vickie’s).7 This long-term example of adaptation based on situation analysis is relevant as many brands and companies such as Nike and Adidas or Mercedes and BMW still adjust strategy over the short- and long-term to remain competitive. However, short-term shifts can also be very important to marketers. For example, the rise of Uber and Lyft via innovative mobile technologies caught most taxi providers off guard and quickly transferred competitive advantage to the new ride-sharing options over the less convenient taxi services offered in most cities.8 Had taxi companies realized that most customers would like an online way—more specifically, an easy-to-use GPS-enabled app—to find a ride for an affordable price, they may have been able to better compete as ride-sharing options quickly gained large market shares in little time.
3.3b Availability of Resources Second, the marketing manager must review the current and anticipated levels of organizational resources that can be used for marketing purposes. This review includes an analysis of financial, human, and experience resources as well as any resources the firm might hold in key relationships with supply chain partners, strategic alliance partners, or customer groups. An important element of this analysis is to gauge whether the availability or level of these resources is likely to change in the near future. Marketers use predictive analytics in an effort to use historical data inputs to accurately predict future outcomes. This informed forward-looking technique helps to identify if
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additional resources might be used to create competitive advantages in meeting customer needs. If the predictive model suggests that resource levels are likely to decline, the manager must find ways to compensate when establishing marketing goals, objectives, and strategies for the next planning period. As economic times fluctuate, financial shortfalls get most of the attention, but the human workforce is often the biggest resource challenge. In good economic times, workers are difficult for managers to hire, yet as the economy turns negative workers are less in demand. In addition, many experts predict that a shortage of skilled labor will be a major problem in the United States over the coming years, regardless of the economy. The problem is not the raw number of workers but the skill set that each one brings to the job. After years of increasing technological innovation, workers must now possess the right set of skills to work with technology. Conversely, many fear the rise of AI and automation will eliminate jobs. Across industries, workers of today must possess knowledge-related skills such as abstract reasoning, problem solving, and communication. Firms are also trying to increase labor productivity by doing the same or more work with fewer employees. Companies in many industries—most notably services—have turned to offshoring jobs to other countries—such as India and the Philippines—where highly educated, English-speaking employees will work for less pay than their U.S. counterparts. There is a tradeoff, however, between labor savings and factors such as time differences and legal hurdles.9 The challenges of a fluctuating workforce across economic conditions, skill needs, technology innovations, and global solutions affect the ability of marketers to implement strategy and must be addressed in the situation analysis.
3.3c Organizational Culture and Structure Finally, the marketing manager should review current and anticipated cultural and structural issues that could affect marketing activities. One of the most important issues in this review involves the internal culture of the firm. In most firms, marketing is respected and central to a customer focus. However, in some organizations, marketing does not hold a prominent position in the management hierarchy. This situation can create challenges for the marketing manager in acquiring resources and gaining approval of the marketing plan. The internal culture also includes any anticipated changes in key executive positions within the firm. The marketing manager, for example, could have difficulty in dealing with a new production manager who fails to see the benefits of marketing. Other structural issues to be considered include the overall customer orientation of the firm (or lack thereof), a focus on the customer’s success with products, issues related to employee motivation and commitment to the organization (particularly among unionized employees), and the relative emphasis on long-term versus short-term planning. Top managers who concern themselves only with short-term profits are unlikely to see the importance of a marketing plan that attempts to create long-term customer relationships. For most firms, culture and structure are relatively stable issues that do not change dramatically from one year to the next. In fact, changing or reorienting an organization’s culture is a difficult and time-consuming process. In some cases, however, the culture and structure can change swiftly, causing political and power struggles within the organization. Today, many firms—enabled by new insights into customer use of products via data insights from cloud-based use sources, product installed sensors, and GPS tracking—are shifting firmwide efforts toward helping customers to use products better. This shift toward a so-called customer success orientation must be instituted across the firm and often is a cultural change that takes time to implement. Another example of culture change comes from the effects when two organizations combine their separate cultures and structures during a merger. Incompatible corporate cultures can result in a failed merger. For example, Amazon’s acquisition of Whole Foods resulted in a culture mismatch, resulting in unhappy employees and customers.10
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Chapter 3: Collecting and Analyzing Marketing Information 61
3.4 THE CUSTOMER ENVIRONMENT In the second part of the situation analysis, the marketing manager must examine the current and future situation with respect to customers in the firm’s target markets. During this analysis, information should be collected that identifies (1) the firm’s current and potential customers, (2) the prevailing needs of current and potential customers, (3) the basic features of the firm’s and competitors’ products perceived by customers as meeting their needs, and (4) anticipated changes in customers’ needs. In assessing the firm’s target markets, the marketing manager must attempt to understand all relevant buyer behavior and product usage characteristics. One method that the manager can use to collect this information is the 5W Model: Who, What, Where, When, and Why. We have adapted and applied this model to customer analysis, as shown in Exhibit 3.4. Organizations that are truly market or customer oriented should know their customers well enough that they have easy access to the types of information that answer these questions. In most firms, much of this data is available and can be turned into insights on customers and how they use products without even having to ask customers. If not, the organization may need to conduct primary marketing research to fully understand its target markets.
3.4a Who Are Our Current and Potential Customers? Answering the “who” question requires an examination of the relevant characteristics that define target markets. This includes demographic characteristics (gender, age, income, etc.), geographic characteristics (where customers live, density of the target market, etc.), and psychographic characteristics (attitudes, opinions, interests, etc.). Depending on the types of products sold by the firm, purchase influencers or users, rather than actual purchasers, may be important as well. For example, in consumer markets it is well known that the influence of children is critical for purchases such as cars, homes, meals, toys, and vacations. In business markets, the analysis typically focuses on the buying center. Is the buying decision made by an individual or by a committee? Who has the greatest influence on the purchase decision? The analysis must also assess the viability of potential customers or markets that may be acquired in the future. This involves looking ahead to situations that may increase the firm’s ability to gain new customers. For example, firms around the world are particularly excited about the further opening of the Chinese market and its 1.4 billion potential consumers. Many firms, including Tesla, Apple, Procter & Gamble, Walmart, Starbucks, and Pepsi, have established a presence in China to better serve these new markets.
3.4b What Do Customers Do With Our Products? The “what” question entails an assessment of how customers consume and dispose of the firm’s products. Here the marketing manager might be interested in identifying the rate of product consumption (also called the usage rate), differences between heavy and light users of products, whether customers use complementary products during consumption, and what customers do with the firm’s products after consumption. In business markets, customers typically use the firm’s products in the creation of their own products. As a result, business customers tend to pay close attention to product specifications and quality. Overall, marketers know more about what customers do with products than they ever did before. Marketers have always been focused on understanding customer product needs and usage. In the past, this process consisted of focus groups, purchase data, and survey research. Today, marketers can go beyond this practice to, in many cases, utilize in-product sensors and AI capabilities to analyze and gain a more complete perspective on how products are used. For example, Amazon’s Echo tracks customer questions and online order usage. Most vehicles, from GM to Tesla, are replete with sensors that allow insight into how far, fast, and long a car drives, as well as how its engine and systems are performing. Online viewing habits at Netflix help the
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EXHIBIT 3.4 The Expanded 5W Model for Customer Analysis Who Are Our Current and Potential Customers? 1. What are the demographic, geographic, and psychographic characteristics of our customers? 2. Who actually purchases our products? 3. How do these purchasers differ from the users of our products? 4. Who are the major influencers of the purchase decision? 5. Who is financially responsible for making the purchase? What Do Customers Do With Our Products? 1. In what quantities and in what combinations are our products purchased? 2. How do heavy users of our products differ from light users? 3. Do purchasers use complementary products during the consumption of our products? If so, what is the nature of the demand for these products, and how does it affect the demand for our products? 4. What do our customers do with our products after consumption? 5. Are our customers recycling our products or packaging? Where Do Customers Purchase Our Products? 1. From what types of vendors are our products purchased? 2. Does e-commerce have an effect on the purchase of our products? 3. Are our customers increasing their purchasing from nonstore outlets? When Do Customers Purchase Our Products? 1. Are the purchase and consumption of our products seasonal? 2. To what extent do promotional events affect the purchase and consumption of our products? 3. Do the purchase and consumption of our products vary based on changes in physical/social surroundings, time perceptions, or the purchase task? Why (and How) Do Customers Select Our Products? 1. What are the basic features provided by our products and our competitors’ products? How do our products compare to those of competitors? 2. What are the customer needs fulfilled by our products and our competitors’ products? How well do our products meet these needs? How well do our competitors’ products meet these needs? 3. Are the needs of our customers expected to change in the future? If so, how? 4. What methods of payment do our customers use when making a purchase? Is the availability of credit or financing an issue with our customers? 5. Are our customers prone to developing close long-term relationships with us and our competitors, or do they buy in a transactional fashion (primarily based on price)? 6. How can we develop, maintain, or enhance the relationships we have with our customers? Why Do Potential Customers Not Purchase Our Products? 1. What are the basic needs of noncustomers that our products do not meet? 2. What are the features, benefits, or advantages of competing products that cause noncustomers to choose them over our products? 3. Are there issues related to distribution, promotion, or pricing that prevent noncustomers from purchasing our products? 4. What is the potential for converting noncustomers into customers of our products? Source: Adapted from Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning, 6th ed. (Boston, MA: McGraw-Hill/Irwin, 2005). Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Chapter 3: Collecting and Analyzing Marketing Information 63
Many firms see China as the world’s most lucrative market with around 1.4 billion potential consumers.
company to predict the likelihood of future viewing trends and interests. These examples, and many, many more, illustrate how marketers gain valuable, data-driven consumer insights simply from customers using their products. In some cases, marketers cannot fully understand how customers use their products without looking at the complementary products that go with them. In these cases of derived demand—where the demand for one product depends on (is derived from) the demand of another product—the marketer must also examine the consumption and usage of the complementary product. For example, tire manufacturers concern themselves with the demand for automobiles, and makers of computer accessories closely watch the demand for desktop and laptop computers. By following the demand for and consumption of complementary products, marketers are in a much better position to understand how customers use their products. Before customers and marketers became more concerned about the natural environment, many firms looked only at how their customers used products. Today, marketers have become increasingly interested in how customers dispose of products, such as whether customers recycle the product or its packaging. Another post-consumption issue deals with the need for reverse channels of distribution to handle product repairs. Car manufacturers, for example, must maintain an elaborate network of certified repair facilities (typically through dealers) to handle maintenance and repairs under warranty. Sometimes recycling and repair issues come into conflict. The relatively low cost of today’s home electronics leads many customers to buy new phones rather than have old ones repaired. This causes a problem: What do consumers do with e-waste, or broken and obsolete electronic devices? Many marketers are working to address these post-consumption issues as they design and develop new products that are more environmentally friendly.
3.4c Where Do Customers Purchase Our Products? The “where” question is associated mainly with distribution and customer convenience. Until recently, most firms looked solely at traditional channels of distribution, such as brokers, wholesalers, and retailers. Thus, the marketing manager would have concerns about the intensity of the distribution effort and the types of retailers that the firm’s customers patronized. Today, however, direct to consumer distribution (e-commerce, direct marketing, and catalogs) is a common means
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64 Part 2: Discovering Market Opportunities
of offering products to customers. Though a prominent industry, in 2019, online e-commerce accounted for $601.7 billion, or 11 percent, of all consumer purchases in the United States.11 Thus, despite huge growth, retail and other channels of product distribution to customers still make up nearly 90 percent of all consumer sales. Business markets have also begun to capitalize on the lower costs of procurement via the Internet. Likewise, many manufacturers have bypassed traditional distribution channels in favor of selling through their own outlet stores or websites. For example, there are now so many different avenues for downloading or streaming movies, either online or via cable, that the traditional movie rental business is in jeopardy. Related to the rise of direct from manufacturer sales models, the importance of the supply chain has never been greater. The supply chain is the path a product takes from raw material to a consumer good. Supply chains differ with some companies opting for shorter chains and some for longer. A good example of the supply chain includes the many products produced in China, India, and other developing markets that are sold in the United States. For example, Apple’s iPhone is produced in many places, including China, the United States (California and Texas), South Korea, the Netherlands, and Taiwan.12 Thus, Apple is dependent on many modes of transportation to develop, create, and assemble the many components needed to produce its final product that is then shipped to retailers and direct to consumers across the globe. Thus, coordinating product manufacturing and connecting it to consumers via the supply chain has become complex and central to business success.
3.4d When Do Customers Purchase Our Products? The “when” question refers to any situational influences that may cause customer purchasing activity to vary over time. This includes broad issues, such as the seasonality of the firm’s products and the variability in purchasing activity caused by promotional events or budgetary constraints. In the past, consumer purchasing activity would increase just after payday, yet today the use of credit cards has changed this dynamic to some extent. Digital distribution of an increasing number of products that we use makes it easier for marketers to forecast when customers will purchase as subscriptions have replaced individual purchase of many products (e.g., subscribing to Spotify to stream music rather than purchasing individual songs or albums). In business markets, budgetary constraints and the timing of a firm’s fiscal year often dictate the “when” question. For example, many schools and universities buy large quantities of supplies just before the end of their fiscal years. The “when” question also includes more subtle influences that can affect purchasing behavior, such as physical and social surroundings, time perceptions, and the purchase task. For example, a consumer may purchase a domestic brand of beer for regular home consumption but purchase an import or microbrew when visiting a bar (physical surroundings), going out with friends (social surroundings), or hosting a party. Customers can also vary their purchasing behavior based on the time of day or how much time they have to search for alternatives. Variation by purchase task depends on what the customer intends to accomplish with the purchase. For example, a customer may purchase brand A for her own use, brand B for her children, and brand C for her coworker as a gift. Or when on a vacation, purchasing patterns and willingness to spend money can change dramatically. To be successful, marketers must know when customers are willing and most likely to purchase their products.
3.4e Why (and How) Do Customers Select Our Products? The “why” question involves identifying the basic need-satisfying benefits provided by the firm’s products. The potential benefits provided by the features of competing products should also be analyzed. This question is important because customers may purchase the firm’s products to fulfill needs that the firm never considered. For example, most people think of vinegar as an ingredient in salad dressings. However, vinegar boasts many other uses, including cleaning floors, loosening rusted screws or nuts, tenderizing meat, and softening hardened paint brushes. The answer to the “why” question can also aid in identifying unsatisfied or under-satisfied customer needs. During the analysis, it is also important to identify potential changes in customers’ current and future
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Chapter 3: Collecting and Analyzing Marketing Information 65
BEYOND THE PAGES 3.2
Cleaning Up E-waste 13 Most people toss old electronics and equipment, such as smartphones, vacuum cleaners, and TVs, into the trash. Therein lies the problem with electronic waste, or e-waste, which is a major problem for electronics manufacturers, state and local governments, and the U.S. Environmental Protection Agency. In fact, only 20 percent of e-waste is recorded as collected and recycled. E-waste globally is estimated to exceed 50 million tons, with annual growth between 4 and 5 percent. Many of these discarded items contain toxins such as mercury, cadmium, and lead that can contaminate the soil and water if they are not disposed of properly. In the United States alone, $55 billion worth of e-waste is thrown away each year. Because of this growing problem, some state and local governments have taken steps to help solve the problem. However, only 19 states ban electronics from landfills. To date, there is no federal law that governs e-waste. A federal law would put enormous pressure on companies, many of which do not have reverse supply chain procedures in place to handle incoming e-waste. To handle the growing demands for recycling, the electronics industry established the Electronic Manufacturers Recycling Management Company (MRM), which is funded by its members, including Toshiba, Sharp, and Panasonic. MRM has recycled more than 1 billion pounds in electronics to date across 20 states. Other companies use third-party recyclers, such as Waste Management, to handle recycling. Electronic Recyclers International (ERI), the country’s largest recycler of electronic waste, processes 300 million pounds of e-waste every year at eight locations.
Goodwill Industries developed an innovative strategy to address this problem—the Reconnect Partnership—where Dell provides training and financial support to refurbish old computers. Since the program’s inception in 2004, Dell has continued to scale it, offering recycling options at more than 2,000 Goodwill locations. The strategy is a huge win for Goodwill, which like other charities has been inundated with donations of unwanted electronics. Dell has recovered 2 billion pounds of computer waste through take-back and recycling programs, including its Asset Resale and Recycling (ARR) service for commercial customers. Due to the growing importance of the e-waste problem, many companies have published formal policies regarding e-waste and e-recycling. In addition to electronics manufacturers, retailers and service companies are now on board supporting a so-called circular economy that encourages recycling or repairing old products. Amazon is one such company. The online retailer has an electronics trade-in program, Amazon Trade-In, which accepts thousands of items such as Amazon smart devices, books, and video games in exchange for gift card credit. Also, the company educates its customers on how to recycle, repair, and trade-in Amazon devices and products through Amazon Second Chance. As connectivity is embedded into more and more everyday items, Internet-connected electronics are expected to generate e-waste at a faster rate than ever before. Therefore, to attract investors and protect their reputation, companies should invest heavily in e-waste management.
needs. Social media has helped marketers to better understand why customers buy their products as online reviews and social posts often reveal insights that are valuable. It is important to understand why products are purchased as customers may purchase the firm’s products for a reason that a competitor may soon capitalize on if not properly addressed by the current seller. The “how” part of this question refers to the means of payment that customers use when making a purchase. Although most people use cash (58 percent), which also includes checks and debit cards for most transactions, the availability of credit makes it possible for customers to take possession of high-priced products such as cars and homes. In addition, credit cards are used by 23 percent of consumers to make purchases with a higher per transaction average than cash purchases.14 The same is true in business markets where credit is essential to the exchange of goods and services in both domestic and international transactions. Recently, a very old form of payment has reemerged in business markets—barter. Barter involves the exchange of goods and services for other goods or services; no money changes hands. Barter arrangements are good for small businesses short on cash. According to the International Reciprocal Trade Association, the annual volume of modern trade and bartering is estimated to be $12–14 billion. It has grown because of development of online trading platforms and global financial strain.15 Online platforms
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66 Part 2: Discovering Market Opportunities
for exchange, such as barternetwork.com, are often used by businesses that desire to barter goods and services.
3.4f Why Do Potential Customers Not Purchase Our Products? An important part of customer analysis is the realization that many potential customers choose not to purchase the firm’s products. Although there are many potential reasons why customers might not purchase a firm’s products, some reasons include: ●● ●●
●● ●● ●● ●● ●● ●●
Noncustomers have a basic need that the firm’s product does not fulfill. Noncustomers perceive that they have better or lower-priced alternatives, such as competing substitute products. Competing products have better features or benefits than the firm’s product. The firm’s product does not match noncustomers’ budgets or lifestyles. Noncustomers have high switching costs. Noncustomers do not know that the firm’s product exists. Noncustomers have misconceptions about the firm’s product (weak or poor image). Poor distribution makes the firm’s product difficult to find.
Once the manager identifies the reasons for nonpurchase, the manager should make a realistic assessment of the potential for converting noncustomers into customers. Although conversion is not always possible, in many cases converting noncustomers is as simple as taking a different approach. For example, Australian-based Casella Wines was able to convert noncustomers into wine drinkers by fundamentally changing their approach to the wine industry. Through its Yellow Tail brand, Casella converted non-wine drinkers by positioning itself as being easy to drink, easy to understand, easy to buy, and fun. Yellow Tail ignored long-held wine attributes such as prestige and complexity to make wine more approachable to the masses.16 Once the marketing manager has analyzed the firm’s current and potential customers, the information can be used to identify and select specific target markets for the revised marketing strategy. The firm should target those customer segments where it can create and maintain a sustainable advantage over its competition.
3.5 THE EXTERNAL ENVIRONMENT The final and broadest issue in a situation analysis is an assessment of the external environment, which includes all the external factors—competitive, economic, political, legal/regulatory, technological, and sociocultural—that can exert considerable direct and indirect pressures on both domestic and international marketing activities. Exhibit 3.5 provides a framework for analyzing factors in the external environment. As this framework suggests, the issues involved in examining the external environment can be divided into separate categories (i.e., competitive, economic, legal, etc.). However, some environmental issues can fall into multiple categories. One such example is the explosive growth in direct-to-consumer (DTC) advertising in the pharmaceutical industry. Billions are spent annually on DTC advertising through “ask your doctor” style ads aimed at encouraging consumers to request drugs by name from their physicians. The United States is the only country where this type of advertising is legal. This promotional strategy has been praised and criticized on a number of fronts. Some argue that DTC advertising plays an important role in educating the population about both disease and available treatments. However, according to a Food and Drug Administration survey, 65 percent of physicians believe DTC ads send confusing messages to patients.17 Issues in the external environment can often be quite complex. The tragic events of September 11, 2001, led to many changes in the competitive, economic, political, legal, technological, and socio cultural environments that will be felt for decades to come. In addition, the global response to COVID-19 (coronavirus) in 2020 changed how virtually every business interacted with its
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EXHIBIT 3.5 A Framework for Analyzing the External Environment Competition 1. Who are our major brand, product, generic, and total budget competitors? What are their characteristics in terms of size, growth, profitability, strategies, and target markets? 2. What are our competitors’ key strengths and weaknesses? 3. What are our competitors’ key capabilities and vulnerabilities with respect to their marketing program (e.g., products, distribution, promotion, and pricing)? 4. What response can we expect from our competitors if environmental conditions change or if we change our marketing strategy? 5. How is our set of competitors likely to change in the future? Who are our new competitors likely to be? Economic Growth and Stability 1. What are the general economic conditions of the country, region, state, and local area in which our firm operates? 2. What are the economic conditions of our industry? Is our industry growing? Why or why not? 3. Overall, are customers optimistic or pessimistic about the economy? Why? 4. What are the buying power and spending patterns of customers in our industry? Are our industry’s customers buying less or more of our products? Why? Political Trends 1. Have recent elections changed the political landscape within our domestic or international markets? If so, how? 2. What type of industry regulations do elected officials favor? 3. What are we doing currently to maintain good relations with elected officials? Have these activities been effective? Why or why not? Legal and Regulatory Issues 1. What proposed changes in international, federal, state, or local laws and regulations have the potential to affect our marketing activities? 2. Do recent court decisions suggest that we should modify our marketing activities? 3. Do the recent rulings of federal, state, local, and self-regulatory agencies suggest that we should modify our marketing activities? 4. What effect will changes in global trade agreements or laws have on our international marketing opportunities? Technological Advancements 1. What impact has changing technology had on our customers? 2. What technological changes will affect the way that we operate or manufacture our products? 3. What technological changes will affect the way that we conduct marketing activities such as distribution or promotion? 4. Are there any current technologies that we do not use to their fullest potential in making our marketing activities more effective and efficient? 5. Do any technological advances threaten to make our products obsolete? Does new technology have the potential to satisfy previously unmet or unknown customer needs? Sociocultural Trends 1. How are society’s demographics and values changing? What effect will these changes have on our customers, products, pricing, distribution, promotion, and our employees? 2. What challenges or opportunities have changes in the diversity of our customers and employees created? 3. What is the general attitude of society about our industry, company, and products? Could we take actions to improve these attitudes? 4. What social or ethical issues should we be addressing?
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68 Part 2: Discovering Market Opportunities
customers. The move to virtual technologies, less direct contact, and redesign of customer areas changed fundamental aspects of customer and seller dynamics. Thankfully, complex situations like these occur infrequently. As we examine each element of the external marketing environment, keep in mind that issues that arise in one aspect of the environment are usually reflected in other elements as well.
3.5a Competition In most industries, customers have preferences and choices in terms of the goods and services they can purchase. Thus, when a firm defines the target markets it will serve, it simultaneously selects a set of competing firms. The current and future actions of these competitors must be constantly monitored, and hopefully even anticipated. One of the major problems in analyzing competition is the question of identification. That is, how does the manager answer the question “Who are our current and future competitors?” To arrive at an answer, the manager must look beyond the obvious examples of competition. Most firms face four basic types of competitors:
1. Brand competitors, which market products with similar features and benefits to the same customers at similar prices. 2. Product competitors, which compete in the same product class, but with products that are different in features, benefits, and price. 3. Generic competitors, which market very different products that solve the same problem or satisfy the same basic customer need. 4. Total budget competitors, which compete for the limited financial resources of the same customers. Exhibit 3.6 presents examples of each type of competition for selected product markets. In the compact SUV segment of the automotive industry, for example, the Jeep Compass, Ford Escape, Honda CR-V, and Toyota RAV4 are brand competitors. However, each faces competition from other types of automotive products, such as midsize SUVs, trucks, crossovers, and passenger cars. Some of this product competition comes from within each company’s own product portfolio
EXHIBIT 3.6 Examples of Major Types of Competition Product Category (Need Fulfilled)
Brand Competitors
Product Competitors
Generic Competitors
Total Budget Competitors
Compact SUVs (Transportation)
Jeep Compass Ford Escape Honda CR-V Toyota RAV4
Midsize SUVs Trucks Passenger cars Minivans
Rental cars Motorcycles Bicycles Public transportation Ride sharing
Vacation Debt reduction Home remodeling
Soft Drinks (Refreshment)
Coca-Cola Zero Diet Coke Pepsi Cola Diet Pepsi
Tea Orange juice Bottled water Energy drinks Sparkling water
Tap water
Candy Gum Potato chips
Movies (Entertainment)
Black Widow Mulan Dune
Cable TV Athletic events Internet-based TV Festivals Pay-Per-View streaming Concerts
Shopping Reading Fishing
Colleges (Education)
Auburn University Florida State University The University of Alabama
Trade school Community college Online programs
New cars Vacations Investments
Books Apprenticeships
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Chapter 3: Collecting and Analyzing Marketing Information 69
(e.g., Honda’s Pilot SUV competes with the CR-V). Compact SUVs also face generic competition from motorcycles, bicycles, rental cars, public transportation, and ride sharing—all of which offer products that satisfy the same basic customer need for transportation. Finally, customers have many alternative uses for their money rather than purchasing a compact SUV: They can take a vacation, install a pool in the backyard, buy a boat, start an investment fund, or pay off debt. All four types of competition are important, but brand competitors rightfully receive the greatest attention as customers see different brands as direct substitutes for each other. For this reason, strategies aimed at getting customers to switch brands are a major focus in any effort to beat brand competitors. Famous business rivalries include Uber vs. Lyft, Coke vs. Pepsi, Marvel Comics vs. DC Comics, McDonald’s vs. Burger King, Dunkin’ vs. Starbucks, and Airbus vs. Boeing. Competitive analysis has received greater attention recently for several reasons: more intense competition from sophisticated competitors, increased competition from foreign firms, shorter product life cycles, and dynamic environments, particularly in the area of technological innovation. A growing number of companies have adopted formalized methods of identifying competitors, tracking their activities, and assessing their strengths and weaknesses—a process referred to as competitive intelligence. Competitive intelligence involves the legal and ethical observation, tracking, and analysis of the total range of competitive activity, including competitors’ capabilities and vulnerabilities with respect to sources of supply, technology, marketing, financial strength, manufacturing capacities/qualities, and target markets. It also attempts to predict and anticipate competitive actions and reactions in the marketplace.18 Competitive analysis should progress through the following stages:
1. Identification. Identify all current and potential brand, product, generic, and total budget competitors. 2. Characteristics. Focus on key competitors by assessing the size, growth, profitability, objectives, strategies, and target markets of each one. 3. Assessment. Assess each key competitor’s strengths and weaknesses, including the major capabilities and vulnerabilities that each possesses within its functional areas (marketing, research and development, production, human resources, etc.). 4. Capabilities. Focus the analysis on each key competitor’s marketing capabilities in terms of its products, distribution, promotion, and pricing. 5. Response. Estimate each key competitor’s most likely strategies and responses under different environmental situations, as well as its reactions to the firm’s own marketing efforts. Many sources are available for gathering information on current or potential competitors. Company annual reports are useful for determining a firm’s current performance and future direction. An examination of a competitor’s mission statement can also provide information, particularly with respect to how the company defines itself. A thorough scan of a competitor’s website can also uncover information—such as product specifications and prices—that can greatly improve the competitive analysis. Other, clever ways to collect competitive information include data mining techniques, patent tracking to reveal technological breakthroughs, creating psychological profiles of competitors’ key executives, searching consumer review and blog websites, and attending trade shows and conferences.19 Other valuable information sources include business periodicals and trade publications that provide newsworthy tidbits about companies. There are also numerous commercial databases, such as ABI/INFORM, InfoTrac, EBSCO Information Services, and Moody’s, which provide a wealth of information on companies and their marketing activities.
3.5b Economic Growth and Stability If there is one truism about any economy, it is that it will inevitably change. Therefore, current and expected conditions in the economy can have a profound impact on marketing strategy. A thorough examination of economic factors requires marketing managers to gauge and anticipate the general economic conditions of the nation, region, state, and local area in which they operate. These general economic conditions include inflation, employment and income levels, interest rates, taxes, trade restrictions, tariffs, and the current and future stages of the business cycle (prosperity, stagnation, recession, depression, and recovery). For example, the annual U.S. inflation
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70 Part 2: Discovering Market Opportunities
rate trended downward for 16 years until it began to rise again in 2003. The upward trend ended in 2008 when inflation actually became negative (i.e., deflation). This means that general price levels began to fall during the economic downturn, brought on by contractions in spending by the government and individuals. After bottoming out in 2010, inflation increased for two years and has trended downward or flat since that time. Today, inflation regularly fluctuates between 1.5 and 3 percent per year in the United States.20 Equally important economic factors include consumers’ overall impressions of the economy and their ability and willingness to spend. Consumer confidence (or lack thereof) can greatly affect what the firm can or cannot do in the marketplace. In times of low confidence, consumers may not be willing to pay higher prices for premium products, even if they have the ability to do so. In other cases, consumers may not have the ability to spend, regardless of the state of the economy. Another important factor is the current and anticipated spending patterns of consumers in the firm’s target market. If consumers buy less (or more) of the firm’s products, there could be important economic reasons for the change. One of the most important economic realities in the United States over the last 60 years has been a steady shift away from a tangibles-dominant economy (goods, equipment, manufacturing) to one dominated by intangibles such as services and information. In fact, virtually everyone is aware that the U.S. economy is a knowledge-based economy. However, our methods of measuring and reporting on the economy have not kept pace with this change. Our methods are good at capturing manufacturing output, capital expenditures, and investments in other tangible assets, but they cannot capture investments in intangibles such as innovation, employee training, brand equity, or product design. Consequently, the true nature of our economy is underreported by virtually all current statistics, such as the revered GDP. Innovation, creativity, and human assets— the main drivers behind the success of most U.S. businesses—are not counted as a part of yearly GDP statistics. Furthermore, intangible assets are woefully underreported on corporate balance sheets. The value of intangible assets in public U.S. companies is estimated at $21 trillion. One of the major challenges as we move forward is finding ways of capturing these intangibles in our regular reporting and economic analyses.21
3.5c Political Trends Although the importance will vary from firm to firm, most organizations should track political trends and attempt to maintain good relations with elected officials. Organizations that do business with government entities, such as defense contractors, must be especially attuned to political trends. Elected officials who have negative attitudes toward a firm or its industry are more likely to create or enforce regulations unfavorable for the firm. For example, the anti-tobacco trend in the United States has been in full swing since the late 1990s. Today, many states and local communities have passed laws to prevent smoking in public places. The Food and Drug Administration banned mint- and fruit-flavored vaping products.22 One of the most hotly contested businessrelated political issues of late has been the status of illegal immigrants crossing the U.S. border, especially from Mexico. This single issue has potential ramifications for our economy (employment, health care, trade), our society (language, culture), and our political relations with other nations. As these examples show, political discussions can have serious, lasting consequences for an industry or firm. Many organizations view political factors as beyond their control and do little more than adjust the firm’s strategies to accommodate changes in those factors. Other firms, however, take a more proactive stance by seeking to influence elected officials. For example, some organizations publicly protest legislative actions, while others seek influence more discreetly by routing funds to political parties or lobbying groups. Whatever the approach, managers should always stay in touch with the political landscape.
3.5d Legal and Regulatory Issues As you might suspect, legal and regulatory issues have close ties to events in the political environment. Numerous laws and regulations have the potential to influence marketing decisions and
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Chapter 3: Collecting and Analyzing Marketing Information 71
activities. The simple existence of these laws and regulations causes many firms to accept this influence as a predetermined aspect of market planning. For example, most firms comply with procompetitive legislation rather than face the penalties of noncompliance. In reality, most laws and regulations are fairly vague (for instance, the Americans with Disabilities Act), which often forces firms to test the limits of certain laws by operating in a legally questionable manner. The vagueness of laws is particularly troubling for e-commerce firms who face a number of ambiguous legal issues involving copyright, liability, taxation, and legal jurisdiction. For reasons such as these, the marketing manager should carefully examine recent court decisions to better understand the law or regulation in question. New court interpretations can point to future changes in existing laws and regulations. The marketing manager should also examine the recent rulings of federal, state, local, and self-regulatory trade agencies to determine their effects on marketing activities. One of the most profound legislative shifts in corporate governance occurred with President Bush’s signing of the Sarbanes-Oxley Act on July 30, 2002. Sarbanes-Oxley was essentially the federal government’s response to a string of corporate scandals—most notably Enron, Tyco, and WorldCom. The law introduced stringent rules for financial practice and corporate governance designed to protect investors by increasing the accuracy and reliability of corporate disclosures of financial information. An interesting result of Sarbanes-Oxley is the intense media and public attention that it garnered. The accuracy of corporate disclosures is now such a closely watched issue that organizations are forced into compliance both legally and practically. It is estimated that compliance with the law—in the form of new information and reporting systems—has cost the average company at least $1.3 million per year in compliance costs.23 Organizations that engage in international business should also be mindful of legal issues surrounding the trade agreements among nations. The implementation of the North American Free Trade Agreement (NAFTA) in 1993, for example, created an open market for the United States, Canada, and Mexico. The three countries modernized the agreement in 2018, now called the United States-Mexico-Canada Agreement (USMCA), to address digital trade, intellectual property, and more.24 Conversely, national governments sometimes use trade agreements to limit the distribution of certain products into member countries. For example, recurring disagreements between the United States, Canada, and Argentina and the European Union over genetically modified foods (or GMOs, genetically modified organisms) led the EU to impose an outright ban on GMOs in 1998. The United States promptly filed several complaints with the WTO, arguing that the ban lacked scientific support and amounted to an unfair trade barrier. The WTO ruled against the EU in 2006, opening the way for genetically modified foods to enter the EU. However, individual EU nations, such as Germany, continued to ban the use of GMOs. The debate raged until early 2015 when the EU ruled that member states could set their own rules on GMOs. France and Germany remain staunchly opposed to GMOs, while Britain, Spain, and Portugal are in favor of them. Slovakia, Romania, and the Czech Republic allow some GMOs within their borders. Today, only a fraction of EU farmland is used to grow genetically modified food, most of that in Spain. Even if the market eventually opens to U.S. producers, the going will be tough. The vast majority of European consumers believe that genetically modified foods are unsafe for consumption.25
3.5e Technological Advancements When most people think about technology, they tend to think about high-tech products such as smartphones, 5G mobile, medical breakthroughs, driverless cars, or 4K television. However, technology actually refers to the way we accomplish specific tasks or the processes we use to create the “things” we consider as new. Of all the new technologies created in the past 40 years, none has had a greater impact on marketing than advances in computer and information technology. These technologies have changed the way consumers and employees live and the way that marketers operate in fulfilling their needs. In some cases, changes in technology can be so profound that they make a firm’s products obsolete, such as with vinyl long-playing (LP) records, typewriters, cassette tapes, pagers, CDs, DVDs, and newspapers. Technological innovation often manifests in disruption of an established product class or market from an unexpected source. For example, facial recognition capabilities are replacing
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72 Part 2: Discovering Market Opportunities
the need for border control agents at international airports—innovation changing an industry in previously unexpected ways. In addition, Uber, Tesla, Airbnb, and Netflix all changed industries via a new and innovative use of technology. Many changes in technology assume a frontstage presence in creating new marketing opportunities. By frontstage technology, we mean those advances that are most noticeable to customers. For example, products such as smartphones, microwave ovens, and genetic engineering have spawned entirely new industries aimed at fulfilling previously unrecognized customer needs. Many frontstage technologies, such as smartphones and GPS satellite navigation systems, aim to increase customer convenience. Likewise, companies continue to push toward even more substantial changes in the ways that marketers reach customers through the use of interactive marketing via computers and mobile devices. These and other technological changes can also assume a backstage presence when their advantages are not necessarily apparent to customers. Advances in backstage technology can affect marketing activities by making them more efficient and effective. For example, advances in computer technology have made warehouse storage and inventory control more efficient and less expensive. Similar changes in communication technology have made field sales representatives more efficient and effective in their dealings with managers and customers. In some cases, technology can have both a frontstage and a backstage presence. One example is radio frequency identification (RFID), which involves the use of tiny radio-enabled chips that can be attached to a product or its packaging, or embedded in electronic devices such as smartphones, smartwatches, or fitness trackers. The radio signals emitted or reflected from the chip (or tag) can be used to track inventory levels, prevent theft, or make wireless payments. Apple’s launch of Apple Pay is a highly visible version of this technology.26 Another example is drones. The applications of drones have multiplied dramatically. Drones can deliver packages and medical supplies, check inventory levels, monitor customer behavior, and much more.
3.5f Sociocultural Trends
Dmitry Kalinovsky/Shutterstock.com
Sociocultural factors are those social and cultural influences that cause changes in attitudes, beliefs, norms, customs, and lifestyles. These forces profoundly affect the way people live and help
Drones are used in a variety of frontstage and backstage applications.
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Chapter 3: Collecting and Analyzing Marketing Information 73
EXHIBIT 3.7 Trends in the U.S. Sociocultural Environment Demographic Trends Aging of the U.S. population Increasing population diversity Increasing number of single-member/individual households Increasing number of single-parent families Population growth in southern states Lifestyle Trends Many Americans are postponing retirement Clothing has become more casual, especially at work Americans have less time for leisure activities Vacationing at home (a “staycation”) is more common Less shopping in malls, more shopping online Increasing importance of leisure time versus work time Time spent by watching streaming has increased Growing popularity of electric vehicles (EVs) More people work remotely Greater focus on LGBTQ equality More women serving on corporate boards Value Trends Growing disconnect with government Greater focus on ethics and social responsibility Increased interest in giving back to the community Shorter attention spans and less tolerance for waiting More value-oriented consumption (good quality, good price) Increasing concerns about the natural environment Less tolerance of smoking in public places More tolerance of individual lifestyle choices Growing skepticism about business
determine what, where, how, and when customers buy a firm’s products. The list of potentially important sociocultural trends is far too long to examine each one here. Exhibit 3.7 illustrates examples of some of these trends. Two of the more important trends, however, are changes in demographics and customer values. There are many changes taking place in the demographic makeup of the U.S. population. For example, most of us know that the population as a whole has grown older as a result of advances in medicine and healthier lifestyles. As shown in Exhibit 3.8, the percentage of workers 55 and older in the U.S. labor force is expected to increase, according to the Bureau of Labor Statistics. Experts project that by 2060, the worldwide population of adults 65 and older will increase from 16 percent to 23 percent.27 As a result, marketers of health care, recreation, tourism, and retirement housing can expect large increases in demand over the next several decades. Other important changes include an increasing number of singles and single-parent households and still greater participation of women in the workforce. More single, college-educated women could result in better business for activewear companies, according to Morgan Stanley, because single women spend more time exercising than married women.28
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74 Part 2: Discovering Market Opportunities
EXHIBIT 3.8 The U.S. Labor Force by Age Group
Percent Distribution of the Labor Force 100% 80%
12.4
18.1
23.1
25.2
20.6
19.3
22.7
20.7
22.4
21.6
22.7
21.6
15.9
14.3
1998
2008
12.9 2018
11.5 Projected 2028
20.6 23.3
60%
27.3
40% 20% 0%
23.8
55 and older
45 to 54
35 to 44
25 to 34
16 to 24 Source: Bureau of Labor Statistics, “Employment Projections,” https://www.bls.gov/emp/graphics/2019/labor-force-share-by-age -group.htm (accessed April 22, 2020).
One of the other most important demographic changes taking place is the increasing diversity of the U.S. population. Generation Z, which accounts for roughly a quarter of the U.S. population, is the most ethnically and racially diverse generation in history. They are more likely to form an opinion of a company based on ethics, practices, and social impact rather than on product or service quality.29 The number of legal immigrants in the United States has risen steadily during the past 50 years. U.S. residents of recent immigrant origin account for 28 percent of the U.S. population, which is expected to increase to 36 percent by 2065. Recent immigration is predominantly from Asia, namely India and China.30 These changes in diversity will create both threats and opportunities for most organizations. A diverse population means a diverse customer base. Firms must alter their marketing practices, including the way they recruit and select employees, to match these changing customer segments. For example, women of color, ignored by cosmetics companies for a long time, used to have a difficult time finding makeup in shades appropriate for their skin tones. However, when Fenty Beauty by Rihanna launched in 2017 with foundation in 40 shades—significantly more shades than offered by most competitors at the time—the company aimed to meet the needs of this previously underserved market. Fenty’s success pushed established brands such as Estée Lauder, NARS Cosmetics, and CoverGirl to follow suit.31 Furthermore, most well-known companies now specifically target Hispanic consumers. In one year, advertisers spent $9.4 billion on reaching Hispanic consumers. Procter & Gamble, for example, is the top spender in Hispanic advertising, according to Ad Age.32 Changes in our cultural values—the guiding principles of everyday life—can also create opportunities and challenges for marketers. Values influence our views of how to live, the decisions we make, the jobs we do, and the brands we buy. In a major study of American values, researchers found that the four most important values regardless of age, gender, race, income, or region are (1) self-respect, (2) having warm relationships with others, (3) security, and (4) having a sense of accomplishment.33 Astute marketers can use this information to reflect our prevailing values in the products they design and the advertising they create.
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Chapter 3: Collecting and Analyzing Marketing Information 75
As you can see, the external environment encompasses a wide array of important factors that must be analyzed carefully before developing the marketing plan. These issues are so important that most firms have specialists on staff to track emerging trends and develop strategies for dealing with external concerns. These specialists are typically housed in corporate affairs departments. Although the external environment is the largest of the three environments we have discussed, it is not necessarily the most important. Depending on the firm, its industry, and the timing, the internal and/or customer environments can be much more important in developing marketing strategy. The important issue is that all three environments must be analyzed prior to developing a marketing strategy and marketing plan. Good analysis requires the collection of relevant data and information, our next topic.
3.6 COLLECTING MARKETING DATA AND INFORMATION To perform a complete situation analysis, the marketing manager must invest time and money to collect data and information pertinent to the development of the marketing plan. This effort will always involve the collection of secondary data, which must be compiled inside or outside the organization for some purpose other than the current analysis. However, if the required data or information are unavailable, primary data may have to be collected through marketing research. Accessing secondary data sources is usually preferable as a first option because these sources can be obtained more quickly and at less cost than collecting primary data. In this section, we will examine the different sources of environmental data and challenges in collecting data.
3.6a Secondary Information Sources There are five basic sources of secondary data and information: internal, government, periodicals/ books, social media/online, and commercial data sources. Most of these sources are available in both print and electronic formats. Let’s look at the major strengths and weaknesses of these sources.
Internal Data Sources The firm’s own records are the best source of data on current objec-
tives, strategy, performance, and available resources. Internal sources may also be a good source of data on customer needs, attitudes, and buying behavior. Internal data also have the advantage of being relevant and believable because the organization itself has responsibility for data collection and organization. One of the biggest problems with internal data is that it is often not in a readily accessible form for planning purposes. To overcome this problem, many organizations maintain complex information systems that make data easily accessible and interactive. These systems enable employees to access internal data such as customer profiles and product inventory, and to share details of their activities and projects with other company employees across the hall or the world. These systems also provide an opportunity for companywide marketing intelligence that permits coordination and integration of efforts to achieve a true market orientation.
Government Sources If it exists, the U.S. government has collected data about it. The sheer
volume of available information on the economy, our population, and business activities is the major strength of most government data sources. Government sources also have the added advantages of easy accessibility and low cost—most are even free. The major drawback to government data is timeliness. Although many government sources have annual updates, some are done much less frequently (e.g., the census every decade). As a result, some government sources may be out of date and not particularly useful for market planning purposes.
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76 Part 2: Discovering Market Opportunities
BEYOND THE PAGES 3.3
Instagram Uses Big Data to Discover Trends 34 Instagram is a photo and video-sharing network owned by Facebook that has surpassed one billion monthly active users. The platform allows its users to manipulate their photos and videos with filters and share them with friends and the greater Instagram community with hashtags and geotags. One thing that keeps its active users engaged is the personalized experience Instagram creates using artificial intelligence (AI) and big data. With millions of new photos and videos posted to the app each day both in-feed and via disappearing Instagram Stories, Instagram has endless data logged on the ways users engage with posts. Instagram uses machine learning to populate its Explore page, an area in the app where users can discover content on the platform. Instagram interprets vast amounts of data to understand how people use the platform to create a curated experience for users. The company is able to adjust a user’s feed based on likes, comments, follows, saves, shares, search history, and more. The app continuously learns and adapts over time. Instagram’s Community Lab team works to identify insights from data trends. Big data is incredibly valuable but is useless when a company doesn’t know how to use it effectively. Instagram prioritizes mining big data for customer insights and is able to drive product development and extract community insights as a result. Instagram strikes a balance between AI and human curation to deliver
personalized content as well as subject matter that may be outside of a user’s interests to create new opportunities for engagement. Instagram also uses this data to sell highly targeted advertising. Facebook—which has more than two billion of its own users—combined with Instagram resulted in a powerful advertising platform. Instagram, which accounts for more than 25 percent of Facebook’s earnings, pulls in $20 billion in ad revenue each year. Instagram also earns revenue from its shopping and checkout features that allow companies such as Revolve, Good American, and Warby Parker to sell products on the app. The company runs the @shop account to help brands gain exposure, working with Instagram’s Community Lab to track trends and source brands. Above all, Instagram’s use of big data is aimed at enhancing the user experience to ensure users keep coming back for more. Case in point, Instagram uses AI to filter out spam posts and comments to improve the user experience. The system, called DeepText, has the ability to understand not just bad words but the context in which they are used. While it’s not a perfect system, the filter outperforms static algorithms because it is always learning. Instagram also uses AI to identify bullying in photos. The influx of content and users on a daily basis requires Instagram to be nimble when it comes to learning from its internal data sources and adapting the app.
Still, the objectivity and low cost of government sources make them an attractive answer to the data needs of many organizations. Some of the best government sources available on the Internet include: ●●
●●
●●
Federal Trade Commission (ftc.gov) provides reports, speeches, and other facts about competitive, antitrust, and consumer protection issues. Edgar Database (sec.gov/edgar.shtml) provides comprehensive financial data (10K reports) on public corporations in the United States. U.S. Small Business Administration (sba.gov) offers numerous resources for small businesses, including industry reports, maps, market analyses (national, regional, or local), library resources, and checklists.
Book and Periodical Sources The articles and research reports available in books and periodicals provide a gamut of information about many organizations, industries, and nations. Forget any notion about books and periodicals appearing only in print. Today, many good sources exist only in electronic format. Timeliness is a major strength of these sources, as most are about current environmental trends and business practices. Some sources, such as academic journals, provide detailed results of research studies that may be pertinent to the manager’s planning efforts. Others, such as trade publications, focus on specific industries and the issues that characterize them.
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Chapter 3: Collecting and Analyzing Marketing Information 77
Many of these sources are freely available on the Internet. Most, however, require paid subscriptions. Some of the better examples include: ●●
●●
●●
●●
Subscription services such as Moody’s (moodys.com) and Standard and Poor’s (standardandpoors.com) offer in-depth analyses and current statistics about major industries and corporations. Major trade associations such as the American Marketing Association (ama.org) and Sales and Marketing Executives (smei.org) and trade publications such as Adweek (adweek.com) and Chain Store Age (chainstoreage.com) offer a wide range of news and information to their membership and readers. Academic journals, such as the Harvard Business Review (hbr.org) and the MIT Sloan Management Review (sloanreview.mit.edu), are good sources of cutting-edge thinking on business and marketing. General business publications, such as The Wall Street Journal (wsj.com), Fortune (fortune. com), and Bloomberg (bloomberg.com), offer a wealth of information on a wide variety of industries and companies.
The two biggest drawbacks to book and periodical sources are information overload and relevance to the specific problem at hand. That is, despite the sheer volume of information that is available, finding data or information that pertains to the manager’s specific and unique situation can feel like looking for that proverbial needle in a haystack.
Social Media and Online The widespread acceptance and use of social media and online platforms offer companies a valuable external data source. Most companies utilize their social media presence to collect internal data on customers via chat, comments, reviews, and various other customer contact points. Social media monitoring involves activities to track, measure, and evaluate a firm’s digital marketing initiatives. Social media analytics tools such as Sprout Social allow marketers to quickly analyze metrics across multiple platforms.35 Social media, unlike many traditional forms of media—such as print advertising—are backed by real-time data. With social media listening, marketers can measure the sentiment of comments about their brand using AI-powered analytics tools. Facebook Ads Manager is also an online tool to create Facebook, Messenger, and Instagram advertisements and determine where ads should be placed and the key metrics related to performance. The tool provides customized reports and the opportunity to download insightful data to help develop key performance metrics. Infusionsoft, a small software company, used Facebook Ads Manager to optimize its digital advertising and attract 67 percent more leads by using mobile video.36 Social media is constantly changing as new platforms rise in popularity and as existing platforms change how they collect and share data, so it’s important for businesses to stay up to date on the latest updates. Websites such as Yelp, TripAdvisor, Google, Amazon, and thousands more collect and display consumer comments and reviews about products. These reviews can be positive or negative, with both offering valuable insights to marketers. Evaluating what critics post should be an important part in a company’s digital marketing strategy. Review management software, such as BirdEye and Vendasta, collects reviews into a single dashboard so marketers can read and respond to reviews from more than 150 review websites. Companies can take a proactive approach by keeping tabs on keyword trends. For example, BirdEye’s language processing engine uses AI to humanize big data and assign sentiments to words to help marketers gain actionable insights. A restaurant might see an uptick in negative reviews using the keyword “burnt” in the past 30 days and choose to retrain employees.37 While paid software is often necessary to quickly and efficiently analyze these high volumes of data across hundreds of websites, the unsolicited data itself is provided by customers for free, making online reviews a valuable resource for marketers. In addition to third-party websites, another incredibly valuable resource for data is a company’s own website. Google Analytics, the most popular web analytics software, can be helpful for small businesses because its basic functions are free to use. Marketers use Google Analytics to measure website visitors, page views, new visits, the average amount of time spent during a visit, and much more. By analyzing rich traffic data, marketers can better understand their customer and
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78 Part 2: Discovering Market Opportunities
measure the effectiveness of their marketing efforts. For example, a company could use Google Analytics to monitor web performance across multiple domain names and track key events such as user registrations or video views. Analyzing performance that comes from websites, social media, and review sites can help marketers make informed decisions.
Commercial Sources Commercial sources are almost always relevant to a specific issue because they deal with the actual behaviors of customers in the marketplace. Firms such as Nielsen monitor a variety of behaviors from food purchases in grocery stores to media usage characteristics. Commercial sources generally charge a fee for their services. However, their data and information are invaluable to many companies. Some commercial sources provide limited information on their websites: ●●
●●
●●
The Nielsen Company (nielsen.com) and IRi (iriworldwide.com) supply data and reports on point-of-purchase sales, multimedia audience research, and a wealth of customer demographic, lifestyle, and product usage data to major media and advertising companies. Alliance for Audited Media (auditedmedia.com) provides independent, third-party audits of print circulation, readership, and website activity. NPD Group (npd.com) uses an online consumer panel to provide information to businesses about the products and services they provide.
The most obvious drawback to these and other commercial sources is cost. Although this is not a problem for large organizations, small companies often cannot afford the expense. However, many commercial sources provide limited, free access to some data and information. Additionally, companies often find “off-the-shelf ” studies less costly than conducting primary research.
3.6b Primary Data Collection The situation analysis should always begin with an examination of secondary data sources due to their availability and low cost. Since each secondary data source has its advantages and disadvantages, the best approach is one that blends data and information from a variety of sources. However, if the needed secondary data are not available, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, an organization may have little choice but to collect primary data through marketing research. Primary marketing research has the major advantages of being relevant to the specific problem and trustworthy due to the control the manager has over data collection. However, primary research is extremely expensive and time consuming. There are four major types of primary data collection: ●●
●●
●●
Direct observation, where the researcher records the overt behaviors of customers, competitors, or suppliers in natural settings. Historically, researchers have used direct observation to study the shopping and buying behaviors of customers. However, behavior can be observed today through the use of technology such as bar code scanners, RFID tags, drones, voice monitoring (e.g., Amazon Echo), and the analysis of clickstream data in online settings. The main advantage of observation research is that it accurately describes behavior without influencing the target under observation. However, the results of observation research are often overly descriptive and subject to a great deal of bias and researcher interpretation. Focus groups, where the researcher moderates a panel discussion among a gathering of 6 to 10 people who openly discuss a specific subject. Focus-group research is an excellent means of obtaining in-depth information about a particular issue. Its flexibility also allows it to be used in a variety of settings and with different types of panel members (i.e., customers, suppliers, and employees). Focus groups are also very useful in designing a large-scale survey to ensure that questions have the appropriate wording. The main disadvantage is that focus groups require a highly skilled moderator to help limit the potential for moderator bias. Surveys, where the researcher asks respondents to answer a series of questions on a particular topic. Surveys can be administered using the paper-and-pencil method, either in person or through the mail; or they can be administered interactively via telephone, e-mail,
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Chapter 3: Collecting and Analyzing Marketing Information 79
●●
or the Internet. Although surveys are a useful and time-efficient way to collect primary data, it has become increasingly difficult to convince people to participate. Potential respondents have become skeptical of survey methods due to overly long questionnaires and the unethical practices of many researchers. These concerns are one of the reasons behind the creation of the national Do Not Call Registry for telemarketers (donotcall.gov). Legitimate survey platforms such as Survey Junkie and Google Rewards are popular apps where consumers can earn money for responding to a variety of surveys. Experiments, where the researcher selects matched subjects and exposes them to different treatments while controlling for extraneous variables. Because experiments are well suited to testing for cause-and-effect relationships, researchers use them quite often in test marketing programs. Marketers can experiment with different combinations of marketing mix variables to determine which combination has the strongest effect on sales or profitability. The major obstacles to effective experimentation in marketing are the expense and the difficulty of controlling for all extraneous variables in the test.
As with secondary data, often the best approach to primary data collection is to use a combination of data sources. Focus groups and direct observation can be used to gain a more complete understanding of a particular issue or marketing phenomenon. Surveys can then be used to further test for certain tendencies or effects before launching into a full-scale test-marketing program. At this point, the process comes full circle as observation and focus groups can be used to explore the outcomes of the test-marketing program.
3.6c Overcoming Problems in Data Collection Despite the best intentions, problems usually arise in collecting data and information. One of the most common problems is an incomplete or inaccurate assessment of the situation that the gathering of data should address. After expending a great degree of effort in collecting data, the manager may be unsure of the usefulness or relevance of what has been collected. In some cases, the manager might even suffer from severe information overload. To prevent these problems from occurring, the marketing problem must be accurately and specifically defined before the collection of any data. Top managers who do not adequately explain their needs and expectations to marketing researchers often cause the problem. Another common difficulty is the expense of collecting environmental data. Although there are always costs associated with data collection (even if the data is free), the process need not be prohibitively expensive. The key is to find alternative data collection methods or sources. For example, an excellent way for some businesses to collect data is to engage the cooperation of a local college or university. Many professors seek out marketing projects for their students as a part of course requirements. Likewise, to help overcome data collection costs, many researchers have turned to the Internet as a means of collecting both quantitative and qualitative data on customer opinions and behaviors. A third issue is the time it takes to collect data and information. Although this is certainly true with respect to primary data collection, the collection of secondary data can be easy and fast. Online data sources are quite accessible. Even if the manager has no idea where to begin the search, the powerful search engines and indexes available on the Internet make it easy to find data. Online data sources have become so good at data retrieval that the real problem involves the time needed to sort through all of the available information to find something that is truly relevant. Finally, it can be challenging to find a way to organize the vast amount of data and information collected during the situation analysis. Clearly defining the marketing problem and blending different data sources are among the first steps toward finding all of the pieces to the puzzle. A critical next step is to convert the data and information into a form that will facilitate strategy development. Although there are a variety of tools that can be used to analyze and organize environmental data and information, one of the most effective of these tools is SWOT analysis. As we will see in the next chapter, SWOT analysis—which involves classifying data and information into strengths, weaknesses, opportunities, and threats—can be used to organize data and information and as a catalyst for strategy formulation.
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80 Part 2: Discovering Market Opportunities
LESSONS FROM CHAPTER 3
●● ●●
Big data: ●●
●●
refers to large data sets from massive structured and unstructured sources. can be analyzed and used to support strategic decisions.
Collecting and analyzing marketing information through a situation analysis: ●●
●●
●●
●●
●●
●●
describes current and future issues and key trends as they affect three key environments: the internal environment, the customer environment, and the external environment. can give the organization a big picture of the issues and trends that affect its ability to deliver value to stakeholders. recognizes that data and information are not the same; data is not useful until converted into information. forces managers to ask continually, “How much data and information do I need?” is valuable only to the extent that it improves the quality of the resulting decisions; marketing managers must avoid “paralysis by analysis.” should provide as complete a picture as possible about the organization’s current and future situation with respect to the internal, customer, and external environments.
●●
●●
●●
●●
the human element—especially with big data—is critical. data, analytics, and insights are not the same things. ●●
●●
●●
●●
data—the facts and details of customers, product use, and/or user inputs analytics—the discovery of trends and patterns within the data via analysis techniques insights—the value of data and analytics, as these outcomes identify useable information that helps to improve operations and performance of marketing activity
situation analysis is not always appropriate and offers many challenges to organizations.
●●
●●
●●
●●
includes an assessment of the firm’s current goals, objectives, performance, and how well the current marketing strategy is working. typically includes review the situation quarterly and monitor it on a daily or weekly basis via metrics and dashboards. can show poor or declining performance as a result of: ●●
●●
holding on to marketing goals or objectives inconsistent with the current realities of the customer or external environments a flawed marketing strategy
examines the firm’s current customers in its target markets, as well as potential customers that currently do not purchase the firm’s product offering. can be conducted by using the expanded 5W model: ●● ●● ●● ●● ●● ●●
Who are our current and potential customers? What do customers do with our products? Where do customers purchase our products? When do customers purchase our products? Why (and how) do customers select our products? Why do potential customers not purchase our products?
Analysis of the external environment: ●●
●●
●●
examines the competitive, economic, political, legal and regulatory, technological, and sociocultural factors in the firm’s external environment. includes an examination of the four basic types of competitors faced by all businesses: brand competitors, product competitors, generic competitors, and total budget competitors. is often handled by a team of specialists within an organization’s corporate affairs department.
Marketing data and information: ●●
●●
Analysis of the internal environment: ●●
may include predictive analytics in an effort to use historical data inputs to accurately predict future outcomes. must include a review of current and anticipated cultural and structural issues that could affect marketing activities.
Analysis of the customer environment:
Conducting a situation analysis: ●●
poor implementation changes in the customer or external environments beyond the control of the firm anticipating disruptive changes due to technology and changing consumer sentiments
●●
can be collected from a wide array of internal, government, periodical, book, social media, online, and commercial sources, as well as through primary marketing research. are often collected through four different types of primary research: direct observation, focus groups, surveys, and experiments. must be blended from many different sources to be the most useful for planning purposes.
Problems that can occur during data collection include: ●●
●●
●● ●● ●●
an incomplete or inaccurate definition of the marketing problem. ambiguity about the usefulness or relevance of the collected data. severe information overload. the expense and time associated with data collection. finding ways to organize the vast amount of collected data and information.
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Chapter 3: Collecting and Analyzing Marketing Information 81
ENDNOTES 1. Deloitte, “The CMO Survey: Fall 2019 report,” August 2019, https:// www2.deloitte.com/us/en/pages/chief-marketing-officer/articles/cmo -survey.html (accessed March 9, 2020); Kim Souza, “The Supply Side: Walmart Cybersecurity Team Handles Over 200 Billion Events Annually,” Talk Business & Politics, May 22, 2019, https://talkbusiness.net/2019/05 /the-supply-side-walmart-cybersecurity-team-handles-over-200 -billion-events-annually/ (accessed March 9, 2020); Nina Trentmann, “Predictive Analytics Give a Boost to Diageo’s Cost-Savings Efforts,” The Wall Street Journal, April 25, 2019, https://www.wsj.com/articles/predictive -analytics-give-a-boost-to-diageos-cost-savings-efforts-11556208946 (accessed March 9, 2020); Nat Ives, “JPMorgan Chase Taps AI to Make Marketing Messages More Powerful,” The Wall Street Journal, July 30, 2019, https:// www.wsj.com/articles/jpmorgan-chase-taps-ai-to-make-marketing -messages-more-powerful-11564482606 (accessed March 9, 2020); SAS, “Data Quality Management: What You Need to Know,” https://www.sas .com/en_us/insights/articles/data-management/data-quality-management -what-you-need-to-know.html (accessed March 9, 2020); Federal Trade Commission, “FTC’s $5 Billion Facebook Settlement: Record-Breaking and History Making,” July 24, 2019, https://www.ftc.gov/news-events/blogs /business-blog/2019/07/ftcs-5-billion-facebook-settlement-record -breaking-history (accessed March 9, 2020). 2. Innovation Enterprise, “Why Analytics Still Needs the Human Element,” August 9, 2019, https://channels.theinnovationenterprise.com /articles/why-analytics-still-needs-the-human-element (accessed March 16, 2020). 3. “53% of Marketers Claim ‘You Can NEver Have Too Much Data’ (But Many Don’t Know What to Do with It),” Net Imperative, June 14, 2019, www.netimperative.com/2019/06/53-of-marketers-claim-you-can-never -have-too-much-data-but-many-dont-know-what-to-do-with-it/ (accessed March 10, 2020). 4. Jake Pryszlak, “Do We Have Too Much Data and Not Enough Understanding?” Advertising Week 360, September 10, 2019, https://www .advertisingweek360.com/do-we-have-too-much-data-and-not-enough -understanding/ (accessed March 10, 2020). 5. These facts are from Katrina Brooker, “The Pepsi Machine,” Fortune, February 6, 2006, pp. 68–72. 6. These facts are from Burt Helm, “Blowing Up Pepsi,” BusinessWeek Online, April 23, 2009, http://www.businessweek.com/magazine /content/09_17/b4128032006687.htm; Duane D. Stanford, “PepsiCo May Boost Marketing Budget to Take on Coca-Cola: Retail,” BusinessWeek Online, January 30, 2012, http://www.businessweek.com/news/2012-01-30 /pepsico-may-boost-marketing-budget-to-take-on-coca-cola-retail.html; Duane D. Stanford, “PepsiCo to Cut 8,700 Jobs, Spend More on Marketing Brands,” BusinessWeek Online, February 10, 2012, http://www.businessweek .com/news/2012-02-10/pepsico-to-cut-8-700-jobs-spend-more-on-marketing -brands.html; Trefis Team, “Frito-Lay Dominates U.S. Salty Snacks, But Rising Cracker Sales Could Stall Growth,” Forbes, June 27, 2014, http://www .forbes.com/sites/greatspeculations/2014/06/27/frito-lay-dominates-u-s -salty-snacks-but-rising-cracker-sales-could-stall-growth/. 7. Jade Scipioni, “Coke vs. Pepsi: Who Is Really Winning?” Fox Business, February 15, 2019, https://www.foxbusiness.com/retail/coke-vs-pepsi -who-is-really-winning (accessed March 10, 2020). 8. Dan Blystone, “The Story of Uber,” Investopedia, June 25, 2019, https://www.investopedia.com/articles/personal-finance/111015/story -uber.asp (accessed March 16, 2020). 9. Ben Casselman, “The White-Collar Job Apocalypse That Didn’t Happen,” The New York Times, September 27, 2019, https://www .nytimes.com/2019/09/27/business/economy/jobs-offshoring.html (accessed March 10, 2020). 10. Michele Gelfand, Sarah Gordon, Chengguang Li, Virginia Choi, and Piotr Prokopowicz, “One Reason Mergers Fail: The Two Cultures Aren’t Compatible,” Harvard Business Review, October 2, 2018,
https://hbr.org/2018/10/one-reason-mergers-fail-the-two-cultures-arent -compatible (accessed March 10, 2020). 11. U.S. Census Bureau, “Quarterly Retail E-Commerce Sales: 4th Quarter 2019,” February 19, 2020, https://www.census.gov/retail/mrts /www/data/pdf/ec_current.pdf (accessed March 16, 2020). 12. Tim Culpan, “Your iPhone Is Already Made in America,” Bloomberg, June 12, 2019, https://www.bloomberg.com/opinion/articles/2019-06-12 /apple-s-iphones-are-already-made-in-u-s-not-china (accessed March 16, 2020). 13. Rick Leblanc, “E-Waste Recycling Facts and Figures,” The Balance Small Business, January 14, 2020, https://www.thebalancesmb.com/e-waste -recycling-facts-and-figures-2878189 (accessed March 9, 2020); Electronic Manufacturers Recycling Management Company, “Home,” www .mrmrecycling.com (accessed March 9, 2020); Jared Paben, “MRM Reaches Recycling Management Milestone,” E-Scrap News, September 19, 2019, https://resource-recycling.com/e-scrap/2019/09/19/mrm-reaches-recycling -management-milestone/ (accessed March 9, 2020); Electronic Recyclers International, “Services,” https://eridirect.com/services/ (accessed March 9, 2020); Kelly Maile, “Dell Recycled Millions of Pounds of Endof-Life Electronics, Ocean-Bound Plastics into New Products,” Recycling Today, August 27, 2019, https://www.recyclingtoday.com/article/dell -recycles-ocean-bound-plastics-electronic-scrap/ (accessed March 9, 2020); Amazon, “Circular Economy,” https://sustainability.aboutamazon.com /packaging-and-products/closing-the-loop-on-waste (accessed March 9, 2020); Elisabeth Mahy, “Can We Fix Our Way out of the Growing E-Waste Problem?” BBC, February 17, 2020, https://www.bbc.com/news /business-51385344 (accessed March 9, 2020). 14. Federal Reserve Bank of Atlanta, “The 2018 Survey of Consumer Payment Choice: Summary Results,” 2019, https://www.frbatlanta.org/-/media /documents/banking/consumer-payments/sur vey-of-consumer -payment-choice/2018/2018-survey-of-consumer-payment-choice.pdf (accessed March 16, 2020). 15. International Reciprocal Trading Association, “The Barter and Trade Industry,” https://www.irta.com/about/the-barter-and-trade-industry/ (accessed March 10, 2020). 16. W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Press, 2005), 24–35. 17. Reenita Das, “Are Direct-to-Consumer Ads for Drugs Doing More Harm Than Good?” Forbes, May 14, 2019, https://www.forbes .com/sites/reenitadas/2019/05/14/direct-to-consumer-drug-ads-are -they-doing-more-harm-than-good/#5289a47b4dfc (accessed March 10, 2020). 18. This definition of competitive intelligence is adapted from Strategic and Competitive Intelligence Professionals, http://www.scip.org (accessed February 22, 2015). 19. Ibid. 20. “United States Inflation Rate,” Trading Economics, https:// tradingeconomics.com/united-states/inflation-cpi (accessed March 10, 2020). 21. Bruce Berman, “$21 Trillion in U.S. Tangible Assets Is 84% of S&P 500 Value—IP Rights and Reputation Included,” IP CloseUp, June 4, 2019, https://ipcloseup.com/2019/06/04/21-trillion-in-u-s-intangible-asset -value-is-84-of-sp-500-value-ip-rights-and-reputation-included/ (accessed March 10, 2020). 22. Ken Alltucker, “FDA Bans Mint- and Fruit-Flavored Vaping Products but Exempts Menthol and Tobacco,” USA Today, January 2, 2020, https://www.usatoday.com/story/news/health/2020/01/02/vaping-ban-fda -strikes-mint-and-fruit-flavored-products/2796299001/ (accessed March 10, 2020). 23. Michael Cohn, “SOX Compliance Costs Rising Thanks to Rev Rec Standard,” Accounting Today, August 14, 2018, https://www.accountingtoday .com/news/sarbanes-oxley-compliance-costs-rising-thanks-to-revenue -recognition-standard (accessed March 10, 2020). 24. Office of the United States Trade Representative, “USMCA,” https:// ustr.gov/usmca (accessed March 16, 2020).
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82 Part 2: Discovering Market Opportunities 25. Kerry Capell, “Now, Will Europe Swallow Frankenfoods?” BusinessWeek Online, February 8, 2006, http://www.businessweek.com/bwdaily /dnflash/feb2006/nf2006028_3575_db039.htm; “Germany Bans Monsanto’s GMO Corn,” BusinessWeek Online, April 16, 2009, http://www.businessweek .com/globalbiz/content/apr2009/gb20090416_667169.htm; “Greece Extends Ban on U.S. Biotech Corn Seeds,” BusinessWeek Online, May 27, 2009, http://www.businessweek.com/ap/financialnews/D98EL0TG2.htm; “Industry Figures Confirm GM Food Is a Commercial Flop in Europe,” Greenpeace Press Release, February 7, 2012, http://www.greenpeace.org/eu-unit/en/News/2012 /GM-figures; “Update on EU’s GMO Ruling,” AG Professional, January 29, 2015, http://www.agprofessional.com/news/update-eu’s-gmo-ruling. 26. These facts are from Robert Hof, “Will Apple Pay Be the Next Great Marketing Channel?” Forbes, February 20, 2015, http://www.forbes.com /sites/roberthof/2015/02/20/will-apple-pay-be-the-next-great-marketing -channel/; “Is Google Dumping NFC to Compete With Apple?” PYMNTS .com, February 12, 2015, http://www.pymnts.com/news/2015/plaso-googles -slightly-unnerving-answer-to-apple-pay/#.VOoSYEKztqs; Marie Mawad, “Gemalto Plans to Introduce Smart Chip for Mobile Payment,” BusinessWeek Online, February 28, 2012, http://www.businessweek.com/news/2012 -02-28/gemalto-plans-to-introduce-smart-chip-for-mobile-payment.html; RFID Journal, http://www. rfidjournal.com (accessed February 22, 2015). 27. Population Reference Bureau, “Fact Sheet: Aging in the United States,” https://www.prb.org/aging-unitedstates-fact-sheet/ (accessed March 10, 2020). 28. Marc Bain, “The Rise in Single American Women Should Be Great for Activewear Brands,” Quartz, August 28, 2019, https://qz.com /quartzy/1696108/nike-and-lululemon-stand-to-benefit-from-a-rise-in -single-american-women/ (accessed March 10, 2020). 29. Deloitte, “Welcome to Generation Z,” https://www2.deloitte.com /content/dam/Deloitte/us/Documents/consumer-business/welcome-to -gen-z.pdf (accessed February 18, 2020). 30. Migration Policy Institute, “Frequently Requested Statistics on Immigrants and immigration in the United States,” February 14, 2020, https://www.migrationpolicy.org/article/frequently-requested-statistics -immigrants-and-immigration-united-states (accessed March 10, 2020). 31. Ray A. Smith, “Beauty Brands Focus on Women of Color,” The Wall Street Journal, July 14, 2019, https://www.wsj.com/articles /beauty-brands-focus-on-women-of-color-11563096600 (accessed March 10, 2020).
32. “What Marketers Need to Know About Hispanic Consumers,” AdAge, August 12, 2019, https://adage.com/article/hispanic-marketing /what-marketers-need-know-about-hispanic-consumers/2189361 (accessed March 10, 2020). 33. Eda Gurel-Atay, Guang-Xin Xie, Johnny Chen, and Lynn Richard Kahle, “Changes in Social Values in the United States, 1976–2007: ‘SelfRespect’ Is on the Upswing as a ‘Sense of Belonging’ Becomes Less Important,” Journal of Advertising Research, 50 (March), 57–67. 34. “How Instagram Uses Machine Learning to Help You Explore,” Fast Company, November 17, 2017, https://www.fastcompany.com/video /how-instagram-uses-machine-learning-to-help-you-explore/5EIAMya0 (accessed March 9, 2020); Bernard Marr, “The Amazing Ways Instagram Uses Big Data and Artificial Intelligence,” Forbes, March 16, 2018, https://www.forbes.com/sites/bernardmarr/2018/03/16/the-amazing-ways -instagram-uses-big-data-and-artificial-intelligence/#6f46f76a5ca6 (accessed March 9, 2020); Nicholas Thompson, “Instagram Unleashes an AI System to Blast Away Nasty Comments,” Wired, June 29, 2017, https://www.wired .com/story/instagram-launches-ai-system-to-blast-nasty-comments/ (accessed March 9, 2020); Sprout Social, “Important Instagram Stats You Need to Know for 2020,” January 23, 2020, https://sproutsocial.com/insights /instagram-stats/ (accessed March 9, 2020); Ashley Carman, “Instagram Brought in $20 Billion in Ad Revenue Last Year, More than a Quarter of Facebook’s Earnings,” The Verge, February 4, 2020, https://www.theverge .com/2020/2/4/21122956/instagram-ad-revenue-earnings-amount-facebook (accessed March 9, 2020); “How Instagram Uses Artificial Intelligence in 2019,” The Science Times, November 29, 2019, https://www.sciencetimes.com /articles/24361/20191129/instagram-uses-artificial-intelligence-2019-works .htm (accessed March 9, 2020); Katie Richards, “How Instagram Is Using Its @shop Account to Get Up-and-Coming Brands to Sell on the Platform,” Glossy, January 10, 2020, https://www.glossy.co/fashion/how-instagram-is -using-its-shop-account-to-get-up-and-coming-brands-selling-on-the-platform (accessed March 9, 2020); Katy Steinmetz, “Inside Instagram’s War on Bullying,” TIME, July 8, 2019, https://time.com/5619999/instagram-mosseri -bullying-artificial-intelligence/ (accessed March 9, 2020). 35. Sprout Social, https://sproutsocial.com/ (accessed March 16, 2020). 36. Facebook, “Infusionsoft: Facebook Ads Case Study,” https://www .facebook.com/business/success/infusionsoft (accessed March 10, 2019). 37. BirdEye, “Insights,” https://birdeye.com/insights/ (accessed March 16, 2020).
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CHAPTER 4 Developing Competitive Advantage and Strategic Focus 4.1 INTRODUCTION Situation analysis, as discussed in Chapter 3, can generate a great deal of data and information for marketing planning. But information, in and of itself, provides little direction to managers in preparing a marketing plan. If the analysis does not structure the information in a meaningful way that clarifies both present and anticipated situations, the manager will be unable to see how the pieces fit together. This synthesis of information is critical in developing competitive advantages and the strategic focus of the marketing plan. As illustrated in Beyond the Pages 4.1, this synthesis often comes from enhanced innovation, a stronger focus on customer needs, and tighter integration within the firm. Understanding the connectedness of the external environment is vital to enhanced innovation across a number of industries. How should the marketing manager organize and use the information collected during the situation analysis? One widely used tool is SWOT analysis (strengths and weaknesses, opportunities and threats). A SWOT analysis encompasses both the internal and external environments of the firm. Internally, the framework addresses a firm’s strengths and weaknesses on key dimensions such as financial performance and resources, human resources, production facilities and capacity, market share, customer perceptions, product quality, product availability, and organizational communication. The assessment of the external environment organizes information on the market (customers and competition), economic conditions, social trends, technology, and government regulations. Many consider SWOT analysis to be one of the most effective tools in the analysis of marketing data and information. SWOT analysis is a simple, straightforward framework that provides direction and serves as a catalyst for the development of viable marketing 83 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
84 Part 2: Discovering Market Opportunities
BEYOND THE PAGES 4.1
Why Innovative Companies Succeed1 Innovative companies transform the world. Innovation has always been important, especially with respect to developing new products, but the focus of innovation in most companies has evolved. The twentieth-century model of innovation was about quality control, cost cutting, and operational efficiency. Today, innovation is more about disruption: reinventing business processes, collaborating and integrating within the firm, investing in new technology, and creating entirely new markets to meet untapped customers’ needs. The focus on disruption comes from swiftly changing markets, globalization, mass connectivity, and customer expectations that force marketers to find new and innovative ways of conducting business. An important lesson that many companies have learned is that innovation can occur across new advances and also within established product lines. These differences in innovation style are apparent in Fast Company’s most recent list of the World’s Most Innovative Companies. This list changes often, as innovation drives new leaders—yet, most of the top 20 companies represent relatively new companies, while a few demonstrate that established brand names can also be innovative:
Rank
Company
1
Snap Inc.
2
Microsoft
3
Tesla
4
Big Hit Entertainment
5
Hackerone
6
White Claw
7
Shopify
8
Canva
9
Roblox
10
Zipline
11
Kaios Technologies
12
Beyond Meat
13
Bravado
14
Meesho
15
Spotify
16
Hello Sunshine
17
Luckin Coffee
18
Merck
19
Whoop
20
Sweetgreen
Several types of innovation are evident in this list. For example, with Snapchat, a mobile messaging app, Snap Inc. created a social media network that supports selfexpression and privacy—addressing many of the concerns associated with established social media platforms—and became a cultural phenomenon with young audiences. Innovation at Tesla in developing advanced electric vehicles and alternative power solutions is perfectly in line with its mission to “accelerate the world’s transition to sustainable energy.” Merck made the list due to both its Ebola vaccine and its ability to scale manufacturing. Similarly, response to the COVID-19 (coronavirus) pandemic drove new innovations within companies, which could change the list of “most innovative” companies once again. One thing that all innovative companies have in common is a laser-like focus on customer needs. Innovative companies find new ways of learning from customers in addition to traditional methods. For example, many companies engage in social media listening and closely watch blogs and online communities to learn what customers are thinking. Focusing on customers may not sound innovative, but increasing competition and shorter product cycles are forcing marketers to shift away from the price- and efficiency-driven approaches of the past. To escape from the commodity trap, marketers must find innovation in unfamiliar places. For example, Sweetgreen, a salad restaurant chain, grew its business by investing in its Outpost program, which created centralized lunch-pickup stations in nearly 1,000 locations. By streamlining meal delivery, Sweetgreen isn’t as bogged down by one-to-one delivery, and it has increased the salad restaurant’s exposure, attracting new customers. Innovation is also good for the bottom line. Though developing innovative products can be costly, increased growth, better collaboration, and a broader product mix help the most innovative companies to pull their products out of commodity status and increase their operating revenue. It is clear that innovation has become a key driver of competitive advantage and success in today’s market.
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Chapter 4: Developing Competitive Advantage and Strategic Focus 85
EXHIBIT 4.1 Major Benefits of SWOT Analysis Simplicity SWOT analysis requires no extensive training or technical skills to be used successfully. The analyst needs only a comprehensive understanding of the nature of the company and the industry in which it competes. Decreases Costs Because specialized training and skills are not necessary, the use of SWOT analysis can actually reduce the costs associated with strategic planning. As firms begin to recognize this benefit of SWOT analysis, many opt to downsize or eliminate their strategic planning departments. Flexibility SWOT analysis can enhance the quality of an organization’s strategic planning even without extensive marketing information systems. However, when comprehensive systems are present, they can be structured to feed information directly into the SWOT framework. The presence of a comprehensive information system can make repeated SWOT analyses run more smoothly and efficiently. Integration and Synthesis SWOT analysis gives the analyst the ability to integrate and synthesize diverse information, both of a quantitative and a qualitative nature. It organizes information that is widely known as well as information that has only recently been acquired or discovered. SWOT analysis can also deal with a wide diversity of information sources. In fact, SWOT analysis helps transform information diversity from a weakness of the planning process into one of its major strengths. Collaboration SWOT analysis fosters collaboration and open information exchange between different functional areas. By learning what their counterparts do, what they know, what they think, and how they feel, the marketing analyst can solve problems, fill voids in the analysis, and eliminate potential disagreements before the finalization of the marketing plan.
plans. It fulfills this role by structuring the assessment of the fit between what a firm can and cannot do (strengths and weaknesses) and the environmental conditions working for and against the firm (opportunities and threats). When performed correctly, a SWOT analysis not only organizes data and information but also can be especially useful in uncovering competitive advantages that can be leveraged in the firm’s marketing strategy. These competitive advantages help establish the strategic focus and direction of the firm’s marketing plan. As a planning tool, SWOT analysis has many benefits, as outlined in Exhibit 4.1. In fact, SWOT analysis is so useful and logical that many underestimate its value in planning. However, this simplicity often leads to unfocused and poorly conducted analyses. The most common criticisms leveled against SWOT analysis are that (1) it allows firms to create lists without serious consideration of the issues and (2) it often becomes a sterile academic exercise of classifying data and information. It is important to remember that SWOT analysis, by itself, is not inherently productive or unproductive. Rather, the way that one uses SWOT analysis will determine whether it yields benefits for the firm.
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86 Part 2: Discovering Market Opportunities
4.2 MODERN RELEVANCE OF SWOT ANALYSIS In a time where data analytics, artificial intelligence (AI), and predictive modeling are maturing, some question the relevance of SWOT analysis. However, because of these tools, SWOT is more relevant than ever for businesses as they strategically plan. SWOT represents myriad data inputs and human interpretation of (sometimes misleading) information based on predictive analytics, trends, and past history. However, how marketers conduct a SWOT analysis is what makes the difference. Whether a firm receives the full benefits of SWOT analysis depends on the way the manager uses the framework and information inputs. If done correctly and diligently, SWOT analysis is a viable and relevant mechanism for the development of the marketing plan. If done haphazardly or incorrectly, it can be a great waste of time and other valuable resources—making it irrelevant. To help ensure that the former, and not the latter, takes place, we offer the following directives to make SWOT analysis more productive and useful. The following section and Exhibit 4.2 outline these directives.
4.3 MAKING SWOT ANALYSIS PRODUCTIVE EXHIBIT 4.2 Directives for a Productive SWOT Analysis Stay Focused A single, broad analysis leads to meaningless generalizations. Separate analyses for each product–market combination are recommended. Search Extensively for Competitors Although major brand competitors are the most important, the analyst must not overlook product, generic, and total budget competitors. Potential future competitors must also be considered. Collaborate With Other Functional Areas SWOT analysis promotes the sharing of information and perspective across departments. This cross-pollination of ideas allows for more creative and innovative solutions to marketing problems. Examine Issues From the Customers’ Perspective Customers’ beliefs about the firm, its products, and marketing activities are important considerations in SWOT analysis. The views of employees and other key stakeholders must also be considered. Look for Causes, Not Characteristics Rather than simply list characteristics of the firm’s internal and external environments, the analyst must also explore the resources possessed by the firm and/or its competitors that are the true causes for the firm’s strengths, weaknesses, opportunities, and threats. Separate Internal Issues From External Issues If an issue would exist even if the firm did not exist, the issue should be classified as external. In the SWOT framework, opportunities (and threats) exist independently of the firm and are associated with characteristics or situations present in the economic, customer, competitive, cultural, technological, political, or legal environments in which the firm resides. Marketing options, strategies, or tactics are not a part of the SWOT analysis. Adopt a Disruptive Mindset We recommend that marketers take a final step of viewing their SWOT analysis from a disruptive perspective. Often, marketers see the world from their vantage point and may not consider how strengths may be weaknesses or weaknesses may be strengths—if only a few things were to change. We call this a “disruptive mindset” and suggest marketers regularly consider their situation from this new vantage point.
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Chapter 4: Developing Competitive Advantage and Strategic Focus 87
4.3a Stay Focused Marketing planners often make the mistake of conducting one generic SWOT analysis for the entire organization or business unit. Such an approach produces stale, meaningless generalizations that come from the tops of managers’ heads or from press release files. Although this type of effort may make managers feel good and provide a quick sense of accomplishment, it does little to add to the creativity and vision of the planning process. When we say SWOT analysis, we really mean SWOT analyses. In most firms, there should be a series of analyses, each focusing on a specific product/market combination. For example, a single SWOT analysis for the Chevrolet division of General Motors would not be focused enough to be meaningful. Instead, separate analyses for each product category (cars, electric, performance, SUVs, trucks, commercial) or brand (Impala, Bolt, Corvette, Tahoe, Silverado, Colorado) in the division would be more appropriate. Such a focus enables the marketing manager to look at the specific mix of competitors, customers, and external factors that are present in a given market. Chevrolet’s Tahoe, for example, competes in the crowded SUV market where competitors release new models and related crossover vehicles at a staggering pace. Consequently, market planning for the Tahoe should differ substantially from market planning for Chevrolet’s Corvette. If needed, separate product/market analyses can be combined to examine the issues relevant for the entire strategic business unit, and business unit analyses can be combined to create a complete SWOT analysis for the entire organization. The only time a single SWOT analysis would be appropriate is when an organization has only one product/market combination.
4.3b Search Extensively for Competitors Information on competitors and their activities is an important aspect of a well-focused SWOT analysis. The key is not to overlook any competitor, whether a current rival or one on the horizon. As we discussed in Chapter 3, the firm will focus most of its efforts on brand competition. During the SWOT analysis, however, the firm must watch for any current or potential direct substitutes for its products. Product, generic, and total budget competitors are important as well. Looking for all four types of competition is crucial because many firms and managers never look past brand competitors. Although it is important for the SWOT analysis to be focused, it must not be myopic (narrowly focused). Even industry giants can lose sight of their potential competitors. The mattress industry has been disrupted by direct-to-consumer brands such as Purple and Leesa, catching established mattress stores off guard. These digital brands offer a modern shopping experience with free delivery, 10-year warranties, and risk-free trials. The problem has been exacerbated by Chinese mattress companies flooding the U.S. market at extremely low prices, a tactic known as dumping. Casper, one of the early mattress-in-a-box frontrunners, started with online sales but is moving into brick and mortar to better compete in the now-crowded mattress market. Legacy mattress retailer Mattress Firm, which at one point had 3,300 retail locations, filed for bankruptcy in the hopes of saving its business by closing underperforming locations and expanding into better markets.2
4.3c Collaborate With Other Functional Areas One of the major benefits of SWOT analysis is that it generates information and perspective that can be shared across a variety of functional areas in the firm. The SWOT process should be a powerful stimulus for communication outside normal channels. The final outcome of a properly conducted SWOT analysis should be a fusion of information from many areas. Managers in sales, advertising, production, research and development, finance, customer service, inventory control, quality control, and other areas should learn what other managers see as the firm’s strengths, weaknesses, opportunities, and threats. Of high importance to marketers is integration of supply chain and logistics into the SWOT analysis. Where products are sold and how they get to customers is critical in an increasingly online marketplace that expects efficient fulfillment and delivery of orders via in-home, in-store, or drop-point delivery models. Including experts on supply and
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Starbucks senior leaders, partners, and baristas work together in the company’s innovation lab to bring ideas to action in 100 days.
logistics and other areas in the SWOT analysis allows the marketing manager to address multiple perspectives that affect the marketing plan before creating and implementing it. Including other functions should go beyond the obvious, as firms work to innovate across all aspects of marketing activities. When combining the SWOT analyses from individual areas, the marketing manager can identify opportunities for joint projects and cross-selling of the firm’s products. In a large firm, the first time a SWOT analysis takes place may be the initial point at which managers from some areas have ever formally communicated with each other. Such cross-pollination can generate a conducive environment for creativity and innovation. Research has shown that the success of introducing a new product, especially a radically new product, is dependent on the ability of different functional areas to collaborate and integrate their differing perspectives. For example, Starbucks is speeding up its ability to innovate with its product development lab, the Tryer Center. Cross-functional teams made up of senior leaders, partners (store managers), and baristas work together to rapidly create and test new products and processes that will benefit both customers and the company.3
4.3d Examine Issues From the Customers’ Perspective In the initial stages of SWOT analysis, it is important to identify issues exhaustively. However, all issues are not equally important with respect to developing competitive advantages and strategic focus for the marketing plan. As the analysis progresses, the marketing manager should identify the most critical issues by looking at each one through the eyes of the firm’s customers. To do this, the manager must constantly ask questions such as: ●● ●●
●●
●● ●●
What do customers (and noncustomers) believe about us as a company? What do customers (and noncustomers) think of our product quality, customer service, price and overall value, convenience, and promotional messages in comparison to our competitors? Which of our weaknesses translate into a decreased ability to serve customers (and decreased ability to convert noncustomers)? How do trends in the external environment affect customers (and noncustomers)? What is the relative importance of these issues, not as we see them, but as customers see them?
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Chapter 4: Developing Competitive Advantage and Strategic Focus 89
EXHIBIT 4.3 Breaking Down Managerial Clichés Into Customer-Oriented
Strengths and Weaknesses
Cliché
Potential Strengths
Potential Weaknesses
“We are an established firm.”
Stable after-sales service Experienced Trustworthy
Old-fashioned Inflexible Weak innovation
“We are a large supplier.”
Comprehensive product line Bureaucratic Focused only on large accounts Technical expertise Impersonal Longevity Weak customer service Strong reputation
“We have a comprehensive product line.”
Wide variety and availability One-stop supplier Convenient Customized solutions
Shallow assortment Cannot offer hard-to-find products Limited in-depth product expertise
“We are the industry standard.”
Wide product adoption High status and image Good marketing leverage Extensive third-party support
Vulnerable to technological changes Limited view of competition Higher prices (weaker value)
Source: Adapted from Nigel Piercy, Market-Led Strategic Change (Oxford, UK: Butterworth-Heineman, 2002).
Marketing planners must also gauge the perceptions of each customer segment that the firm attempts to target. For example, younger banking customers, due to their adoption of online banking services such as Venmo and Zelle, may have vastly different perceptions of a bank’s convenience than older customers. Each customer segment’s perceptions of external issues, such as the economy or the environment, are also important. It matters little, for example, that managers think the economic outlook is positive if customers have curbed their spending because they think the economy is weak. Examining issues from the customers’ perspective also includes the firm’s internal customers: its employees. The fact that management perceives the firm as offering competitive compensation and benefits is unimportant. The real issue is what the employees think. Employees are also a valuable source of information on strengths, weaknesses, opportunities, and threats that management may have never considered. Some employees, especially frontline employees, are closer to the customer and can offer a different perspective on what customers think and believe. Other key stakeholders, such as investors, the general public, and government officials, should also be considered. The key is to examine every issue from the most relevant perspective. Exhibit 4.3 illustrates how taking the customers’ perspective can help managers interpret the clichés they might develop, and then break them down into meaningful customer-oriented strengths and weaknesses. Taking the customers’ perspective is a cornerstone of a well-done SWOT analysis. Managers have a natural tendency to see issues the way they think they are (e.g., “We offer a high-quality product”). SWOT analysis forces managers to change their perceptions to the way customers and other important groups see things (e.g., “The product offers weak value given its price and features as compared against the strongest brand competitor”). The contrast between these two perspectives often leads to the identification of a gap between management’s version of reality and customers’ perceptions. As the planning process moves ahead, managers must reduce or eliminate this gap and determine whether their views of the firm are realistic.
4.3e Look for Causes, Not Characteristics Although taking the customers’ perspective is important, it often provides just enough information to get into serious trouble. That is, it provides a level of detail that is often descriptive, but not
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very constructive. The problem lies in listing strengths, weaknesses, opportunities, and threats as simple descriptions or characteristics of the firm’s internal and external environments without going deeper to consider the causes for these characteristics. Although the customers’ perspective is quite valuable, customers do not see behind the scenes to understand the reasons for a firm’s characteristics. More often than not, the causes for each issue in a SWOT analysis can be found in the resources possessed by the firm and/or its competitors. From a resource-based viewpoint, every organization can be considered as a unique bundle of tangible and intangible resources. Major types of these resources include: ●●
●● ●● ●● ●●
●●
●● ●●
●●
Financial resources—cash, access to financial markets, physical facilities, equipment, raw materials, systems, and configurations Intellectual resources—expertise, discoveries, creativity, and innovation Legal resources—patents, trademarks, and contracts Human resources—employee expertise and skills, and leadership Organizational resources—culture, customs, shared values, vision, routines, working relationships, processes, and systems Informational resources—customer intelligence, competitive intelligence, and marketing information systems Insight resources—data sources, AI, and analytics ability Relational resources—strategic alliances; relations with customers, vendors, and other stakeholders; bargaining power; and switching costs Reputational resources—brand names, symbols, image, and reputation4
The availability or lack of these resources are the causes for the firm’s strengths and weaknesses in meeting customers’ needs, and determine which external conditions represent opportunities and threats. For example, Walmart’s strength in low-cost distribution and logistics comes from its combined resources in terms of distribution, information, and communication infrastructure, and strong relationships with vendors. These resources not only give Walmart strengths or advantages in serving customers but also create imposing threats for their competitors.
4.3f Separate Internal Issues From External Issues For the results of a SWOT analysis to be truly beneficial, we have seen that the analyst must go beyond simple descriptions of internal and external characteristics to explore the resources that are the foundation for these characteristics. It is equally important, however, for the analyst to maintain a separation between internal issues and external issues. Some aspects of SWOT are internal while some are external to the firm. Internal issues are the firm’s strengths and weaknesses, while external issues refer to opportunities and threats in the environments outside of the firm. Given the importance of differentiating these, the key test to separate a strength or weakness (internal) from an opportunity or threat (external) is to ask, “Would this issue exist if the firm did not exist?” If the answer is yes, the issue should be classified as external to the firm. At first glance, the distinction between internal and external issues seems simplistic and immaterial. However, the failure to understand the difference between internal and external issues is one of the major reasons for a poorly conducted SWOT analysis. This happens because managers tend to get ahead of themselves and list their marketing options or strategies as opportunities. For example, a manager might state that the firm has “an opportunity to move into global markets.” However, such a move is a strategy or action that the firm might take to expand market share. In the SWOT framework, opportunities (and threats) exist independently of the firm and are associated with characteristics or situations present in the economic, customer, competitive, cultural, technological, political, or legal environments in which the firm resides. For example, an opportunity in this case could be “increasing customer demand for U.S. products,” or that a “competitor recently pulled out of the foreign market.” Once the opportunities
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Chapter 4: Developing Competitive Advantage and Strategic Focus 91
(and threats) are known, the manager’s options, strategies, or tactics should be based on what the firm intends to do about its opportunities and threats relative to its own strengths and weaknesses. The development of these strategic options occurs at a later point within the marketing plan framework.
4.3g Adopt a Disruptive Mindset A final consideration in SWOT analysis is to look at the entire plan from a new perspective. After clearly identifying internal strengths and weaknesses and external opportunities and threats, a good marketer must also assess if situations might soon change. As indicated throughout this text, business environments are highly dynamic and change quickly; thus, what looks positive today might become a negative characteristic in the future. Stated in another way, at times characteristics of a business can be viewed as both a strength and a weakness. This idea is expressed in the difference of “right-side-up” and “upside-down” thinking that acknowledges that a flip can occur when disruptive technologies and competitors change the rules of the game.5 Right-sideup thinking is the current state of business based on known facts and information, in essence the basis of SWOT analysis. Conversely, upside-down thinking is an assessment of what could change in the environment that might transform current strengths into weaknesses and current weaknesses into strengths. As demonstrated in Exhibit 4.4, by being realistic and clearly identifying areas that are, and could, change, businesses are able to better negotiate and plan for a disruptive marketplace. Another final assessment of SWOT analysis is outside-in thinking. Outside-in thinking utilizes the idea of upside-down thinking and applies it to a firm’s competitors. This process is defined as looking at competitor strengths and weaknesses with a goal of identifying areas where competitive advantage can be gained by flipping the strengths and weaknesses of others. The example of Tesla in Exhibit 4.4 suggests how one may perceive strengths of larger automakers as potential weaknesses that offer an advantage for Tesla. Thus, marketers conducting a SWOT analysis should also utilize outside-in thinking and look for ways to disrupt their competition and improve their competitive advantage. To adopt a disruptive mindset, marketers must assess what would need to change to flip strengths and weaknesses. This process isn’t easy and relies on a diligent SWOT analysis of internal and external factors (as the prior sections have indicated). Most of the SWOT should be focused on “what is,” or right-side-up thinking, as market realities should drive most decision making. However, as a final step, looking for disruption helps marketers to anticipate “what could be” in the near future. For example, had cab companies looked at the fact that mobile technologies were changing how people navigate the world, they may have avoided near takeover by companies such as Uber and Lyft. In this example, a strength of taxi companies was having a secure contract with a municipality that precluded competition (for a fee), which made them overly confident that they would not face a competitive challenge. Had taxi companies developed apps that offered convenience (ease of payment and pickup options), they may have solidified customer loyalty and filled customer needs before ride share companies had the opportunity. In summary, a SWOT analysis should be directed by Socrates’s advice: “Know thyself.” This knowledge should be realistic, based on how customers (external and internal) and other key stakeholders see the company, and viewed in terms of the firm’s resources. If managers find it difficult to make an honest and realistic assessment of these issues, they should recognize the need to bring in outside experts or consultants to oversee the process. In addition, firms also need to “know others” and adopt a disruptive mindset to anticipate possible changes and respond before they lose market share and customer loyalty.
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92 Part 2: Discovering Market Opportunities
EXHIBIT 4.4 Adopting a Disruptive Mindset Evaluation
Definition
Example
Right-side-up thinking
Identification of the current state of business based on known facts and information (the basis of SWOT analysis)
While conducting its SWOT analysis via right-sideup thinking, Ford Motor Company identifies two key strengths for the coming year: (1) its line of F-Series pickup trucks and (2) its overall brand reputation that drives customer loyalty.
Upside-down thinking
An assessment of what could change in the environment that might transform current strengths into weaknesses and current weaknesses into strengths
While assessing its SWOT, Ford’s marketers utilize upside-down thinking of the two strengths and if they might flip to weaknesses in the near future by questioning right-side-up thinking. First, by being overly focused on pickup trucks and producing as many as possible, is Ford missing a larger market shift to all-electric vehicles? And will a large segment of truck buyers migrate to tech-enabled electric powered work vehicles? Second, Ford has a strong brand and exceptional customer loyalty, but by relying on this strength is Ford missing demographic changes that might soon make this strength a weakness as its customer base ages with younger buyers being less brand loyal and more product innovation, or environmentally motivated? The question is, can Ford adapt to or overcome changes in either area in the near future, or are they fully committed to the status-quo, and what should they do now to maintain competitive advantage now and into the future?
Outside-in thinking
A process of looking at competitor strengths and weaknesses with a goal of identifying areas where competitive advantage can be gained by flipping the strengths and weaknesses of others
Imagine that during Tesla Motor Company’s SWOT analysis, they practice outside-in thinking. Their electric car line has already disrupted the worldwide auto market, and now they look at Ford’s dominance with pickup truck buyers. However, what if Ford’s commitment to gas-powered engines is a weakness in their strategy? Tesla may see an opportunity where an auto giant is unable (or unwilling) to consider a new segment of the market, such as younger pickup truck buyers interested in a high-tech, feature loaded electric alternative to the Ford F-series pickup truck (even though they offer an electric version). Thus, outside-in thinking is used to see where a dominant competitor may be overlooking a large market segment that it can’t (or won’t) serve because of its commitment to the status quo.
4.4 SWOT-DRIVEN STRATEGIC PLANNING As we discussed in Chapter 3, the collection of marketing information via a situation analysis identifies the key factors that should be tracked by the firm and organizes them within a system that will monitor and distribute information on these factors on an ongoing basis. This process
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Chapter 4: Developing Competitive Advantage and Strategic Focus 93
EXHIBIT 4.5 Potential Issues to Consider in a SWOT Analysis Potential Internal Strengths Abundant financial resources Respected company/brand image Agile and able to address disruption Number 1 ranking in the industry Customer brand advocacy Economies of scale Proprietary technology and patents Lower costs (raw materials or processes) Superior management talent Better marketing skills Superior product quality Alliances with other firms Good distribution skills Committed employees
Potential External Opportunities Rapid market growth Complacent rival firms Changing customer needs/tastes Opening of foreign markets Mishap of a rival firm New product or process discoveries Economic boom/downturn Government deregulation New technology Demographic shifts Other firms seeking alliances High brand switching Sales decline for a substitute product Evolving business models in the industry
Potential Internal Weaknesses Lack of strategic direction Limited financial resources Lack of focus on disruptive competition Lack of focus on disruptive technology Weak spending on R&D Very narrow product line Limited distribution Higher costs (raw materials or processes) Out-of-date products or technology Internal operating problems Internal political problems Weak market image Poor marketing skills Alliances with weak firms Limited management skills Undertrained employees
Potential External Threats Entry of foreign competitors Introduction of new substitute products Product life cycle in decline Evolving business models in the industry Changing customer needs/tastes Declining consumer confidence Rival firms adopting new strategies Increased government regulation Economic boom/downturn Change in Federal Reserve policy New technology Demographic shifts Foreign trade barriers Poor performance of ally firm International political turmoil Weakening currency exchange rates
feeds into and helps define the boundaries of a SWOT analysis that will be used as a catalyst for the development of the firm’s marketing plan. The role of SWOT analysis then is to help the marketing manager make the transition from a broad understanding of the marketing environment to the development of a strategic focus for the firm’s marketing efforts. The potential issues that can be considered in a SWOT analysis are numerous and will vary depending on the particular firm or industry being examined. To aid your search for relevant issues, we have provided a list of potential strengths, weaknesses, opportunities, and threats in Exhibit 4.5. This list is not exhaustive, as these items illustrate only some of the potential issues that may arise in a SWOT analysis.
4.4a Strengths and Weaknesses Relative to market needs and competitors’ characteristics, the marketing manager must begin to think in terms of what the firm can do well and where it may have deficiencies. Strengths and weaknesses exist either because of resources possessed (or not possessed) by the firm, or in the nature of the relationships between the firm and its customers, its employees, or outside organizations (e.g., supply chain partners, suppliers, lending institutions, government agencies, etc.). Given that SWOT analysis must be customer focused to gain maximum benefit, strengths are meaningful only when they serve to satisfy a customer need. When this is the case, that strength
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EXHIBIT 4.6 U.S. Airline Domestic Cost per Available Seat Mile
Delta American United JetBlue Hawaiian Southwest Alaska Allegiant Frontier Spirit 0
2
4
6
8
10
12
14
16
Domestic CASM in U.S. dollar cents Source: E. Mazareanu, “U.S. Airlines’ Domestic Cost per Available Seat Mile in Q3 2018,” Statista, April 24, 2019, https://www.statista .com/statistics/527881/us-domestic-cost-per-available-seat-mile-by-airline/ (accessed March 19, 2020).
becomes a capability.6 The marketing manager can then develop marketing strategies that leverage these capabilities in the form of competitive advantages. At the same time, the manager can develop strategies to overcome the firm’s weaknesses or find ways to minimize the negative effects of these weaknesses. A great example of strengths and weaknesses in action occurs in the U.S. airline industry. Big carriers (or network carriers) such as American, Delta, and United have strengths in terms of sheer size, passenger volume, and marketing muscle. However, they suffer from a number of weaknesses related to internal efficiency, labor relations, and business models that cannot compensate for changes in customer preferences. These weaknesses are especially dramatic when compared to low-cost airlines such as Southwest, Frontier Airlines, Spirit Airlines, Allegiant Air, and JetBlue. Initially, these carriers offered low-cost service in routes ignored by the big carriers. Their strengths in terms of internal efficiency, flexible operations, and lower cost equipment gave low-cost carriers a major advantage with respect to cost economies. The differences in operating expenses per available seat mile (an industry benchmark) are eye opening as seen in Exhibit 4.6. The ability of low-cost carriers to operate more efficiently and at reduced costs has changed the way customers look at air travel. Today, most customers see air travel as a commodity product, with price being the only real distinguishing feature among competing brands.7
4.4b Opportunities and Threats In leveraging strengths to create capabilities and competitive advantages, the marketing manager must be mindful of trends and situations in the external environment. Stressing internal strengths while ignoring external issues can lead to an organization that, although efficient, cannot adapt when external changes either enhance or impede the firm’s ability to serve the needs of its customers. Opportunities and threats exist outside the firm, independently of internal strengths, weaknesses, or marketing options. Opportunities and threats typically occur within the competitive, customer, economic, political/legal, technological, and/or sociocultural environments. After identifying opportunities and threats, the manager can develop strategies to take advantage of opportunities and minimize or overcome the firm’s threats.
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Chapter 4: Developing Competitive Advantage and Strategic Focus 95
Netflix seized an open market opportunity and forever changed the entertainment industry.
Market opportunities can come from many sources. For example, Netflix, which started as a DVD-by-mail subscription service in 1997, now has more than 190 million paid subscribers in 190 countries. Though movie rental stores such as Blockbuster dominated the market, Netflix’s mail-order business was unique. Netflix shifted its strategy in 2007 and introduced its streaming model. At the time, there was almost no competition in streaming, and demand was essentially nonexistent. In 2013, Netflix pivoted once more into developing original programming, staying a step ahead of its competitors and becoming the first Internet TV network to be nominated for a Primetime Emmy. For the first time ever, Netflix subscribers surpassed the number of cable TV subscribers in the United States in 2017, an impressive milestone. With rivals such as Amazon Prime, Hulu, and Disney+, Netflix will need to continue to identify new market opportunities.8 New frontiers for these firms include an expanding opportunity to stream first-run movies at the same time as theaters, which became popular as a result of the COVID-19 pandemic of 2020. The question is, who will get this content, and how will it be priced to compensate studios, celebrity talent, and production support? One thing is for sure, the movie industry is transforming and traditional cinemas as well as companies such as Netflix must anticipate, adapt to, and capitalize on changing societal and consumer demands to survive.
4.4c The SWOT Matrix As we consider how a firm can use its strengths, weaknesses, opportunities, and threats to drive the development of its marketing plan, remember that SWOT analysis is designed to synthesize a wide array of information and aid the transition to the firm’s strategic focus. To address these issues properly, the marketing manager should appraise every strength, weakness, opportunity, and threat to determine their total impact on the firm’s marketing efforts. To utilize SWOT analysis successfully, the marketing manager must be cognizant of six issues:
1. The assessment of strengths and weaknesses must look beyond the firm’s resources and product offering(s) to examine processes that are key to meeting customers’ needs. This often entails offering “solutions” to customers’ problems, rather than specific products.
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96 Part 2: Discovering Market Opportunities
2. The achievement of the firm’s goals and objectives depends on its ability to create capabilities by matching its strengths with market opportunities. Capabilities become competitive advantages if they provide better value to customers than competing offerings. 3. Firms can often convert weaknesses into strengths or even capabilities by investing strategically in key areas (e.g., customer support, research and development, supply chain efficiency, employee training). Likewise, threats can often be converted into opportunities if the right resources are available. 4. Weaknesses that cannot be converted into strengths become the firm’s limitations. Limitations that are obvious and meaningful to customers or other stakeholders must be minimized through effective strategic choices.9 5. Strengths and weaknesses should be assessed via upside-down thinking to determine the potential of disruption to their marketing plans via a fundamental change in the market (e.g., technologies or societal change) that flips strengths to weaknesses or weaknesses to strengths. 6. Opportunities and threats should be assessed via outside-in thinking to identify potential areas where internal disruptive strategy may help to establish new competitive advantages in the marketplace based on analysis of competitor strengths that may become weaknesses. One useful method of conducting this assessment is to visualize the analysis via a SWOT matrix. Exhibit 4.7 provides an example of this four-cell array that can be used to visually evaluate each element of a SWOT analysis. At this point, the manager must evaluate the issues within each cell of the matrix in terms of their magnitude and importance. As we have stated before, this evaluation should ideally be based on customers’ perceptions. If customers’ perceptions cannot be gathered, the manager should base the ratings on the input of employees, business partners, or their own intuition and expertise. It is not mandatory that the SWOT matrix be assessed quantitatively, but it can be informative to do so. Exhibit 4.8 illustrates how this assessment might be conducted using information from the VirPharm marketing plan example found on our website. The first step is to quantify the
EXHIBIT 4.7 The SWOT Matrix
Match
Strengths
Opportunities
(internal)
(external)
Assess disruption (upside-down thinking)
Assess disruption (outside-in thinking) Convert
Convert
Weaknesses
Threats
(internal)
(external) Minimize/Avoid
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Chapter 4: Developing Competitive Advantage and Strategic Focus 97
EXHIBIT 4.8 Quantitative Assessment of the SWOT Matrix This analysis was conducted for the VirPharm marketing plan example found on our website. The ratings in each cell have their basis in a thorough analysis of the company and the industry. Strengths
M
I
R
3
3
9
Patent exclusivity for three years
3
3
9
New product entry
3
2
6
Prescription-strength pain relief available over-the-counter (OTC)
3
2
6
Effective migraine treatment
3
2
6
Talented and motivated workforce
2
2
4
Lower cost of raw materials
3
1
3
Wide range of products
1
2
2
Weaknesses
M
I
R
Limited marketing budget
–3
3
–9
Market position (number 6 in market)
–3
3
–9
Weak product differentiation
–3
3
–9
Current brand name (new to market)
–3
2
–6
Mid-sized company
–2
2
–4
BOPREX associated with gastrointestinal side effects
–1
3
–3
Variability in offshore suppliers
–1
2
–2
Opportunities
M
I
R
FDA has approved the transition of prescription nonsteroidal anti-inflammatory drugs (NSAIDs) into OTC market
3
3
9
Consumers will try new products as they become available
3
3
9
NSAIDs can be used as general pain reliever and fever reducer
3
3
9
Potential market channels not currently exploited
3
3
9
Competing prescription pain relievers have been pulled from the market
3
2
6
Weak product differentiation among OTC competitors
3
2
6
U.S. population is increasingly seeking convenience of online shopping
2
3
6
Increase in aging population
2
2
4
M
I
R
Competition from both prescription pain relievers and OTC pain –3 relievers
3
–9
Extremely crowded OTC market
–3
3
–9
Consumer loyalty with existing competitors
–3
2
–6
Negative publicity regarding NSAIDs
–2
3
–6
Declining physician recommendation of NSAIDs
–1
3
–3
OTC NSAIDs not indicated for long-term use
–1
2
–2
Regulations on drug advertisements could intensify
–1
2
–2
BOPREX approved to treat arthritis, migraine headache, and general pain
Threats
M = magnitude of the element, I = importance of the element, R = total rating of the element. Magnitude scale ranges from 1 (low magnitude) to 3 (high magnitude). Importance scale ranges from 1 (low importance) to 3 (high importance). Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
98 Part 2: Discovering Market Opportunities
magnitude of each element within the matrix. Magnitude refers to how strongly each element affects the firm. A simple method is to use a scale of 1 (low magnitude), 2 (medium magnitude), or 3 (high magnitude) for each strength and opportunity, and −1 (low magnitude), −2 (medium magnitude), or −3 (high magnitude) for each weakness and threat. The second step is to rate the importance of each element using a scale of 1 (weak importance), 2 (average importance), or 3 (major importance) for all elements in the matrix. The final step is to multiply the magnitude ratings by the importance ratings to create a total rating for each element. Remember that the magnitude and importance ratings should be heavily influenced by customer perceptions, not just the perceptions of the manager. The elements with the highest total ratings (positive or negative) should have the greatest influence in developing the marketing strategy. A sizable strength in an important area must be emphasized in order to convert it into a capability or competitive advantage. On the other hand, a fairly small and insignificant opportunity should not play a central role in the planning process. The magnitude and importance of opportunities and threats will vary depending on the particular product or market. For example, a dramatic increase in new housing starts would be important for the lumber, mortgage, or real estate industries, but not as important for industries involving semiconductors or telecommunications. In this example, the magnitude of the opportunity would be the same for all industries; however, the importance ratings would differ across industries.
4.5 DEVELOPING AND LEVERAGING COMPETITIVE ADVANTAGES After the magnitude and importance of each element in the SWOT matrix have been assessed, the manager should focus on identifying competitive advantages by matching strengths to opportunities and adopting a disruptive mindset. The key strengths most likely to be converted into capabilities will be those that have a compatibility with important and sizable opportunities. Remember that capabilities that allow a firm to serve customers’ needs better than the competition give it a competitive advantage. As a final step, the entire SWOT analysis should be reviewed for upside-down and outside-in thinking to assess areas of likely disruption of plans and ways to capitalize via disruption of competitors. As outlined in Exhibit 4.9, competitive advantages can arise from many internal or external sources.
EXHIBIT 4.9 Common Sources of Competitive Advantage Relational Advantages Customer data insights Brand-loyal customers High customer-switching costs Long-term relationships with supply chain partners Strategic alliance agreements Co-marketing or cobranding agreements Tight coordination and integration with supply chain partners Strong bargaining power Legal Advantages Patents and trademarks Strong and beneficial contracts Tax advantages Zoning laws Global trade restrictions Government subsidies continued
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Chapter 4: Developing Competitive Advantage and Strategic Focus 99
EXHIBIT 4.9 Common Sources of Competitive Advantage (Continued ) Organizational Advantages Agility and adaptiveness Data and analytics capability Abundant financial resources Modern plant and equipment Effective competitor and customer intelligence systems Culture, vision, and shared goals Strong organizational goodwill Human Resource Advantages Superior management talent Strong organizational culture Access to skilled labor Committed employees World-class employee training Product Advantages Brand equity and brand name Exclusive products Superior quality or features Production expertise Guarantees and warranties Outstanding customer service Research and development Superior product image Pricing Advantages Lower production costs Economies of scale Large-volume buying Low-cost distribution Bargaining power with vendors Promotion Advantages Company image Large promotion budget Superior sales force Creativity Extensive marketing expertise Distribution Advantages Efficient distribution system Real-time inventory control Extensive supply chain integration Superior information systems Exclusive distribution outlets Convenient locations Strong e-commerce capabilities
When we refer to competitive advantages, we usually speak in terms of real differences between competing firms. After all, competitive advantages stem from real strengths possessed by the firm or in real weaknesses possessed by rival firms. However, competitive advantages can also be based more on perception than reality. For example, Apple’s iPad dominates the market for tablet computers despite the fact that competing products from Samsung, LG, Google, and Amazon typically match, or even beat, the iPad in terms of features and performance. Customers who are unaware of better tablets (or those that simply don’t care) buy the iPad because of its slick image, integration with Apple Music and the App Store, and the availability of third-party accessories.
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Because consumers maintain the perception that the iPad is better than competing products, competing products have a difficult time breaking through. Even though the tablet market is shrinking, Apple’s market share continues to increase.10 Apple needs to exercise upside-down thinking to make sure that this leader advantage doesn’t become a weakness if a currently unknown disruption is imminent. By thinking ahead of disruption, Apple is more likely to adapt and prepare for market changes that may affect its position. Effectively managing customers’ perceptions has been a challenge for marketers for generations. The problem lies in developing and maintaining capabilities and competitive advantages that customers can easily understand, and that solve their specific needs. Capabilities or competitive advantages that do not translate into specific benefits for customers are of little use to a firm. In recent years, many successful firms have developed capabilities and competitive advantages based on one of three basic strategies: operational excellence, product leadership, and customer intimacy:11 ●●
●●
●●
Operational Excellence. Firms employing a strategy of operational excellence focus on efficiency of operations and processes. Many firms employ operational excellence, including Dell, Walmart, and several airlines. These firms operate at lower costs than their competitors, allowing them to deliver goods and services to their customers at lower prices or a better value. Low-cost airlines, like JetBlue and Southwest Airlines, are a prime example of operational excellence in action. Southwest’s no-frills service and use of nearly identical aircraft keep operating costs quite low compared to other air carriers. However, the strength of no-frills could become a weakness if the travel market is disrupted, as it was during the COVID-19 outbreak. Time will tell if this disruption causes consumers to reassess value airlines, perhaps looking to airlines that offer more space and better cleaning standards for a higher price. Product Leadership. Firms that focus on product leadership excel at technology and product development. As a result, these firms offer customers the most advanced, highest quality goods and services in the industry. For example, Microsoft, which dominates the market for personal computer operating systems and office productivity suites, continues to upgrade and stretch the technology underlying its software, while creating complementary products, such as the Surface Pro, that solve customers’ needs. Of course, competitors look to disrupt Microsoft’s leadership via outside-in thinking that in the future may provide a better solution than what Microsoft offers. Yet, as of now, Microsoft has been adept at upside-down thinking, staying ahead of disruption of their product leadership. Pfizer, Intel, and 3M are other examples of companies that pursue a product leadership strategy. Customer Intimacy. Working to know your customers and understand their needs better than the competition is the hallmark of customer intimacy. These firms attempt to develop long-term relationships with customers by seeking their input on how to make the firm’s goods and services better or how to solve specific customer problems. Nordstrom, for example, organizes its store layout by fashion and lifestyle rather than by merchandise categories. The company offers high-quality products with impeccable customer service. In fact, Nordstrom consistently receives high rankings in customer satisfaction. Other firms that pursue customer intimacy include Amazon, DHL, and Ritz-Carlton. Many firms are actively capitalizing on new data capabilities in an effort to use outside-in thinking that disrupts long-term loyalty strategies. For example, Netflix develops deep customer intimacy via data analytics and algorithms that predictively serve unexpressed consumer needs. New data-driven ways of gaining customer intimacy are changing the tried-and-true strategy of personal touch and human anticipation of consumer wants and needs.
To be successful, firms should be able to execute all three strategies. However, the most successful firms choose one area at which to excel, and then actively manage customer perceptions so that customers believe that the firm does indeed excel in that area. To implement any one of these strategies effectively, a firm must possess certain core competencies, as outlined in Exhibit 4.10. Firms that boast such competencies are more likely to create a competitive advantage than those that do not. However, before a competitive advantage can be translated into specific customer
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Chapter 4: Developing Competitive Advantage and Strategic Focus 101
EXHIBIT 4.10 Core Competencies Necessary for Competitive Advantage
Strategies
Operational Excellence—Example Firms: Walmart, Southwest Airlines, Dell Core Competencies ●● Low-cost operations ●● Totally dependable product supply ●● Expedient customer service ●● Effective demand management Common Attributes of Operationally Excellent Firms ●● Deliver compelling value through the use of low prices, standardized product offerings, and convenient buying processes ●● Target a broad, heterogeneous market of price-sensitive buyers ●● Invest to achieve scale economies and efficiency-driven systems that translate into lower prices for buyers ●● Develop information systems geared toward capturing and distributing information on inventories, shipments, customer transactions, and costs in real time ●● Maintain a system to avoid waste and highly reward efficiency improvement Product Leadership—Example Firms: 3M, Pfizer, Intel Core Competencies ●● Quality data inputs and analytics capabilities ●● Basic research/rapid research interpretation ●● Applied research geared toward product development ●● Rapid exploitation of market opportunities ●● Excellent marketing skills Common Attributes of Product-Leading Firms ●● Focus their marketing plans on the rapid introduction of high-quality, technologically sophisticated products in order to create customer loyalty ●● Constantly scan the environment in search of new opportunities; often making their own products obsolete through continuous innovation ●● Target narrow, homogeneous market segments ●● Maintain organizational cultures characterized by decentralization, adaptability, entrepreneurship, creativity, and the expectation of learning from failure ●● Have an attitude of “How can we make this work?” rather than “Why can’t we make this work?” Customer Intimacy—Example Firms: Nordstrom, Amazon, Ritz-Carlton Core Competencies ●● Exceptional skills in discovering customer needs ●● Problem-solving proficiency ●● Flexible product/solution customization ●● A customer relationship management mind-set ●● A wide presence of collaborative (win-win) negotiation skills Common Attributes of Customer-Intimate Firms ●● See customer loyalty as their greatest asset as they focus their efforts on developing and maintaining an intimate knowledge of customer requirements ●● Consistently exceed customer expectations by offering high-quality products and solutions without an apology for charging higher prices ●● Decentralize most decision-making authority to the customer-contact level ●● Regularly form strategic alliances with other companies to address customers’ needs in a comprehensive fashion ●● Assess all relationships with customers or alliance partners on a long-term, even lifetime basis Source: Adapted from Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Addison-Wesley, 1995).
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benefits, the firm’s target markets must recognize that its competencies give it an advantage over the competition. Exhibit 4.10 includes a list of attributes that customers might use to describe a company that possesses each particular competitive advantage. The core competencies are internal (strength) issues, while specific attributes refer to activities that customers will notice as they interact with the firm.
4.6 ESTABLISHING A STRATEGIC FOCUS At the conclusion of the SWOT analysis, the marketing manager must turn his or her attention toward establishing the strategic focus of the firm’s marketing program. By strategic focus, we mean the overall concept or model that guides the firm as it weaves various marketing elements together into a coherent strategy. A firm’s strategic focus is typically tied to its competitive advantages. However, depending on the situation, the strategic focus can shift to compensate for the firm’s weaknesses or to defend against its vulnerabilities. A firm’s strategic focus can change over time to reflect the dynamic nature of the internal and external environments. The direction taken depends on how the firm’s strengths and weaknesses match up with its external opportunities and threats and any anticipated disruption to current markets. Using the results of the SWOT analysis as a guide, a firm might consider four general directions for its strategic efforts:12 ●●
Aggressive (many internal strengths/many external opportunities). Firms in this enviable position can develop marketing strategies to aggressively take on multiple opportunities. Expansion and growth, with new products and new markets, are the keys to an aggressive approach. These firms are often so dominant that they can actually reshape the industry or the competitive landscape to fit their agenda. Google offers a good example of this approach
BEYOND THE PAGES 4.2
Kroger Goes Digital for Grocery Growth13 Cincinnati-based Kroger, which was founded in the nineteenth century, has remained a favorite of tech-savvy twenty -first-century shoppers. The retailer operates 3,000 grocery and non-food stores in 35 states under well-known names such as Kroger, Ralphs, and Fred Meyer. Feeling competitive pressure from Walmart and Amazon, Kroger’s strategy is to enhance the customer experience through a combination of technology and innovative offerings. The acceptance of home grocery delivery was boosted significantly by the COVID-19 pandemic. It continues to grow in popularity as consumers have little time to shop. Rather than invest in a proprietary delivery network, as a short-term solution Kroger partnered with the delivery firm Instacart to serve a broad geographic area. Customers buy groceries online or via app, and Instacart delivers their purchases within two hours. Next, the company partnered with Nuro, a robotics company, to test an unmanned delivery service powered by autonomous vehicles. Additionally, for quick and easy cooking at home, Kroger stores now feature Home Chef build-your-own frozen meals and a diverse line of meal kits.
The company has also partnered with the e-commerce firm Ocado as it seeks to provide what Kroger’s CEO calls the “convenience of shopping for anything, anytime, anywhere.” Its six high-tech warehouses have enabled the retailer to improve its omnichannel capabilities, get the right groceries to the right markets as quickly as possible, and better serve customers who buy digitally. Kroger believes its main competitive advantage over Amazon is its physical stores. Because of its longestablished loyalty program, Kroger has an abundance of data on customer transactions that it’s using to inform its strategies. For example, the grocery chain has built customer profiles that result in more relevant online messaging, including tailored product recommendations and promotions, that allows the company to harness relationships with shoppers who do not shop online but may in the future. Kroger’s new model is designed to capture customers as they shift to digital.
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Chapter 4: Developing Competitive Advantage and Strategic Focus 103
●●
●●
●●
in its development of web-based applications that serve multiple needs and markets. Voice, G Suite, Translate, Chrome, AdSense, Drive, Gmail, and YouTube are a few examples of Google’s offerings. Diversification (many internal strengths/many external threats). Firms in this position have a great deal to offer, but external factors weaken their ability to pursue aggressive strategies. To help offset these threats, firms can use marketing strategy to diversify their portfolio of products, markets, or even business units. A good example of this strategy in action is the Altria Group, whose divisions include Philip Morris USA (tobacco), U.S. Smokeless Tobacco Company, John Middleton (cigars), Ste. Michelle Wine Estates, Philip Morris Capital Corporation (leasing), Juul (e-cigarettes and vapor products), ABInBev (brewing), and more. Although Altria owns many of the world’s most recognizable brands (e.g., Marlboro and Virginia Slims), the firm faces innumerable threats from low-cost competitors, taxes, and litigation.14 Turnaround (many internal weaknesses/many external opportunities). Firms often pursue turnaround strategies because they find themselves in the situation—often temporary—of having too many internal problems to consider strategies that will take advantage of external opportunities. In these cases, firms typically have to put their own house back in order before looking beyond their current products or markets. For example, GM was once the dominant carmaker in the world. However, a weak product portfolio, high pension costs, stiff competition, and the downturn in the world economy during the Great Recession created a perfect storm that forced GM into bankruptcy in 2009. Though more than a decade later GM is once again the world’s leading automaker, it has trailed Tesla in producing viable electric vehicles.15 GM once again faced a crisis during the COVID-19 recession in 2020. Shortly after shutting down auto production, the company started manufacturing ventilators to help combat the virus, converting one of its facilities in Indiana.16 Defensive (many internal weaknesses/many external threats). Firms take a defensive posture when they become overwhelmed by internal and external problems simultaneously. For example, in the last decade, multiple retail chains have filed for bankruptcy more than once as they struggle to cope with declining foot traffic in malls and shopping centers (e.g., Barneys New York, RadioShack, Wet Seal, and American Apparel). Filing for bankruptcy is a defensive strategy that allows companies to break bad leases as they restructure. American Apparel, once highly popular with teens, faced declining sales and internal issues with sexual harassment, leading to two bankruptcy filings just over a year apart.17
Although these four stances are quite common, other combinations of strengths, weaknesses, opportunities, and threats are possible. For example: ●●
●●
A firm may have few internal strengths but many external opportunities. In this situation, the firm cannot take advantage of opportunities because it does not possess the needed resources to create capabilities or competitive advantages. To resolve this problem, the firm might focus all of its efforts toward small niche markets, or it might consider establishing alliances with firms that possess the necessary resources. Startups, for instance, often have limited resources. These businesses can apply to be part of so-called accelerator programs to get access to business advisors, mentorship programs, and seed funding.18 A firm may possess many internal strengths but few external opportunities. In this situation, the firm might pursue a strategy of diversification by entering new markets or acquiring other companies. This strategy is dangerous, however, unless these new pursuits are consistent with the mission of the firm. Business history is replete with stories of firms that explored new opportunities that were outside of their core mission and values. Facebook, for example, invested in virtual reality (VR) technology with its $2 billion purchase of Oculus, a VR startup. It can be argued that virtual technology goes against the social network’s mission of building community and bringing people closer together. Facebook later shut down Oculus Story Studio, its film studio, and sold off Oculus Medium, a 3D sculpting tool. Though the company’s vision for VR is taking longer than Facebook expected to come to fruition, the social network giant is still optimistic.19
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104 Part 2: Discovering Market Opportunities
Establishing a solid strategic focus is important at this stage of the planning process because it lays the groundwork for the development of marketing goals and objectives that follow. Unfortunately, many firms struggle with finding a focus that translates into a strategy that offers customers a compelling reason for purchasing the firm’s products. Firms can use any number of tools and techniques for identifying a compelling strategic focus. We believe that one of the most useful tools is the strategy canvas, which was developed by Professors W. Chan Kim and Renée Mauborgne in their book Blue Ocean Strategy.20 In essence, a strategy canvas is a tool for visualizing a firm’s strategy relative to other firms in a given industry. As an example, consider the strategy canvas for Southwest Airlines depicted in Exhibit 4.11. The horizontal axis of a strategy canvas identifies the key factors that the industry competes on with the products that are offered to customers. In the case of the airline industry, these factors include price, meals, seating choices, and service, among others. The vertical axis indicates the offering level that firms offer to buyers across these factors. The central portion of the strategy canvas is the value curve, or the graphic representation of the firm’s relative performance across its industry’s factors. The key to using the strategy canvas (and the key to developing a compelling strategic focus) lies in identifying a value curve that stands apart from the competition. As illustrated in the exhibit, Southwest’s strategic focus is based on downplaying the traditional competitive factors used in the airline industry (price, meals, etc.), stressing other factors (service, speed), and creating a new factor upon which to base its competitive advantage (frequent departures). In doing this, Southwest offers a compelling alternative to customers who dislike making the tradeoffs between air travel and car travel. Southwest’s strategic focus, then, is offering fast, friendly, and frequent air travel at prices that appeal to customers who would have customarily opted to travel by car. As we have seen earlier in this chapter, Southwest is able to support this focus through its competitive advantages based on operational excellence. It should be no surprise that Southwest has been one of the most successful and profitable carriers in the industry for quite some time. To use the strategy canvas successfully, the marketing manager must identify a value curve with two major characteristics.21 First, the value curve should clearly depict the firm’s strategic focus. As shown in Exhibit 4.11, Southwest Airlines’s focus on service, speed, and frequent EXHIBIT 4.11 Strategy Canvas for Southwest Airlines
Offerings
High
Low Price
Meals
Other Airlines
Lounges
Southwest
Seating Friendly High choices connectivity service
Speed
Frequent departures
Car
Source: W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Publishing Corporation, 2015), p. 41.
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Chapter 4: Developing Competitive Advantage and Strategic Focus 105
departures is clear. All other competitive factors are downplayed in Southwest’s strategy. Second, the value curve should be distinctively different from competitors. Again, this is the case for Southwest as its combination of competitive factors clearly separates the firm from the competition. More information on the Blue Ocean approach to developing a strategic focus can be found in Beyond the Pages 4.3. The combination of the SWOT matrix and the strategy canvas offers a useful and powerful means of visualizing the firm’s competitive advantage and strategic focus. Clearly articulating the firm’s focus is crucial as the marketing manager moves ahead in developing the marketing plan. In the next phase of the planning process, the manager must identify the firm’s marketing goals and objectives in order to connect the strategic focus to the outcomes that are desired and expected. These goals and objectives will also be crucial at the latter stages of planning as the manager identifies standards that will be used to assess the performance of the marketing strategy. In the next section, we look at the development of marketing goals and objectives in more detail.
4.7 DEVELOPING MARKETING GOALS AND OBJECTIVES After identifying a strategic focus, the marketing manager may have some ideas about potential marketing activities that can be used to leverage the firm’s competitive advantages relative to the opportunities available in the market. At this stage, however, there are likely to be many different goals and objectives that coincide with the anticipated strategic direction. Because most firms have limited resources, it is typically difficult to accomplish everything in a single planning cycle. At this point, the manager must prioritize the firm’s strategic intentions and develop specific goals and objectives for the marketing plan. We reiterate that marketing goals and objectives must be consistent with the overall mission and vision of the firm. Once the firm has a mission statement that clearly delineates what it is, what it stands for, and what it does for others, the marketing manager can then begin to express what he or she hopes to achieve in the firm’s marketing program. These statements of desired accomplishments are goals and objectives. Some use the terms goals and objectives interchangeably. However, failure to understand the key differences between them can severely limit the effectiveness of the marketing plan. Goals are general desired accomplishments, while objectives provide specific, quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals.
BEYOND THE PAGES 4.3
Diving Into Blue Ocean Strategy22 In addition to the strategy canvas discussed in the chapter, W. Chan Kim and Renée Mauborgne, professors at INSEAD graduate business schools, developed a companion tool called the four actions framework. Strategy canvas graphically depicts the firm’s strategic focus relative to competitors and the factors that define competition within an industry, while the four actions framework is a tool for discovering how to shift the strategy canvas and reorient the firm’s strategic focus. As shown in the diagram below, the four actions
framework is designed to challenge traditional assumptions about strategy by asking four questions about the firm’s way of doing business: (1) “Which factors should be reduced well below the industry’s standard?” (2) “Which factors should be created that the industry has never offered?” (3) “Which factors should be raised well above industry standard?” (4) “Which of the factors that the industry takes for granted should be eliminated?” continued
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106 Part 2: Discovering Market Opportunities
As an example of how the four actions framework can be used, the authors drew on the experiences of Casella Wine’s successful launch of Yellow Tail. First, Casella eliminated traditional competitive factors such as hard-to-understand wine terminology, aging qualities, and heavy marketing expenditures. Casella reasoned that these factors made wine inaccessible to the mass of buyers who were unfamiliar with wine culture. Second, Casella reduced the importance of other factors such as wine complexity, range of wine selections, and prestige. At launch, for example, Casella introduced only two wines: Chardonnay and Shiraz. They also used a nontraditional label featuring an orange and yellow kangaroo on a black background to reduce the prestige or “snob appeal” common in most wines. Third, Casella raised the importance of competitive factors such as store involvement. Casella utilized store employees by giving them Australian clothing to wear at work. This created a laid-back approach to wine that made the employees eager to recommend Yellow Tail to their customers. Finally, Casella created easy to drink, easy to buy, and fun as new competitive factors. Yellow Tail
has a soft fruity taste that makes it more approachable. Casella also put red and white wines in the same-shaped bottle—an industry first. This simple change greatly reduces manufacturing costs and makes point-of-sale displays simpler and more eye catching. The Blue Ocean approach is also used successfully by Southwest Airlines and Cirque du Soleil, among others. Kim and Mauborgne argue that successfully reorienting a firm’s strategic focus requires the firm to give up long-held assumptions about how business should be conducted. They caution firms to avoid benchmarking and extensive customer research because these approaches tend to create a typical “more for less” mentality that guides the strategic focus of most firms. Instead, this approach requires firms to fundamentally alter their strategic logic. Therein lies the challenge of Blue Ocean thinking: it is very, very difficult for most businesses to change. Yet, the advent of disruptive thinking has made the use of upside-down and outside-in thinking critical, as most firms are seeking to find and develop a blue ocean, either from disruption or identification of a market.
Reduce Which factors should be reduced well below the industry’s standard? Eliminate Which of the factors that the industry takes for granted should be eliminated?
A New Value Curve
Create Which factors should be created that the industry has never offered?
Raise Which factors should be raised well above the industry’s standard?
The Four Actions Framework
4.7a Developing Marketing Goals As statements of broad, desired accomplishments, goals are expressed in general terms and do not contain specific information about where the organization presently stands or where it hopes to be in the future. Wattpad, an online community for original user-generated stories, has a goal to become the future of entertainment. This goal is not specific, however, because it does not specify any benchmarks. To achieve this goal, Wattpad introduced several programs (e.g., Wattpad Brand Partnerships, Wattpad Studios, and the Wattpad Stars program) to promote the site’s authors and their works.23 Goals like these are important because they indicate the direction in which the firm attempts to move as well as the set of priorities it will use in evaluating alternatives and making decisions.
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Chapter 4: Developing Competitive Advantage and Strategic Focus 107
It is also important that all functional areas of the organization be considered in the goal-setting process. In developing goals for the marketing plan, it is important to keep in mind that marketing goals should be attainable, consistent, comprehensive, and involve some degree of intangibility. Failure to consider these issues will result in goals that are less effective, and perhaps even dysfunctional. Let’s look more closely at these characteristics.
Attainability Setting realistic goals is important because the key parties involved in reaching them must see each goal as reasonable. Determining whether a goal is realistic requires an assessment of both the internal and external environments. For example, it would not be unrealistic for a firm in second place in market share, trailing the leading brand by just 2 percent, to set a goal of becoming the industry leader. Other things being equal, such a goal could help motivate employees toward becoming “number one.” In contrast, a firm in sixth place, trailing the fifth-place firm by 5 percent and the leader by 30 percent, could set the same goal—but it would not be realistic. Unrealistic goals can be demotivational because they show employees that management is out of touch. Since one of the primary benefits of having goals is to motivate employees toward better performance, setting unrealistic goals can cause major problems. Consistency In addition to being realistic, management must work to set goals that are
consistent with one another. Enhancing market share and working to have the highest profit margins in the industry are both reasonable goals by themselves, but together they are inconsistent. Goals to increase both sales and market share would be consistent, as would goals to enhance customer service and customer satisfaction. However, setting goals to reduce inventory levels and increase customer service are usually incompatible. Goals across and within functional areas should also mesh together. This is a major concern in large organizations, and it highlights the need for a great deal of information sharing during the goal-formulation process.
Comprehensiveness The goal-setting process should also be comprehensive. This means that each functional area should be able to develop its own goals that relate to the organization’s goals. For example, if goals are set only in terms of advancing the technology associated with a firm’s products, members of the marketing department may wonder what role they will play in this accomplishment. The goal should be stated so that both marketing and research and development can work together to help advance the organizational goal of offering the most technologically advanced products. Marketing will need to work on the demand side of this effort (measuring customer needs and staying attuned to trends in the external environment), while research and development will focus on the supply side (conducting basic and applied research, as well as staying abreast of all major technological innovations). Goals should help clarify the roles of all parties in the organization. Functional areas that do not match any of the organization’s goals should question their need for future resources and their ability to acquire them. Intangibility Finally, goals should involve some degree of intangibility. Some planners have been known to confuse strategies, and even tactics, with goals. A goal is not some action the firm can take; rather, it is an outcome the organization hopes to accomplish. Actions such as hiring 100 new salespeople or doubling the advertising budget are not goals, as any firm with adequate resources can accomplish both tasks. However, having “the best-trained sales force in the industry” or “the most creative and effective advertising campaign in the industry” are suitable goals. Note the intangibility associated with the use of terms such as best trained, most creative, and most effective. These terms are motivational because they promote comparisons with rival firms. They also continually push for excellence, as their open-ended nature always leaves room for improvement.
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108 Part 2: Discovering Market Opportunities
4.7b Developing Marketing Objectives Objectives provide specific and quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals. In some cases, a particular goal may require several objectives for its progress to be adequately monitored, usually across multiple business functions. For example, a goal of “creating a high-quality image for the firm” cannot be accomplished by better inventory control if accounts receivable makes mistakes and customer complaints about the firm’s salespeople are on the rise. Goals without objectives are essentially meaningless because progress is impossible to measure. A typical marketing objective might be: “The sales division will decrease unfilled customer orders from 3 percent to 2 percent between January and June of this fiscal year.” Note that this objective contains a high degree of specificity. It is this specificity that sets goals and objectives apart. Objectives involve measurable, quantitative outcomes, with specifically assigned responsibility for their accomplishment, and a definite time period for their attainment. Let’s look at the specific characteristics of marketing objectives. Advances in measuring outcomes allows real-time assessment of marketing objectives. Marketers are better positioned today to monitor and adjust progress toward objectives than in the past. Development of specific metrics and automatic ways to measure them via big data inputs drive dashboards designed around marketing objectives. For marketers, developments in data quality and analytics make it much easier to see how their strategies are working to help accomplish objectives. In the past, assessment of objectives occurred at the end of a quarter or year, making adaptive response difficult. Thus, real-time assessment of marketing objectives makes it much easier to adjust strategy and respond to changing conditions as the overall plan is implemented.
Attainability As with goals, marketing objectives should be realistic given the internal and ex-
ternal environments identified during the situation and SWOT analyses. A good objective is one that is attainable with a reasonable amount of effort. Easily attainable objectives will not motivate employees to achieve higher levels of performance. Likewise, good objectives do not come from false assumptions that everything will go as planned or that every employee will give 110 percent effort. In some cases, competitors will establish objectives that include taking customers and sales away from the firm. Setting objectives that assume inanimate or inept competitors, when history has proven otherwise, creates objectives that quickly lose their value as employees recognize them as being unreasonable.
Continuity The need for realism brings up a second consideration, that of continuity. Marketing objectives can be either continuous or discontinuous. A firm uses continuous objectives when its current objectives are similar to objectives set in the previous planning period. For example, an objective “to increase market share from 20 to 22 percent in the next fiscal year” could be carried forward in a similar fashion to the next period: “to increase market share from 22 to 24 percent in the next fiscal year.” This would be a continuous objective because the factor in question and the magnitude of change are similar, or even identical, from period to period. An important caveat about continuous objectives: Objectives that are identical, or only slightly modified, from period to period often do not need new strategies, increased effort, or better implementation to be achieved. Marketing objectives should lead employees to perform at higher levels than would otherwise have been the case. Employees naturally tend to be objective oriented. Once they meet the objective, the level of creativity and effort tends to fall off. There are certainly circumstances where continuous objectives are appropriate, but they should not be set simply as a matter of habit. Discontinuous objectives significantly elevate the level of performance on a given outcome factor or bring new factors into the set of objectives. If sales growth has been averaging 10 percent, and the SWOT analysis suggests that this is an easily obtainable level, an example of a discontinuous objective might be “to increase sales 18 percent during the next fiscal year.” This would
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Chapter 4: Developing Competitive Advantage and Strategic Focus 109
EXHIBIT 4.12 Baldrige Performance Excellence Framework
Organizational Profile
Workforce
Strategy Leadership
Results
Integration
Customers
Operations
Measurement, Analysis, and Knowledge Management
Source: Baldrige Performance Excellence Program. 2015. 2015–2016 Baldrige Excellence Framework: A Systems Approach to Improving Your Organization’s Performance. Gaithersburg, MD: U.S. Department of Commerce, National Institute of Standards and Technology (http://www.nist.gov/baldrige).
require new strategies to sell additional products to existing customers, to expand the customer base, or at the very least to develop new tactics and/or enhance the implementation of existing strategies. Discontinuous objectives require more analysis and linkage to strategic planning than continuous objectives. Developing discontinuous objectives is one of the major benefits a company can gain from applying for the Malcolm Baldrige National Quality Award. Exhibit 4.12 identifies the elements of the Baldrige performance framework. To demonstrate proficiency in these areas, a firm must first establish benchmarks, which typically are the quantitative performance levels of the leaders in an industry. The firm then develops objectives that center on improving performance in each area. Many companies feel that simply applying for the Baldrige Award has positive effects on performance, if for no other reason than the process forces the company to set challenging discontinuous objectives. This is also true for organizations that use the Baldrige guidelines as a planning aid.
Time Frame Another key consideration in setting objectives is the time frame for their achievement. Although companies often establish marketing plans on an annual basis, marketing objectives may differ from this period in their time frame. Sales volume, market share, customer service, and gross margin objectives may be set for terms less than, equal to, or greater than one year. The time frame should be appropriate and allow for accomplishment with reasonable levels of effort. To set a target of doubling sales for a well-established company within six months would likely be unreasonable. On the other hand, objectives having an excessively long time frame may be attained without any increased effort or creativity. The combination of managerial expertise and experience, along with the information acquired during the situation and SWOT analyses, should lead to the establishment of an appropriate time frame. For objectives with longer time frames, it is important to remind employees of the objective on a regular basis and to provide feedback on progress toward its achievement. For example, employees at FedEx’s terminal in Memphis, Tennessee, can see a real-time accuracy gauge that
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110 Part 2: Discovering Market Opportunities
displays the company’s current performance in terms of getting packages to their rightful destinations. FedEx also uses a nightly countdown clock to remind employees of the speed needed to turnaround packages and load them on outbound cargo planes. Whether a weekly announcement, a monthly newsletter, or a real-time gauge on the wall that charts progress toward the objective, feedback is a critical part of the objective-setting process, particularly for longer-term objectives.
Assignment of Responsibility One final aspect of objectives that sets them apart from
goals is that the marketing manager must identify the person, team, or unit responsible for achieving each objective. By explicitly assigning responsibility, the firm can limit the problems of stealing credit and avoiding responsibility. A bank might give the marketing department the responsibility of achieving an objective of “having 40 percent of its customers list the bank as their primary financial institution within one year.” If by the end of the year, 42 percent of all customers list the bank as their primary financial institution, the marketing department gets credit for this outcome. If the figure is only 38 percent, the marketing department must provide an explanation.
4.7c Moving Beyond Goals and Objectives Marketing goals and objectives identify the desired ends, both general and specific, that the organization hopes to achieve during the planning period. However, companies do not fulfill properly set goals and objectives automatically or through wishing and hoping. They set into motion a chain of decisions and serve as a catalyst for the subsequent stages in the planning process. Organizational goals and objectives must lead to the establishment of consistent goals and objectives for each functional area of the firm. Having recognized the desired ends, each area, including marketing, must next determine the means that will lead to these targeted results. As we move forward, we focus our attention on the means issue as we address marketing strategy development. Although a firm might consider the steps of the market planning process sequentially, in reality the firm must move back and forth between steps. If marketing strategies that have the potential to achieve the marketing goals and objectives cannot be developed, the goals and objectives may not be reasonable and need to be reevaluated before the development of the marketing strategy. Given that the marketing plan must be a working document, the cycling among planning steps never truly ends.
LESSONS FROM CHAPTER 4 SWOT analysis: ●●
●●
●●
●●
●●
●●
To make SWOT analysis as productive as possible, the marketing manager should: ●●
is considered to be one of the most effective tools in analyzing marketing data and information links a company’s ongoing situation analysis to the development of the marketing plan structures the information from the situation analysis into four categories: strengths, weaknesses, opportunities, and threats uses the structured information to uncover competitive advantages and guide the selection of the strategic focus for the firm’s marketing strategy is more relevant than ever for businesses as they strategically plan is a viable and relevant mechanism for the development of the marketing plan
●●
●●
●●
stay focused by using a series of SWOT analyses, each focusing on a specific product/market combination search extensively for competitors, whether they are a present competitor or potential future competitor collaborate with other functional areas by sharing information and perspectives examine issues from the customers’ perspective by asking questions such as “What do customers (and noncustomers) believe about us as a company?” and “Which of our weaknesses translate into a decreased ability to serve customers (and a decreased ability to convert noncustomers)?” This includes examining the issues from the perspective of the firm’s internal customers, its employees
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Chapter 4: Developing Competitive Advantage and Strategic Focus 111
●●
●●
●●
look for causes, not characteristics, by considering the firm’s resources that are the true causes for the firm’s strengths, weaknesses, opportunities, and threats separate internal issues from external issues using this key test to differentiate: “Would this issue exist if the firm did not exist?” If the answer is yes, the issue should be classified as external to the firm adopt a disruptive mindset
A final consideration in SWOT is to look at the entire plan from a new perspective: ●●
●●
●●
right-side-up thinking is the current state of business based on known facts and information, in essence the basis of SWOT upside-down thinking is an assessment of what could change in the environment that might transform current strengths into weaknesses and current weaknesses into strengths outside-in thinking utilizes the idea of upside-down thinking and applies it to a firm’s competitors
Competitive advantage: ●●
●● ●● ●●
Establishing a strategic focus: ●●
●● ●●
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Strengths and weaknesses: ●●
●●
●●
exist because of resources possessed (or not possessed) by the firm, or they exist due to the nature of key relationships between the firm and its customers, its employees, or outside organizations must be leveraged into capabilities (in the case of strengths) or overcome (in the case of weaknesses) are meaningful only when they assist or hinder the firm in satisfying customer needs
Opportunities and threats: ●●
●●
●●
are not potential marketing actions; rather, they involve issues or situations that occur in the firm’s external environments should not be ignored as the firm gets caught up in developing strengths and capabilities for fear of creating an efficient, but ineffective, organization may stem from changes in the competitive, customer, economic, political/legal, technological, and/or sociocultural environments
The SWOT matrix: ●● ●●
●●
●●
allows the marketing manager to visualize the analysis should serve as a catalyst to facilitate and guide the creation of marketing strategies that will produce desired results allows the manager to see how strengths and opportunities might be connected to create capabilities that are key to meeting customer needs involves assessing the magnitude and importance of each strength, weakness, opportunity, and threat
stems from the firm’s capabilities in relation to those held by the competition can be based on both internal and external factors is based on both reality and customer perceptions is often based on the basic strategies of operational excellence, product leadership, and/or customer intimacy
●●
●●
is based on developing an overall concept or model that guides the firm as it weaves various marketing elements together into a coherent strategy is typically tied to the firm’s competitive advantages involves using the results of the SWOT analysis as the firm considers four major directions for its strategic efforts: aggressiveness, diversification, turnaround, or defensiveness can help ensure that the firm does not step beyond its core strengths to consider opportunities that are outside its capabilities can be visualized through the use of a strategy canvas where the goal is to develop a value curve that is distinct from the competition is often done by downplaying traditional industry competitive factors in favor of new approaches is an important stage of the planning process because it lays the groundwork for the development of marketing goals and objectives and connects the outcomes of the SWOT analysis to the remainder of the marketing plan
Marketing goals: ●●
●●
●●
●●
are broad, desired accomplishments that are stated in general terms indicate the direction the firm attempts to move in, as well as the set of priorities it will use in evaluating alternatives and making decisions should be attainable, realistic, internally consistent, and comprehensive and help to clarify the roles of all parties in the organization should involve some degree of intangibility
Marketing objectives: ●●
●●
●● ●●
●● ●●
provide specific and quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals can be assessed in real time because of advances in measuring outcomes should be attainable with a reasonable degree of effort may be either continuous or discontinuous, depending on the degree to which they depart from present objectives should specify the time frame for their completion should be assigned to specific areas, departments, or individuals who have the responsibility to accomplish them
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112 Part 2: Discovering Market Opportunities
ENDNOTES 1. Mae Anderson, “From Idea to Store Shelf: A New Product Is Born,” Yahoo!, March 4, 2012 https://www.yahoo.com/news/idea-store-shelf-product -born-174428924.html (accessed March 18, 2020); “The World’s Most Innovative Companies,” Fast Company, 2020, https://www.fastcompany.com /most-innovative-companies/2020 (accessed March 18, 2020); Amy Farley, “Sweetgreen’s Free Delivery Service Is the Trojan Horse of the Salad Wars,” Fast Company, March 10, 2020, https://www.fastcompany.com/90457701 /sweetgreen-most-innovative-companies-2020 (accessed March 18, 2020); Adam Bluestein, “This Revolutionary Vaccine Could Eradicate the Deadly Ebola Virus,” Fast Company, March 10, 2020, https://www.fastcompany .com/90457581/merck-most-innovative-companies-2020 (accessed March 18, 2020); Mark Wilson, “Snap Is the World’s Most Innovative Company of 2020,” Fast Company, March 10, 2020, https://www.fastcompany .com/90457684/snap-most-innovative-companies-2020 (accessed March 18, 2020); Nathan Furr and Jeff Dyer, “Lessons From Tesla’s Approach to Innova tion,” Harvard Business Review, February 12, 2020, https://hbr.org/2020/02 /lessons-from-teslas-approach-to-innovation (accessed March 18, 2020). 2. Jordan Valinsky, “Mattress Firm Files for Bankruptcy and Will Close up to 700 Stores,” CNN, October 5, 2018, https://www.cnn.com/2018/10/05 /business/mattress-firm-bankruptcy/index.html (accessed March 19, 2020); Daniels Fund Ethics Initiative Case Bank, “Chinese Manufacturers Dump Mattresses in the U.S.,” 2019, https://www.danielsfund.org/images/df/Ethics /Mini-Cases/Mini-Case-9-Chinese-Manufacturers-Dump-Mattresses-in -the-US.pdf (accessed April 6, 2020). 3. Starbucks, “Inside the Tryer Center, the Starbucks Lab Where Anything Is Possible,” June 11, 2019, https://stories.starbucks.com/stories/2019 /inside-the-tryer-center-the-starbucks-lab-where-anything-is-possible/ (accessed March 19, 2020). 4. This list and most of this section are based on E. K. Valentin, “SWOT Analysis From a Resource-Based View,” Journal of Marketing Theory and Practice, 9(Spring 2001), 54–69. 5. Adam Brandenburger, “Are Your Company’s Strengths Really Weaknesses?” Harvard Business Review, August 22, 2019, https://hbr.org/2019/08 /are-your-companys-strengths-really-weaknesses (accessed April 6, 2020). 6. Shelby D. Hunt, A General Theory of Competition (Thousand Oaks, CA: Sage, 2000), pp. 67–68. 7. Bob Hazel, Tom Stalnaker, Aaron Taylor, and Khalid Usman, “Airline Economic Analysis,” Oliver Wyman Consulting, November 2014, http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2014 /nov/Airline_Economic_Analysis_Screen_OW_Nov_2014.pdf. 8. “How Netflix Became a $100 Billion Company in 20 Years,” Product Habits Blog,” https://producthabits.com/how-netflix-became-a-100-billion -company-in-20-years/ (accessed March 19, 2020); Christopher McFadden, “The Fascinating History of Netflix,” Interesting Engineering, October 12, 2019, https://interestingengineering.com/the-fascinating-history-of-netflix (accessed March 19, 2020). 9. George Stalk, Philip Evans, and Lawrence E. Shulman, “Competing on Capabilities: The New Rules of Corporate Strategy,” Harvard Business Review, 70(March-April 1992), 57–69. 10. Malcolm Owen, “Growth of iPad Market Share Defies Shrinking Tablet Shipments,” Apple Insider, August 6, 2019, https://appleinsider.com /articles/19/08/06/growth-of-ipad-market-share-defies-shrinking-tablet -shipments (accessed March 19, 2020). 11. The material in this section is adapted from Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Reading, MA: Addison-Wesley, 1995).
12. This material is based on Cornelis A. De Kluyver, Strategic Thinking: An Executive Perspective (Upper Saddle River, NJ: Prentice Hall, 2000), pp. 53–56; Philip Kotler, A Framework for Marketing Management, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), p. 67. 13. Kitty Adams, “Groceries and Clothing? Kroger Thinks You’ll Love Its New Fashion Line,” Louisville Courier Journal, September 26, 2018, www .courier-journal.com/story/life/shopping/2018/09/26/kroger-marketplace -stores-add-fashion-line-dip/1356117002/ (accessed January 3, 2019); Gina Acosta, “Kroger’s Plan to Conquer America Pays Off,” Retail Leader, June 21, 2018, https://retailleader.com/krogers-plan-conquer-america-pays (accessed January 3, 2019); “Kroger Lets Shoppers Build Their Own Quick Meals at the Freezer,” Progressive Grocer, September 25, 2018, https:// progressivegrocer.com/kroger-lets-shoppers-build-their-own-quick-meals -freezer (accessed January 3, 2019); Kroger, “State Facts,” https://www .thekrogerco.com/newsroom/state-facts/ (accessed March 19, 2020); Kroger, “Kroger and Nuro Launch Autonomous Grocery Delivery Service in Houston,” April 17, 2019, https://ir.kroger.com/file/Index?KeyFile=397554297 (accessed March 19, 2020); Russell Redman, “Kroger Names Location for Sixth Ocado Warehouse,” Supermarket News, November 14, 2019, https:// www.supermarketnews.com/online-retail/kroger-names-location-sixth -ocado-warehouse (accessed March 19, 2020); Hilary Milnes, “To Protect Its Business, Kroger Is Building an Amazon-Style Flywheel,” Digiday, February 19, 2019, https://digiday.com/retail/protect-business-kroger-building -amazon-style-flywheel/ (accessed March 19, 2020). 14. Altria, “Corporate Profile,” https://www.altria.com/about-altria /who-we-are/corporate-profile?src=topnav (accessed March 19, 2020). 15. Reuters, “GM Tries Catching up to Tesla by Investing $20B in Electric Cars,” New York Post, March 4, 2020, https://nypost.com/2020/03/04 /gm-tries-catching-up-to-tesla-by-investing-20b-in-electric-cars/ (accessed March 19, 2020). 16. Mike Colias, “GM Hustles to Pump Out Ventilators to Fight Coronavirus,” The Wall Street Journal, March 30, 2020, https://www.wsj.com /articles/gm-hustles-to-pump-out-ventilators-to-fight-coronavirus-amid -trump-barbs-11585586925 (accessed April 6, 2020). 17. Lauren Thomas, “More Retailers File for Bankruptcy Twice as They Struggle With Rising Debt, Pressure From Amazon,” CNBC, February 2, 2020, https://www.cnbc.com/2020/02/01/why-many-retail-chains-like-fairway -have-filed-for-bankruptcy-twice.html (accessed March 19, 2020). 18. Tom Popomaronis, “Brands Are Partnering With Accelerators to Find Startups—Here’s Why It’s Actually a Brilliant Strategy,” Inc., February 8, 2019, https://www.inc.com/tom-popomaronis/brands-are -partnering-with-accelerators-to-find-startups-heres-why-its-actually -a-brilliant-strategy.html (accessed April 6, 2020). 19. Aaron Holmes, “Mark Zuckerberg Admits That Facebook’s $2 Billion Bet on Virtual Reality ‘Is Taking a Bit Longer Than We Thought’ to Pay Off,” Business Insider, October 31, 2019, https://www.businessinsider .com/mark-zuckerberg-facebook-oculus-vr-bet-taking-longer-than -expected-2019-10 (accessed March 19, 2020); Lucas Matney, “Facebook Sells Off Oculus Medium to Adobe,” TechCrunch, December 7, 2019, https://techcrunch.com/2019/12/07/facebook-sells-off-oculus-medium -to-adobe/ (accessed March 19, 2020). 20. W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Publishing Corporation, 2015). 21. Ibid., p. 41. 22. Ibid, pp. 27–46. 23. Wattpad, “About Wattpad,” https://company.wattpad.com (accessed March 19, 2020).
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CHAPTER 5 Customers, Segmentation, and Target Marketing 5.1 INTRODUCTION In this chapter, we begin our discussion of marketing strategy by examining customers, segments, and target markets. In Chapter 1, we referred to a market as a collection of buyers and sellers. Now, we focus our attention on the buyers who collectively make up the major portion of most markets. From this perspective, we concern ourselves with markets as individuals, institutions, or groups of individuals or institutions that have similar needs that can be met by a particular product offering. As we shall see, firms can attempt to reach all buyers in a market, smaller groups or segments of the market, or even specific buyers on an individual level. Whether the firm aims for the entire market or smaller market segments, the goal of marketing strategy is to identify specific customer needs, then design a marketing program that can satisfy those needs. To do this effectively, the firm must have a comprehensive understanding of its current and potential customers, including their motivations, behaviors, needs, and wants. Market segmentation is critical to the success of most firms. Segmentation allows marketers to more precisely define and understand customer needs, and gives them the ability to tailor products to better suit those needs. The level of detailed information available about customers today has changed the way firms do business. However, the use of such information raises concerns about consumer privacy. Still, without segmentation we would not enjoy the incredible variety of products available today. Consider the number of choices we have in categories such as soft drinks, cereals, packaged goods, automobiles, and clothing. In addition, segmentation allows firms such as Amazon to better anticipate and serve consumer needs without ever having to ask what those needs are. In many respects, segmentation has improved our standard of living. Customers now expect firms to delve into their needs and wants and to tailor products accordingly. This fact makes market segmentation 113 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
114 Part 3: Developing Marketing Strategy
a vital part of marketing strategy. Until a firm has chosen and analyzed a target market, it cannot make effective decisions regarding other elements of the marketing strategy. In this chapter, we examine issues associated with buyer behavior in both consumer and business markets. We also discuss traditional and individualized approaches to market segmentation, the criteria for successful market segmentation, and specific target marketing strategies. The potential combinations of target markets and marketing programs are essentially limitless. Choosing the right target market from among many possible alternatives is one of the key tests in developing a good marketing strategy.
BEYOND THE PAGES 5.1
How Social Media Segmentation Impacts Strategy1 Social media has become part of our daily lives, and thus an integral part of business and marketing. Each social network appeals to a different audience segment, so it’s important for marketing professionals to understand the distinctions. Social media segmentation, which refers to identifying target audi ences on various social media platforms, is a critical component of any social media strategy. A few examples of social media segments include Adults, Gen Z, Millennials, and Information.
Adults Segment Facebook is a social network where friends and family connect through status updates, photos, and videos. It is the dominant social media network with 69 percent of U.S. adults saying they use the platform. Brands can establish Facebook pages to keep in touch with customers, but more and more the social network is becoming a pay-to-play arena. Luckily, Facebook Ads Manager is one of the most sophisticated advertising tools for targeting. It is an online analytics tool to create Face book, Messenger, and Instagram ads and determine where ads should be placed. For example, Suave Beauty turned to Facebook ads to build awareness around its natural hair care line by targeting African American women age 18–49. While Facebook is used across a variety of age ranges, the top social networks for teens are Instagram, TikTok, and Snapchat. Instagram, a video and photo-sharing platform owned by Facebook, attracts 37 percent of U.S. adults and is more popular with women than men. Shoppable ads are successful on the network because it is seen as a platform for discovery. In fact, one-third of Instagram users have made a purchase from an advertisement, which has benefited di rect-to-consumer brands. Across all demographics, Gen Z users and male users are more likely than others to buy through the app, indicating an important Instagram segment.
Gen Z and Millennial Segment Snapchat is a mobile photo and video messaging app popular with young audiences that sends disappearing messages. Snap chat, which features skippable, vertical video ads, custom filters, and augmented reality (AR) lenses, is used mostly by people
under the age of 25. Bud Light has taken advantage of this young audience to reach drinkers age 21–24. To complement its Super Bowl television advertisements, the company created geotargeted image and video filters that are used on Snapchat. TikTok is a video sharing app that has become one of the top social networks among Gen Z and Millennials, attracting 1.5 billion total users. By adopting the platform’s fun and quirky culture, brands such as ESPN, Apple Music, and e.l.f. Cosmetics have captured young audiences. In addition to reaching people organically, TikTok offers native video ads. Guess, a clothing company, created the #InMyDenim chal lenge, inviting consumers to share how they transform their look using denim. The company collaborated with relevant influencers to spread the word. The campaign attracted more than 5,500 user-generated videos and 10.5 million views, helping Guess gain followers on the platform.
Information Segment Twitter is both one of the oldest social media networks and one of the least popular, attracting a narrow audience. The plat form allows for posts up to 280 characters and is popular for current events and to spread information. Many brands, such as H&M, Cigna, and Honda, have separate profiles for company updates and customer service. Wendy’s—which is well-known for its Twitter strategy that connects with fans on a personal level—took advantage of the buzz around March Madness to create an advertising campaign for its new menu items, sponsoring polls, video highlights, live streams, and Moments, which highlight trending topics. The fast-food restaurant’s cam paign garnered 2 million tweet engagements and 140 million impressions. Twitter has found a large following around politics and celebrities that express their thoughts to their followers. Social media marketing enables firms to promote a mes sage and nurture relationships through a variety of platforms. Audiences can be targeted and reached through paid, owned, and earned media. Marketers need to analyze their target markets and determine the best social media approach to support marketing objectives. The challenge is determining which platforms are relevant and how to use each one.
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Chapter 5: Customers, Segmentation, and Target Marketing 115
5.2 BUYER BEHAVIOR IN CONSUMER MARKETS Trying to understand the buyer behavior of consumers is a challenging task for many reasons, but it is worth the effort. Consumers often behave in irrational and unpredictable ways. Consumers often say one thing but do another. Consumers are difficult to please and easy to upset. Still, the effort spent trying to understand consumers is valuable because it provides needed insight on how to design products and marketing programs that better meet consumer needs and wants. Big data and social media offer many ways to understand consumers. One form of big data use is netnography, a qualitative research technique designed to understand cultural phenomena such as communication, shared meanings, and personal interests, and to draw insights from social media data sources. Social media is a rich source for cultural insights about consumers. Each day more than 500 tweets are published on Twitter, 95 million photos and videos are uploaded to Instagram, 14 million articles are pinned on Pinterest, 500 million stories are shared on Facebook, 2 million posts, articles, and videos are published on LinkedIn, 1 billion videos are viewed on TikTok, and 3.5 billion snaps are created on Snapchat.2 That’s a lot of data. Computer maker Lenovo, as an example, analyzes this diverse data to find out how their products are used in different cultures. One interesting finding is that the family social center in Indian homes is the parents’ bedroom, while the kitchen serves the same social function in American homes. Lenovo uses this type of information to develop consumer electronics that better fit differing family lifestyles for different settings. In the following section, we look at key issues with respect to buyer behavior in consumer markets. Here, we examine the consumer buying process and the factors that alter the ways consumers buy goods and services. As we will see, successful marketing strategy depends on a clear understanding of customers with respect to who they are, what they need, what they prefer, why they buy, and how they use the products they buy. Although this understanding clearly has relevance for designing the product offering, it also impacts the rest of the four Ps—pricing, place (distribution), and promotion—in the marketing program.
5.2a The Consumer Decision Journey The consumer journey is described in Exhibit 5.1, which outlines the five stages of activities that consumers may go through in buying goods and services. Consumers follow an ongoing journey of gathering information and building knowledge. We depict this journey from a starting point of when a “trigger” occurs and a consumer realizes they need to buy something, yet consumers interact with products and information even when not considering a purchase decision. For example, a consumer may be interested in smartphones and pay attention to their innovations and features even when not actively seeking to purchase a new device. However, at some point the consumer decides to buy a new smartphone, and at that trigger point they actively follow a process within their ongoing journey of assessing and storing information. The process of making a purchase decision begins with the recognition of a need that requires a purchase. The next part, as illustrated in Exhibit 5.2, is determining the initial consideration set, active evaluation of alternatives, moment of purchase, and post-purchase experience.3 If all goes well, a loyalty loop forms and the journey more quickly brings one back to products that have been evaluated as offering value and a good experience. For many, Apple products are an example of an ongoing consumer journey with a loyalty loop as many consumers consistently evaluate the experience with Apple products as superior and simply purchase newer models of the same products as needed, skipping much of the typical journey stages. To provide a superior experience, marketers focus on the purchase journey well beyond the decision stages to include actual consumption behaviors, product uses, and product disposal after consumption, all with a focus on improving the ongoing product experience. As we consider each stage of the consumer journey, it is important to keep a few key issues in mind.
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EXHIBIT 5.1 Stages and Issues of the Consumer Purchase Decision Journey Stages
Key Issues
Trigger (Need Recognition)
●●
●● ●●
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Initial Consideration Set
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●●
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Active Evaluation
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●●
●●
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Moment of Purchase
●●
●●
Post-purchase Experience
●●
●●
Activates purchase cycle, informed by ongoing information accumulation. Consumer needs and wants are not the same. An understanding of consumer wants is essential for market segmentation and the development of the marketing program. Marketers must create the appropriate stimuli to foster need recognition. Consumers translate their needs into wants for specific products or brands. Consumers evaluate products as bundles of attributes that have varying abilities to satisfy their needs. Marketers must ensure that their product is in the evoked set of potential alternatives. Marketers must take steps to understand consumers’ choice criteria and the importance they place on specific product attributes. Consumers trust internal, consumer review, and personal sources of information more than firmprovided external sources. The amount of time, effort, and expense dedicated to the search for information depends on (1) the degree of risk involved in the purchase, (2) the amount of experience the consumer has with the product category, and (3) the actual cost of the search in terms of time and money. Consumers narrow their potential choices to an evoked set of suitable alternatives that may meet their needs. Consumers typically add to (and change) their consideration set in this stage, so marketers need to be positioned to capture attention. A consumer’s purchase intention and the actual act of buying are distinct concepts. Several factors may prevent the actual purchase from taking place. Marketers must ensure that their product is available and offer solutions that increase possession utility. Post-purchase evaluation is the connection between the buying process and the development of long-term customer relationships. Marketers must closely follow consumers’ responses (delight, satisfaction, dissatisfaction, cognitive dissonance) to monitor the product’s performance and its ability to meet customers’ expectations.
First, the decision journey depicts the possible range of activities that may occur in making purchase decisions. In most cases, modern consumers are on their journey long before they actively decide to initiate a purchase, and when they do decide to proceed, they typically have a defined consideration set that is the starting point. However, consumers do not always follow these stages
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EXHIBIT 5.2 The Consumer Purchase Decision Journey 2 Consumers add or subtract brands as they evaluate what they want. 1 The consumer considers an initial set of brands, based on brand perceptions and exposure to recent Initialtouch points. consideration set
Active evaluation Information gathering, shopping
Loyalty loop
3 Ultimately, the consumer selects a brand at the moment of purchese. Moment of purchase
Trigger Post-purchase experience Ongoing exposure
4 After purchasing a product or service, the consumer builds expectations based on experience to inform the next decision journey. Source: David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik, “The Consumer Decision Journey,” McKinsey & Company, June 2009, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-consumer-decision-journey (accessed April 7, 2020).
in sequence and may even skip stages en route to making a purchase. For example, impulse purchases, such as buying a pack of chewing gum, do not involve lengthy search or evaluation activities. On the other hand, complex purchases like buying a home are often quite lengthy as they incorporate every stage of the decision journey. Likewise, consumers who are loyal to a product or brand will skip some stages and are most likely to simply enter the loyalty loop and purchase a newer version of a previous product. Consequently, for loyal consumers, marketers have a difficult time promoting brand switching because they must convince these customers to exit the loyalty loop and consider what different products have to offer. As an example, both Android and iOS users are typically loyal to each operating system, making it difficult to gain crossover business. Second, the buying process often involves a parallel sequence of activities associated with finding the most suitable merchant of the product in question. That is, while consumers consider which product to buy, they also consider where they might buy it. In the case of name brand products, this selection process may focus on the product’s price and availability at different stores or online merchants. A specific model of Samsung QLED 4K TV, for example, is often available from many different retailers. Conversely, in the case of private-label merchandise, the choices of product and merchant are made simultaneously. If a customer is interested only in Old Navy brand clothing, then that customer must purchase the clothing from Old Navy online or in store. Third, the choice of a suitable merchant may actually take precedence over the choice of a specific product. In some cases, customers are so loyal to a particular merchant that they will not consider looking elsewhere. For example, many older consumers are fiercely loyal to American car manufacturers. These customers will limit their product selection to a single brand or dealership, greatly limiting their range of potential product choices. In other cases, customers might be loyal to a particular merchant because they hold that merchant’s credit card or are a member of its frequent-user customer program. Finally, some merchants become so well known for certain products that customers just naturally execute their buying process with those retailers. Home Depot, for example, is well known for its selection of name-brand appliances and tools. For many customers, Home Depot is the natural place to go when they are in the market for home appliances.
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118 Part 3: Developing Marketing Strategy
When consumers purchase products like candy or gum on impulse, they rarely go through each stage of the buying process.
Need Recognition Trigger The buying process formally begins when a trigger occurs and
consumers recognize that they have an unmet need. This occurs when consumers identify that there is a discrepancy between their existing level of satisfaction and their desired level of satisfaction. Consumers can recognize needs in a variety of settings and situations. Some needs have their basis in internal stimuli, such as hunger, thirst, and fatigue. Other needs have their basis in external stimuli, such as advertising, window shopping, interacting with salespeople, or talking with friends and family. External stimuli can also arouse internal responses, such as the hunger you might feel when watching an advertisement for Domino’s. Typically, we think of needs as necessities, particularly with respect to the necessities of life (food, water, clothing, safety, shelter, health, or love). However, this definition is limited because everyone has a different perspective on what constitutes a need. For example, many people would argue that they need a car when their real need is for transportation. Their need for a car is really a “want” for a car. This is where we draw the distinction between needs and wants. A need occurs when an individual’s current level of satisfaction does not equal their desired level of satisfaction. A want is a consumer’s desire for a specific product that will satisfy the need. Hence, people need transportation, but they choose to fulfill that need with a car, rather than with alternative products such as motorcycles, bicycles, public transportation, a taxi, or a horse. The distinction between needs and wants is not simply academic. In any marketing effort, the firm must always understand the basic needs fulfilled by their products. For example, people do not need drills; they need to make holes or drive screws. Similarly, they do not need lawnmowers; they need shorter, well-manicured grass. Understanding these basic needs allows the firm to segment markets and create marketing programs that can translate consumer needs into wants for their specific products. An important part of this effort involves creating the appropriate stimuli that will foster need recognition among consumers. The idea is to build on the basic need and
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convince potential consumers to want your product because it will fulfill their needs better than any competing product. It is also important to understand that wants are not the same thing as demand. Demand occurs only when the consumer’s ability and willingness to purchase a specific product backs up their want for the product. Many customers want a luxury yacht, for example, but only a few are able and willing to buy one. In some cases, consumers may actually need a product, but not want it. So-called unsought products such as life insurance, funeral services, long-term health insurance, and continuing education are good examples. In these cases, the marketer must first educate consumers on the need for the product, and then convince consumers to want their products over competing products. For example, Allstate often ends its advertisements posing the question, “Are You in Good Hands?” which specifically questions whether potential customers are sure about their insurance coverage. Creating the seed of doubt in the consumer’s mind is a good first step toward educating potential customers about the need for adequate insurance. Understanding consumers’ needs and wants is an important consideration in market segmentation. Some markets can be segmented on the basis of needs alone. College students, for example, have needs that are different from senior citizens, and single consumers have different needs than families with small children. However, the marketing of most products does not occur on the basis of need-fulfillment alone. In the automobile market, for example, essentially no manufacturer promotes their products as being the best to get you from Point A to Point B (the basic need of transportation). Rather, they market their products on the basis of consumer wants such as luxury (Tesla), image (Audi), sportiness (Jaguar), durability (Ford), fuel economy (Honda), and value (Kia). These wants are the hot buttons for consumers and the keys to promoting further activity in the buying process.
Initial Consideration Set In evaluating the alternative product or brand choices among the members of the initial consideration set, the consumer essentially translates his or her need into a want for a specific product or brand. The evaluation of alternatives is the black box of consumer behavior because it is typically the hardest for marketers to understand, measure, or influence. What we do know about this stage of the buying process is that consumers base their evaluation on a number of different criteria, which usually equate with a number of product attributes and what they know about them from prior touchpoints with the product and brand. Consumers evaluate products as bundles of attributes that have varying abilities to satisfy their needs. In buying a car, for example, each potential choice represents a bundle of attributes, including brand attributes (e.g., image, reputation, reliability, safety), product features (e.g., self-driving features, Apple CarPlay, battery range), aesthetic attributes (e.g., styling, sportiness, roominess, color), and price. Each consumer has a different opinion as to the relative importance of these attributes—some put safety first, while others consider price the dominant factor. Another interesting feature of the evaluation stage is that the priority of each consumer’s choice criteria can change during the process. Consumers may visit a dealership with price as their dominant criterion, only to leave the dealership with price dropping to third on their list of important attributes. There are several important considerations for marketers during the initial evaluation stage. First and foremost, the firm’s products must either be in the initial set of alternatives or be visible enough to be considered as options are formally evaluated. For this reason, marketers constantly remind consumers of their company and its product offerings even when the consumer isn’t actively seeking to make a purchase. Second, it is vital that marketers take steps to understand consumers’ choice criteria and the importance they place on specific product attributes. As we will see later in this chapter, understanding the connection between customers’ needs and product attributes is an important consideration in market segmentation and target marketing decisions. Finally, marketers must often design marketing programs that change the priority of choice criteria or change consumers’ opinions about a product’s image. Microsoft, for example, fought for tablet market share by touting the Surface Pro as a laptop replacement, highlighting features that Apple’s iPad did not have such as a trackpad and mouse support. This changed what consumers demanded
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120 Part 3: Developing Marketing Strategy
from a tablet, and Apple eventually followed suit years later. Microsoft will have to work once again to change its strategy, perhaps to focus on elevating its software instead of hardware.4
Active Evaluation When done correctly, marketing stimuli can prompt consumers to become
interested in a product, leading to a desire to seek out additional information. This desire can be passive or active. During the consumer’s journey, much information is gathered passively when the consumer is not actively pursuing a purchase. However, during the active evaluation stage, consumers become more highly aware of both passive and active information sources. In a passive information search, the consumer becomes more attentive and receptive to information such as noticing and paying attention to automobile advertisements if the customer has a want for a specific car brand. A consumer engages in an active information search when they purposefully seek additional information, such as browsing the Internet, seeking and reading reviews, or visiting dealer showrooms. Information can come from a variety of sources. Internal sources, including personal experiences and memories, are typically the first type of information that consumers search. Information can also come from personal sources, including review advice from friends, family, or coworkers. External sources of information include review sites, advertising, magazines, websites, packaging, displays, and salespeople. Although external sources are the most numerous, consumers typically trust these sources less than internal and personal sources of information. Overall, consumers have more power because of active evaluation. It is worth noting that in the past, marketers had a great deal of control over what information consumers could access and consider. However, as is obvious today, a variety of sources of information are available to consumers. Some are in the control of marketers (e.g., websites, produced content, offers) though many are not (e.g., consumer posted content, reviews, ratings). Thus, consumers are wise to utilize both forms of information as they actively evaluate which pieces of information are trustworthy and useful to aid decision making. The amount of time, effort, and expense dedicated to the search for information depends on a number of issues. First, and perhaps most important, is the degree of risk involved in the purchase. Consumers by nature are risk averse; they use their search for information to reduce risk and increase the odds of making the right choice. Risk comes in many forms, including financial risk (buying a home), social risk (buying the right clothing), emotional risk (selecting a wedding photographer), and personal risk (choosing the right surgeon). In buying a car, for example, consumers regularly turn to Consumer Reports, Kelley Blue Book, reviews, and government safety ratings to help reduce these types of risk. A second issue is the amount of expertise or experience the consumer has with the product category. If a first-time buyer is in the market for a laptop, they face a bewildering array of choices and brands. This buyer is likely to engage in an extensive information search to reduce risk and narrow the potential set of product choices. The same buyer, several purchases later, will not go through the same process. Finally, the actual cost of the search in terms of time and money will limit the degree to which consumers search for information. In some situations, such as deadlines or emergencies, consumers have little time to consult all sources of information at their disposal. Interestingly, consumers typically expand their consideration set during this stage, before making a final decision. Despite having a clear set of alternatives, the evaluation process identifies new options and may lead to a different decision than originally expected. For computers, consumers add an average of 1.7 new products to their decision making, while for cars they add an average of 2.2 new options.5 They evaluate and reevaluate their initial set of products or brands until their list of potential product choices has been narrowed to only a few products or brands that can meet their needs. This list of suitable alternatives is called the evoked set, and it leads to the ultimate decision choice at the moment of purchase, the next stage.
Moment of Purchase After the consumer has evaluated each alternative in the evoked set, they form an intention to purchase a particular product or brand. However, a purchase intention and the actual act of buying are distinct concepts. A consumer may have every intention of purchasing a new car, for example, but several factors may prevent the moment of purchase from taking place. The customer may postpone the purchase due to unforeseen circumstances, such as an illness, job loss, or natural disaster. The salesperson or the sales manager may anger the
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Free delivery is one of the most common ways to increase possession utility during the purchase stage of the consumer buying process.
consumer, leading them to walk away from the deal. The buyer may not be able to obtain financing for their purchase due to a mistake in their credit file. Or the buyer may simply change his or her mind. Marketers can often reduce or eliminate these problems by reducing the risk of purchase through warranties or guarantees, making the purchase stage as easy as possible, or finding creative solutions to unexpected problems. Assuming these potential intervening factors are not a concern, the key issues for marketers during the purchase stage are product availability and possession utility. Product availability is critical. Without it, buyers will not purchase from you, but from someone else who can deliver the product. The key to availability—which is closely related to the distribution component of the marketing program—is convenience. The goal is to put the product within the consumer’s reach wherever that consumer happens to be. Coca-Cola has long understood this issue, and it is the reason for the company’s long-held business mantra to put Coca-Cola “within an arm’s length of desire.” In other words, it should always be very easy for customers to find a Coke.6 This task is closely related to possession utility, or the ease of taking possession of a product. To increase possession utility, the marketer may have to offer financing or flexible payment options for large dollar purchases, delivery and installation of products like appliances or furniture, home delivery of convenience items such as pizza and coffee, or the proper packaging and prompt shipment of items through the mail.
Post-purchase Experience In the context of attracting and retaining buyers, post-purchase
evaluation is the connection between the buying process and the customer experience that builds long-term customer relationships. Marketers must closely follow consumers’ responses during this stage to monitor the product’s performance and its ability to meet consumers’ expectations. In the post-purchase stage, consumers will experience one of these four experience outcomes:
●● ●● ●● ●●
Delight—the product’s performance greatly exceeds the consumer’s expectations Satisfaction—the product’s performance matches the consumer’s expectations Dissatisfaction—the product’s performance falls short of the consumer’s expectations Cognitive Dissonance (Post-purchase Doubt)—the consumer is unsure of the product’s performance relative to their expectations
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122 Part 3: Developing Marketing Strategy
Consumers are more likely to experience dissatisfaction or cognitive dissonance when the dollar value of the purchase increases, the opportunity costs of rejected alternatives are high, or the purchase decision is emotionally involving. Firms can manage these responses by offering liberal return policies, providing extensive post-sale support, or reinforcing the wisdom of the consumer’s purchase decision. The firm’s ability to manage dissatisfaction and dissonance not only is a key to creating customer satisfaction, but it also has a major influence on the consumer’s intentions to spread word-of-mouth information about the company and its products.
5.2b Factors That Affect the Consumer Purchase Decision Journey As we have mentioned previously, the stages in the buyer’s journey depict a range of possible activities that may occur as consumers make purchase decisions. Consumers may spend relatively more or less time in certain stages, they may follow the stages in or out of sequence, or they may even skip stages entirely. This variation in the buying process occurs because consumers are different, the products that they buy are different, and the situations in which consumers make purchase decisions are different. There are a number of factors that affect the consumer journey, including the complexity of the purchase and decision, individual influences, social influences, and situational influences. Let’s briefly examine each factor.
Decision-Making Complexity The complexity of the purchase and decision-making pro-
cess is the primary reason why the buying process will vary across consumers and with the same consumer in different situations. For example, highly complex decisions, such as buying a first home, purchasing a first car, selecting the right college, or choosing elective surgery, are involving for most consumers. These purchases are often characterized by high personal, social, or financial risk; strong emotional involvement; and the lack of experience with the product or purchase situation. In these instances, consumers will spend a great deal of time, effort, and even money to help ensure that they make the right decision. In contrast, purchase tasks that are low in complexity are relatively non-involving for most consumers. In some cases, these purchase tasks can become routine in nature. For example, many consumers buy groceries by selecting familiar items from the shelf and placing them in their carts without considering alternative products. For marketers, managing decision-making complexity is an important consideration. Marketers of highly complex products must recognize that consumers are quite risk averse and need a great deal of information to help them make the right decision. In these situations, access to high-quality and useful information should be an important consideration in the firm’s marketing program. In these cases, marketers also need to remain diligent to be aware of other content that is generated by past customers and rating sites as this information can make a positive or negative difference. Firms that sell less complex products do not have to provide as much information, but they do face the challenges of creating a brand image and ensuring that their products are easily recognizable. For these marketers, issues such as branding, packaging, advertising, and point-of-purchase displays are key considerations in the marketing program.
Individual Influences The range of individual influences that can affect the buying process
is quite extensive. Some individual factors, such as age, life cycle, occupation, and socioeconomic status, are fairly easy to understand and incorporate into the marketing strategy. For the most part, these individual factors dictate preferences for certain types of products or brands. Married consumers with three children will clearly have different needs and preferences than young, single consumers. Likewise, more affluent consumers will have the same basic needs as less affluent consumers; however, their “wants” will be quite different. These individual factors are quite useful for marketers in target market selection, product development, and promotional strategy.
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Chapter 5: Customers, Segmentation, and Target Marketing 123
Other individual factors, such as perceptions, motives, interests, attitudes, opinions, or lifestyles, are much harder to understand because they do not clearly coincide with demographic characteristics such as age, gender, or income levels. These individual factors are also difficult to change. For that reason, many marketers adapt their products and promotional messages to fit existing attitudes, interests, or lifestyles. For example, Doritos released a series of ads without the company’s logo or brand name to appeal to Gen Z consumers who dislike overt advertising, deeming it an “anti-ad.”7
Social Influences Like individual influences, there is a wide range of social influences that can affect the buying process. Social influences such as culture, subculture, social class, reference groups, and family have a profound impact on what, why, and how consumers buy. Among these social influences, none is more important than the family. From birth, individuals become socialized with respect to the knowledge and skills needed to be an effective consumer. As adults, consumers typically exhibit the brand and product preferences of their parents. The influence of children on the buying process has grown tremendously over the last 50 years. Reference groups and opinion leaders also have an important impact on consumers’ buying processes. Reference groups act as a point of comparison and source of product information. A consumer’s purchase decisions tend to fall in line with the advice, beliefs, and actions of one or more reference groups. Opinion leaders can be part of a reference group or may be specific individuals that exist outside of a reference group. When consumers feel like they lack personal expertise, they seek the advice of opinion leaders, who they view as being well informed in a particular field of knowledge. In some cases, marketers will seek out opinion leaders before trying to reach more mainstream consumers. Software manufacturers, for example, release beta (test) versions of their products to opinion leaders before a full-scale launch. Not only does this practice work the bugs out of the product, it also starts a word-of-mouth buzz about the upcoming software release. This is incredibly common in the video game industry and allows developers to reduce the cost of quality assurance testing.8 Overall, social media is changing how products are promoted across industries, creating powerful influencers, such as Kylie Jenner, who can greatly impact a product’s acceptance or rejection.9 Situational Influences There are a number of situational influences that can affect the con-
sumer buying process. Exhibit 5.3 illustrates some of the most common situational influences, many of which affect the amount of time and effort that consumers devote to the purchase task. For example, busy consumers with limited time may turn to retailers that offer same-day or one-day delivery. Furthermore, consumers facing emergency situations have little time to reflect on their product choices and whether they will make the right decision. Consumers may also devote less time and effort to the buying process if they are uncomfortable. For this reason, sitdown restaurants should be inviting and relaxing to encourage longer visits and add-ons such as dessert or coffee after the meal. Other situational influences can affect specific product choices. For example, if you have your boss over for dinner, your product choices would likely differ from those you make in everyday purchases of food and drink. Likewise, customers may purchase more expensive items for gifts when they shop with friends. Product choices also change when customers make the purchase for someone else, such as buying clothing for children. In fact, many parents will purposely buy less expensive clothing for their children if they are growing rapidly or are exceptionally active. These parents want to save money on clothing that will quickly wear out or become too small.
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124 Part 3: Developing Marketing Strategy
EXHIBIT 5.3 Common Situational Influences in the Consumer Buying Process Situational Influences
Examples
Potential Influences on Buying Behavior
Physical and spatial influences
Retail atmospherics Retail crowding Store layout and design
A comfortable atmosphere or ambience promotes lingering, browsing, and buying. Crowded stores may cause customers to leave or buy less than planned.
Social and interpersonal influences
Shopping in groups Salespeople Other customers
Desire to avoid crowds may drive customers to shop online. Consumers are more susceptible to the influences of other consumers when shopping in groups. Rude salespeople can end the buying process. Obnoxious “other” customers may cause the con sumer to leave or be dissatisfied.
Temporal (time) influences
Lack of time Emergencies Convenience
Consumers will pay more for products when they are in a hurry or face an emergency. Lack of time greatly reduces the search for infor mation and the evaluation of alternatives. Last-minute purchases might be made in-store for immediacy or online with retailers offering same-day delivery. Consumers with ample time can seek information on many different product alternatives.
Purchase task or product usage influences
Special occasions Buying for others Buying a gift
Consumers may buy higher quality products for gifts or special occasions. The evoked set will differ when consumers are buying for others as opposed to themselves.
Consumer dispositional influences
Stress Anxiety Fear Fatigue Emotional involvement Good/bad mood
Consumers suffering from stress or fatigue may not buy at all or they may indulge in certain products to make themselves feel better. Consumers who are in a bad mood are exception ally difficult to please. An increase in fear or anxiety over a purchase may cause consumers to seek additional information and take great pains to make the right decision.
5.3 BUYER BEHAVIOR IN BUSINESS MARKETS As we shift our attention to buyer behavior in business markets, keep in mind that business markets and consumer markets have many things in common. Both contain buyers and sellers who seek to make good purchases and satisfy their personal or organizational objectives. Both markets use similar buying processes that include stages associated with need identification, information search, and product evaluation. Finally, both processes focus on customer satisfaction as the desired outcome. However, business markets differ from consumer markets in important ways. One of the most important differences involves the consumption of the purchased products. Consumers buy products for their personal use or consumption. In contrast, organizational buyers purchase products for use in their operations. These uses can be direct, as in acquiring raw materials to produce finished goods, or indirect, as in buying office supplies or leasing cars for salespeople. There are four types of business markets: Commercial Markets. These markets buy raw materials for use in producing finished goods, and they buy facilitating goods and services used in the production of finished goods. Commercial markets include a variety of industries, such as aerospace, agriculture, mining, construction, transportation, communication, and utilities.
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Chapter 5: Customers, Segmentation, and Target Marketing 125
●●
●●
●●
Reseller Markets. These markets consist of channel intermediaries such as wholesalers, retailers, or brokers that buy finished goods from the producer market and resell them at a profit. As we will see in Chapter 6, channel intermediaries have the responsibility for creating the variety and assortment of products offered to consumers. Therefore, they wield a great deal of power in the supply chain. Government Markets. These markets include federal, state, county, city, and local governments. Governments buy a wide range of finished goods ranging from aircraft carriers to fire trucks to office equipment. However, most government purchases are for the services provided to citizens, such as education, fire and police protection, maintenance and repair of roads, and water and sewage treatment. Institutional Markets. These markets consist of a diverse group of noncommercial organizations such as churches, charities, schools, hospitals, or professional organizations. These organizations primarily buy finished goods that facilitate their ongoing operations.
5.3a Unique Characteristics of Business Markets Business markets differ from consumer markets in at least five ways. These differences concern the nature of the decision-making unit, the role of hard and soft costs in making and evaluating purchase decisions, reciprocal buying relationships, and the dependence of the two parties on each other. As a general rule, these differences are more acute for firms attempting to build longterm client relationships. In business markets, buying needed products at the lowest possible price is not necessarily the most important objective. Since many business transactions are based on long-term relationships, trust, reliability, and overall goal attainment are often much more important than the price of the product.
The Buying Center The first key difference relates to the role of the buying center—the
group of people responsible for making purchase decisions. In consumer markets, the buying center is fairly straightforward: The adult head-of-household tends to make most major purchase decisions for the family, with input and assistance from children and other family members as applicable. In an organization, however, the buying center tends to be much more complex and difficult to identify, in part because it may include three distinct groups of people—economic buyers, technical buyers, and users—each of which may have its own agenda and unique needs that affect the buying decision. Any effort to build a relationship between the selling and buying organization must include economic buyers—those senior managers with the overall responsibility of achieving the buying firm’s objectives. In recent years, economic buyers have become increasingly influential as price has become less important in determining a product’s true value to the buying firm. This has made economic buyers a greater target for promotional activities. Technical buyers—employees with the responsibility of buying products to meet needs on an ongoing basis—include purchasing agents and materials managers. These buyers have the responsibility of narrowing the number of product options and delivering buying recommendations to the economic buyer(s) that are within budget. Technical buyers are critical in the execution of purchase transactions and are also important to the day-to-day maintenance of long-term relationships. Users—managers and employees who have the responsibility of using a product purchased by the firm—comprise the last group of people in the buying center. The user is often not the ultimate decision maker but frequently has a place in the decision process, particularly in the case of technologically advanced products. For example, the head of information technology often has a major role in computer and IT purchase decisions.
Hard and Soft Costs The second difference between business and consumer markets involves the significance of hard and soft costs. Consumers and organizations both consider hard costs, which include monetary price and associated purchase costs such as shipping and installation. Organizations, however, must also consider soft costs, such as downtime, opportunity costs, and human resource costs associated with the compatibility of systems, in the buying
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126 Part 3: Developing Marketing Strategy
decision. The purchase and implementation of a new payroll system, for example, will decrease productivity and increase training costs in the payroll department until the new system has been fully integrated.
Reciprocity The third key difference involves the existence of reciprocal buying relationships. With consumer purchases, the opportunity for buying and selling is usually a one-way street: The marketer sells and the consumer buys. Business marketing, however, is more often a twoway street, with each firm marketing products that the other firm buys. For example, a company may buy office supplies from another company that in turn buys computer hardware from the first firm. In fact, such arrangements can be an upfront condition of purchase in purely transaction-based marketing. Reciprocal buying is less likely to occur within long-term relationships unless it helps both parties achieve their respective goals. Mutual Dependence In business markets, the buyer and seller are more likely to be de-
pendent on one another. For consumer–marketer relationships, this level of dependence tends to be low. If a store is out of a product or a firm goes out of business, customers simply switch to another source to meet their needs. Likewise, the loss of a particular customer through brand switching, relocation, or death is unfortunate for a company but not in itself particularly damaging. The only real exception to this norm is when consumers are loyal to a brand or merchant. In these cases, consumers become dependent on a single brand or merchant, and the firm can become dependent on the sales volume generated by these brand loyal consumers. This is not the case in business markets where sole-source or limited-source buying may leave an organization’s operations severely distressed when a supplier shuts down or cannot deliver. For example, during the COVID-19 (coronavirus) pandemic in 2020, Apple’s supply chain was disrupted due to factory shutdowns in China, causing some retailers to run out of stock of certain iPhone models.10 The same is true for the loss of a customer. The selling firm has invested significantly in the client relationship, often modifying products and altering information or other systems central to the organization. Each client relationship represents a significant portion of the firm’s profit, and the loss of a single customer can take months or even years to replace.
Value Outcomes Over Experience A final difference is that business markets focus more
on the value a product provides than the experience offered by the product. In consumer markets, customer experience is a key element of building customer loyalty, often more important than how well the product performs. For example, an easy-to-use and cool-looking product may offer fewer features but will be preferred by consumers. In business markets, the opposite is normally true as business buyers are required to spend resources on products that return value and do their job well and consistently over time. This seems obvious, but what isn’t obvious relates to the experience a product delivers. In business settings, buyers will sacrifice an ease of use if the product makes money. As an example, Salesforce.com is a large cloud-based software used to track and manage customer relationships. Sold via a monthly subscription, Salesforce has built its business by offering a solid customer experience that provides exceptional value outcomes in the form of better sales revenue and customer relationships. Currently, Salesforce is the largest and fastest growing product of its type largely because it helps companies to make more money. Specifically, companies that use the software see average increases in a variety of areas, including an average 27 percent increase in sales revenues, 32 percent increase in lead conversion, 34 percent increase in customer satisfaction, and 56 percent faster deployment.11
5.3b The Business Buying Process Like consumers, businesses follow a buying journey. However, given the complexity, risk, and expense of many business purchases, business buyers tend to follow these stages in formal sequence. Some buying situations can be quite routine, such as the daily or weekly purchase and delivery of
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Chapter 5: Customers, Segmentation, and Target Marketing 127
raw materials or the purchase of office consumables such as paper and toner cartridges. Nonetheless, business buyers often make even routine purchases from prequalified or single-source suppliers. Consequently, virtually all business purchases have gone through the following stages of the buying process at one time or another:
1. Problem Recognition. The recognition of needs can stem from a variety of internal and external sources, such as employees, members of the buying center, or outside salespeople. Business buyers often recognize needs due to special circumstances, such as when equipment or machinery breaks or malfunctions. 2. Develop Product Specifications. Detailed product specifications often define business purchases. This occurs because new purchases must be integrated with current technologies and processes. Developing product specifications is typically done by the buying center. 3. Vendor Identification and Qualification. Business buyers must ensure that potential vendors can deliver on needed product specifications, within a specified time frame, and in the needed quantities. Therefore, business buyers will conduct a thorough analysis of potential vendors to ensure they can meet their firm’s needs. The buyers then qualify and approve the vendors that meet their criteria to supply goods and services to the firm. 4. Solicitation of Proposals or Bids. Depending on the purchase in question, the buying firm may request that qualified vendors submit proposals or bids. These proposals or bids will detail how the vendor will meet the buying firm’s needs and fulfill the purchase criteria established during the second stage of the process. 5. Vendor Selection. The buying firm will select the vendor or vendors that can best meet its needs. The best vendor is not necessarily the one offering the lowest price. Other issues such as reputation, timeliness of delivery, guarantees, or personal relationships with the members of the buying center are often more important. 6. Order Processing. Often a behind-the-scenes process, order processing involves the details of processing the order, negotiating credit terms, setting firm delivery dates, and any final technical assistance needed to complete the purchase. 7. Vendor Performance Review. The final stage of the buying process involves a review of the vendor’s performance. In some cases, the product may flawlessly fulfill the needed specifications, but the vendor’s performance is poor. In this stage, both product and vendor specifications can be reevaluated and changed if necessary. In the end, the overall value received by the purchaser will affect future purchase decisions. Like consumer markets, there are a number of factors that can influence the business buying process. Environmental conditions can have a major influence on buyer behavior by increasing the uncertainty, complexity, and risk associated with a purchase. In situations of rapid environmental change, business buyers may alter their buying plans, postpone purchases, or even cancel purchases until things settle down. Environmental conditions not only affect the purchase of products but also affect decisions regarding the recruitment and hiring of employees. Organizational factors can also influence corporate buying decisions. These factors include conditions within the firm’s internal environment (resources, strategies, policies, objectives) as well as the condition of relationships with business or supply chain partners. A shift in the firm’s resources can change buying decisions, such as a temporary delay in purchasing until favorable credit terms can be arranged. Likewise, if a supplier suddenly cannot provide needed quantities of products or cannot meet a needed delivery schedule, the buying firm will be forced to identify and qualify new suppliers. Internal changes in information technology can also affect the buying process, such as when technicians integrate electronic procurement systems with the legacy systems of the firm and its vendors. Finally, interpersonal relationships and individual factors can affect the buying process. A common example occurs when members of the buying center are at odds over purchase decisions. Power struggles are not uncommon in business buying, and they can bring the entire process to a halt if not handled properly. Individual factors, such as a manager’s personal preferences or prejudices, can also affect business buying decisions. The importance of interpersonal and individual factors depends on the specific buying situation and its importance to the firm’s goals and objectives. Major purchases typically create the most conflict among members of the buying center.
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128 Part 3: Developing Marketing Strategy
5.4 MARKET SEGMENTATION Understanding the processes that consumers and businesses use to make purchase decisions is critical to the development of long-term, mutually beneficial relationships with customers. It is also a necessary first step in uncovering similarities among groups of potential buyers that can be used in market segmentation and target marketing decisions. From a strategic perspective, we define market segmentation as the process of dividing the total market for a particular product or product category into relatively homogeneous segments or groups. To be effective, segmentation should create groups where the members within the group have similar likes, tastes, needs, wants, or preferences, but where the groups themselves are dissimilar from each other. As noted in Beyond the Pages 5.2, the increasing diversity of the U.S. population creates a number of challenges when it comes to segmenting markets. In reality, the most fundamental segmentation decision is really whether to segment at all. When a firm makes the decision to pursue the entire market, it must do so on the basis of universal needs that all customers possess. However, most firms opt to target one or more segments of the total market because they find that they can be more successful when they tailor products to fit unique needs or requirements. In today’s economy, segmentation is often mandated by customers due to their search for unique products and their changing uses of communication media. The end result is that customer segments have become even more fragmented and more difficult to reach. Many firms today take segmentation to the extreme by targeting small niches of a market, or even the smallest of market segments: individuals.
5.4a Traditional Market Segmentation Approaches Many segmentation approaches are traditional in the sense that firms have used them successfully for decades. It is not our intention to depict these approaches as old or out of date, especially when compared to individualized segmentation strategies that we discuss later. In fact, many of today’s most successful firms use these tried-and-true approaches. Some organizations actually use more than one type of segmentation, depending on the brand, product, or market in question.
Mass Marketing It seems odd to call mass marketing a segmentation approach, as it involves
no segmentation whatsoever. Companies aim mass marketing campaigns at the total (whole) market for a particular product. Companies that adopt mass marketing take an undifferentiated approach that assumes that all customers in the market have similar needs and wants that can be reasonably satisfied with a single marketing program. This marketing program typically consists of a single product or brand (or, in the case of retailers, a homogeneous set of products), one price, one promotional program, and one distribution system. Duracell, for example, offers a collection of different battery sizes (D, C, AA, AAA, 9-volt), but they are all disposable batteries marketed to consumers for use in toys and small electronic devices. The use of mass marketing campaigns is becoming less common as most products and advertising options are able to identify more specific segments. Mass marketing works best when the needs of an entire market are relatively homogeneous. Good examples include commodities such as oil and agricultural products. In reality, few products or markets are ideal for mass marketing, if for no other reason than companies, wanting to reach new customers, often modify their product lines. For much of its existence, Vaseline manufactured and offered a single product: Vaseline Petroleum Jelly. To reach new customers, Vaseline modified this strategy by launching new products over time such as body lotions and lip balms. Furthermore, think of Arm & Hammer, which got its start with baking soda as its only product. Now, the company sells a variety of products from cat litter to toothpaste. Although mass marketing is advantageous in terms of production efficiency and lower marketing costs, it is inherently risky. By offering a standard product to all customers, the organization
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BEYOND THE PAGES 5.2
The Opportunities in Multicultural Marketing12 The U.S. population is becoming more racially and ethnically diverse, which is no surprise considering the United States was founded as a melting pot of cultures. That pot of cultural dif ferences creates many challenges and opportunities in finding and serving target markets. Consider the following statistics: ●●
●●
●●
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●● ●●
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The most common age in the United States is 27, but the most common age for white Americans is 58. The post– World War II baby boom is one reason for this skew in age distribution. Nearly 60 percent of minorities are Millennial, Gen Z, or younger. Texas, California, Hawaii, New Mexico, and the District of Columbia now have so-called majority–minority popula tions where more than 50 percent of the population is part of a minority group. The combined buying power of minorities stands at $3.9 trillion. Hispanic buying power accounts for $1.5 trillion, which is greater than Australia’s gross domestic product (GDP). Asian Americans are the fastest growing minority market. The defining characteristics of minority markets are not based on skin color or language. Instead, core values such as family, faith, nationalism, respect for the elderly and community leaders, and cultural institutions are the dominant features that define minority populations. Many minority populations work to preserve their ethnic values and customs. Distinct minority populations have little in common with each other, other than their emotional connections to their own ethnic traditions.
Given these impressive facts, it becomes clear that firms will have a hard time reaching a mass audience of U.S. con sumers using a one-size-fits-all marketing approach. So, how can a firm reach across segments of society for maximum marketing effectiveness and efficiency? The truth is that most firms don’t bother. In fact, multicultural media spend ing only accounts for 5.2 percent of total advertising and marketing spending. In a survey on diversity in advertising conducted by Adobe, one-third of respondents said they
have discontinued use of a brand that did not represent their identity in advertisements. On the bright side, more than two-thirds of respondents have seen an increase in diverse marketing in the past three years. Targeting specific minority groups has become increas ingly nuanced. The key to effective diversity marketing is to begin with a multicultural context, which is accomplished by researching the target consumer’s buying habits, values, and preferred methods of communication. The tactics of yester day—simple language translation, hiring diverse employees, or using photos of ethnic minorities in promotional images— won’t work anymore. Today, consumers crave authenticity. It’s also important to have diverse marketing professionals behind the scenes to bring multiple perspectives into the creative process. Several companies have been singled out as having suc cessful approaches to multicultural marketing. McDonald’s, for example, recently introduced its “Black & Positively Golden” campaign—a mix of TV, social media, radio, print, and experiential marketing—which is said to be the most significant campaign targeted to African Americans in 16 years, according to Ad Age. Toyota’s marketing to Hispan ics has been so successful that it has been the top-selling car brand among Hispanic consumers for more than 14 years. The carmaker has worked with celebrity spokespeople such as retired Mexican goalkeeper Jorge Campos to connect with audiences. It’s important to consider the best way to reach each audi ence and invest in relevant media outlets. For example, mul ticultural audiences are more likely to engage in messaging, digital video, and streaming. The fastest growing categories for multicultural spending include esports sponsorships, influencer marketing, and branded content marketing. Ad ditionally, multicultural marketing should acknowledge and embrace differences in cultural backgrounds, values, and traits. Considering nearly half of the U.S. population is a racial or ethnic minority, marketers are underspending on these populations, making multicultural advertising a gigan tic missed opportunity.
becomes vulnerable to competitors that offer specialized products that better match customers’ needs. In industries where barriers to entry are low, mass marketing runs the risk of being seen as too generic. This situation is very inviting for competitors who use more targeted approaches. Mass marketing is also risky in global markets, where even global brands such as McDonald’s must be adapted to match local tastes and customs.
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Differentiated Marketing Most firms use some form of market segmentation by (1) dividing the total market into groups of customers having relatively common or homogeneous needs and (2) attempting to develop a marketing program that appeals to one or more of these groups. This approach may be necessary when customer needs are similar within a single group, but their needs differ across groups. Through well-designed and carefully conducted research, firms can identify the particular needs of each market segment to create marketing programs that best match those needs and expectations. Within the differentiated approach there are two options: the multisegment approach and the market concentration approach. Firms using the multisegment approach seek to attract buyers in more than one market segment by offering a variety of products that appeal to different needs. Firms using this option can increase their share of the market by responding to the heterogeneous needs of different segments. If the segments have enough buying potential, and the product is successful, the resulting sales increases can more than offset the increased costs of offering multiple products and marketing programs. The multisegment approach is the most widely used segmentation strategy in medium- to large-sized firms. It is extremely common in packaged goods and grocery products. Maxwell House, for example, began by marketing one type of coffee and one brand. Today, this division of Kraft Foods offers more than 120 products under the Maxwell House brand alone. Kraft also markets coffee under other labels such as the Sanka and Yuban labels, in addition to providing private label brands for retailers. A walk down the cereal aisle of your local supermarket offers additional examples. Firms such as Kellogg’s and Nabisco offer seemingly hundreds of brands of breakfast cereals targeted at specific segments, including children (e.g., Fruity Pebbles, Apple Jacks), health-conscious adults (e.g., Special K, Shredded Wheat), parents looking for healthier foods for their children (e.g., Life, Kix), and so on. Firms using the market concentration approach focus on a single market segment. These firms often find it most efficient to seek a maximum share in one segment of the market. For example, Armor All markets a well-known line of automotive cleaners, protectants, and polishes targeted primarily to young, driving-age males. The main advantage of market concentration is specialization, as it allows the firm to focus all of its resources toward understanding and serving a single segment. Specialization is also the major disadvantage of this approach. By “putting all of its eggs in one basket,” the firm can be vulnerable to changes in its market segment, such as economic downturns and demographic shifts. Still, the market concentration approach can be highly successful. In the arts, where market concentration is almost universal, musical groups hone their talents and plan their performances to satisfy the tastes of one market segment, divided by genres of music such as country, rock, or electronic dance music (EDM). Niche Marketing Some companies narrow the market concentration approach even more and focus their marketing efforts on one small, well-defined market segment or niche market that has a unique, specific set of needs. Customers in niche markets will typically pay higher prices for products that match their specialized needs. Just For Men, a men’s hair care brand, exclusively targets mature men and focuses on those with graying hair. The key to successful niche marketing is to understand and meet the needs of target customers so completely that, despite the small size of the niche, the firm’s substantial share makes the segment highly profitable. An attractive market niche is one that has growth and profit potential, but is not so appealing that it attracts competitors. The firm should also possess a specialization or provide a unique offering that customers find highly desirable. 5.4b Individualized Segmentation Approaches Due to advances in communication and Internet technology, individualized segmentation approaches have emerged. These approaches are possible because organizations now have the ability to track customers with a high degree of specificity. By combining demographic data with past and current purchasing behavior, organizations can tweak their marketing programs in ways that allow them to precisely match customers’ needs, wants, and preferences. Three types of individualized segmentation approaches are one-to-one marketing, mass customization, and permission marketing.
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One-to-One Marketing When a company creates an entirely unique product or marketing program for each customer in the target segment, it employs one-to-one marketing. This approach is common in business markets where companies design unique programs and/or systems for each customer. For example, providers of enterprise software—such as Oracle and SAP—create customized solutions that allow firms to track customers, business processes, and results in real time. Insurance companies or brokers, such as Britain’s Sedgwick Group, design insurance and pension programs to meet a corporation’s specific needs. The key to one-to-one marketing is personalization, where every element of the marketing program is customized to meet the specifics of a particular client’s situation. Historically, one-to-one marketing has been used less often in consumer markets, but technology has made it easier. For instance, TD Ameritrade, an online broker, uses artificial intelligence (AI) to make its digital investing more personal for each client. Its AI-powered tool sends personalized e-mails to investors that include tailored education resources based on the investor’s previous activity and profile.13 One-to-one marketing is quite common in luxury and custom-made products, such as when a consumer buys a large sailboat, airplane, or custom-built home. In such instances, the product has significant modifications made to it to meet unique customer needs and preferences. Many service firms—such as hairstylists, lawyers, doctors, and educational institutions—also customize their marketing programs to match individual consumer needs. One-to-one marketing has grown rapidly in electronic commerce where customers can be targeted precisely. Amazon, for example, maintains complete profiles on customers who browse and buy from its site. These profiles assist Amazon with the customization of webpages in real time, product suggestions, and reminder e-mails sent to customers. Mass Customization An extension of one-to-one marketing, mass customization refers to providing unique products and solutions to individual customers on a mass scale. Along with the Internet, advances in supply chain management—including real-time inventory control—have allowed companies to customize products in ways that are both cost-effective and practical. For example, Dell builds thousands of custom-ordered computers every day. Each customer gets to choose from a variety of options (storage, screen sizes, colors, etc.) to configure a computer as they want it. Dell gets to take advantage of scale economies because it builds thousands of the same basic computer for its other customers. Other firms that use mass customization include Build-A-Bear Workshop (custom teddy bears or other animals) and Finding Ferdinand (custom lipstick). Mass customization also occurs in business markets. Through a buying firm’s electronic procurement system, employees can order products ranging from office supplies to travel services. The system allows employees to requisition goods and services via a customized catalog—unique to the firm—where the buying firm has negotiated the products and prices. E-procurement systems like these have become quite popular for good reason: They allow firms to save a great deal of money—not only on prices but also on the costs of placing orders. Selling firms benefit as well by customizing their catalogs to specific buying firms, allowing them to sell more goods and services at a reduced cost. Permission Marketing Permission marketing, although similar to one-to-one marketing, is different in that customers choose to become part of a firm’s market segment. In permission marketing, customers give companies permission to specifically target them in their marketing efforts. The most common tool used in permission marketing is the opt-in e-mail list, where customers permit a firm—or a third-party partner of the firm—to send periodic e-mail about goods and services that they have interest in purchasing. This scenario is ubiquitous in business-to-consumer e-commerce, so much so that many consumers fail to notice it. When customers order products online, they receive the option of receiving or not receiving future e-mail notifications about new products. In many cases, the customer must deselect a box at the end of the order form or they will be added to the e-mail list.
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132 Part 3: Developing Marketing Strategy
Permission marketing has a major advantage over other individualized segmentation approaches: Customers who opt-in have already shown interest in the goods and services offered by the firm. This allows the firm to precisely target only those individuals with an interest in their products, thereby eliminating wasted marketing effort and expense. For example, many airlines have the permission of their customers to send weekly e-mail notices of airfare and other travel-related specials. This system is in stark contrast to traditional mass media advertising where only a portion of the viewing or reading audience has a real interest in the company’s product. One-to-one marketing, mass customization, and permission marketing will become even more important in the future because their focus on individual customers makes them critical to the development and maintenance of long-term relationships. The simple truth is that customers will maintain relationships with firms that best fulfill their needs or solve their problems. Unfortunately, individualized segmentation approaches can be prohibitively expensive. To make these approaches viable, firms must be mindful of two important issues. First, the delivery of the marketing program must be automated to a degree that makes it cost efficient. The Internet makes this possible by allowing for individual customization in real time. Second, the marketing program must not become so automated that the offering lacks personalization. Today, personalization means much more than simply calling customers by name. We use the term to describe the idea of giving customers choices—not only in terms of product configuration but also in terms of the entire marketing program. Firms such as Dell and Amazon offer a great deal of personalization by effectively mining their customer databases. Customers can choose payment terms, shipping terms, delivery locations, gift-wrapping, and whether to opt-in to future e-mail promotions. Also, by monitoring clickstream data in real time, the best e-commerce firms can offer product suggestions on the fly—while customers visit their sites. This sort of customized point-of-sale information not only increases sales but also better fulfills customers’ needs and increases the likelihood of establishing long-term customer relationships.
5.4c Criteria for Successful Segmentation It is important to remember that not all segmentation approaches or their resulting market segments are viable in a marketing sense. For example, it makes little sense to segment the soft drink market based on eye color or shoe size, as these characteristics have nothing to do with the purchase of soft drinks. Although markets can be segmented in limitless ways, the segmentation approach must make sense in terms of at least five related criteria: ●●
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Identifiable and Measurable. The characteristics of the segment’s members must be easily identifiable. This allows the firm to measure identifying characteristics, including the segment’s size and purchasing power. Substantial. The segment must be large and profitable enough to make it worthwhile for the firm. The profit potential must be greater than the costs involved in creating a marketing program specifically for the segment. Accessible. The segment must be accessible in terms of communication (advertising, mail, telephone, etc.) and distribution (channels, merchants, retail outlets, etc.). Responsive. The segment must respond to the firm’s marketing efforts, including changes to the marketing program over time. The segment must also respond differently than other segments. Viable and Sustainable. The segment must meet the basic criteria for exchange, including being ready, willing, and able to conduct business with the firm. The segment must also be sustainable over time to allow the firm to effectively develop a marketing strategy for serving the needs of the segment.
It is possible for a market segment to meet these criteria yet still not be viable in a business sense. Markets for many illegal products, such as illicit drugs or pornography, can easily meet these criteria. However, ethical and socially responsible firms would not pursue these markets. Other markets, such as gaming or gambling, may be legal in some geographical areas but are often not in the best interests of the firm. More commonly, firms will identify perfectly viable market segments; however, these segments will rest outside of the firm’s expertise or mission. Just because a market segment is viable or highly profitable does not mean the firm should pursue it.
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Chapter 5: Customers, Segmentation, and Target Marketing 133
5.5 IDENTIFYING MARKET SEGMENTS A firm’s segmentation strategy and its choice of one or more target markets depend on its ability to identify the characteristics of buyers within those markets. This involves selecting the most relevant variables to identify and define the target market or markets. Many of these variables, including demographics, lifestyles, product usage, or firm size, derive from the situation analysis section of the marketing plan. In addition, data analytics of big data allow marketers an opportunity to identify and investigate segments within their existing customer base. However, a new or revised marketing strategy often requires changes in target market definition to correct problems in the previous marketing strategy. Target markets also shift in response to required changes in specific elements of the marketing program, such as reducing price to enhance value, increasing price to connote higher quality, adding a new product feature to make the benefits more meaningful, or selling through retail stores instead of direct distribution to add the convenience of immediate availability. In short, the target market and the marketing program are interdependent, and changes in one typically require changes in the other. Beyond the Pages 5.3 outlines how major beverage companies have addressed changing customers’ demands in the beverage market.
BEYOND THE PAGES 5.3
Strategies Pop in the Beverage Industry14 The beverage industry has experienced major changes as consumer demand has shifted, causing companies to revamp their product offerings. Sparkling water, hard seltzer, and ener gy drinks have been big winners, while mature categories such as soda, milk, and juice have lost appeal. It’s important for to day’s beverage industry leaders to fill in gaps in their portfolios, reposition mature brands, and keep an eye toward the future. Many industries are pivoting to focus on health and well ness as younger generations become increasingly health conscious. The beverage industry in particular has shifted heavily over the past decade as soda consumption has de clined and healthier alternatives have taken the spotlight. Sparkling water’s rise to popularity happened fast, and bev erage giants Coca-Cola and PepsiCo have been quick to hop on the trend and take market share from LaCroix, the lead ing bubbly water brand. Kombucha, a fizzy, sweet-and-sour drink made with fermented tea, has also gained popularity. Kombucha, which touts a variety of health benefits, can even be found on tap at many bars and restaurants. Coca-Cola invested early in kombucha with Health-Ade while PepsiCo acquired KeVita, both California-based beverage companies. Consumers have also leaned into lower-calorie alcohol beverages such as hard seltzer products that have few calorie and low sugar content. As beer lost market share, every major beer company introduced a hard seltzer product to compete. White Claw and Truly—the two most popular brands—make up 85 percent of hard seltzer sales. The beverage is often per ceived as being a healthier alternative to beer. Additionally, hard seltzer appeals to both men and women as companies such as White Claw have sold hard seltzer as a lifestyle in stead of targeting audiences on the basis of sex.
The energy drink category has also grown steadily as ingredients have changed and low-sugar options have be come available. For example, brands such as MATI Energy are made with organic ingredients and tea-based caffeine. While Red Bull and Monster dominate sales, both Coca-Cola and Pepsi have made new plays in the category. Coca Cola released Coca-Cola Energy while PepsiCo acquired Rockstar Energy Beverages for $3.85 billion. A focus on sustainability has also impacted the bever age industry. With the rise in environmental concerns, con sumers are becoming more reluctant to support single-use plastics, including soda and water bottles. Coca-Cola, Nestlé, and PepsiCo are ranked as the world’s top plastic polluting companies, according to Break Free from Plastic. Compa nies have started to convert to more eco-friendly packag ing options such as aluminum cans and paper boxes, which can readily be recycled. Both Coca-Cola and Pepsi have announced a commitment to using recyclable aluminum containers for water. Packaging changes have also been fueled by another consumer priority: convenience. According to a Nielsen survey, more than half of people view hard seltzer as being convenient. For this reason, canned wine and ready-to-drink cocktails have increased in popularity. Grab-and-go conve nience is becoming more import to consumers who are living busy lives. Additionally, with the new trend of direct-to-con sumer offerings for food and groceries, the beverage in dustry is finding new routes to market. On-demand alcohol delivery, wine subscription clubs, and direct-to-consumer via websites such as Amazon are just a few of the ways com panies are getting their drinks in front of the consumer.
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134 Part 3: Developing Marketing Strategy
5.5a Segmenting Consumer Markets The goal in segmenting consumer markets is to isolate individual characteristics that distinguish one or more segments from the total market. The key is to segment the total market into groups with relatively homogeneous needs. As you may recall from our earlier discussion, consumers buy products because the benefits they provide can fulfill specific needs or wants. The difficulty in segmenting consumer markets lies in isolating one or more characteristics that closely align with these needs and wants. For example, marketers of soft drinks do not necessarily concern themselves with the age or gender of their customers, but rather analyze data to identify how age and gender relate to customers’ needs, attitudes, preferences, and lifestyles. In the discussion that follows, we look more closely at segmentation in consumer markets by examining the different factors that can be used to divide these markets into homogeneous groupings. As Exhibit 5.4 illustrates, these factors fall into one of four general categories: behavioral segmentation, demographic segmentation, psychographic segmentation, and geographic segmentation. EXHIBIT 5.4 Common Segmentation Variables Used in Consumer Markets Category
Variables
Examples
Behavioral Segmentation
Benefits sought
Quality, value, taste, image enhancement, beauty, sportiness, speed, excitement, entertainment, nutrition, convenience
Demographic Segmentation
Psychographic Segmentation
Geographic Segmentation
Product usage
Heavy, medium, and light users; nonusers; former users; first-time users
Occasions or situations
Emergencies, celebrations, birthdays, anniversaries, weddings, births, funerals, graduation
Price sensitivity
Price sensitive, value conscious, status conscious (not price sensitive)
Age
Newborns, 0–5, 6–12, 13–17, 18–25, 26–34, 35–49, 50–64, 65+
Gender
Male, female, other
Income
Under $15,000, $15,000–$30,000, $30,000–$50,000, $50,000–$75,000, $75,000–$100,000, over $100,000
Occupation
Blue collar, white collar, technical, professional, managers, laborers, retired, homemakers, unemployed
Education
Less than high school degree, high school degree or equivalent, some college, college graduate, graduate degree
Family life cycle
Single, married no children, married with young children, married with teenage children, married with grown children, divorced, widowed
Generation
Gen Z, Millennials, Generation X, baby boomers, seniors
Ethnicity
Caucasian, African American, Hispanic, Asian
Religion
Protestant, Catholic, Muslim, Hindu
Nationality
American, Italian, Japanese, Australian, Korean
Social class
Upper class, middle class, lower class, working class, poverty level
Personality
Outgoing, shy, compulsive, individualistic, materialistic, civic minded, anxious, controlled, venturesome
Lifestyle
Outdoor enthusiast, sports-minded, homebody, couch potato, familycentered, workaholic
Motives
Safety, status, relaxation, convenience
Regional
Northeast, Southeast, Midwest, New England, Southern France, South Africa
City/county size
Under 50,000; 50,000–100,000; 100,000–250,000; 250,000–500,000; 500,000–1,000,000, over 1,000,000
Population density
Urban, suburban, rural
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Chapter 5: Customers, Segmentation, and Target Marketing 135
Behavioral Segmentation Behavioral segmentation is the most powerful approach because it uses actual consumer behavior or product usage to make distinctions among market segments. Typically, these distinctions are tied to the reasons that customers buy and use products. Consequently, behavioral segmentation, unlike other types of consumer segmentation, is most closely associated with consumers’ needs. A common use of behavioral segmentation is to group consumers based on their extent of product usage—heavy, medium, and light users. Heavy users are a firm’s breadand-butter customers, and they should always be served well. Marketers often use strategies to increase product usage among light users, as well as nonusers of the product or brand. One of the best uses of behavioral segmentation is to create market segments based on specific consumer benefits. Exhibit 5.5 illustrates how benefit segmentation might be applied in the snack food market. Once different benefit segments have been identified, marketers can conduct research to develop profiles of the consumers in each segment. Behavioral segmentation is a powerful tool; however, it is also quite difficult to execute in practice. Conducting research to identify behavioral segments is quite expensive and time consuming. Also, the personal characteristics associated with behavioral segments are not always clear. For example, although some consumers buy a new car solely for transportation, most buy specific makes and models for other reasons. Some consumers want cars that are sporty, fun to drive, and that enhance their image. The problem lies in identifying the characteristics of these consumers. Are they older or younger, men or women, single or married, and do they live in urban or suburban areas? In some cases, consumer characteristics are easy to identify. Families purchase crossovers because they want more room for their children and cargo. Older consumers tend to opt for comfortable and luxurious models. The key to successful behavioral segmentation is to clearly understand the basic needs and benefits sought by different consumer groups. Then this information can be combined with demographic, psychographic, and geographic segmentation to create complete consumer profiles.
EXHIBIT 5.5 Benefit Segmentation of the Snack Food Market Nutritional Snackers
Weight Watchers
Guilty Snackers
Party Snackers
Indiscriminant Economical Snackers Snackers
Benefits Sought
Nutritious, all-natural ingredients
Low calorie, quick energy
Low calo rie, good tasting
Can be served to guests, goes well with beverages
Good tasting, Low price, satisfies hunger best value cravings
Types of Snacks Eaten
Fruits, vegetables, cheeses
Yogurt, vegetables
Yogurt, cookies, crackers, candy
No specific Potato chips, Candy, ice nuts, crackers, cream, cookies, products pretzels potato chips, pretzels, popcorn
Snack Consumption Level
Light
Light
Heavy
Average
Heavy
Average
Percentage of Snackers
23%
15%
10%
16%
16%
19%
Demographic Characteristics
Better educated, have young children
Younger, single
Less edu Middle aged, Teens cated, low suburban er incomes
Psychographic Characteristics
Self-assured, Outdoorsy, controlled influential, venturesome
Anxious, isolated
Sociable, outgoing
Better edu cated, larger families
Hedonistic, time Self-assured, deprived price sensitive
Source: Adapted from Charles W. Lamb Jr., Joseph F. Hair Jr., and Carl McDaniel, MKTG, 11th ed. (Mason, OH: Cengage Learning, 2017), p. 144.
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136 Part 3: Developing Marketing Strategy
Demographic Segmentation Demographic segmentation divides markets into segments
using demographic factors such as gender (e.g., Secret deodorant for women), age (e.g., American Eagle clothing for teens and young adults), income (e.g., Lexus automobiles for wealthy consumers), and education (e.g., online executive MBA programs for busy professionals). Demographic segmentation tends to be the most widely used basis for segmenting consumer markets because demographic information is widely available and relatively easy to measure. In fact, much of this information is easily obtainable during the situation analysis through secondary sources. Some demographic characteristics are often associated with true differences in needs that can be used to segment markets. In these cases, the connection between demographics, needs, and desired product benefits can make demographic segmentation quite easy. For example, men and women have different needs with respect to clothing and health care. Large families with children have a greater need for life insurance, laundry detergent, and food. Children prefer sweeter-tasting food and beverages than do adults. Unfortunately, demographic segmentation becomes less useful when the firm has a strong interest in understanding the motives or values that drive buying behavior. Often, the motives and values that drive actual purchases do not necessarily have anything to do with demographics. Consider that while many Walmart shoppers are price sensitive and value-conscious, the store’s customers come from all walks of life. The problem in understanding consumer motives and values is that these variables depend more on what consumers think and feel rather than whom they are. Delving into consumer thoughts and feelings is the subject of psychographic segmentation.
Psychographic Segmentation Psychographic segmentation deals with state-of-mind issues
such as motives, attitudes, opinions, values, lifestyles, interests, and personality. These issues are more difficult to measure and often require primary marketing research to properly determine the makeup and size of various market segments. Once the firm identifies one or more psychographic segments, they can be combined with demographic, geographic, or behavioral segmentation to create fully developed consumer profiles. One of the most successful and well-known tools of psychographic segmentation is the VALS framework, developed by Strategic Business Insights.15 VALS, which stands for “values and lifestyles,” divides adult U.S. consumers into one of eight profiles based on their level of resources and one of three primary consumption motives: ideals (knowledge and principles), achievement (demonstrating success to others), or self-expression (social or physical activity, variety, and risk taking). Exhibit 5.6 describes the eight VALS profiles. Many companies use VALS in a variety of marketing activities including new product development, product positioning, brand development, promotional strategy, and media placement. There is also a geographic version of VALS, called GeoVALS, which links each consumer profile with geographic information such as ZIP codes. This tool is quite useful in direct marketing campaigns and retail site selection. Psychographic segmentation is useful because it transcends purely descriptive characteristics to help explain personal motives, attitudes, emotions, and lifestyles directly connected to buying behavior. For example, companies such as ADT, Michelin, and State Farm appeal to consumers motivated by issues such as safety, security, and protection when buying tires or insurance. Other firms, such as Subaru, Kia, and Hyundai, appeal to consumers whose values and opinions about transportation focus more on economy than status. Online degree programs appeal to consumers whose active lifestyles do not allow them to attend classes in the traditional sense.
Geographic Segmentation Geographic characteristics often play a large part in developing
market segments. For example, firms often find that their customers are geographically concentrated. Even ubiquitous products like Coca-Cola sell better in the southern United States than in other parts of the country. Consumer preferences for certain purchases based on geography are a primary consideration in developing trade areas for retailers such as grocery stores, gas
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Chapter 5: Customers, Segmentation, and Target Marketing 137
EXHIBIT 5.6 VALS Profiles of U.S. Consumers Innovators These consumers have abundant resources and high self-esteem. Innovators are successful, sophisticated con sumers who have a taste for upscale, innovative, and specialized goods and services. Innovators are concerned about image as an expression of self, but not as an expression of status or power. Example products: fine wines, upscale home furnishings, lawn maintenance services, recent technology, luxury automobiles Thinkers Thinkers are well-educated consumers who value order, knowledge, and responsibility. These consumers like to be as well informed about the products they buy as they are about world and national events. Although Thinkers have resources that give them many choices or options, they tend to be conservative consumers who look for practicality, durability, functionality, and value. Example products: news and information services, low-emission vehicles, conservative homes and home furnishings Achievers The lifestyle of an Achiever is focused and structured around family, a place of worship, and career. Achievers are conventional, conservative, and respect authority and the status quo. These individuals are very active consumers who desire established, prestigious products and services that demonstrate their success. Achievers lead busy lives; hence, they value products that can save them time and effort. Example products: SUVs, family vacations, products that promote career enhancement, online shopping, swimming pools Experiencers Experiencers are young, enthusiastic, and impulsive consumers who are motivated by self-expression. These con sumers emphasize variety, excitement, the offbeat, and the risky. Experiencers enjoy looking good and buying “cool” products. Example products: fashion, entertainment, sports/exercise, outdoor recreation and social activities Believers Believers are conservative, conventional consumers who hold steadfast beliefs based on traditional values related to family, religion, community, and patriotism. These consumers are predictable in that they follow established routines centered on family, community, or organizational membership. Believers prefer familiar and well-known American brands and tend to be very loyal customers. Example products: membership in social, religious, or fraternal organizations; American made products; charitable organizations Strivers Strivers are motivated by achievement, yet they lack the resources to meet all their desires. As a group, Strivers are trendy, fun loving, and concerned with the opinions and approval of others. These consumers see shopping as a social activity and an opportunity to demonstrate their purchasing power up to the limits imposed by their financial situations. Most Strivers think of themselves as having jobs rather than careers. Example products: stylish products, impulse items, credit cards, designer “knock-offs,” shopping as entertainment Makers Makers, like Experiencers, are motivated by self-expression. However, these consumers experience the world by engaging in many do-it-yourself activities such as repairing their own cars, building houses, or growing and can ning their own vegetables. Makers are practical consumers who value self-sufficiency and have the skills to back it up. Makers are also unimpressed by material possessions, new ideas, or big business. They live traditional lives and prefer to buy basic items. Example products: auto parts, home-improvement supplies, gardening supplies, sewing supplies, discount retailers Survivors Survivors live narrowly focused lives and have few resources with which to cope. They are primarily concerned with safety, security, and meeting needs rather than fulfilling wants. As a group, Survivors are cautious consumers who rep resent a fairly small market for most products. They are loyal to favorite brands, especially if they can buy them on sale. Example products: basic necessities and staples; old, established brands Source: Strategic Business Insights, http://www.strategicbusinessinsights.com/vals/ustypes.shtml (accessed March 25, 2020).
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138 Part 3: Developing Marketing Strategy
stations, and dry cleaners. For example, geodemographic segmentation, or geoclustering, is an approach that looks at neighborhood profiles based on demographic, geographic, and lifestyle segmentation variables. One of the best-known geoclustering tools is Clarita’s PRIZM segmentation system, which classifies every neighborhood in the United States into one of 68 different demographic and behavioral clusters, which are further divided into 11 life-stage groups and 14 social groups. For example, so-called Networked Neighbors represents wealthy suburban married couples age 35–54 years old that have children. They are prime targets for high-end cars, exclusive social clubs, and designer jeans. PRIZM is useful to marketers because it allows them to focus their marketing programs only in areas where their products are more likely to be accepted. Not only does this make their marketing activities more successful, it also greatly reduces marketing expenditures.16
5.5b Segmenting Business Markets One of the most basic methods of segmenting business markets involves the four types of markets we discussed earlier in the chapter: commercial markets, reseller markets, government markets, and institutional markets. Marketers may focus on one or more of these markets, as each has different requirements. However, even within one type of market, marketers will discover that buying firms have unique and varying characteristics. In these cases, further segmentation using additional variables might be needed to further refine the needs and characteristics of business customers. For example, Canon sells a line of wide-format printers aimed at CAD and architectural design users, as well as other segments such as fine art, photography, office, and signage. Each segment has different uses for wide-format printing, as well as different requirements with respect to the types of inks used in the printers. In addition to the types of business markets, firms can also segment business buyers with respect to: ●●
●●
●●
●●
●●
Type of Organization. Different types of organizations may require different and specific marketing programs, such as product modifications, different distribution and delivery structures, or different selling strategies. A glass manufacturer, for example, might segment customers into several groups, such as car manufacturers, furniture makers, window manufacturers, or repair and maintenance contractors. Organizational Characteristics. The needs of business buyers often vary based on their size, geographic location, or product usage. Large buyers often command price discounts and structural relationships that are appropriate for their volume of purchases. Likewise, buyers in different parts of the country, as well as in different nations, may have varying product requirements, specifications, or distribution arrangements. Product usage is also important. Computer manufacturers often segment markets based on how their products will be used. For example, K–12 educational institutions have different requirements for computers and software than do major research universities. Potential for Growth. Many business firms segment customers based on their purchase volume or revenue importance to the company. A more complete way to segment in this area is to assess the growth potential of clients. Some small clients may be poised for substantial growth, while some large clients may be slow to grow and have little potential to be realized by the selling firm. Segmenting based on growth helps to properly assign resources and promotional attention where it will be most impactful. Benefits Sought or Buying Processes. Organizations differ with respect to the benefits they seek and the buying processes they use to acquire products. Some business buyers seek only the lowest cost provider, while others require extensive product support and service. Additionally, some businesses buy using highly structured processes, most likely through their buying center. Others may use online auctions or even highly informal processes. Personal and Psychological Characteristics. The personal characteristics of the buyers themselves often play a role in segmentation decisions. Buyers will vary according to risk tolerance, buying influence, job responsibilities, and decision styles.
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Chapter 5: Customers, Segmentation, and Target Marketing 139
●●
Relationship Intensity. Business markets can also be segmented based on the strength and longevity of the relationship with the firm. Many organizations structure their selling organization using this approach with one person or team dedicated to the most critical relationships. Other members of the selling organization may be involved in business development strategies to seek out new customers.
As we have seen, segmentation in business markets addresses many of the same issues found in consumer markets. Despite some differences and additional considerations that must be addressed, the foundation remains the same. Marketers must understand the needs of their potential customers and how these needs differ across segments within the total market.
5.6 TARGET MARKETING STRATEGIES Once the firm has completed segmenting a market, it must then evaluate each segment to determine its attractiveness and whether it offers opportunities that match the firm’s capabilities and resources. Remember that just because a market segment meets all criteria for viability does not mean the firm should pursue it. Attractive segments might be dropped for several reasons, including a lack of resources, no synergy with the firm’s mission, overwhelming competition in the segment, an impending technology shift, or ethical and legal concerns over targeting a particular segment. Based on its analysis of each segment, the firm’s current and anticipated situation, and a comprehensive SWOT analysis, a firm might consider five basic strategies for target market selection. Exhibit 5.7 depicts the following strategies.17 ●●
●●
Single Segment Targeting. Firms use single segment targeting when their capabilities are intrinsically tied to the needs of a specific market segment. Many consider the firms using this targeting strategy to be true specialists in a particular product category. Good examples include Sierra Nevada Brewing (craft beer), Porsche, and Ray-Ban. These and other firms using single segment targeting are successful because they fully understand their customers’ needs, preferences, and lifestyles. These firms also constantly strive to improve quality and customer satisfaction by continuously refining their products to meet changing customer preferences. Selective Targeting. Firms that have multiple capabilities in many different product categories use selective targeting successfully. This strategy has several advantages, including diversification of the firm’s risk and the ability to cherry pick only the most attractive market segment opportunities. Procter & Gamble (P&G) uses selective targeting to offer customers many different products in the fabric and home care, health and grooming, baby, feminine, and family care, and beauty, hair, and personal care markets. For instance, P&G has both Pampers and Luvs diapers. Pampers has a reputation for quality, while Luvs has a reputation
EXHIBIT 5.7 Basic Strategies for Target Market Selection Single Segment Targeting M1
M2
Mass Market Targeting
Selective Targeting M1
M3
M2
M1
M3
M2
Product Specialization
M3
M1
M2
Market Specialization M1
M3
P1
P1
P1
P1
P1
P2
P2
P2
P2
P2
P3
P3
P3
P3
P3
M2
M3
P = Product Category; M = Market
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140 Part 3: Developing Marketing Strategy
●●
●●
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for affordability. Besides the familiar deodorants, laundry detergents, and hair care products, P&G also sells products in the cosmetics, cologne, and prescription drug markets. One of the keys to P&G’s success is that the company does not try to be all things for all customers. The company carefully selects product/market combinations where its capabilities match customers’ needs. Mass Market Targeting. Only the largest firms have the capability to execute mass market targeting, which involves the development of multiple marketing programs to serve all customer segments simultaneously. For example, Frito-Lay sells hundreds of different varieties of snack foods around the world such as SunChips, Cheetos, Lay’s, and Smartfood. Product Specialization. Firms engage in product specialization when their expertise in a product category can be leveraged across many different market segments. These firms can adapt product specifications to match the different needs of individual customer groups. For example, many consider Littmann Stethoscopes, a division of 3M, as the worldwide leader in auscultation technology. Littmann offers high-performance electronic stethoscopes for cardiologists, specially designed stethoscopes for pediatric/infant use, lightweight stethoscopes for simple physical assessment, and a line of stethoscopes for nursing and medical students. The company also offers a line of veterinary stethoscopes.18 Market Specialization. Firms engage in market specialization when their intimate knowledge and expertise in one market allows them to offer customized marketing programs that not only deliver needed products but also provide needed solutions to customers’ problems. The Follett Corporation is a prime example. Follett provides educational technology and services and print and digital content, serving over half of the students in the United States. The company’s vision is to “empower education everywhere learning is happening.”19
In addition to targeting a subset of current customers within the product/market, firms can also take steps to target noncustomers. As we discussed in Chapter 3, there are many reasons why noncustomers do not purchase a firm’s products. These reasons can include unique customer needs, better competing alternatives, high switching costs, lack of product awareness, or the existence of long-held assumptions about a product. For example, products associated with tooth whitening were at one time associated only with dentists. Consequently, consumers were hesitant to use these products due to the expense, effort, and anxiety involved. Oral care companies were able to break this tradition and reach out to noncustomers by developing high-quality, low-price, overthe-counter alternatives that were much easier to purchase. Today, these at-home tooth-whitening products—such as Procter & Gamble’s Crest 3D White Whitestrips—are a $6.6 billion market in the United States.20 As this example illustrates, the key to targeting noncustomers lies in understanding the reasons why they do not buy, and then finding ways to remove these obstacles. Removing obstacles to purchase, whether they exist in product design, affordability, distribution convenience, or product awareness, is a major strategic issue in developing an effective marketing program. Over the next two chapters, we turn our attention to the important strategic issues involved in creating the marketing program, including branding and positioning the product offering.
LESSONS FROM CHAPTER 5
●●
Buyer behavior in consumer markets: ●●
●●
●●
is often irrational and unpredictable as consumers often say one thing but do another. can progress through five stages: need recognition (trigger), initial consideration set, active evaluation, moment of purchase, and post-purchase experience. does not always follow these stages in sequence and may even skip stages en route to the purchase.
●●
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may be characterized by a loyalty loop where consumers simply purchase the same product that they bought last time. often involves a parallel sequence of activities associated with finding the most suitable merchant. That is, while consumers consider which product to buy, they also consider where they might buy it. may occur with only one merchant for a particular product category if the consumer is fiercely loyal to that merchant.
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Chapter 5: Customers, Segmentation, and Target Marketing 141
Keys to understanding consumer needs and wants: ●●
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Defining needs as “necessities” has limitations because everyone has a different perspective on what constitutes a need. Needs occur when a consumer’s current level of satisfaction does not equal the desired level of satisfaction. Wants are a consumer’s desire for a specific product that will satisfy a need. The firm must always understand the basic needs fulfilled by its products. This understanding allows the firm to segment markets and create marketing programs that can translate consumer needs into wants for their specific products. Although some products and markets can be segmented on the basis of needs alone, most product categories are marketed on the basis of wants, not need fulfillment. Wants are not the same thing as demand, as demand occurs only when the consumer’s ability and willingness to pay backs up a want for a specific product.
●●
Overall, the consumer buying process can be affected by: ●●
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●● ●●
consumers essentially translate their needs into wants for specific products or brands. consumers evaluate products as bundles of attributes that have varying abilities to satisfy their needs. the priority of each consumer’s choice criteria can change. marketers must ensure that their product is in the evoked set of potential alternatives by constantly reminding consumers of their company and its product offerings.
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can be passive—where the consumer becomes more attentive and receptive to information—or active—where the consumer engages in a more aggressive information search by seeking additional information. depends on a number of issues, including the degree of risk involved in the purchase, the amount of expertise or experience the consumer has with the product category, and the actual cost of the search in terms of time and money. culminates in an evoked set of suitable buying alternatives.
Moment of purchase: ●●
●●
It is important to remember that the intention to purchase and the actual act of buying are distinct concepts. The key issues for marketers are product availability and possession utility.
●●
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The business buying process: ●●
●●
Post-purchase experience: ●●
The outcome of the buying process is linked to the customer experience that builds long-term customer relationships. Marketers must closely follow customers’ responses to monitor the product’s performance and its ability to meet customers’ expectations.
purchase products for use in their operations, such as acquiring raw materials to produce finished goods or buying office supplies or leasing cars. consist of four types of buyers: commercial markets, reseller markets, government markets, and institutional markets. possess five unique characteristics not typically found in consumer markets: the buying center: economic buyers, technical buyers, and users. hard and soft costs: soft costs (downtime, opportunity costs, human resource costs) are just as important as hard costs (monetary price or purchase costs). reciprocity: business buyers and sellers often buy products from each other. mutual dependence: sole-source or limited-source buying makes both buying and selling firms mutually dependent. value outcomes over experience: business buyers are required to spend resources on products that return value and do their job well and consistently over time. ●●
Active evaluation: ●●
the complexity of the purchase and decision-making process. individual factors, such as age, life cycle, occupation, socioeconomic status, perceptions, motives, interests, attitudes, opinions, and lifestyles. social influences such as culture, subculture, social class, family, reference groups, and opinion leaders. situational influences, such as physical and spatial influences, social and interpersonal influences, time, purchase task or usage, and the consumer’s disposition.
Business markets:
Initial consideration set: ●●
Consumers will experience one of four potential outcomes: delight, satisfaction, dissatisfaction, or cognitive dissonance (post-purchase doubt).
follows a well-defined sequence of stages, including (1) problem recognition, (2) development of product specifications, (3) vendor identification and qualification, (4) solicitation of proposals or bids, (5) vendor selection, (6) order processing, and (7) vendor performance review. can be affected by a number of factors, including environmental conditions, organizational factors, and interpersonal and individual factors.
Market segmentation: ●●
is the process of dividing the total market for a particular product or product category into relatively homogeneous segments or groups.
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142 Part 3: Developing Marketing Strategy
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should create groups where the members are similar to each other, but where the groups are dissimilar from each other. involves a fundamental decision of whether to segment at all. typically allows firms to be more successful due to the fact that they can tailor products to meet the needs or requirements of a particular market segment.
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Traditional market segmentation approaches: ●●
●●
have been used successfully for decades, are not out of date, and are used by many of today’s most successful firms. are sometimes used in combination with newer approaches by the same firm, depending on the brand/ product or market in question.
Mass marketing: ●●
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involves dividing the total market into groups of customers having relatively common or homogeneous needs and attempting to develop a marketing program that appeals to one or more of these groups. may be necessary when customer needs are similar within a single group but their needs differ across groups. involves two options: the multisegment approach and the market concentration approach.
Niche marketing: ●●
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One-to-one marketing:
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●●
have become viable due to advances in technology, particularly communication technology and the Internet.
involves the creation of an entirely unique product or marketing program for each customer in the target segment. is common in business markets where unique programs and/or systems are designed for each customer. is growing rapidly in consumer markets, particularly in luxury and custom-made products, as well as in services and electronic commerce.
Mass customization: ●●
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●●
refers to providing unique products and solutions to individual customers on a mass scale. is now cost-effective and practical due to advances in supply chain management, including real-time inventory control. is used quite often in business markets, especially in electronic procurement systems.
Permission marketing: ●●
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involves focusing marketing efforts on one small, well-defined market segment or niche that has a unique, specific set of needs. requires that firms understand and meet the needs of target customers so completely that, despite the small size of the niche, the firm’s substantial share makes the segment highly profitable.
Individualized segmentation approaches: ●●
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involves no segmentation whatsoever as it is aimed at the total (whole) market for a particular product. is an undifferentiated approach that assumes that all customers in the market have similar needs and wants that can be reasonably satisfied with a single marketing program. is becoming less common as most products and advertising options are able to identify more specific segments. works best when the needs of an entire market are relatively homogeneous. is advantageous in terms of production efficiency and lower marketing costs. is inherently risky because a standardized product is vulnerable to competitors that offer specialized products that better match customers’ needs.
Differentiated marketing: ●●
●●
are possible because organizations now have the ability to track customers with a high degree of specificity. allow firms to combine demographic data with past and current purchasing behavior so they can tweak their marketing programs in ways that allow them to precisely match customers’ needs, wants, and preferences. will become even more important in the future because their focus on individual customers makes them critical to the development and maintenance of long-term relationships. can be prohibitively expensive to deliver. depend on two important considerations: automated delivery of the marketing program and personalization.
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is different from one-to-one marketing because customers choose to become a member of the firm’s target market. is commonly executed via the opt-in e-mail list, where customers permit a firm to send periodic e-mail about goods and services that they have an interest in purchasing. has a major advantage in that customers who opt in are already interested in the goods and services offered by the firm. allows a firm to precisely target individuals, thereby eliminating the problem of wasted marketing effort and expense.
Successful segmentation: ●●
requires that market segments fulfill five related criteria: segments must be identifiable and measurable, substantial, accessible, responsive, and viable and sustainable.
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Chapter 5: Customers, Segmentation, and Target Marketing 143
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involves avoiding ethically and legally sensitive segments that are profitable but not viable in a business sense. involves avoiding potentially viable segments that do not match the firm’s expertise or mission.
Identifying market segments: ●●
●●
●●
involves selecting the most relevant variables to identify and define the target market, many of which come from the situation analysis section of the marketing plan. involves the isolation of individual characteristics that distinguish one or more segments from the total market. These segments must have relatively homogeneous needs. in consumer markets involves the examination of factors that fall into one of four general categories: behavioral segmentation—the most powerful approach because it uses actual consumer behavior or product usage that helps to make distinctions among market segments. demographic segmentation, which divides markets using factors such as gender, age, income, and education. psychographic segmentation, which deals with stateof-mind issues such as motives, attitudes, opinions, values, lifestyles, interests, and personality. geographic segmentation, which is often most useful when combined with other segmentation variables. One of the best examples is geodemographic segmentation, or geoclustering. in business markets is often based on type of market (commercial, reseller, government, or institutional) or on other characteristics such as type of organization, organizational characteristics, potential for growth, benefits sought or buying processes, personal or psychological characteristics, or relationship intensity. ●●
●●
●●
●●
●●
Target marketing strategies: ●●
●●
●●
are based on an evaluation of the attractiveness of each segment and whether each offers opportunities that match the firm’s capabilities and resources. include single segment targeting, selective targeting, mass market targeting, product specialization, and market specialization. should also consider issues related to noncustomers such as reasons why they do not buy and finding ways to remove obstacles to purchase.
ENDNOTES 1. Pew Research Center, “Share of U.S. Adults Using Social Media, Including Facebook, Is Mostly Unchanged Since 2018,” April 10, 2019, https:// www.pewresearch.org/fact-tank/2019/04/10/share-of-u-s-adults-using -social-media-including-facebook-is-mostly-unchanged-since-2018/ (accessed March 26, 2020); Facebook, “Suave Beauty: Connecting with Audiences
Using a Mix of Facebook and Instagram Creative,” https://www.facebook .com/business/success/suave-beauty (accessed March 26, 2020); Robert Williams, “1/3 of Instagram Users Have Bought Directly from an Ad, Study Finds,” Mobile Marketer, September 19, 2019, https://www.mobilemarketer .com/news/13-of-instagram-users-have-bought-directly-from-an-ad-study -finds/563239/ (accessed March 26, 2020); TikTok, “Guess: Lift Brand Engagement and Brand Affinity AMong the Young Generation in the U.S.,” https://ads.tiktok.com/homepage/inspiration/7 (accessed March 26, 2020); Sprout Social, “Social Media Demographics to Inform Your Brand’s Strategy in 2020,” January 15, 2020, https://sproutsocial.com/insights/new-social-media -demographics/ (accessed March 26, 2020); Laura Forman, “Snap Has an Age Limit,” The Wall Street Journal, July 11, 2019, https://www.wsj.com /articles/snap-has-an-age-limit-11562842801 (accessed March 26, 2020); Ilyse Liffreing, “Inside Bud Light’s Super Bowl Snapchat Strategy,” Digiday, February 1, 2018, https://digiday.com/marketing/inside-bud-lights-super -bowl-snapchat-strategy/ (accessed March 26, 2020). 2. Jimit Bagadiya, “309 Social Media Statistics You Must Know in 2020,” SocialPilot, https://www.socialpilot.co/blog/social-media-statistics #tk-usage-stats (accessed March 24, 2020); James Asquith, “Is TikTok Really The Next Big Social Media Platform For Travel,” Forbes, February 1, 2020, https://www.forbes.com/sites/jamesasquith/2020/02/01/is-tiktok-really -the-next-big-social-media-platform-for-travel/#6adb14e96b9c (accessed March 24, 2020). 3. David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik, “The Consumer Decision Journey,” McKinsey & Company, June 2009, https:// www.mckinsey.com/business-functions/marketing-and-sales/our-insights /the-consumer-decision-journey (accessed April 7, 2020). 4. Tom Warren, “Apple Finally Admits Microsoft Was Right about Tablets,” The Verge, March 19, 2020, https://www.theverge .com/2020/3/19/21186500/apple-ipad-pro-vs-surface-pro-trackpad-mouse -inputs-history (accessed March 24, 2020). 5. David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik, “The Consumer Decision Journey,” McKinsey & Company, June 2009, https:// www.mckinsey.com/business-functions/marketing-and-sales/our-insights /the-consumer-decision-journey (accessed April 7, 2020). 6. Elliot Maras, “Share a Coke: How a Personalized Promotion Became an E-Commerce Platform,” Retail Customer Experience, April 18, 2019, https://www.retailcustomerexperience.com/articles/share-a-coke-how-a -personalized-promotion-became-an-e-commerce-platform/ (accessed March 24, 2020). 7. Lucy Handley, “Gen Z Doesn’t Like Branding, So Doritos Tries a New Approach,” CNBC, August 27, 2019, https://www.cnbc.com/2019/08/27 /doritos-launches-ads-with-no-logo-and-no-brand-name-to-attract-gen-z .html (accessed March 25, 2020). 8. Jared McCarty, “Currently in Beta: Game Testing Done Cheap,” Medium, November 10, 2019, https://medium.com/@mccartyj1232/currently -in-beta-game-testing-done-cheap-a5b00bfee92d (accessed March 25, 2020). 9. “Top Instagram Influencers for 2020,” Influencer Marketing Hub, March 27, 2020, https://influencermarketinghub.com/top-instagram -influencers/ (accessed April 7, 2020). 10. Wesley Hilliard, “Retain iPhone 11 Inventory Dries up in NYC as Coronavirus Hits Supply,” Apple Insider, March 7, 2020, https://appleinsider .com/articles/20/03/07/retail-iphone-11-inventory-dries-up-in-nyc-as -coronavirus-hits-supply (accessed March 25, 2020); Emily Bary, “Here’s What Apple Suppliers Have Been Saying about the Coronavirus,” Market Watch, March 6, 2020, https://www.marketwatch.com/story/heres -what-apple-suppliers-have-been-saying-about-the-coronavirus-epidemic -2020-03-04 (accessed March 25, 2020). 11. Anne Sraders, “What Is Salesforce and What Does It Do in 2020?” The Street, December 4, 2018, https://www.thestreet.com/technology/what -is-salesforce-14796378 (accessed April 7, 2020). 12. Matt Weeks, “Minority Markets See Economic Growth,” UGA Today, March 21, 2019, https://news.uga.edu/multicultural-economy/ (accessed March 23, 2020); Governing, “State Population by Race, Ethnicity Data,”
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144 Part 3: Developing Marketing Strategy https://www.governing.com/gov-data/census/state-minority-population -data-estimates.html (accessed March 23, 2020); Katherine Schaeffer, “The Most Common Age Among Whites in U.S. Is 58 – More Than Double That of Racial Ethnic Minorities,” Pew Research Center, July 30, 2019, https:// www.pewresearch.org/fact-tank/2019/07/30/most-common-age-among -us-racial-ethnic-groups/ (accessed March 23, 2020); Barry Levine, “ANA: Marketers Underspend on Multicultural Media,” Marketing Dive, August 9, 2019, https://www.marketingdive.com/news/ana-marketers-underspend -on-multicultural-media/560586/ (accessed March 23, 2020); Peter Adams, “McDonald’s Makes Black Millennial Consumers Top Priority With Extensive ‘Campaign Movement’,” Marketing Dive, March 29, 2019, https:// www.marketingdive.com/news/mcdonalds-makes-black-millennial -consumers-top-priority-with-extensive-ca/551638/ (accessed March 23, 2020); Ximena Cassab, “Interview on Why Toyota Cose a Mexican Soccer Legan to Connect With Hispanic,” Portada, October 14, 2019, https://www.portada -online.com/sports-marketing/interview-on-why-toyota-chose-a-soccer -campaign-to-connect-with-hispanics/ (accessed March 23, 2020); Adobe, “Diversity in Advertising: Adobe Digital Insights 2019,” https://adobeenterprise .lookbookhq.com/c/adi-diversityinavtsn-1 (accessed March 23, 2020). 13. Sara Castellanos, “TD Ameritrade Beefs up Personalization With AI,” The Wall Street Journal, November 18, 2019, https://www.wsj.com /articles/td-ameritrade-beefs-up-personalization-with-ai-11574115074 (accessed March 25, 2020). 14. Martín Caballero, “Report: Health-Ade Lands $20M Coke Equity Investment,” BevNET, July 17, 2019, https://www.bevnet.com/news/2019 /report-coke-veb-reups-in-health-ade (accessed March 24, 2020); Rebecca Jennings, “Hard Seltzer Is Here to Stay,” Vox, August 20, 2019, https://www .vox.com/the-goods/2019/8/20/20812814/white-claw-truly-hard-seltzer -explained (accessed March 24, 2020); Brakkton Booker, “PepsiCo Seeks Boost In Energy Drink Market With Purchase Of Rockstar,” NPR, March 11, 2020, https://www.npr.org/2020/03/11/814462332/pepsico-seeks-boost-in -energy-drink-market-with-purchase-of-rockstar (accessed March 24,
2020); Justine Calma, “Plastic Giant Coca-Cola Says People Want Its Plastic,” The Verge, January 22, 2020, https://www.theverge.com/2020/1/22/21076868 /plastic-bottle-coca-cola-davos-world-economic-forum (accessed March 24, 2020); KPMG, “Top 2020 Beverage Trends and Insights,” https:// corporatefinance.kpmg.us/insights/2019/beverage-trends-and-insights .html (accessed March 24, 2020); Jennifer Maloney, “LaCroix Fights Sales Drop as Rivals Bubble Up,” The Wall Street Journal, June 26, 2019, https://www.wsj.com/articles/lacroix-fights-sales-drop-as-rivals-bubble -up-11561541400 (accessed March 24, 2020). 15. Strategic Business Insights, “US Framework and VALS Types,” http://www.strategicbusinessinsights.com/vals/ustypes.shtml (accessed March 25, 2020). 16. Claritas LLC, “Segmentation Overview - PRIZM Premier,” YouTube, December 17, 2018, https://www.youtube.com/watch?v=VTWSkqQ7gW4 (accessed March 25, 2020); Strategic Business Insights, http://www .strategicbusinessinsights.com/vals/ustypes.shtml (accessed March 25, 2020). 17. This material is adapted from Charles W. Lamb Jr., Joseph F. Hair Jr., and Carl McDaniel, Marketing, 7th ed. (Mason, OH: South-Western, 2004), pp. 228–231; Philip Kotler, A Framework for Marketing Management, 2nd ed. (Upper Saddle River, NJ: Prentice-Hall, 2003), pp. 181–185. 18. Littmann, http://www.littmann.com (accessed March 25, 2020). 19. Follett, “Our Company,” https://www.follett.com/ABOUT-COMPANY (accessed March 25, 2020). 20. “The Price of a Perfect Smile,” Forbes, June 1, 2006, https://www .forbes.com/2006/06/01/teeth-cosmetic-cost_cx_sy_0602health.html #4ba800a32d39 (accessed March 25, 2020); “The Global Teeth Whitening Market to Reach Revenues of Over $6.6 Billion by2025 - Market Research by Arizton,” Markets Inisder, November 20, 2019, https://markets .businessinsider.com/news/stocks/the-global-teeth-whitening-market-to -reach-revenues-of-over-6-6-billion-by2025-market-research-by-arizton -1028704469 (accessed March 25, 2020).
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CHAPTER 6 The Marketing Program 6.1 INTRODUCTION With a clearly defined target market in hand, the organization turns its attention toward developing a marketing program that will fulfill the target’s needs and wants better than the competition. When we say marketing program, we are referring to the strategic combination of the four basic marketing mix elements, commonly known as the four Ps: product, price, place (distribution), and promotion. Although each element is vitally important to the success of the marketing strategy, the product usually receives the most attention because it is most responsible for fulfilling the customers’ needs and wants. However, since customers’ needs and wants are multifaceted, we prefer to think of the outcome of the marketing program as a complete “offering” that consists of an array of physical (tangible), service (intangible), and symbolic (perceptual) attributes designed to satisfy customers’ needs and wants. In other words, the best marketing strategy is likely to be one that combines the product, price, place (distribution), and promotion elements in a way that maximizes the tangible, intangible, and perceptual attributes of the complete offering. Good marketing strategy considers all four elements of the marketing program and the offering rather than emphasizing a single element. We have noted throughout this text how most firms today compete in rather mature markets characterized by commoditization. In these cases, the core product (the element that satisfies the basic customer need) typically becomes incapable of differentiating the offering from those of the competition. Consequently, most organizations work to enhance the service and symbolic elements of their offerings by changing price, distribution, or promotion in order to stand out from the crowd. In many cases, products are becoming combined with services to help them overcome commoditization. For example, 3M enhanced its FiltreteTM Smart furnace air filters, typically a commodity product, by offering a smartphone app 145 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
146 Part 3: Developing Marketing Strategy
that sends reminders and air quality tips based on sensors embedded in the filter.1 By positioning the product as a digital enabled service, 3M aims to maintain a competitive advantage over its competitors. Combining products with service solutions makes marketing strategy even more challenging for the firm. It also requires that the marketing program be considered holistically rather than sequentially. This means that products must be designed with an eye toward how they will be priced, distributed, and promoted. It does a company no good to develop a standout product that is not price competitive, difficult to ship or store, and that offers services hard to convey in promotional messages. All four elements of the marketing program must be developed simultaneously. In this chapter, we examine the four elements of the marketing program in more detail. Issues such as product design, affordability, distribution convenience, and product awareness are major considerations in developing an effective marketing program. Problems in any one area can create obstacles that customers may be unwilling to overlook as they search for the best offering that will fulfill their needs.
BEYOND THE PAGES 6.1
Tesla Veers Away From Traditional Marketing Strategy2 Tesla, an electric vehicle (EV) and energy generation products company based in Palo Alto, California, was founded in 2003 by engineers Martin Eberhard and Marc Tarpenning. Tesla is widely admired for its product innovations as well as its unique marketing strategy. Today, Tesla is the most valuable car maker in the United States, and it managed to reach that achievement with no traditional advertising. How is it possible that Tesla has a $0 advertising budget? To answer that question, we first look at the company’s marketing program: ●●
●●
●●
Products. Tesla did not invent the EV, but it was the first to create a viable EV for consumers and has set the standard of what an electric car should be. For example, The Model X was the first vehicle to earn 5-star ratings across every safety category from the National Highway Traffic Safety Administration. Tesla continues to outpace competitors with its nonstop innovation. Looking forward, Tesla aims for its vehicles to be completely self-driving, though there are still many regulatory hurdles to jump. The company is focused on its most recent products such as the Tesla Semi, Model Y, and Cybertruck. In addition to its vehicles, the company has branched out to create a variety of renewable energy technologies from solar roof tiles to clean energy storage. Pricing. Tesla uses a premium pricing strategy with vehicles ranging from $40,000 to $200,000. Though the company got its start creating high-end performance EVs with the Roadster, Tesla achieved CEO Elon Musk’s goal of creating a more affordable EV for the broader market with the Model 3, which has become the all-time best-selling EV globally. Distribution. In the supply chain there is an “upstream” in the supply chain (e.g., suppliers) and “downstream” (e.g.,
●●
wholesalers and retailers). Tesla has invested many resources into its upstream supply chain by focusing on its in-house battery cell production and vehicle production at its Gigafactories. Downstream, Tesla has a unique retail distribution compared to competitors. The company sells online with no agency dealerships. Customers pick up their vehicles at a Tesla-owned regional distribution center. Interestingly, Tesla showrooms are strictly used for promotion, not purchases. Promotion. Tesla has effortlessly attracted the attention of consumers, sparking interest almost exclusively through public relations. The company is well-known for its launch events where Musk addresses massive crowds including industry insiders and the media. For instance, after its Cybertruck unveiling, Tesla secured nearly 150,000 vehicle orders even though the company invested $0 in traditional advertising or endorsements. Additionally, Tesla has mastered the art of attracting free publicity. For example, Musk, also the CEO of aerospace company SpaceX, used the Falcon Heavy rocket launch to release a Tesla Roadster in space. Media outlets continue to reference the publicity stunt years later.
Capitalizing on earned media rather than investing in paid media has been a winning strategy for Tesla. The vehicle is challenging the dominance of German brands BMW, Audi, and Mercedes in many countries, even with its higher prices. In fact, the Model 3 became the best-selling car in the Netherlands in 2019, and Tesla became Iceland’s most popular overall car brand in 2020. Tesla has made significant gains and has firmly established itself as a leader in EVs.
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Chapter 6: The Marketing Program 147
6.2 PRODUCT STRATEGY Of all the strategic decisions to be made in the marketing plan, the design, development, branding, and positioning of the product are perhaps the most critical. At the heart of every organization lies one or more products that define what the organization does and why it exists. As we stated in Chapter 1, the term product refers to something that buyers can acquire via exchange to satisfy a need or a want. This is a very broad definition that allows us to classify many different things as products: food, entertainment, information, people, places, ideas, etc. An organization’s product offering is typically composed of many different elements—usually some combination of tangible goods, services, ideas, image, or even people. As we consider product decisions here, it is important to remember that product offerings in and of themselves have little value to customers. Rather, an offering’s real value comes from its ability to deliver benefits that enhance a customer’s situation or solve a customer’s problems. For example, customers don’t buy bugspray; they buy a bug-free environment. Neil Lane customers don’t buy jewelry; they buy luxury, status, and social appeal. Students who frequent a local nightclub are not thirsty; they want to fulfill their need for social interaction. Likewise, companies do not need computers; they need to store, retrieve, distribute, network, and analyze data and information. Marketers who keep their sights set on developing product offerings that truly meet the needs of the target market are more likely to be successful.
6.2a Strategic Issues in the Product Portfolio Products fall into two general categories. Products used for personal use and enjoyment are called consumer products, while those purchased for resale, to make other products, or for use in a firm’s operations are called business products. Although the distinction may seem simplistic, it is important in a strategic sense because the type of product in question can influence its pricing, distribution, or promotion. For example, marketing strategy for consumer convenience products must maximize availability and ease of purchase—both important distribution considerations. The strategy associated with consumer shopping products often focuses more on differentiation through image and symbolic attributes—both important branding and promotion issues. Marketing strategies for raw materials are especially challenging because these products are commodities by definition. Here, conformance to exacting product specifications and low acquisition costs are the keys to effective strategy. Many business products are also characterized by derived demand, where the demand for the product is derived from, or dependent on, the demand for other business or consumer products. For example, the demand for business products such as mica, beeswax, kaolin, and paraffin is dependent on the demand for cosmetics. It is rare for a company to sell only one product. Most firms sell a variety of products to fulfill a variety of different needs. In general terms, the products sold by a firm can be described with respect to product lines and product mixes. A product line consists of a group of closely related product items. As shown in Exhibit 6.1, Procter & Gamble sells a number of famous brands in its fabric and home care line, including Tide, Dawn, and Cascade. Most companies sell a variety of different product lines. The different product lines at General Motors carry well-known brand names GMC, Chevrolet, Cadillac, and Buick. Likewise, FedEx offers a number of logistics and supply chain services in its family of brands, such as FedEx Express, FedEx Ground, and FedEx Freight. A firm’s product mix (or portfolio) is the total group of products offered by the company. For example, Procter & Gamble’s entire product portfolio consists of beauty, hair, and personal care products; baby, feminine, and family care products; and health and grooming products in addition to the products in its fabric and home care line. Decisions regarding product lines and product mixes are important strategic considerations for most firms. One of these important decisions is the number of product lines to offer, referred to as the width or variety of the product mix. By offering a wide variety of product lines, the firm can diversify its risk across a portfolio of product offerings. Also, a wide product mix can be used
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148 Part 3: Developing Marketing Strategy
EXHIBIT 6.1 Procter & Gamble’s Portfolio of Fabric and Home Care Products
Product Mix Width (Variety) Dish Washing
Household Cleaners
Laundry
Odor Eliminators
Insect Repellent
Product
Cascade
Comet
Ace
Ambi Pur
Zevo
Mix
Dawn
Microban 24
Ariel
Febreze
Depth
Joy
Mr. Clean
Bounce
Swiffer
Cheer
(Assortment) Salvo
Downy Dreft Era Gain Rindex 3en1 Tide Source: Procter & Gamble, “Brands,” https://us.pg.com/brands/#Home-Care#Fabric-Care (accessed April 3, 2020).
to capitalize on the strength and reputation of the firm. Sony, for example, enjoys this advantage as it uses its name to stake out a strong position in consumer electronics, video games, music, movies, and financial services. The second important decision involves the depth of each product line. Sometimes called assortment, product line depth is an important marketing tool. Firms can attract a wide range of customers and market segments by offering a deep assortment of products in a specific line. Each brand or product in the assortment can be used to fulfill different customer needs. For example, Hilton offers 18 different lodging brands—including Waldorf Astoria, Home2 Suites, Hilton Garden Inn, Hampton Inn, Conrad, and Embassy Suites—that cater to different segments of the hospitality market.3 Although offering a large portfolio of products can make the coordination of marketing activities more challenging and expensive, it also creates a number of important benefits: ●●
●●
●●
●●
●●
Economies of Scale. Offering many different product lines can create economies of scale in production, bulk buying, and promotion. Many firms advertise using an umbrella theme for all products in the line. Nike’s “Just Do It” is an example of this. The single theme covering the entire product line saves considerably on promotional expenses. Package Uniformity. When all packages in a product line have the same look and feel, customers can locate the firm’s products more quickly. It also becomes easier for the firm to coordinate and integrate promotion and distribution. For example, Duracell batteries all have the same copper look with black and copper packaging. Even its green rechargeable batteries are recognizable because of the copper tip and black cardboard backer. Standardization. Product lines often use the same component parts. For example, GM often shares components across its Buick, GMC, and Chevrolet product lines. This greatly reduces GM’s manufacturing and inventory handling costs. Sales and Distribution Efficiency. When a firm offers many different product lines, sales personnel can offer a full range of choices and options to customers. For the same reason, channel intermediaries are more accepting of a product line than they are of individual products. Equivalent Quality Beliefs. Customers typically expect and believe that all products in a product line are about equal in terms of quality and performance. This is a major advantage for a firm that offers a well-known and respected line of products. For example, Crest’s complete portfolio of oral care products enjoys the same reputation for high quality.
A firm’s product portfolio must be carefully managed to reflect changes in customers’ preferences and the introduction of competitive products. Product offerings may be modified to change
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Chapter 6: The Marketing Program 149
one or more characteristics that enhance quality, style, or lower the product’s price. Firms may introduce product line extensions that allow it to compete more broadly in an industry. The recent trend of flavored sparkling water—such as Bubly, LaCroix, and Spindrift—is a good example of this. Sometimes, a firm may decide that a product or product line has become obsolete or is just not competitive against other products. When this happens, the firm can decide to contract the product line, as makeup brands regularly do. For example, Glossier, a New York– based cosmetics company, eliminated its Glossier Play product line after a poor reception from its customer base.4
6.2b The Challenges of Service Products It is important to remember that products can be intangible services and ideas as well as tangible goods. Service firms such as airlines, hotels, hospitals, movie theaters, and hair stylists, as well as nonprofit organizations, charitable causes, and government agencies, all develop and implement marketing strategies designed to match their portfolio of intangible products to the needs of target markets. Products lie on a continuum ranging from tangible-dominant goods (salt, soap) to intangible-dominant services (ride sharing, education, consulting). Firms lying closer to the intangible end of this spectrum face unique challenges in developing marketing strategy. These challenges are the direct result of the unique characteristics of services as shown in Exhibit 6.2. Obviously, the primary difference between a good and a service is that a service is intangible. Some services, such as business consulting and education, are almost completely intangible, while others have more tangible elements. The services provided by UPS and FedEx, for example, include tangible airplanes, trucks, boxes, and invoices. Another challenging characteristic of services is that they cannot be stored for future use. This lack of inventory means that service firms experience major problems in balancing service supply (capacity) and service demand. Likewise, the demand for services is extremely time-and-place dependent because customers must typically be present for a service to be delivered. Consider the issues faced by popular restaurants every Friday and Saturday night. The increased demand forces restaurant managers to preschedule the right amount of food ingredients and employees to accommodate the increase in guests. And, given that the restaurant’s capacity is fixed, the manager and employees must serve guests efficiently and effectively in a crowded, noisy atmosphere. Conversely, as evidenced in the COVID-19 (coronavirus) pandemic, many services cannot easily be delivered when barriers exist to purchasing the service. This concept is broader than just a global pandemic as things such as road closures, natural disasters, and changes in regulations can all restrict effective delivery of services. Even digital services can have problems with accessibility as mobile and Wi-Fi connectivity can act as a barrier to product use. This precarious balance is quite common across most industries in the services sector of our economy. Because of the intangibility of service, it is quite difficult for customers to evaluate a service before they actually purchase and consume it. Third-party reviews and recommendations for services are usually available but often provide a wide range of consumer perceptions of past consumer experiences with the service that may or may not be conclusive or consistent. Reviews and recommendations from friends and family can be helpful, but in many cases a good assessment of quality is hard to obtain. Customers usually must place some degree of trust in the service provider to perform the service correctly and in the timeframe promised or anticipated. This problem is the reason for the launch of Angie’s List, a membership-based referral and recommendation service that provides member ratings for local service providers. One way that companies attempt to overcome this issue is by providing satisfaction guarantees to customers. For example, Hampton Inn, a national chain of mid-priced hotels, offers guests a free night if they are not 100 percent satisfied with their stay.5 Midas, H&R Block, and FedEx offer similar guarantees. Moreover, because most services are dependent on people (employees, customers) for their delivery, they are susceptible to variations in quality and inconsistency. Such variations can occur from one organization to another, from one outlet to another within the same organization, from one service to another within the same outlet, and even from one employee to another within the same outlet. Service quality can further vary from week to week, day to day, or even
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150 Part 3: Developing Marketing Strategy
EXHIBIT 6.2 Unique Characteristics of Services and Resulting Marketing
Challenges
Service Characteristics
Marketing Challenges
Intangibility
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●●
●●
●● ●●
Simultaneous Production and Consumption
●●
●●
●●
●●
●● ●●
Perishability
●●
●●
●●
Heterogeneity
●●
●●
●●
Client-Based Relationships
●●
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It is difficult for customers to evaluate quality, especially before purchase and consumption. It is difficult to convey service characteristics and benefits in promotion. As a result, the firm is forced to sell a promise. Many services have few standardized units of measurement. Therefore, service prices are difficult to set and justify. Customers cannot take possession of a service. New digital services can be developed by competitors with same/different intangible offerings that may be attractive to customers. Customers or their possessions must be present during service delivery. Other customers can affect service outcomes including service quality and customer satisfaction. Service employees are critical because they must interact with customers to deliver service. Converting high-contact services to low-contact services will lower costs but may reduce service quality. Services are often difficult to distribute. Barriers to physical and digital service delivery can make services undeliverable. Services cannot be inventoried for later use. Therefore, unused service capacity is lost forever. Service demand is time-and-place sensitive. As a result, it is difficult to balance supply and demand, especially during periods of peak demand. Service facilities and equipment sit idle during periods of off-peak demand. Service quality varies across people, time, and place, making it difficult to deliver good service consistently. There are limited opportunities to standardize service delivery. Many services are customizable by nature. However, customization can dramatically increase the costs of providing the service. Most services live or die by maintaining a satisfied clientele over the long term. Generating repeat business is crucial for the service firm’s success. Firms need to focus on how customers use their service products to make sure they are receiving expected value of the offering.
hour to hour. Also, because service quality is a subjective phenomenon, it can also vary from customer to customer, and for the same customer from one visit to the next. A good example is a haircut at a national chain. The quality of a haircut can vary from location to location and even from one month to the next at the same location. As a result, standardization and service quality are difficult to control. The lack of standardization, however, actually gives service firms one advantage: Services can be customized to match the specific needs of any customer. Such
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customized services are frequently very expensive for both the firm and its customers. This creates a dilemma: How does a service firm provide efficient, standardized service at an acceptable level of quality while simultaneously treating every customer as a unique person? This dilemma is especially prevalent in the health care industry today, where care is managed to carefully control both access and cost. Another major challenge for service marketers is to tie services directly to customers’ needs. Although customers typically have few problems in expressing needs for tangible goods, they often have difficulty in expressing or explaining needs for services. In some cases, the need is vague. For example, you may decide that you need a relaxing vacation, but how do you know which services will best meet your need? Which is best for relaxation: a trip to the beach, a cruise, or a stay at an Airbnb? The answer depends on how you personally define “relaxing.” Since different customers have different definitions, the vacation provider has a more difficult job in connecting their service offerings to customers’ needs. In other cases, customers may not understand the need for a specific service. For example, business consultants, insurance agents, financial planners, and wedding consultants often have to educate customers on why their services are needed. This is a necessary first hurdle to overcome before these service providers can offer their products as the solution that will best fulfill the need.
6.2c Developing New Products One of the key issues in product strategy deals with the introduction of new products. The development and commercialization of new products is a vital part of a firm’s efforts to sustain growth and profits over time. The success of new products depends on the product’s fit with the firm’s strengths and a defined market opportunity. Market characteristics and the competitive situation will also affect the sales potential of new products. For example, Garmin, which got its start as a GPS company, has greatly expanded its wearables and smartwatches to respond as GPS technology became available in smartphones. Creating a new service that focused on fitness tracking technology was the perfect fit to build on Garmin’s brand strength.6 Many firms base their new product introductions on key themes such as product or technological superiority. New product introductions in the electronics, computer, and automotive industries often take this approach. In other firms and industries, new product introductions may stem from only minor tweaking of current products. This approach is common in packaged goods and household items. Truthfully, what is considered to be a new product depends on the point of view of both the firm and its customers. Although some product introductions are actually new, others may only be perceived as being new. There are six strategic options related to the newness of products. These options follow, in decreasing degrees of product change: ●●
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New-to-the-World Products (Disruptive Innovations). These products involve a pioneering effort by a firm that eventually leads to the creation of an entirely new market. New-to-the-world products are typically the result of radical thinking by individual inventors or entrepreneurs. For example, Garrett Camp and Travis Kalanick’s vision for a cab that you could summon with your phone gave birth to Uber, originally called UberCab.7 New Product Lines. These products represent new offerings by the firm, but the firm introduces them into established markets. For example, Coca-Cola adding Fairlife dairy products to its portfolio is a new product line for the company.8 New product lines are not as risky as true innovation, and they allow the firm to diversify into closely related product categories. Product Line Extensions. These products supplement an existing product line with new styles, models, features, or flavors. Anheuser-Busch’s introduction of Bud Light Seltzer and Honda’s launch of the CR-V Hybrid are good examples. Product line extensions allow the firm to keep its products fresh and exciting with minimal development costs and risk of market failure. Improvements or Revisions of Existing Products. These products offer customers improved performance or greater perceived value. The common “new and improved” strategy used in packaged goods and the yearly design changes in the automobile industry are good examples. La Mer, for example, reformulated and reintroduced its Eye Concentrate eye cream, claiming the new version is fast-acting and more concentrated than before.9
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Repositioning. This strategy involves targeting existing products at new markets or segments. Repositioning can involve real or perceived changes to a product. An example is Holden Outerwear, a California-based clothing company, and its effort to improve sales of its women’s outerwear. During the company’s rebrand, it took a new approach to women’s clothing, working to design clothing that was both feminine and functional in an effort to connect with new women consumers. It worked, and sales were boosted by 70 percent.10 Cost Reductions. This strategy involves modifying products to offer performance similar to competing products at a lower price. A firm may be able to lower a product’s price due to improved manufacturing efficiency or a drop in the price of raw materials. For example, many computer manufacturers offer lower-priced products that use standard or slightly dated technology.
The first two options are the most effective and profitable when the firm wants to significantly differentiate its product offering from competitors. However, there are often good reasons to pursue one of the remaining four options, particularly if resource constraints are an issue or if the firm’s management does not want to expose the firm to increased market risk. The key to new product success is to create a differential advantage for the new product. What unique benefit does the new product offer to customers? Although this benefit can be based on real differences or based entirely on image, it is the customers’ perception of differentiation that is critical. For example, despite Consumer Reports tests that five-blade or battery-powered razors do not provide a closer shave than traditional three-blade razors, many consumers believe that they do. This belief is based primarily on the back-and-forth marketing battle between Gillette and Schick. Even Dollar Shave Club offers a six-blade razor. Whether five blades are truly better than three blades is immaterial. In the battle for supremacy in the razor market, customer perceptions are all that matter. Customer perceptions are also critical in the process of developing new products. Although the new product development process varies across firms, most firms will go through the following stages: ●●
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Idea Generation. New product ideas can be obtained from a number of sources, including customers, employees, basic research, competitors, and supply chain partners. Screening and Evaluation. New product ideas are screened for their match with the firm’s capabilities and the degree to which they meet customers’ needs and wants. In some cases, prototype products are developed to further test the commercial viability of a product concept. New product concepts are also evaluated with respect to projected costs, revenues, and profit potential. Development. At this stage, product specifications are set, the product design is finalized, and initial production begins. In addition, the full marketing plan is developed in order to acquire the resources and collaboration needed for a full-scale launch. Test Marketing. As a final test before launch, the new product is test marketed in either real or simulated situations to determine its performance relative to customer needs and competing products. Commercialization. In this final stage, the product is launched with a complete marketing program designed to stimulate customer awareness and acceptance of the new product.
Many firms try to think outside the box in designing new products. Kia, for example, turned to Peter Schreyer, a German automotive designer, to reinvigorate the South Korean company’s brand image. When he was hired away from Volkswagen, Schreyer’s first task was to design two new vehicles—the Kia Forte and the Kia Soul—to compete against new designs from Nissan and Scion. He then redesigned Kia’s popular Sorento SUV and the midsize Optima sedan. The increase in Kia’s brand reputation and sales has been impressive.
6.3 PRICING STRATEGY There is no other component of the marketing program that firms become more infatuated with than pricing. There are at least four reasons for the attention given to pricing. First, the revenue equation is simple: Revenue equals the price times quantity sold. There are only two ways for a firm to grow revenue: increase prices or increase the volume of product sold. Rarely can a firm do
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both simultaneously. Second, pricing is the easiest of all marketing variables to change. Although changing the product and its distribution or promotion can take months or even years, changes in pricing can be executed immediately in real time. Real-time price changes are the norm in many industries, including air travel, hotels, and e-commerce. Prices for the same product vary around the world to account for differences in currencies, taxes/tariffs, and consumer demand. Third, firms take considerable pains to discover and anticipate the pricing strategies and tactics of other firms. Salespeople learn to read a competitor’s price sheet upside down at a buyer’s desk. Retailers send “secret shoppers” into competitors’ stores to learn what they charge for the same merchandise. Even buyers spend considerable time comparison shopping to find the best deal. Competitor webpages and offers are scraped by AI bots to quickly and consistently monitor price changes and/or new offers. Finally, pricing receives a great deal of attention because it is considered to be one of the few ways to differentiate a product in commoditized and mature markets. When customers see all competing products as offering the same features and benefits, their buying decisions are primarily driven by price.
6.3a Key Issues in Pricing Strategy Given the importance of pricing in marketing strategy, pricing decisions are among the most complex decisions to be made in developing a marketing plan. Decisions regarding price require a tightly integrated balance among a number of important issues. Many of these issues possess some degree of uncertainty regarding the reactions to pricing among customers, competitors, and supply chain partners.
BEYOND THE PAGES 6.2
Clearance Pricing Is Unclear11 Discounting, which involves price reductions to stimulate sales, are attractive to consumers because they feel that they are getting a good deal in paying less for an item than its initial price. One type of sales promotion commonly used in retail is clearance. A clearance implies the store is selling off the remaining stock to make room for more goods. While retailers can offer sales for temporary time periods, items in a clearance sale do not return to their original prices. Rather, the product is discounted until it is sold. Clearance is often short in duration, and items under clearance are not advertised. Studies demonstrate that many people view the word clearance as a price signal indicating substantial discounts. However, clearance is less regulated than other forms of sales promotions, providing retailers with more freedom. Clearance is attractive to consumers for a variety of reasons including fear that the product will be discontinued and a belief that they are saving money. Clearance is beneficial for retailers as well, particularly as a tool for getting rid of excess inventory. This tactic, however, has the potential to be abused. Ultimately, unsold clearance stock is sold for a small percentage of its original price to liquidators. Bargain stores—such as Dirt Cheap, which has more than 100
locations across the southeast United States—buy remaining clearance inventory at auction that they reposition to shoppers interested in low-cost closeout items in a setting of ever changing inventory and pricing. Interestingly, there is no general consensus on the definition of a clearance. And, since clearance is not regulated, retailers can use them in ways to mislead consumers into thinking they’re getting a better deal. Some argue that the term clearance is an example of puffery, an exaggerated promotional claim that should not be taken seriously by a reasonable person. However, others argue that the term should be regulated just as terms such as sale, markdown, and buy-one-get-one-free are regulated by the Federal Trade Commission. If the term clearance sale is used, it is regulated as a type of sale. On the other hand, regulating how the word clearance is used could have negative implications as well. Regulation limits what a business can and cannot do. Yet, clearance can be important strategies for retailers in selling products, particularly for firms that face much demand uncertainty for a product. Proponents of clearance pricing believe that firms should be free to use the term to signal price discounts as long as the claims are not false.
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These issues are critically important in establishing initial prices and to modifying the pricing strategy over time. As we review these issues, keep in mind that they are interrelated and must be considered in the context of the firm’s entire marketing program. For example, increases in product quality or the addition of new product features often come with an increase in price. Pricing is also influenced by distribution, especially the image and reputation of the outlets where the good or service is sold. Finally, companies often use price as a tool of promotion. Coupons, for example, represent a combination of price and promotion that can stimulate increased sales in many different product categories. In services, price changes are often used to fill unused capacity (e.g., empty airline or theater seats) during nonpeak demand.
The Firm’s Cost Structure The firm’s costs in producing and marketing a product are an important factor in setting prices. Obviously, a firm that fails to cover both its direct costs (e.g., finished goods/components, materials, supplies, sales commission, transportation) and its indirect costs (e.g., administrative expenses, utilities, rent) will not make a profit. Perhaps the most popular way to associate costs and prices is through breakeven pricing, where the firm’s fixed and variable costs are considered: Breakeven in Units 5
Total Fixed Costs Unit Price 2 Unit Variable Costs
To use breakeven analysis in setting prices, the firm must look at the feasibility of selling more than the breakeven level in order to make a profit. The breakeven number is only a point of reference in setting prices, as market conditions and customer demand must also be considered. Another way to use the firm’s cost structure in setting prices is to use cost-plus pricing—a strategy that is quite common in retailing. Here, the firm sets prices based on average unit costs and its planned markup percentage: Selling Price 5
Average Unit Cost 1 2 Markup Percent (decimal)
Cost-plus pricing is not only intuitive but also very easy to use. Its weakness, however, lies in determining the correct markup percentage. Industry norms often come into play at this point. For example, average markups in grocery retailing are typically in the 20 percent range, while markups can be several hundred percent or more in furniture or jewelry stores. Customer expectations are also an important consideration in determining the correct markup percentage. Although breakeven analysis and cost-plus pricing are important tools, they should not be the driving force behind pricing strategy. The reason is often ignored: Different firms have different cost structures. By setting prices solely on the basis of costs, firms run a major risk in setting their prices too high or too low. If one firm’s costs are relatively higher than other firms, it will have to accept lower margins in order to compete effectively. Conversely, just because a product costs little to produce and market does not mean that the firm should sell it at a low price (movie theater popcorn is a good example). Even if the firm covers its costs, the fact is that customers may not be willing to pay their prices. Hence, market demand is also a critical factor in pricing strategy. In the final analysis, cost is best understood as an absolute floor below which prices cannot be set for an extended period of time.
Perceived Value Both the firm and its customers are concerned with value. Value is a difficult
term to define because it means different things to different people.12 Some customers equate good value with high product quality, while others see value as nothing more than a low price. We define value as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. A simple formula for value might look like this: Perceived Value 5
Customer Benefits Customer Costs
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Customer benefits include everything the customer obtains from the product offering such as quality, satisfaction, prestige/image, and the solution to a problem. Customer costs include everything the customer must give up such as money, time, effort, and all nonselected alternatives (opportunity costs). Although value is a key component in setting a viable pricing strategy, good value depends on much more than pricing. In fact, value is intricately tied to every element in the marketing program and is a key factor in customer satisfaction and retention. We will discuss the strategic implications of value more fully in Chapter 10.
The Price/Revenue Relationship All firms understand the relationship between price and
revenue. However, firms cannot always charge high prices due to competition from their rivals. In the face of this competition, it is natural for firms to see price-cutting as a viable means of increasing sales. Price cutting can also move excess inventory and generate short-term cash flow. However, all price cuts affect the firm’s bottom line. When setting prices, many firms hold fast to these two general pricing myths:13
Myth #1: When business is good, a price cut will capture greater market share. Myth #2: When business is bad, a price cut will stimulate sales. Unfortunately, the relationship between price and revenue challenges these assumptions and makes them a risky proposition for most firms. The reality is that any price cut must be offset by an increase in sales volume just to maintain the same level of revenue. Let’s look at an example. Assume that a sporting goods manufacturer sells 1,000 sets of golf clubs per month at $1,000 per set. The firm’s total cost is $500 per set, which leaves a gross margin of $500. When the sales of this model of golf clubs decline, the firm decides to cut the price to increase sales. The firm’s strategy is to offer a $100 rebate to anyone who buys a set over the next 3 months. The rebate is consistent with a 10 percent price cut, but it is in reality a 20 percent reduction in gross margin (from $500 to $400). To compensate for the loss in gross margin, the firm must increase the volume of clubs sold. The question is by how much? We can find the answer using this formula: Percent Change in Unit Volume 5 0 25 5
Gross Margin % Gross Margin % 6 Price Change % 0.50 0.50 2 0.10
21
21
As the calculation indicates, the firm would have to increase sales volume by 25 percent to 1,250 units sold (sets of golf clubs) in order to maintain the same level of total gross margin. How likely is it that a $100 rebate will increase sales volume by 25 percent? This question is critical to the success of the firm’s rebate strategy. In many instances, the needed increase in sales volume is too high. Consequently, the firm’s gross margin may actually be lower after the price cut. Rather than blindly use price cutting to stimulate sales and revenue, it is often better for a firm to find ways to build value into the product and justify the current price, or even a higher price, rather than cutting the product’s price in search of higher sales volume. In the case of the stereo manufacturer, giving customers $100 worth of music or movies with each purchase is a much better option than a $100 rebate. Video game manufacturers, such as Microsoft (Xbox One X and Xbox One S) and Sony (PS 4, PS4 Pro, PS VR), often bundle games and accessories with their system consoles to increase value. The cost of giving customers these free add-ons is low because the marketer buys them in bulk quantities. This added expense is almost always less costly than a price cut. Moreover, the increase in value may allow the marketer to charge higher prices for the product bundle.
Pricing Objectives Setting specific pricing objectives that are realistic, measurable, and attainable is an important part of pricing strategy. As shown in Exhibit 6.3, there are a number of pricing objectives that firms may pursue. Remember that firms make money on profit margin, volume, or some combination of the two. A firm’s pricing objectives will always reflect this market reality.
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EXHIBIT 6.3 Description of Common Pricing Objectives Pricing Objectives
Description
Profit-Oriented
Designed to maximize price relative to competitors’ prices, the product’s perceived value, the firm’s cost structure, and production efficiency. Profit objectives are typically based on a target return, rather than simple profit maximization.
Volume-Oriented
Sets prices in order to maximize dollar or unit sales volume. This objective sacrifices profit margin in favor of high product turnover.
Market Demand
Sets prices in accordance with customer expectations and specific buying situations. This objective is often known as “charging what the market will bear.”
Market Share
Designed to increase or maintain market share regardless of fluctuations in industry sales. Market share objectives are often used in the maturity stage of the product life cycle.
Cash Flow
Designed to maximize the recovery of cash as quickly as possible. This objective is useful when a firm has a cash emergency or when the product life cycle is expected to be quite short.
Competitive Matching
Designed to match or beat competitors’ prices. The goal is to maintain the perception of good value relative to the competition.
Prestige
Sets high prices that are consistent with a prestige or high status product. Prices are set with little regard for the firm’s cost structure or the competition.
Status Quo
Maintains current prices in an effort to sustain a position relative to the competition.
Price Elasticity Price elasticity is perhaps the most important overall consideration in setting
effective prices. Simply defined, price elasticity refers to customers’ responsiveness or sensitivity to changes in price. A more precise definition defines elasticity as the relative impact on the demand for a product, given specific increases or decreases in the price charged for that product. Firms cannot base prices solely on price elasticity calculations because they will rarely know the elasticity for any product with great precision over time. Further, the same product can have different elasticities in different times, places, and situations. Since the actual price elasticity calculation is difficult to pinpoint precisely, firms often consider price elasticity in regard to differing customer behavior patterns or purchase situations. Understanding when, where, and how customers are more or less sensitive to price is crucial in setting fair and profitable prices. Generally speaking, customers become much more sensitive to price when they have many different choices or options for fulfilling their needs and wants. E-commerce makes price elasticity an important issue. Items that can easily be shipped and delivered typically offer more price elasticity, while those that are more difficult to ship and deliver often are less price sensitive and may be better suited to fewer and more local buying options. Price elasticity is higher (more elastic) in the following situations:
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Availability of Substitute Products. When customers can choose among a number of different substitutes, they will be much more sensitive to price differences. This situation occurs frequently among name-brand products and in markets where product offerings have become commoditized (airlines, for example). Higher Total Expenditure. As a general rule, the higher the total expense, the more elastic the demand for that product will be. This effect is actually easier to see if we look at a lowpriced product. A 20 percent increase in the price of a candy bar, from $1.00 to $1.20, for example, would not have a large impact on demand. However, if the price of a $20,000 car increases by 20 percent, then the impact is a much more noticeable $4,000. At that rate of change, some customers will look for a different car or pull out of buying all together.
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Noticeable Price Differences. Products having heavily promoted prices tend to experience more elastic demand. Gasoline is a classic example. An increase of 3 cents per gallon is only 45 cents more on a 15-gallon fill-up. However, many customers will drive several miles out of their way to find a lower price (often spending more in gas consumption than they save). Noticeable price differences sometimes occur at specific pricing thresholds. Using the gasoline example, many customers may not notice small price increases but may notice when it hits the next dollar mark. These customers suddenly move from an inelastic mindset to an elastic mindset. The move from $2.80 to $2.90 may not have an impact on these customers, but the jump from $2.90 to $3.00 totally changes their mental framework. Easy Price Comparisons. Regardless of the product or product category, customers will become more price sensitive if they can easily compare prices among competing products. In industries such as retailing, supermarkets, travel, and toys, price has become a dominant purchase consideration because customers can easily compare prices. It should come as no surprise that these industries have also experienced a shift from physical stores to online sales.
In general, customers become much less sensitive to price when they have few choices or options for fulfilling their needs and wants. Price elasticity is lower (more inelastic) in these situations: ●●
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Lack of Substitutes. When customers have few choices in terms of substitutes, they will be much less sensitive to price. This situation is common in some categories, including baking/ cooking ingredients, add-on or replacement parts, one-of-a-kind antiques, collectables or memorabilia, unique sporting events, and specialized vacation destinations. The more unique or specialized the product, the more customers will pay for it. Real or Perceived Necessities. Many products, such as food, water, medical care, cigarettes, and prescription drugs, have extremely inelastic demand because customers have real or perceived needs for them. Some product categories are price inelastic because customers perceive those products as true necessities. It matters little whether a customer truly has a need for a specific product. If that customer perceives the product as a necessity, then that customer becomes much less sensitive to price increases for that product. Complementary Products. Complementary products have an effect on the price sensitivity of related products. If the price of one product falls, customers will become less sensitive to the price of complementary products. For example, when the price of a cruise goes down, the price of shore excursions becomes more inelastic. With more travelers on board, and each having more money to spend, excursion operators realize that travelers are less sensitive to the prices they charge. Perceived Product Benefits. For some customers, certain products are just worth the price. For these purchases, the phrase “expensive but worth it” comes to mind. All of us have certain products that we indulge in from time to time, such as fine wines, gourmet chocolates, imported coffee, or trips to a day spa. Since these products do not comprise the bulk of our purchasing activities, customers rarely notice, or simply ignore, price increases. Situational Influences. The circumstances surrounding a purchase situation can vastly alter the price elasticity for a product. Many of these situational influences occur because time pressures or purchase risk increase to the point that an immediate purchase must be made (emergencies, for example). Other common situational influences revolve around purchase risk, typically the social risk involved in making a bad decision. In a general sense, customers tend to be much less price sensitive when they purchase items for others or for gift giving. Product Differentiation. Differentiation reduces the number of perceived substitutes for a product. For example, Coca-Cola’s differentiation strategy has worked so well that Coke drinkers will buy the soft drink even when the price fluctuates. Product differentiation does not have to be based on real differences in order to make customers less price sensitive. Many times the differences are perceptual. Blindfolded, a person may not know the difference between Coke and Pepsi, but consumers do not buy or consume soft drinks blindfolded. The look of the can, the advertising, and prior experiences all come together to differentiate the product.
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In a strategic sense, product differentiation is the best way to ensure that customers are not sensitive to price changes. The ultimate goal of this effort is to differentiate the product so well that customers perceive that no competing product can take its place. When this happens, customers will become brand loyal and the demand for the product will become inelastic. Nike, for example, commands extreme brand loyalty because the firm has successfully differentiated its products through technological innovation, effective advertising, and the ubiquitous swoosh. Likewise, Intel has done a great job using real and perceived differentiation to become the dominant supplier of processor chips in the computer industry.
Pricing Service Products When it comes to buying services, customers have a difficult time determining quality prior to purchase. Remember that services—such as a Netflix subscription, a haircut, or monthly delivery of shaving products—are at least partially intangible (i.e., cannot be touched, felt, and inspected) and are usually delivered as needed (i.e., a movie on Amazon Prime isn’t useful to you until you watch it). Consequently, service pricing is critical because it may be the only quality cue that is available in advance of the purchase experience. If the service provider sets prices too low, customers will have inaccurate perceptions and expectations about quality. If prices are too high, customers may not give the firm a chance. In general, services pricing becomes more important—and more difficult—when: ●● ●● ●● ●● ●● ●● ●●
Service quality is hard to detect prior to purchase. The costs associated with providing the service are difficult to determine. Customers are unfamiliar with the service process. Brand names are not well established. The customer can perform the service themselves. Advertising within a service category is limited. The total price of the service experience is difficult to state beforehand.
Setting prices for professional services (lawyers, accountants, consultants, doctors, and mechanics) is especially difficult as they suffer from a number of the conditions in the list above. Customers often balk at the high prices of these service providers because they have a limited ability to evaluate the quality or total cost until the service process has been completed. The heterogeneous nature of these services limits standardization; therefore, customer knowledge about pricing is limited. Heterogeneity also limits price comparison among competing providers. The key for these firms is to be up-front about the expected quality and costs of the service. This is often done through the use of binding estimates and contractual guarantees of quality. Due to the limited capacity associated with most services, service pricing is also a key issue with respect to balancing supply and demand during peak and off-peak demand times. In these situations, many service firms use yield management systems to balance pricing and revenue considerations with their need to fill unfilled capacity. Exhibit 6.4 depicts an example of yield management for a hotel. Digital services such as Disney+ and Spotify follow a subscription-based pricing model to overcome some service pricing issues. These widely distributed services avoid many of the problems associated with pricing of more traditional service delivery models, as listed above. However, subscription services suffer from another pricing problem, customer churn. Customer churn is when subscriptions are not renewed because the customer stops using it and no longer sees value in the service. For subscriptions, this problem is magnified because many offer low cost or socalled freemium pricing to entice new customers but then lose the customer when the price increases. In these cases, many companies operate at a loss to gain the customer, expecting to make up for the loss over the life of the customer, which makes churn painful because it represents actual losses due to customer acquisition costs and licensing costs to deliver the product during the initial trial. For example, home meal delivery service Hello Fresh offers discounts and free offers to earn new customer trials, but if that customer doesn’t continue the service, Hello Fresh has to cover the costs of food, packaging, shipping, and overhead required to produce and deliver the meals delivered for free or at a deeply reduced cost.
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EXHIBIT 6.4 Yield Management for a Hypothetical Hotel WEEK 35 (Peak Season)
WEEK 5 (Low Season) 100%
100%
Closed for remodeling
Capacity (% rooms)
Business guests
Business guests
Transient guests Weekend package Weekend package
50% Transient guests
50% Groups and conventions
Groups (no conventions)
Airline contracts
Airline contracts Nights:
M
Tu
W
Th
F
S
Su
M
Tu
W
Th
F
S
Su
Source: Adapted from Lovelock, Christopher, Services Marketing: People, Technology, Strategy, 4th ed., © 2001. Electronically reproduced by permission of Pearson Education Inc., Upper Saddle River, New Jersey.
Yield management allows the service firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization. This is accomplished in two ways. First, the service firm controls capacity by limiting the available capacity at certain price points. Airlines do this by selling a limited number of seats at discount prices three or more weeks prior to a flight’s departure. Southwest Airlines, for example, sells limited seats in three categories: Wanna Get Away (the lowest priced seats), Anytime, and Business Select (the highest priced seats).14 Second, the service firm controls demand through price changes over time and by overbooking capacity. These activities ensure that service demand will be consistent and that any unused capacity will be minimized. Dynamic pricing that changes with demand allows Southwest to quickly and automatically adjust pricing. As most are aware, the price of a Southwest ticket can change at any time, often multiple times in a day if demand is high, so prices aren’t guaranteed until the ticket is booked. Fortunately, at Southwest, most tickets can be exchanged, so a lower price later can still be captured by savvy customers that continue to check pricing. These practices are common in services characterized by high fixed costs and low variable costs, such as airlines, hotels, rental cars, cruises, transportation firms, and hospitals. Since variable costs in these services are quite low, the profit for these firms directly relates to sales and capacity utilization. Consequently, these firms will sell some capacity at reduced prices in order to maximize utilization. Yield management systems are also useful in their ability to segment markets based on price elasticity. That is, yield management allows a firm to offer the same basic service to different market segments at different price points. Customers who are price sensitive with respect to travel services—vacation travelers and families with children—can get a good deal on a hotel if they book it early. Conversely, consultants are less price sensitive because their clients reimburse them for expenses. Likewise, business travelers book flights on the spur of the moment, so they are more forgiving of the higher prices just prior to departure. Other firms can reach different market segments with attractive off-peak pricing. Many customers take advantage of the lower prices at theme parks and beach resorts by traveling during the off-season. Similar situations occur in lower-priced movie matinees and lower prices for lunch items at most restaurants.
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6.3b Base Pricing Strategies Although prices for individual products are made on a case-by-case basis, most firms have developed a general and consistent approach—or base pricing strategy—to be used in establishing prices. The relationship between price and other elements of the marketing program dictates that pricing decisions cannot be made in isolation. In fact, price changes may result in minor modifications to the product, distribution, or promotion strategies. As we have discussed, it is not so much the actual price being charged that influences buying decisions as the way that members of the target market perceive the price. This reality reminds us that many of the strategic issues involved in pricing have close ties with customer psychology and information processing: What customers think about prices is what those prices are to them. A firm’s base pricing strategy establishes the initial price and sets the range of possible price movements throughout the product’s life cycle. The initial price is critical, not only for initial success but also for maintaining the potential for profit over the long term. There are several different approaches to base pricing. Some of the most common approaches include: ●●
●●
●●
●●
●●
●●
●●
Price Skimming. This strategy intentionally sets a high price relative to the competition, thereby “skimming” off the profits early after the product’s launch. Price skimming is designed to recover the high R&D and marketing expenses associated with developing a new product. For example, new prescription drugs are priced high initially and only drop in price once their patent protection expires. Price Penetration. This strategy is designed to maximize sales, gain widespread market acceptance, and capture a large market share quickly by setting a relatively low initial price. This approach works best when customers are price sensitive for the product or product category, research and development and marketing expenses are relatively low, or when new competitors will quickly enter the market. To use penetration pricing successfully, the firm must have a cost structure and scale economies that can withstand narrow profit margins. Freemium Pricing. For subscription services, many use a freemium pricing strategy by offering a free trial in order to gain customers with the goal that individuals will continue their subscription once the trial period ends. This strategy is commonly used by digital streaming services (e.g., Hulu, CBS All Access, and Sling TV) or recurring ship-to-home services (e.g., Dollar Shave Club and Blue Apron). In these cases, the pricing strategy is dependent on subscription renewal as the initial freemium is considered a customer acquisition cost that is only recovered with paid subscription renewal (typically over 12–18 months). Prestige Pricing. This strategy sets prices at the top end of all competing products in a category. This is done to promote an image of exclusivity and superior quality. Prestige pricing is a viable approach in situations where it is hard to objectively judge the true value of a product. Ritz-Carlton Hotels, for example, never compete with other hotels on price. Instead, the company competes only on service and the value of the unique, high-quality experience that they deliver to hotel guests. Value-Based Pricing (EDLP). Firms that use a value-based pricing approach set reasonably low prices but still offer high-quality products and adequate customer services. Many different types of firms use value-based pricing; however, retailing has widely embraced this approach, where it is known as everyday low pricing or EDLP. Prices are not the highest in the market, nor are they the lowest. Instead, value-based pricing sets prices so they are consistent with the benefits and costs associated with acquiring the product. Many wellknown firms use value-based pricing, including Walmart, Lowe’s, Home Depot, IKEA, and Southwest Airlines. Competitive Matching. In many industries, pricing strategy focuses on matching competitors’ prices and price changes. Although some firms may charge slightly more or slightly less, these firms set prices at what most consider to be the “going rate” for the industry. This is especially true in commoditized markets such as airlines, oil, and steel. Non-Price Strategies. This strategy builds the marketing program around factors other than price. By downplaying price in the marketing program, the firm must be able to emphasize
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the product’s quality, benefits, and unique features, as well as customer service, promotion, or packaging in order to make the product stand out against competitors, many of whom will offer similar products at lower prices. For example, theme parks such as Disney World, Legoland, Sea World, Islands of Adventure, and Universal Studios generally compete on excellent service, unique benefits, and one-of-a-kind experiences rather than price. Customers willingly pay for these experiences because they cannot be found in any other setting.
6.3c Adjusting the Base Price In addition to a base pricing strategy, firms also use other techniques to adjust or fine-tune prices. These techniques can involve permanent adjustments to a product’s price, or temporary adjustments used to stimulate sales during a particular time or situation. Although the list of potentially viable pricing techniques is quite long, five of the most common techniques in consumer markets are: ●●
●●
●●
●●
●●
●●
Discounting. This strategy involves temporary price reductions to stimulate sales or store traffic. Customers love a sale, and that is precisely the main benefit of discounting. Virtually all firms, even those using value-based pricing, will occasionally run special promotions or sales to attract customers and create excitement. Dillard’s, for example, will hold a quick sale early in a selling season and then return prices to their normal levels. Near the end of the season, Dillard’s will begin to make these sale prices (or markdowns) permanent as time draws closer to the end-of-season clearance sale. Reference Pricing. Firms use reference pricing when they compare the actual selling price to an internal or external reference price. All customers use internal reference prices, or the internal expectation for what a product should cost. As consumers, our experiences have given us a reasonable expectation of how much to pay for a combo meal at McDonald’s or a gallon of gas. In other cases, the firm will state a reference price, such as “Originally $99, Now $49.” These comparisons make it easier for customers to judge prices prior to purchase. Price Lining. This strategy, where the price of a competing product is the reference price, takes advantage of the simple truth that some customers will always choose the lowest-priced or highest-priced product. Firms use this to their advantage by creating lines of products that are similar in appearance and functionality, but are offered with different features and at different price points. For example, Canon’s most affordable DSLR camera is the EOS Rebel T7 ($449.99), which offers basic functionality while its top-of-the-line model, the EOS-1D X Mark III ($6,499), takes higher quality images and offers significantly more features, such as 4K video and advanced auto-focus capabilities.15 Each model establishes reference prices for the other models in the line. The same is true for all competing DSLR cameras from other manufacturers. Odd Pricing. Everyone knows that prices are rarely set at whole, round numbers. The concert tickets are $49.95, the breakfast special is $3.95, and the gallon of gas is $2.799. The prevalence of odd pricing is based mostly on psychology: Customers perceive that the seller did everything possible to get the price as fine (and thus as low) as he or she possibly could. To say you will cut my grass for $47 sounds like you put a lot more thought into it than if you just said, “I will do it for $40,” even though the first figure is $7 higher. Price Bundling. Sometimes called solution-based pricing or all-inclusive pricing, price bundling brings together two or more complementary products for a single price. At its best, the bundled price is less than if a company sold the products separately. Slow moving items can be bundled with hot sellers to expand the scope of the product offering, build value, and manage inventory. All-inclusive resorts, including Sandals and Club Med, use price bundling because many customers want to simplify their vacations and add budget predictability. Tiered Pricing. Many subscription-based services improve profitability by offering a base-level service and additional levels of service that include more features. For example, LinkedIn offers free accounts to users but also offers a variety of premium services to help
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162 Part 3: Developing Marketing Strategy
those looking for a job (Premium Career), trying to fill a job (Recruiter Lite), improve their sales leads (Sales Navigator), and more. Many of these techniques are also used in business markets to adjust or fine-tune base prices. However, there are a number of pricing techniques unique to business markets, including: ●●
●●
●●
●●
●●
●●
Trade Discounts. Manufacturers will reduce prices for certain intermediaries in the supply chain based on the functions that the intermediary performs. In general, discounts are greater for wholesalers than for retailers because the manufacturer wants to compensate wholesalers for the extra functions they perform, such as selling, storage, transportation, and risk taking. Trade discounts vary widely and have become more complicated due to the growth of large retailers who now perform their own wholesaling functions. Discounts and Allowances. Business buyers can take advantage of sales just like consumers. However, business buyers also receive other price breaks, including discounts for cash, quantity or bulk discounts, seasonal discounts, or trade allowances for participation in advertising or sales support programs. Per Unit/User. Many subscription services offer different plans for businesses based on the number of employees that use the product. As new users are added to the plan, typically price per user decreases, which represents a volume discount. For example, the virtual meeting platform Zoom offers a business plan at $19.99 per month per host for a minimum of 10 users ($199.90 per month), and lower per user fee for larger accounts with more than 10 users of the product. Geographic Pricing. Selling firms often quote prices in terms of reductions or increases based on transportation costs or the actual physical distance between the seller and the buyer. The most common examples of geographic pricing are uniform delivered pricing (same price for all buyers regardless of transportation expenses) and zone pricing (different prices based on transportation to predefined geographic zones). Transfer Pricing. Transfer pricing occurs when one unit in an organization sells products to another unit. Barter and Countertrade. In business exchanges across national boundaries, companies sometimes use products, rather than cash, for payments. Barter involves the direct exchange of goods or services between two firms or nations. Countertrade refers to agreements based on partial payments in both cash and products, or to agreements between firms or nations to buy goods and services from each other.
Another important pricing technique used in business markets is price discrimination, which occurs when firms charge different prices to different customers. When this situation occurs, firms set different prices based on actual cost differences in selling products to one customer relative to the costs involved in selling to other customers. Price discrimination is a viable technique because the costs of selling to one firm are often much higher than selling to others.
6.4 SUPPLY CHAIN STRATEGY Supply chain management refers to the coordination of activities related to the flow and transformation of supplies, products, and information throughout the supply chain to the ultimate consumer, integrating the functions of operations management, logistics management, procurement, and marketing channel management—as seen in Exhibit 6.5—so that products are produced and distributed in the right quantities, to the right locations, and at the right times.16 Walmart, Best Buy, Amazon, and Starbucks depend on effective and highly efficient supply chains to provide competitive advantage. Unfortunately, customers rarely appreciate how companies connect to their supply lines because the processes occur behind the scenes. Normally, customers take supply chain issues for granted and only notice when supply lines are interrupted. However, during the COVID-19 crisis, the topic of supply chains became more salient to
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EXHIBIT 6.5 Supply Chain Management Key Areas Marketing Activities
Sample Activities
Operations management
Managing activities from production to final delivery through system-wide coordination
Procurement management
Processes to obtain resources to create value through sourcing, purchasing, and recycling including materials and information
Logistics management
Managing the efficient and effective flow of materials, products, and information from the point of origin to consumption
Channel management
Channel members that direct the flow of products
Source: William M. Pride and O. C. Ferrell, Marketing, Boston, MA: Cengage Learning, 2022.
consumers. Items such as toilet paper, perishable food products (e.g., meat, cheese, and produce), and cleaning supplies became scarce at many grocery stores and big box retailers. For most of these products, the scarcity wasn’t due to a lack of supply but rather a big disruption to consumer patterns (less dining out, less time at work, less time at school) that put unexpected demands on a complex supply chain. Warehouses full of restaurant packaged food products and foods ready for school lunches became less needed while grocery product demand increased greatly. Thus, empty store shelves and rationing occurred as the supply chain was redirected in new and unexpected ways. For many consumers, this was their first glimpse into a complex and dynamic supply chain that is responsible for supplying consumer needs. The complex and well-tuned supply chain is well understood from the firm’s perspective. Most companies rank supply chain concerns at the top of the list for achieving a sustainable advantage and true differentiation in the marketplace. Prices can be copied easily, even if only for the short term. Products can become obsolete almost overnight. Promotion may have a short span of influence. Even during a global pandemic, the ability to effectively manage a supply chain helped many firms to better serve their customer’s needs more effectively than other firms. The lesson is clear: Supply chain strategy is vital to the success and survival of every firm. When we think of supply chain management, we tend to think of four interrelated components: ●●
●●
●●
●●
Operations management—the total set of managerial activities used by an organization to transform resource inputs into goods, services, or both. Operations are often the most public and visible aspects of the supply chain. Procurement management—Procurement involves the processes used to obtain resources to create value through sourcing, purchasing, and recycling, including materials and information. Procurement is important for services as well as physical products. Logistics management—involves planning, implementing, and controlling the flow and storage of products and information from the point of origin to consumption. Logistics refers to more than simply the physical transport of goods and materials. There is also a need to quickly and accurately share information. Channel management—an organized system of marketing institutions through which products, resources, information, funds, and/or product ownership flow from the point of production to the final user. Some channel members or intermediaries physically take possession or title of products (e.g., wholesalers, distributors, retailers), while others simply facilitate the process (e.g., agents, brokers, financial institutions).
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The term supply chain expresses the connection and integration of all members of the marketing channel. Velocity or the need to speed inventory to and from channel members requires collaborating with technology, transportation, and other outside logistics experts. This supply chain process is designed to increase inventory turns and get the right products to the right place at the right time maintaining the appropriate service and quality standards.17 The linchpin of effective supply chain management in today’s economy is integration. Through informational, technological, social, and structural linkages, the goal of supply chain integration is to create a seamless network of collaborating suppliers, vendors, buyers, and customers. When done correctly, this level of integration results in an extended enterprise that manages value by coordinating the flow of information, goods, and services toward end users, as well as reverse flows away from end users. Creating an extended enterprise requires investments in and commitment to three key factors:18 ●●
●●
●●
Connectivity—the informational and technological linkages among firms in the supply chain network. Connectivity ensures that firms can access real-time information about the flow in the supply chain network. Community—the sense of compatible goals and objectives among firms in the supply chain network. All firms must be willing to work together to achieve a common mission and vision. Collaboration—the recognition of mutual interdependence among members of the supply chain network. Collaboration goes beyond contractual obligations to establish principles, processes, and structures that promote a level of shared understanding. Firms learn to put the needs of the supply chain ahead of their own, because they understand that the success of each firm separately has a strong connection to the success of other firms, as well as the entire supply chain.
Supply chain integration and creating an extended enterprise are extremely challenging goals. In the most seamlessly integrated supply chains, the boundaries among channel members blur to the point where it is difficult to tell where one firm ends and another firm begins. This level of integration requires a tenuous balance of trust, cooperation, interdependence, and stability in order to create mutual benefits.19
6.4a Strategic Supply Chain Issues The importance of the supply chain ultimately comes down to providing time, place, and possession utility for consumer and business buyers. Without good distribution and logistics, buyers would not be able to acquire goods and services when and where they need them. However, the expense of distribution and logistics requires that firms balance customers’ needs with their own need to minimize total costs. Half of logistics are associated with warehousing, storing, and carrying inventory—key factors in ensuring product availability for customers. To manage these costs efficiently, distribution and logistics strategy must balance the needs of customers with the needs of the firm.
Marketing Channel Functions Marketing channels make our lives easier because of the variety of functions performed by channel members. Likewise, channel members, particularly manufacturers, can cut costs by working through channel intermediaries. The most basic benefit of marketing channels is contact efficiency, where channels reduce the number of contacts necessary to exchange products. Without contact efficiency, we would have to visit a bakery, poultry farm, slaughterhouse, and dairy just to assemble the products necessary for breakfast. Likewise, contact efficiency allows companies such as Del Monte Foods to maximize product distribution by selling to select intermediaries. For Del Monte, Walmart stores account for over 31 percent of the company’s sales volume. Del Monte’s next nine largest customers account for another 30 percent of the company’s sales. These percentages will increase if additional consolidation among food retailers and growth of mass merchandisers continues.20
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MOZCO Mateusz Szymanski/Shutterstock.com
The marketing channels described in this chapter include many references to store and nonstore retailing because both are highly relevant. Many people assume that Amazon and other e-commerce options have taken over, replacing retail stores, but e-commerce is still growing. For many products, retail stores are preferred by consumers. Though cars and trucks can be purchased online, most are purchased at a physical dealership. Most clothing, shoes, alcoholic or softdrink beverages, and home-improvement materials are purchased locally. In these cases, an instore visit completes the distribution channel via consumer selection and pickup of the product. Even for Amazon, Overstock, and Zappos purchases, the e-commerce experience still involves a supply chain that simply extends further with home delivery of individual products. In a simplified example, we can think of Amazon as simply a “super” Super Walmart that has all products in well-placed, geographically central distribution warehouses (instead of retail stores). When an order is placed at Amazon, a robot likely finds the items, a person/AI inspects the order, it is boxed (instead of bagged), and it is shipped/delivered by a logistics partner of Amazon to your door (instead of placed in your SUV or car and transported to your door by you). In essence, Amazon and other e-commerce retailers have simply removed the physical store and replaced it with a longer and more complex supply chain. Thus, concepts of supply chain fit both traditional store retailers and online merchants as they work to sell their products to consumers. Walmart has moved into Internet retailing with a supply chain similar to Amazon. On the other hand, Amazon has opened physical stores and purchased Whole Foods to compete directly with Walmart in the grocery product category. Therefore, large retailers have both store and Internet retail operations to have multiple touch points with customers. Home delivery is becoming an important function of the supply chain to consumers. Pioneers of local delivery include Domino’s Pizza, Pizza Hut, and Jimmy John’s. In many cities, other restaurants, pharmacies, and even grocery stores have offered delivery for decades. However, today almost any business can offer affordable and effective delivery of their products via platforms such as Uber Eats, Grubhub, DoorDash, and Delivery.com. As social norms change, most businesses are utilizing third-party delivery services to connect their products with their customers at their customer’s front door.
Restaurants partner with delivery services such as Uber Eats for affordable and effective local delivery.
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To maintain a quality customer journey, it is important to communicate consistent messages on many different platforms to best engage customers. Omnichannel retailing calls for a multidimensional approach to delivering value, disrupting traditional views about what a marketing channel is. Omnichannel is the concept of bringing together communication, products and services, supply chain management, payment options and terms, customer service, and more into a seamless experience for consumers. Consumers expect to be able to shop, purchase, search, and pay effectively across many platforms. For instance, a consumer may see an advertisement on Instagram for a smart speaker and then seek additional product information via a Google search and a visit to the brand’s website. They may visit a physical store, such as Best Buy, to see the speaker in person and test its features. While in the store, they may consult an app on their phone to instantly price compare the smart speaker across multiple retailers. They may choose to complete the purchase in-store or online, and they might pay using an online payment platform. Throughout the process, technology enables all touchpoints: the social media platform, the web browser, the smart speaker company’s website, the physical retailer, the payment platform, and the bank to collect data about the consumer’s preferences.21
Marketing Channel Structure There are many strategic options for the structure of a market-
ing channel; these strategies are often complex and costly to implement. However, a good distribution strategy is essential for success because once a firm selects a channel and makes commitments to it, distribution often becomes highly inflexible due to long-term contracts, sizable investments, and commitments among channel members. There are three basic structural options for distribution in terms of the amount of market coverage and level of exclusivity between vendor and retailer (applies to e-commerce and traditional retail):
●●
●●
●●
Exclusive Distribution. Exclusive distribution is the most restrictive type of market coverage. Firms using this strategy give one merchant or outlet the sole right to sell a product within a defined geographic region. Selective Distribution. Firms using selective distribution give several merchants or outlets the right to sell a product in a defined geographic region. Selective distribution is desirable when customers need the opportunity to comparison shop, and after-sale services are important. Intensive Distribution. Intensive distribution makes a product available in the maximum number of merchants or outlets in each area to gain as much exposure and as many sales opportunities as possible.
Channel structure is clearly linked to other elements in the marketing program and can be an integral part of both branding strategy and product positioning. For example, exclusive distribution is commonly associated with prestige products, major industrial equipment, or with firms that attempt to give their products an exclusive or prestige image (e.g., BMW, Jaguar, and Mercedes). Firms that pursue exclusive distribution usually target a single, well-defined market segment. Selective distribution is used across many product categories, including clothing (Free People), cosmetics (Fenty), electronics (Bose), franchising (Subway), and premium pet food (Blue Buffalo). These and other companies carefully screen the image and selling practices of merchants to ensure that they match those of the manufacturer and its products. Intensive distribution is the best option for most consumer convenience goods, such as candy, soft drinks, over-the-counter drugs, or cigarettes, and for business office supplies such as paper and toner cartridges. To gain this visibility and sales volume, the manufacturer must give up a good degree of control over pricing and product display. If a customer cannot find one firm’s products in a given location, they will simply substitute another brand to fill the need.
Power in the Supply Chain True supply chain integration requires a fundamental change in
how channel members work together. Among these changes is a move from a “win–lose” competitive attitude to a “win–win” collaborative approach in which there is a common realization that all firms in the supply chain must prosper. Consider the Toro Company that sells turf maintenance equipment, irrigation systems, landscaping equipment, and yard products to both professional and residential markets. This requires many different distributors and dealers (many of which are quite small), as well as supplying products to large national retailers such as Home Depot. If one of Toro’s products is made available in Home Depot, it is likely to have a lower retail price (due to
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bulk buying) than the same or similar product at a local tractor supply company. This situation is clearly not in the best interests of the local firm, so it will strive to put its interests ahead of others in the supply chain. However, the local tractor supply company also understands that it must service Toro equipment—no matter where it was purchased—if it is to remain a certified service facility. For the local firm, putting the needs of the supply chain ahead of its own needs is likely to create tension and conflict with the Toro Company. In situations like this, each firm will exhibit a different degree of authority or power in managing or controlling the activities within the supply chain. There are five basic sources of power in a supply chain:22 ●●
●●
●●
●●
●●
Legitimate Power. This power source is based on the firm’s position in the supply chain. Historically, manufacturers held most of the legitimate power, but this power balance shifted to retailers in the 1990s. In today’s economy, retailers still wield a great deal of power, but consumers are clearly in charge. Reward Power. The ability to help other parties reach their goals and objectives is the crux of reward power. Rewards may come in terms of higher volume sales, sales with more favorable margins, or both. Individual salespeople at the buyer end of the channel may be rewarded with cash payments, merchandise, or vacations to gain more favorable presentation of a manufacturer’s or wholesaler’s products. Coercive Power. The ability to take positive outcomes away from other channel members, or the ability to inflict punishment on other channel members. For example, a manufacturer may slow down deliveries or postpone the availability of some portions of a product line to a wholesaler or retailer. Likewise, a retailer can decide not to carry a product, not to promote a product, or to give a product unfavorable placement on its shelves. Information Power. Having and sharing knowledge is the root of information power. Such knowledge makes channel members more effective and efficient. Information power may stem from knowledge concerning sales forecasts, market trends, competitive intelligence, product uses and usage rates, or other critical pieces of information. In many supply chains, retailers hold the most information power because their close proximity to customers gives them access to data and information that is difficult to obtain from other sources. Referent Power. Referent power has its basis in personal relationships and the fact that one party likes another party. It has long been said that buyers like to do business with salespeople they enjoy being around. This is still true, but increasingly referent power has its roots in firms wanting to associate with other firms, as opposed to individual one-onone relationships. Similar cultures, values, and even information systems can lead to the development of referent power.
Powerful channel members have the ability to get other firms to do things they otherwise would not do. Depending on how the channel member uses its influence, power can create considerable conflict, or it can make the entire supply chain operate more smoothly and effectively. Today, Amazon, discount mass merchandise retailers—like Walmart and Costco—and category focused retailers (also known as category killers)—such as Best Buy, Office Depot, and AutoZone—hold the power in most consumer channels. The sheer size and buying power of these firms allows them to demand price concessions from manufacturers. They also perform their own wholesaling functions; therefore, they receive trade discounts traditionally reserved for true wholesalers. Likewise, their control over retail shelf space allows them to dictate when and where new products will be introduced. Manufacturers typically must pay hefty fees, called slotting allowances, just to get a single product placed on store shelves or featured as a “choice” product on e-commerce sites. Finally, their closeness to millions of customers allows these large retailers to gather valuable information at the point of sale. As mentioned previously, control over information is a valuable commodity and a source of power in virtually all supply chains.
6.4b Trends in Supply Chain Strategy In addition to the strategic supply chain issues discussed to this point, a number of trends have shaped the structure of marketing channels and the ways that supply chains function. In this section, we examine a number of these trends.
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168 Part 3: Developing Marketing Strategy
EXHIBIT 6.6 U.S. E-Commerce Percent of Total Retail 16.0% 14.4% 13.2% 11.8%
6.4%
2010
7.2%
2011
8.0%
2012
8.8%
2013
9.7%
10.7%
2014
E-commerce sales
2015
2016
2017
2018
2019
In-store sales
Source: Jessica Young, “US Ecommerce Sales Grow 14.8% in 2019,” Digital 360 Commerce, February 19, 2020, https://www .digitalcommerce360.com/article/us-ecommerce-sales/ (accessed April 13, 2020).
Technological Improvements Significant advancements in information processing and dig-
ital communication have created new methods for placing and filling orders for both business buyers and consumers. For example, e-commerce has increased, as seen in Exhibit 6.6, but it still has a great deal of room to grow, especially in consumer markets.23 In 2020, e-commerce saw a major boost in sales due to the COVID-19 pandemic, led by online grocery demand. However, despite nearly complete consumer acceptance of e-commerce for products, it is unlikely or not possible for many products to be sold and delivered with efficiency directly through online channels (e.g., gasoline and car repair). Advances in distribution via more local distribution centers, faster methods (e.g., drones), and continued digitization of products will aid the trend toward less physical stores in most areas but not the complete elimination of retail brick-and-mortar stores in our local communities as many products are best chosen and retrieved by the individual consumer in person. A popular technology is radio frequency identification (RFID), which involves the use of tiny computer chips with radio transmission capability that can be attached to a product or its packaging. The radio signals reflected from the chip can be used to track inventory levels and product spoilage, or prevent theft. They can also be used for instantaneous checkout of an entire shopping cart of items. Large retailers and packaged goods manufacturers have widely adopted RFID, which has largely replaced bar codes as a means to manage inventory.24 Innovations in web-based communication technologies such as global positioning are also taking rail and truck equipment to a new level of service in supply chain integration. Sensors and data are also becoming prevalent in managing supply chains. The overall supply chain is a complex system of things and how they move. Advances in sensors that monitor every aspect of where a product is and what is happening to the product help to produce useful data. For example, sensors in John Deere seed planting equipment monitor GPS positioning of each crop, soil conditions, moisture, and more. This data, combined with ongoing geo-located weather data and additional inputs about crop conditions, help food manufactures to accurately predict crop outputs long before the crops are harvested. The movement of products is also monitored as trucking companies combine and analyze weather, traffic, and potential equipment breakdowns to precisely manage truck movements and delivery of goods. Finally, well-designed algorithms
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Chapter 6: The Marketing Program 169
help companies like Walmart to predict exact demand in different cities, stores, and even countries to send just the right product for each location, greatly reducing stock problems and shortages. However, all of these practices involve accurate and predictable data. As was evidenced during the COVID-19 crisis, at times even the most sophisticated data and analytics can fail when conditions change dramatically. Thus, technology and human innovation must work together to maintain effective supply chain operations. One technology transforming supply chain management is blockchain. Blockchain is a linked group of ordered transactions that are a subset of a database, a technology that can help improve communication and transparency within the supply chain. Individual organizations within a supply chain can record every movement of products and components from where they are sourced, processed, stored, and when they expire, all the way to the final consumer. Starbucks, for instance, can trace its beans from its 380,000 coffee farms all the way to the consumer’s cup.25 Another technology improving supply chain management is artificial intelligence (AI), which can help firms with complex computing tasks. UPS, for example, uses an AI tool to determine optimal routes for drivers by collecting data from customers, drivers, and vehicles. It and then identifies ideal routes in real time, even adjusting for traffic congestion.26 Starbucks uses AI to manage inventory, staffing, and most in-store operational decisions. AI and blockchain technologies are likely to continue to transform supply chain management as more firms embrace their use.
BEYOND THE PAGES 6.3
Walmart Dominates Supply Chain Management27 Walmart—the world’s largest retailer—has earned a reputation as being a leader in supply chain management. With net sales of more than $514 billion and more than 2.2 million employees, managing stakeholder relationships is a major challenge. Their key strategy is a broad assortment of quality merchandise and services at everyday low prices (also referred to as EDLP). The company expects suppliers to continually improve their systems as well. Walmart typically works with suppliers to reduce packaging and shipping costs, which lowers prices for consumers. In addition, Walmart embraces emerging technology to maintain its competitive advantage and low costs. Walmart has worked with The Sustainability Consortium— an association of businesses that helps its members achieve sustainability goals—to develop a measurement and reporting system known as the Walmart Sustainability Index since 2009. Among their many goals, Walmart desires to use the Sustainability Index to increase the sustainability of their products and create a more efficient, sustainable supply chain. In 2017, Walmart and the Sustainability Consortium created Project Gigaton, a sustainability effort to eliminate 1 billion tons of greenhouse gas from Walmart’s global supply chain before 2030. With the help of vendors, Walmart has made great progress toward their goal. Suppliers also receive better ratings from Walmart for providing environmentally friendly products, an incentive that has paid off so far. Walmart holds suppliers to high standards, especially when it comes to delivery. In 2019, Walmart revamped their rules to require suppliers to obtain an 87 percent success rate of delivering full trucks of products over two days. For
partially full trucks, the success rate of on-time delivery went from 50 percent to 70 percent that year, indicating the more stringent standards for suppliers are working. Walmart generally refuses to sign long-term supply contracts, giving them the power to easily and quickly change suppliers at their own discretion. Despite this, suppliers will invest significantly in long-term strategic and business commitments to meet Walmart demands, even without any guarantee that Walmart will continue to buy from them. By having to become more efficient and streamlined for Walmart, companies develop competitive advantages and are able to serve their other customers better as well. For example, as Walmart worked with IBM to develop a blockchain solution to food safety, Walmart began requiring all suppliers of green leafy vegetables to use the blockchain database. Though blockchain technology makes Walmart’s supply chain more traceable and transparent, this requirement is a financial and technical burden for many companies. However, as these companies adapt with the help of IBM’s onboarding system, they will be better prepared to use blockchain technology in their own businesses. Walmart is also investing heavily in robots at the store level. While it has introduced robots in select locations to clean the store and scan inventory, Walmart unveiled Alphabot, an automated warehouse with robotic carts that make grocery pickup service fast and efficient. The brand has struggled in its battle to gain e-commerce business due to increased competition from retailers like Amazon, so this type of investment could stand to make Walmart the ultimate competition.
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170 Part 3: Developing Marketing Strategy
Balancing the Risks and Benefits of Supply Chain Functions Outsourcing—shifting
work activities to businesses outside the firm—is a trend across many different industries and supply chains.28 In the past, outsourcing was used primarily as a way of cutting expenses associated with labor, transportation, or other overhead costs. Today, though cutting expenses is still a main factor, the desire of many firms to focus on core competencies drives outsourcing. By outsourcing noncore activities, firms can improve their focus on what they do best, free resources for other purposes, and enhance product differentiation—all of which lead to greater opportunities to develop and maintain competitive advantages. The hourly labor costs in countries such as China, India, and Mexico are far less than in the United States or Europe. These developing countries have improved their manufacturing capabilities, infrastructure, and technical and business skills, making them more attractive regions for global sourcing. On the other hand, the costs and risks of outsourcing halfway around the world must be taken into consideration. Firms that outsource give up a measure of control over key factors such as data security and the quality of service delivered to customers. To combat these issues, many firms have shifted from outsourcing to offshoring of their own activities. These companies set up their own offshore operations (called captives) to handle business processes where wage rates are lower. Many risks became evident during the COVID-19 crisis, as many industries realized the potential danger of their decisions to outsource production of their products. For example, nearly all U.S. pharmaceutical (prescription) drugs are produced outside the United States. Many question this practice, as a weakened or damaged supply chain due to pandemic, conflict, or disagreement could cause problems for millions of Americans. Thus, new ideas are being implemented with regard to balancing the risks and benefits of outsourcing, offshoring, and insourcing in an effort by many companies to manage their supply chain. Information technology is the primary activity outsourced today. Currently, however, firms are shifting supporting processes to outside businesses. These supporting processes include administrative activities, distribution, human resources, financial analysis, call centers, and even sales and marketing. When a firm has significant needs and insufficient in-house expertise, the importance of outsourcing will increase. For example, an entire industry known as 3PLs (third-party logistics providers) has emerged in the United States and Europe as retailers look toward outside expertise as a way to reduce costs and make their products more readily available. In fact, roughly 90 percent of Fortune 500 firms use 3PLs to manage inventories and handle the physical movement of products in the supply chain to ensure that items are in the right amounts and in the right places when needed.29
Expecting and Planning for Disruption Disruption is one constant that can be depended on in the supply chain. Across time, moving products from place to place has been at the mercy of disruption. Hundreds of years ago, as goods moved by wooden ships, often storms or piracy would sabotage expected deliveries for waiting customers. Trucks and trains move products with similar concerns for weather, worker strike, or equipment failure disruptions. Technology has caused much disruption to how we distribute products to customers. For example, once busy malls have closed and acres of retail space have been torn down due to the disruptions of e-commerce and efficient home delivery. Even more recently, our entire global system of supply chain was disrupted by a complete change in consumer habits and needs due to COVID-19. During this crisis, much of the retail-based delivery system was deemed nonessential and was required to close business operations. This disruption challenged supply chains as they struggled to adapt and recalibrate to new consumer patterns. New distribution channels offer many benefits and some challenges to marketers. Most companies are finding effective ways to utilize digital, mobile, and online ways to better communicate with, sell to, and build relationships with their customers. From these efforts, marketers are able to build competitive advantages and, in new and different ways, keep their customers engaged. However, as machines take the place of humans, some are concerned that customer loyalty will be affected. For example, for direct sellers, concerns exist when they cede control to a website over personal consultation with their customers. Similarly, for delivery services, concerns over who and how the delivery service gets the product to customers abound (e.g., will the food be cold,
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Chapter 6: The Marketing Program 171
on-time, or of intended quality). Thus, the changing supply chain is good, but it requires intentional management to be effective and sustainable for most companies. In the future, what disruptions exist? The answer is hard to predict, yet the implications are easy to see. All companies have learned that supply chain operations must be nimble and adaptable to meet current and yet unknown market demands. Wise companies have realized that how they conduct business today will likely be very different from how they conduct business in 3, 5, or 10 years, which challenges them to innovate operations on a continual basis. While this change seems difficult, consumers in 10 to 20 years will likely shop and procure their goods and services in many of the same ways we do today, but also in many ways that we haven’t even thought of yet. Thus, companies with long-term vision are planning for change today to remain successful and in business tomorrow.
6.5 INTEGRATED MARKETING COMMUNICATIONS Without a doubt, promotion and marketing communications are the most ubiquitous elements of any firm’s marketing program. This is not surprising because promotional activities are necessary to communicate the features and benefits of a product to the firm’s intended target markets. Marketing communications include conveying and sharing meaning between buyers and sellers, either as individuals, firms, or between individuals and firms. Integrated marketing communications (IMC) refers to the strategic, coordinated use of promotion to create one consistent message across multiple channels to ensure maximum persuasive impact on the firm’s current and potential customers. For example, Taco Bell developed an integrated marketing campaign to promote its Nacho Fries with a series of movie trailer–inspired television advertisements paired with public relations efforts and social media to support the campaign. The introduction of Nacho Fries was Taco Bell’s biggest debut of all time.30 IMC takes a 360-degree view of the customer that considers each and every contact that customers or potential customers may have in their relationship with the firm. The key to IMC is consistency and uniformity of message across all elements of promotion as shown in Exhibit 6.7.
EXHIBIT 6.7 Components of IMC Strtegy
Advertising Print Broadcast Online/Interactive Mobile Direct Marketing
Public Relations Publicity Press Releases Newsletters
Integrated Marketing Communication
Personal Selling Account Management Prospecting Retail Sales
Sales Promotion Consumer Promotion Trade Promotion
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172 Part 3: Developing Marketing Strategy
Due to the many advantages associated with IMC, most marketers have adopted integrated marketing as the basis for their communication and promotion strategies. By coordinating all communication “touch points,” firms using IMC convey an image of truly knowing and caring about their customers that can translate into long-term customer relationships. Likewise, IMC reduces costs and increases efficiency because it can reduce or eliminate redundancies and waste in the overall promotional program. Many firms have embraced IMC because mass-media advertising has become more expensive and less predictable than in the past. Marketers are being forced to adopt new marketing strategies as advancing technology and customer preferences are threatening to make traditional forms of promotion obsolete. Many firms are also embracing technology in order to target customers directly through product placement and online promotion. With the rise of artificial intelligence and data analytics, marketing communications continue to evolve. Companies can collect mass amounts of data and use artificial intelligence (AI) to sort through the data to find relevant information. Marketers then analyze the data to help determine their marketing strategies. Using the refined data from AI, marketers can quickly adapt their marketing strategies and target consumers more efficiently.
6.5a Strategic Issues in Integrated Marketing Communications When selecting elements to include in the IMC program, it is important to take a holistic perspective that coordinates not only all promotional elements but also the IMC program with the rest of the marketing program (product, price, and supply chain strategy). Taking this approach allows a firm to communicate a consistent message to target customers from every possible angle, thereby maximizing the total impact on those customers. For example, if the advertising campaign stresses quality, the sales force talks about low price, the supply chain pushes wide availability, and the website stresses product innovation, then what is the customer to believe? Not readily seeing that a product can deliver all these benefits, the customer is likely to become confused and go to a competitor with a more consistent message. All too frequently, firms rush to launch an intensive IMC campaign that has no clear promotional objectives. The vast majority of promotion activities do not create results in the short term, so firms must focus on long-term promotional objectives and have the patience to continue the program long enough to gauge true success. It takes a great deal of time, effort, and resources to build a solid market position. Promotion based on creativity alone, unlinked to the rest of the marketing strategy, can waste limited and valuable marketing resources. Ultimately, the goals and objectives of any promotional campaign culminate in the purchase of goods or services by the target market. The classic model for outlining promotional goals and achieving this ultimate outcome is the AIDA model—attention, interest, desire, and action: ●●
●●
●●
●●
Attention. Firms cannot sell products if the members of the target market do not know they exist. As a result, the first major goal of any promotional campaign is to attract the attention of potential customers. Interest. Attracting attention seldom sells products. Therefore, the firm must spark interest in the product by demonstrating its features, uses, and benefits. Desire. To be successful, firms must move potential customers beyond mere interest in the product. Good promotion will stimulate desire by convincing potential customers of the product’s superiority and its ability to satisfy specific needs. Action. After convincing potential customers to buy the product, promotion must then push them toward the actual purchase.
The role and importance of specific promotional elements vary across the steps in the AIDA model. Mass-communication elements, such as advertising and public relations, tend to be used more heavily to stimulate awareness and interest due to their efficiency in reaching large numbers of potential customers. Along with advertising, sales promotion activities, such as product samples or demonstrations, are vital to stimulating interest in the product. The enhanced communication effectiveness of personal selling makes it ideally suited to moving potential customers through internal desire and into action. Other sales promotion activities, such as product displays, coupons, and trial-size packaging, are well suited to pushing customers toward the final act of making a purchase.
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Alongside the issue of promotional goals and objectives, the firm must also consider its promotional goals with respect to the supply chain. In essence, the firm must decide whether it will use a pull strategy, a push strategy, or some combination of the two. When firms use a pull strategy, they focus their promotional efforts toward stimulating demand among final customers, who then exert pressure on the supply chain to carry the product. The coordinated use of heavy advertising, public relations, and consumer sales promotion has the effect of pulling products through the supply chain, hence its name. In a push strategy, promotional efforts focus on members of the supply chain, such as wholesalers and retailers, to motivate them to spend extra time and effort on selling the product. This strategy relies heavily on personal selling and trade sales promotion to push products through the supply chain toward final customers. Coordinating promotional elements within the context of the entire marketing program requires a complete understanding of the role, function, and benefits of each element. The advantages and disadvantages of each element must be carefully balanced against the promotional budget and the firm’s IMC goals and objectives. To ensure a constant and synergistic message to targeted customers, the firm must ultimately decide how to weigh each promotional element in the overall IMC strategy. The next sections take a closer look at the four key elements that comprise most IMC programs.
6.5b Advertising Advertising is a key component of promotion and is usually one of the most visible elements of an integrated marketing communications program. Advertising is paid, nonpersonal communication transmitted through media such as television, radio, magazines, newspapers, direct mail, outdoor displays, the Internet, and mobile devices. Exhibit 6.8 outlines the changing trends in digital vs. traditional advertising in the United States. Note the continued growth in Internet advertising while newspapers and magazines continue to struggle. This spending pattern follows trends in media usage as consumers are spending more time online and less time with traditional media.
07 $1
2018
2019
Traditional media ad spending (billions)
2020
$1 2 $1 04 .3
.1 3
.4 8 $1 29 .
09 $1
.6 4 08
$1
$1
14
.8 4
34
$1
51
.2
9
72
.2 9
EXHIBIT 6.8 Digital vs. Traditional Ad Spending in the United States
2021
Digital ad spending (billions)
Source: eMarketer, February 2019
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174 Part 3: Developing Marketing Strategy
EXHIBIT 6.9 Digital Advertising Revenues by Format
Search
Banner*
Video
Other**
9% 15% 45% 31%
*Banner includes: Ad Banners/Display, Rich Media, and Sponsorship. **Other includes: Classifieds, Lead Generation, Audio, and Unspecified. Note: Totals may not equal 100 percent due to rounding.
Source: IAB/PwC Internet Ad Revenue Report, FY 2018
As the use of traditional media declines, advertisers are accelerating their use of Internet-based advertising methods. As shown in Exhibit 6.9, the bulk of Internet-based ad spending comes from search advertising, followed by display/banner ads. Although companies enjoy the large number of impressions that can be generated via Internet-based advertising, their efforts suffer from the fleeting nature of most online ads. Getting a potential customer to click on a banner ad or look at a message for more than a few seconds can be quite challenging. Influencer marketing has become a popular advertising tool. As consumers have become increasingly skeptical of traditional advertising tactics, using influencer marketing helps consumers associate products with people they already trust. Companies often partner with social media influencers—people who have established themselves as a credible source within a particular industry or subject matter with an engaged following on social media—to sponsor content, host competitions and giveaways, and collaborate on new products. ColourPop Cosmetics, for example, has collaborated with popular YouTubers such as Safiya Nygaard and Kathleen Fuentes to create and promote makeup collections. The influencer marketing is estimated to be a $15 billion industry.31 Despite the many advantages of advertising, its use does create a number of challenges for companies. First, the initial expense for advertising is typically high. Although media buys such as airtime on the Super Bowl gets a lot of attention, the actual production cost for a 30-second commercial can also be expensive (the U.S. average is around $115,000).32 Second, many companies struggle to determine the correct amount of money to allocate to advertising because the effects of advertising are sometimes difficult to measure. Online or mobile campaigns provide insight into the effectiveness of an advertising campaign, yet even with accurate data, it is difficult to determine the direct return-on-investment of most advertising. There are many factors that can determine a firm’s decision about the appropriate level to fund advertising activities, including the geographic size of the market, the distribution or density of customers, the types of products advertised, sales volume relative to the competition, and the firm’s budget. While setting the budget too high will obviously result in waste and lower profits, setting the budget too low may be worse. Firms that do not spend enough on advertising find it very difficult to stand out in an extremely crowded market for customer attention. Third, it is usually difficult to evaluate the effectiveness of advertising. Many of the effects and outcomes of advertising take a long time to develop, especially regarding important outcomes such as enhanced brand image, corporate reputation, and positive product attitudes. Short-term
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Chapter 6: The Marketing Program 175
results, such as a viral video that receives more than a million views, are encouraging but may not tell the whole story. The effect of advertising on sales lags in some cases, with the effect occurring long after the campaign has ended. The seemingly unending methods that can be used to evaluate advertising effectiveness further complicate the task of measuring advertising results. Some methods include evaluating the achievement of advertising objectives; assessing the effectiveness of advertising copy, illustrations, and layouts; and evaluating the effectiveness of various media. Effectiveness measures can also look at different market segments and their responses to advertising, including brand image; attitudes toward the advertising, the brand, or the firm; and actual customer purchasing behavior. Finally, most marketers struggle with the fine line between what is permissible and not permissible in advertising. In addition to cultural and stylistic considerations, marketers must also carefully consider how they portray their products to potential customers. For example, the Federal Trade Commission (FTC) fined the University of Phoenix $191 million for deceptive advertisements. The FTC found that the university made false claims about companies where students had found employment after graduating.33 Product claims are also important in comparative advertising, which occurs when one firm compares its product with one or more competing products on specific features or benefits. Comparative advertising is common in product categories such as soft drinks, automobiles, computers, and over-the-counter medications. In some cases, this comparison is direct, such as a Chobani vs. Yoplait Greek yogurt taste test. In other cases, the comparison used in the advertisement is indirect or implied. Procter & Gamble uses this tactic when promoting its Gillette razors as “The Best a Man Can Get.” The implied comparison in this case involves all competing razors on the market. Under the provisions of the Trademark Law Revision Act, marketers using comparative advertising must ensure they do not misrepresent the characteristics of competing products.
6.5c Public Relations Public relations is one component of a firm’s corporate affairs activities. The goal of public relations is to track public attitudes, identify issues that may elicit public concern, and develop programs to create and maintain positive relationships between a firm and its stakeholders. A firm uses public relations to communicate with its stakeholders for the same reasons that it develops advertisements. Public relations can be used to promote the firm, its people, its ideas, and its image and can even create an internal shared understanding among employees. Because various stakeholders’ attitudes toward the firm affect their decisions relative to the firm, it is important to maintain positive public opinion. Public relations can improve the public’s general awareness of a company and can create specific images such as quality, innovativeness, value, or concern for social issues. For example, New Belgium Brewery in Fort Collins, Colorado, has a strong reputation for its stance on environmental efficiency and conservation. The brewery takes an aggressive stance toward recycling and uses windmills to generate electricity.34 Likewise, Starbucks has gained international awareness through its fair treatment of employees. The company was also the first coffee retailer to establish a global code of conduct for fair treatment of agricultural suppliers—the small farmers who supply the coffee beans for its products. Firms use a number of public relations methods to convey messages and to create the right attitudes, images, and opinions. Public relations is sometimes confused with publicity. Although publicity is one part of public relations, it is more narrowly defined to include the firm’s activities designed to gain media attention through articles, editorials, or news stories. By encouraging the media to report on a firm’s accomplishments, publicity helps maintain positive public awareness, visibility, and a desired image. Publicity can be used for a single purpose, such as to launch a new product or diminish the public’s opinion regarding a negative event, or it can be used for multiple purposes to enhance many aspects of the firm’s activities. Having a good publicity strategy is important because publicity can have the same effect as advertising, though typically with greater credibility. There are a number of different methods used in public relations and publicity efforts: ●●
News (or Press) Releases. A news release is a few pages of typewritten copy—typically fewer than 300 words—used to draw attention to a company event, product, or person affiliated
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176 Part 3: Developing Marketing Strategy
●●
●●
●●
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with the firm. News releases are submitted to reporters, news outlets, influencers, video/text online content aggregators, suppliers, key customers, or even the firm’s employees. Feature Articles or Content. A feature article is a full-length story prepared for a specific purpose or target audience. For example, a firm building a new production facility in northeast Georgia might supply a feature article to regional and local media outlets, chambers of commerce, local governments, and major firms in the area. Video content usually accompanies an article, providing a visual and narrative version of the intended message. Featured content typically focuses on the implications or economic impact of a firm’s actions. Both article and content are also useful when responding to negative events or publicity. White Papers. White papers are similar to feature articles; however, they are more technical and focus on very specific topics of interest to the firm’s stakeholders. White papers promote a firm’s stance on important product or market issues and can be used to promote the firm’s own products and solutions. White papers have been used extensively in the information technology field where firms continually work to establish standards and keep up with technological innovation. Press Conferences and Webinars. A press conference is a meeting with news media called to announce or respond to major events. Media personnel receive invitations to a specific location or online meeting site, Invited guests typically receive written materials, video content, website links, images, customer reviews, and even product samples. Multimedia materials may be distributed to online and broadcast news sources. Webinars are similar to a press conference, but they specifically utilize a virtual forum to distribute news and details about a new product or development. Firms typically hold press conferences when announcing new products, patents, mergers or acquisitions, philanthropic efforts, or internal administrative changes. Event Sponsorship. Corporate sponsorship of major events has become an entire industry in itself. Sponsorships can range from local events, such as high school athletics and local charities, to international events such as the Tour de France or NASCAR. Another popular sponsorship strategy involves the naming of sports stadiums and venues, such as Gillette Stadium, home to the New England Patriots. Employee Relations. Employee relations are every bit as important as public and investor relations. Employee relations’ activities provide organizational support for employees with respect to their jobs and lives. Employee relations can encompass many different activities including internal newsletters, training programs, employee assistance programs, and human resource programs.
When these methods generate publicity in the media, the public perceives the message as having more credibility due to the implied endorsement of the media that carries the story. The public will typically consider news coverage more truthful and credible than advertising because the firm has not paid for the media time. One major drawback of public relations activities is that the firm has much less control over how the message will be delivered. For example, many media personnel have a reputation for inserting their own opinions and biases when communicating a news story. Another drawback involves the risk of spending a great deal of time and effort in developing public relations messages that fail to attract media attention.
6.6 PERSONAL SELLING AND SALES MANAGEMENT Personal selling is paid personal communication that attempts to inform customers about products and persuade them to purchase those products. Personal selling takes place in many forms. For example, a Best Buy salesperson who describes the benefits of an HP laptop to a customer engages in personal selling. The salesperson who attempts to convince a large industrial organization to purchase a new type of data sensors to better monitor their product performance also is selling. Some types of personal selling are highly complex and relational in nature. The complexity of these types of contracts requires a long-term, personal relationship between salespeople, buyers, and the support networks of both the buyer and seller companies. Compared to other types of promotion, personal selling is the most precise form of communication because it assures companies that they are in direct contact with an excellent prospect.
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Though one-on-one contact is highly advantageous, it does not come without disadvantages. The most serious drawback of personal selling is the cost per contact. In business markets, a single sales presentation can take many months and thousands of dollars to prepare. For instance, to give government officials a real feel for the design and scope of a bridge construction project, Parsons, Inc. (a large engineering and construction firm) must invest thousands of dollars in detailed scale models of several different bridge designs. Personal selling is also expensive due to the costs associated with recruiting, selecting, training, and motivating salespeople. Despite the high costs, personal selling plays an increasingly important role in IMC and overall marketing strategy. Many firms are reducing the cost of personal selling via new processes and systems. Like all aspects of business, sales operations have been transformed by technology. Many large firms now apply a modular sales process to better utilize human resources. Using online demand generation communications, marketers develop leads (interest by potential customers) that are developed by business development representatives to sort out interested qualified leads from those that are not. Utilizing technology, like Salesforce.com’s relationship management system, these leads are passed to acquisition salespeople that develop the lead into a prospect (a prospective customer) in hopes of eventually making the sale. Once a customer has adopted the product, they may work with many different sales employees, from a customer success manager that helps them master product use to a retention salesperson that helps them add features and new products to their sales. Across all salespeople in the process, different technologies, data, and AI help to maintain and grow customer relationships via quality service and delivery of consistent product value to the customer. The goals of personal selling vary tremendously based on what role the salesperson plays with regard to the company’s integrated communications and sales process. To effectively deliver value and build relationships, salespeople have to be not only competent in selling skills but also thoroughly trained in technical product characteristics. For example, pharmaceutical salespeople (drug reps) who sell to physicians and hospitals must have detailed training in the technical medical applications of the drugs and medical devices that they sell. In fact, it is not unusual for salespeople who sell medical implants such as knee or hip replacements to have as much technical training about the product as the physicians who actually implant these devices during surgery. When the products and buyers are less sophisticated, salespeople will require much less training. However, good salespeople maintain an interest in learning about their product and skills in how to communicate and transfer their knowledge to customers. Few businesses can survive on the profits generated from purely transactional marketing (onetime purchases). For long-term survival, most firms depend on repeat sales and the development of ongoing relationships with customers. For this reason, personal selling has evolved to take on elements of customer service and marketing research. More than any other part of the firm, salespeople are closer to the customer and have many more opportunities for communication with them. Every contact with a customer gives the sales force a chance to deliver exceptional service and learn more about the customer’s needs. Salespeople also have the opportunity to learn about competing products and the customer’s reaction toward them. These relational aspects are important—whether the salesperson makes a sale or not. In today’s highly competitive markets, the frontline knowledge held by the sales force is one of the most important assets of the firm. In fact, the knowledge held by the sales force is often an important strength that can be leveraged in developing marketing strategy. Because the sales force has a direct bearing on sales revenue and customer satisfaction, the effective management of the sales force is vital to a firm’s marketing program. In addition to generating performance outcomes, the sales force often creates the firm’s reputation, and the conduct of individual salespeople determines the perceived ethicalness of the entire firm. The strategic implementation of effective sales management requires a number of activities: ●●
Developing Sales Force Objectives. The technical aspects of establishing sales force objectives involve desired sales dollars, sales volume, or market share. These sales objectives can be translated into guidelines for recruiting new salespeople as well as setting quotas for individual salespeople. Further, individual sales objectives might be based on order size, the number of sales calls, or the ratio of orders to calls. Ultimately, sales objectives help evaluate and control sales force activities, as well as compensate individual salespeople.
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178 Part 3: Developing Marketing Strategy
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Determining Sales Force Size. The size of the sales force is a function of many variables including the type of salespeople used, specific sales objectives, and the importance of personal selling within the overall IMC program. The size of the sales force is important because the firm must find a balance between sales expenses and revenue generation. Having a sales force that is too large or too small can lead to inflated expenses, lost sales, and lost profit. Recruiting and Training Salespeople. Recruiting the right types of salespeople should be closely tied to the personal selling and IMC strategies. Firms usually recruit potential salespeople from a number of sources including within the firm, competing firms, employment agencies, educational institutions, and direct response advertisements placed on the Internet, in magazines, or in newspapers. Salesperson recruitment should be a continuous activity because firms must ensure that new salespeople are consistently available to sustain the sales program. Enabling Salespeople via Operations. Modern salespeople cannot operate effectively without support from sales operations employees that manage the technology and information systems that salespeople use. Sales operations identifies and implements new tools designed to reduce the workload of salespeople for non-selling activities (database entry, data interpretation, forecasting of sales) to allow more time selling to customers. Most salespeople are comfortable with mobile and office technology and rely on support staff to manage the details and actions required to remain successful in a fast-paced marketplace. Controlling and Evaluating the Sales Force. Controlling and evaluating the sales force require a comparison of sales objectives with actual sales performance. To effectively evaluate a salesperson, predetermined performance standards must be in place. These standards also determine the compensation plan for the sales force. Exhibit 6.10 provides a comparison of various sales force compensation systems.
Across many industries, sales forces have shrunk due to advances in communications technology and mobile computing. The development of integrated supply chains and the procurement of standardized products over the Internet have reduced the need for salespeople in many industries. Although these developments reduce selling costs, they create a major management challenge for most firms: How can firms use new technology to reduce costs and increase productivity while maintaining personalized, one-to-one client relationships? EXHIBIT 6.10 Comparison of Sales Force Compensation Methods Method
Most Useful When:
Straight Salary
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Straight Commission
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Combination
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Salespeople are new Salespeople move into new territories Products require intense presale and post-sale service Aggressive selling is required Non-selling tasks can be minimized The firm outsources some selling functions Sales territories have similar sales potential The firm wants to provide incentive and still have some control
Advantages ●● ●●
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Easy to administer Gives salespeople more security Greater control over salespeople More predictable selling expenses Gives salespeople maximum incentive Ties selling expenses to sales volume Can use differential commissions for different products to boost sales Good balance of incentive and security for salespeople
Disadvantages ●●
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Little or no incentive for salespeople Salespeople require close supervision
Less security for salespeople Managers have less control over salespeople Small accounts may receive less service Selling expenses are less predictable May be difficult to administer
Source: Adapted from William M. Pride and O. C. Ferrell, Marketing (Mason, OH: South-Western: Cengage Learning, 2020), p. 539.
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One of the keys to using sales technology effectively is to seamlessly integrate it with customer relationship management systems, competitive intelligence activities, and internal customer databases. By automating many repetitive selling tasks, like filling repeat orders, sales technology can actually increase sales, productivity, and one-to-one client relationships at the same time. Although many firms develop and maintain their own sales automation systems, others who lack the resources to do so can turn to third-party providers like Salesforce.com—an on-demand, web-based provider of integrated CRM and sales automation solutions. Whether in-house or third party, the key to these solutions is integration. By pushing integrated customer, competitive, and product information toward the salesperson, technology can increase salesperson productivity and sales revenue by allowing the sales force to serve customers’ needs more effectively.
6.6a Sales Promotion Despite the attention paid to advertising, sales promotion activities account for the bulk of promotional spending in many firms. Sales promotion involves activities that create buyer incentives to purchase a product or that add value for the buyer or the trade. Sales promotion can be targeted toward consumers, channel intermediaries, or the sales force. Regardless of the activity and toward whom it is directed, sales promotion has one universal goal: to induce product trial and purchase. Most firms use sales promotion in support of advertising, public relations, or personal selling activities rather than as a stand-alone promotional element. Advertising is frequently coordinated with sales promotion activities to provide free product samples, premiums, or value-added incentives. For example, a manufacturer might offer free merchandise to channel intermediaries who purchase a stated quantity of product within a specified time frame. A 7-Up bottler, for example, might offer a free case of 7-Up for every 10 cases purchased by a retailer.
Consumer Sales Promotion Any member of the supply chain can initiate consumer sales
promotions, but manufacturers and retailers typically offer them. For manufacturers, sales promotion activities represent an effective way to introduce new products or promote established brands. Coupons and product sampling are frequently used during new product launches to stimulate interest and trial. Streaming services such as Netflix and Hulu offer 30-day trial (freemium) periods where potential users can test the service. After the trial is up, users can either cancel the subscription or begin to pay for the service. Retailers typically offer sales promotions to stimulate customer traffic or increase sales at specific locations. Coupons and free products are common examples, as are in-store product demonstrations. Many retailers are known for their sales promotions such as the free toys that come with kid’s meals at McDonald’s, Burger King, and other fast-food establishments. A potentially limitless variety of sales promotion methods can be used in consumer markets. Developing and using these methods is limited only by the creativity of the firm offering the promotion. However, firms will typically offer one or more of the following types of sales promotions to consumers:
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Coupons. Coupons reduce the price of a product and encourage customers to try new or established brands. Coupons can be used to increase sales volume quickly, to attract repeat purchasers, or even to introduce new product sizes or models. While coupon cutting (cutting coupons from newspapers or direct mail) was once quite common, the practice declined over the years. This mentality changed with the Great Recession as many consumers returned to using coupons, especially new mobile coupons. Rebates. Rebates are similar to coupons except that they require more effort on the consumer’s part to obtain the price reduction. Although consumers prefer coupons because of the ease of use, most firms prefer rebates for several reasons. First, firms have more control over rebates because they can be launched and ended very quickly. Second, a rebate program allows the firm to collect important consumer information that can be used to build customer databases. The best reason is that most consumers never bother to redeem rebate offers. This allows a firm to entice customers to purchase a product with only a minimal loss of profit.
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Samples. Free samples are one of the most widely used consumer sales promotion methods. Samples stimulate trial of a product, increase volume in the early stages of the product’s life cycle, and encourage consumers to actively search for a product. Samples can be distributed through the mail, attached to other products, and given out through personal selling efforts or in-store displays. Samples can also be distributed via less direct methods. For example, free samples of soap, shampoo, coffee, or sunscreen might be placed in hotel rooms to create consumer awareness of new products. Loyalty Programs. Loyalty programs, or frequent-buyer programs, reward loyal customers who engage in repeat purchases. These programs are popular in many industries due to their potential to dramatically increase profits over the long term. We are all familiar with the frequent-flier programs offered by major airlines. Other companies, such as hotels, auto rental agencies, and credit card companies, offer free goods or services for repeat purchases. For instance, Godiva Rewards Club members receive free shipping, a special birthday offer, and a free chocolate in-store every month.35 Point-of-Purchase Promotion. Point-of-purchase (POP) promotion includes displays, instore demonstrations, counter pieces, display racks, or self-service cartons that are designed to build traffic, advertise a product, or induce impulse purchases. Premiums. Premiums are items offered free or at a minimum cost as a bonus for purchasing a product. Examples of premiums include a free car wash with a gasoline fill-up, a free toothbrush with a purchase of a tube of toothpaste, and the toys offered inside a McDonald’s Happy Meal. Premiums are good at increasing consumption and persuading consumers to switch brands. Contests and Sweepstakes. Consumer contests, games, and sweepstakes encourage potential consumers to compete for prizes or try their luck by submitting their names in a drawing for prizes. In addition to being valuable information collection tools, contests and sweepstakes are good at attracting a large number of participants and generating widespread interest in a product. Because they require no skill to enter, sweepstakes are an effective way to increase sales or market share in the short term. Direct Mail. Direct mail, which includes catalog marketing and other printed material mailed to individual consumers, is a unique category because it incorporates elements of advertising, sales promotion, and distribution into a coordinated effort to induce customers to buy. The use of direct mail has grown tremendously in recent years due to consumer time constraints, relatively low cost, and the advent of sophisticated database management tools.
Firms can use any one or all of these consumer promotion methods in their overall IMC program. However, the choice of one or more methods must be made in consideration of the firm’s IMC objectives. Furthermore, the choice must also consider the use of sales promotions by competitors and whether a particular method involves ethical or legal dimensions. Consumer sweepstakes, in particular, have specific legal requirements to ensure that each entrant has an equally likely chance of winning.
Business (Trade) Sales Promotion Sales promotion in business markets, or trade promotion, is generally the largest expense in a firm’s total sales promotion budget. By targeting channel intermediaries with promotional activities, manufacturers hope to push their products through the channel by increasing sales and encouraging increased effort among their channel partners. Manufacturers use many of the same promotional methods that target consumers; however, a number of sales promotion methods are unique to business markets: ●●
Trade Allowances. Manufacturers offer a number of different trade allowances, or price reductions, to their channel intermediaries. Buying allowances are price reductions for purchasing specified quantities of a product at a single time (the equivalent of a bulk discount). Related to this is a buy-back allowance where the reduction is proportional to the total amount of product purchased during the time frame of the promotional offer. Finally, a merchandise allowance is a manufacturer’s agreement to pay intermediaries a specific sum of money in exchange for specific promotional efforts such as special displays or advertising. In each case, the goal of the allowance is to induce intermediaries to perform specific actions.
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Free Merchandise. Manufacturers sometimes offer free merchandise to intermediaries instead of quantity discounts. Typically, they provide the free merchandise to reduce invoice costs as a way of compensating the intermediary for other activities that assist the manufacturer. Cooperative Advertising, Cooperative advertising is an arrangement whereby a manufacturer agrees to pay a certain amount of an intermediary’s media cost for advertising the manufacturer’s products. This is a very popular sales promotion method among retailers. Training Assistance and Sales Incentives. In some cases, a manufacturer can offer free training to an intermediary’s employees or sales staff. This typically occurs when the products involved are rather complex. Selling incentives come in two general forms: push money and sales contests. The intermediary’s sales staff receives push money in the form of additional compensation to encourage a more aggressive selling effort for a particular product. This method is expensive and should be used carefully to avoid any ethical or legal issues. Sales contests encourage outstanding performance within an intermediary’s sales force. Sales personnel can be recognized for outstanding achievements by receiving money, vacations, computers, or even cars for meeting or exceeding certain sales targets.
Trade sales promotion encompasses a wide variety of activities and is vital when a manufacturer needs the cooperation and support of the channel to fulfill its own sales and marketing objectives. This is particularly true when a manufacturer must obtain support for a new product launch or a new consumer sales promotion. Given the importance of integrated supply chains, it should not be surprising that effective trade promotion is also vital to fulfilling a firm’s distribution strategy.
LESSONS FROM CHAPTER 6
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The marketing program: ●●
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refers to the strategic combination of the four basic marketing mix elements, commonly known as the four Ps: product, price, place (distribution), and promotion. has as its outcome a complete offering that consists of an array of physical (tangible), service (intangible), and symbolic (perceptual) attributes designed to satisfy customers’ needs and wants. strives to overcome commoditization by enhancing the service and symbolic elements of the offering.
Product strategy: ●●
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lies at the heart of every organization in that it defines what the organization does and why it exists. is about delivering benefits that enhance a customer’s situation or solve a customer’s problems.
The product portfolio: ●●
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is used in both consumer (convenience, shopping, specialty, and unsought products) and business (raw materials, component parts, process materials, MRO supplies, accessory equipment, installations, and business services) markets. is used in most firms due to the advantages of selling a variety of products rather than a single product. consists of a group of closely related product items (product lines) and the total group of products offered by the firm (product mix).
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involves strategic decisions such as the number of product lines to offer (variety), as well as the depth of each product line (assortment). can create a number of important benefits for firms, including economies of scale, package uniformity, standardization, sales and distribution efficiency, and equivalent quality beliefs.
The challenges of service products: ●●
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stem mainly from the fact that services are intangible. Other challenging characteristics of services include simultaneous production and consumption, perishability, heterogeneity, and client-based relationships. include the following issues: service firms experience problems in balancing supply (capacity) with demand. service demand is time-and-place dependent because customers or their possessions must be present for delivery. customers have a difficult time evaluating the quality of a service before it is purchased and consumed. service quality is often inconsistent and very difficult to standardize across many customers. the need for some services is not always apparent to customers. Consequently, service marketers often have trouble tying their offerings directly to customers’ needs. many services cannot easily be delivered when barriers exist to purchasing the service. ●●
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182 Part 3: Developing Marketing Strategy
New product development: ●●
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is a vital part of a firm’s efforts to sustain growth and profits. considers six strategic options related to the newness of products: New-to-the-world products (disruptive innovations)—which involve a pioneering effort by a firm that leads to the creation of an entirely new market. New product lines—which represent new offerings by the firm, but they become introduced into established markets. Product line extensions—which supplement an existing product line with new styles, models, features, or flavors. Improvements or revisions of existing products— which offer customers improved performance or greater perceived value. Repositioning—which involves targeting existing products at new markets or segments. Cost reductions—which involves modifying products to offer performance similar to competing products at a lower price. depends on the ability of the firm to create a differential advantage for the new product. typically proceeds through five stages: idea generation, screening and evaluation, development, test marketing, and commercialization.
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The price/revenue relationship: ●●
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Pricing: ●● ●● ●● ●●
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is a key factor in producing revenue for a firm. is the easiest of all marketing variables to change. is an important consideration in competitive intelligence. is considered to be the only real means of differentiation in mature markets plagued by commoditization. is among the most complex decisions to be made in developing a marketing plan.
The key issues in pricing strategy include: ●● ●● ●● ●● ●●
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Pricing strategy in services: ●●
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is typically associated with pricing through the use of breakeven analysis or cost-plus pricing. should not be the driving force behind pricing strategy because different firms have different cost structures. should be used to establish a floor below which prices cannot be set for an extended period of time.
Perceived value: ●●
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is a difficult term to define because it means different things to different people.
is critical because price may be the only cue to quality that is available in advance of the purchase experience. becomes more important—and more difficult—when: service quality is hard to detect prior to purchase. the costs associated with providing the service are difficult to determine. customers are unfamiliar with the service process. brand names are not well established. the customer can perform the service themselves. the service has poorly defined units of consumption. advertising within a service category is limited. the total price of the service experience is difficult to state beforehand. can follow a subscription-based pricing model. Subscription services suffer from customer churn when subscriptions are not renewed because the customer stops using it and no longer sees value in the service. is often based on yield management systems that allow a firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization. ●●
the firm’s cost structure. perceived value. the price/revenue relationship. pricing objectives. price elasticity.
The firm’s cost structure: ●●
refers to customers’ responsiveness or sensitivity to changes in price. can increase under these conditions: when substitute products are widely available. when the total expenditure is high. when changes in price are noticeable to customers. when price comparison among competing products is easy. can decrease under these conditions: when substitute products are not available. when customers perceive products as being necessities. when the prices of complementary products go down. when customers believe that the product is just worth the price. when customers are in certain situations associated with time pressures or purchase risk. when products are highly differentiated from the competition. ●●
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is usually based on two general pricing myths: (1) when business is good, a price cut will capture greater market share, and (2) when business is bad, a price cut will stimulate sales. means that firms should not always cut prices but should instead find ways to build value into the product and justify the current, or a higher, price.
Price elasticity:
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is defined as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings.
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Chapter 6: The Marketing Program 183
Major base pricing strategies include: ●● ●● ●● ●● ●● ●● ●●
price skimming. price penetration. freemium pricing. prestige pricing. value-based pricing (EDLP). competitive matching. non-price strategies.
Strategies for adjusting prices in consumer markets include: ●● ●● ●● ●● ●● ●●
discounting. reference pricing. price lining. odd pricing. price bundling. tiered pricing.
Strategies for adjusting prices in business markets include: ●● ●● ●● ●● ●● ●●
trade discounts. discounts and allowances. per unit/user. geographic pricing. transfer pricing. barter and countertrade.
Supply chain strategy: ●●
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centers around supply chain management, the coordination of activities related to the flow and transformation of supplies, products, and information throughout the supply chain to the ultimate consumer. has become more salient to consumers. is one of the most important strategic decisions for many marketers. has remained essentially invisible to customers because the processes occur behind the scenes. is important to providing time, place, and possession utility for consumer and business buyers. consists of four interrelated components: operations management, procurement management, logistics management, channel management. is only effective when all channel members are integrated and committed to connectivity, community, and collaboration.
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Marketing channel structures include: ●●
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are organized systems of marketing institutions through which products, resources, information, funds, and/or product ownership flow from the point of production to the final user. greatly increase contact efficiency by reducing the number of contacts necessary to exchange products. described in this chapter include many references to store and nonstore retailing because both are highly relevant.
exclusive distribution, where a firm gives one merchant or outlet the sole right to sell a product within a defined geographic region. selective distribution, where a firm gives several merchants or outlets the right to sell a product in a defined geographic region. intensive distribution, which makes a product available in the maximum number of merchants or outlets in each area to gain as much exposure and as many sales opportunities as possible.
Power in the supply chain: ●●
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can lead to conflict as each firm attempts to fulfill its mission, goals, objectives, and strategies by putting its own interests ahead of other firms. can result from five different sources: legitimate power, reward power, coercive power, information power, and referent power.
Trends in marketing channels include: ●●
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technological improvements, such as the growth of electronic commerce and the increasing use of radio frequency identification (RFID), sensors, blockchain technology, and artificial intelligence (AI). outsourcing and offshoring of work activities, particularly information technology operations and supporting functions. new disruption channels.
Integrated marketing communication: ●●
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Marketing channels: ●●
have been disrupted by omnichannel, the concept of bringing together communication, products and services, supply chain management, payment options and terms, customer service, and more into a seamless experience for consumers.
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includes conveying and sharing meaning between buyers and sellers, either as individuals, firms, or between individuals and firms. includes the traditional elements of the promotion mix: advertising, public relations, personal selling, and sales promotion. refers to the strategic, coordinated use of promotion to create one consistent message across multiple channels to ensure maximum persuasive impact on the firm’s current and potential customers. takes a 360-degree view of the customer that considers every contact that a customer or potential customer may have in his or her relationship with the firm. typically sets goals and objectives for the promotional campaign using the AIDA model—attention, interest, desire, and action. can change depending on whether the firm uses a pull or push strategy with respect to its supply chain.
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184 Part 3: Developing Marketing Strategy
Advertising: ●●
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is identified as paid, nonpersonal communication transmitted through the media such as television, radio, magazines, newspapers, direct mail, outdoor displays, the Internet, and mobile devices. is rapidly expanding online as consumers spend less time with traditional media. online is evolving, with influencer marketing. offers many benefits because it is extremely cost efficient when it reaches a large number of people. On the other hand, the initial outlay for advertising can be expensive. is sometimes difficult to measure in terms of its effectiveness in increasing sales.
Public relations: ●●
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Personal selling: ●●
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Sales promotion: ●●
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is the element of an IMC program that tracks public attitudes, identifies issues that may elicit public concern, and develops programs to create and maintain positive relationships between a firm and its stakeholders. can be used to promote the firm, its people, its ideas, and its image and even to create an internal shared understanding among employees. can improve the public’s general awareness of a company and can create specific images such as quality, innovativeness, value, or concern for social issues. is often confused with publicity; however, publicity is more narrowly defined to include the firm’s activities designed to gain media attention through articles, editorials, or news stories. can involve the use of a wide variety of methods, including news or press releases, feature articles or content, white papers, press conferences and webinars, event sponsorship, product placement, and employee relations. is paid, personal communication that attempts to inform customers about products and persuade them to purchase those products. is the most precise form of communication because it assures companies that they are in direct contact with an excellent prospect. has a serious drawback of high cost per contact. costs can be reduced via new processes and systems. goals are typically associated with finding prospects, informing prospects, persuading prospects to buy, and keeping customers satisfied through follow-up service after the sale. has evolved to take on elements of customer service and marketing research in order to generate repeat sales and develop ongoing relationships with customers. and sales management activities include the development of sales force objectives, determining the size of the sales force, recruiting and training salespeople, enabling salespeople via operations, and controlling and evaluating the sales force.
has been greatly impacted by technological advances, especially online sales training and sales automation systems that push integrated customer, competitive, and product information toward the salesperson. involves activities that create buyer incentives to purchase a product or that add value for the buyer or the trade. can be targeted toward consumers, channel intermediaries, or the sales force. has one universal goal: to induce product trial and purchase. is typically used in support of advertising, public relations, or personal selling activities rather than as a standalone promotional element. directed toward consumers: can be initiated by any member of the supply chain, but manufacturers or retailers typically offer them. represents an effective way to introduce new products or promote established brands. can include such activities as coupons, rebates, samples, loyalty programs, point-of-purchase promotion, premiums, contests and sweepstakes, and direct mail. directed toward the trade (business markets): is undertaken to push products through the channel by increasing sales and encouraging increased effort among channel partners. uses many of the same promotional methods that are targeted toward consumers; however, it involves a number of unique methods including trade allowances, free merchandise, training assistance, cooperative advertising, and selling incentives offered to an intermediary’s sales force. ●●
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ENDNOTES 1. Filtrete, “Filtrete Change Reminder,” https://www.filtrete.com/3M/en _US/filtrete/program/change-reminder-programs/ (accessed April 13, 2020). 2. Karen Langley, “Tesla Is Now the Most Valuable U.S. Car Maker of All Time,” The Wall Street Journal, January 7, 2020, https://www .wsj.com/articles/tesla-is-now-the-most-valuable-u-s-car-maker-of-all -time-11578427858 (accessed April 3, 2020); Maximilian Holland, “Tesla Passes 1 Million EV Milestone & Model 3 Becomes All Time Best Seller,” Clean Technica, March 10, 2020, https://cleantechnica.com/2020/03/10/tesla -passes-1-million-ev-milestone-and-model-3-becomes-all-time-best-seller/ (accessed April 3, 2020); “Cybertruck: Tesla Truck Gets 150,000 Orders Despite Launch Gaffe,” BBC, November 24, 2019, https://www.bbc.com/news /business-50536200 (accessed April 3, 2020); ThoughtCatalyst, “The Genius of Tesla’s $0 Social Marketing Strategy,” YouTube, December 12, 2019, https://www.youtube.com/watch?v=tF9r9LrOb70 (accessed April 3, 2020); Aarian Marshall, “Tesla Turns a Profit—and Builds a Chinese Factory Very Fast,” Wired, October 23, 2019, https://www.wired.com/story/tesla-turns -profit-builds-chinese-factory-fast/ (accessed November 7, 2019); Andrew Greiner, Ivory Sherman, Tiffany Baker, Allie Schmitz, and Jen Tse, “The History of Tesla and Elon Musk: A Radical Vision for the Future of Autos,” CNN, March 22, 2019, https://www.cnn.com/interactive/2019/03/business/tesla -history-timeline/index.html (accessed November 7, 2019); Sean O’Kane, “Tesla’s Fourth Gigafactory Will Be in Berlin, Elon Musk Says,” The Verge, November 12, 2019, https://www.theverge.com/2019/11/12/20961812
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Chapter 6: The Marketing Program 185 /elon-musk-berlin-tesla-ceo-fourth-gigafactory-construction (accessed November 13, 2019); Tesla, “Master Plan, Part Deux,” July 20, 2016, https://www.tesla.com/blog/master-plan-part-deux (accessed November 7, 2019); Tesla, “Tesla Gigafactory 2,” https://www.tesla.com/gigafactory2 (accessed November 7, 2019); Matthew Beedham, “Tesla Becomes Iceland’s Most Popular Car Brand With Its First Batch of Deliveries,” The Next Web, April 2, 2020, https://thenextweb.com/shift/2020/04/02/tesla-becomes -most-popular-car-brand-iceland-one-batch-deliveries/ (accessed April 3, 2020). 3. Hilton, “Hilton Brands,” https://www.hilton.com/en/corporate/ (accessed April 3, 2020). 4. Erica Smith, “R.I.P. Glossier Play,” The Cut, February 21, 2020, https://www.thecut.com/2020/02/glossier-play-glitter-gelee-discontinued .html (accessed April 3, 2020). 5. The Hampton Inn Guarantee, http://hamptoninn3.hilton.com/en /about/why-hampton/index.html (accessed March 29, 2015). 6. Danielle Abril, “How Early GPS Gadget Maker Garmin Mapped Out Success Against the Likes of Apple and Google,” Fortune, March 16, 2020, https://fortune.com/2020/03/16/garmin-survived-gps-revolution/ (accessed April 3, 2020). 7. Avery Hartmans and Paige Leskin, “The History of How Uber Went From the Most Feared Startup in the World to Its Massive IPO,” Business Insider, May 18, 2019, https://www.businessinsider.com/ubers-history (accessed April 3, 2020). 8. Lillianna Byington, “Coca-Cola Acquires Full Ownership of Dairy Brand Fairlife,” Food Dive, January 7, 2020, https://www.fooddive.com /news/coca-cola-acquires-full-ownership-of-dairy-brand-fairlife/569873/ (accessed April 3, 2020). 9. Charlotte Turner, “La Mer’s Reformulated Eye Concentrate Promises to Bring ‘Calm and Clarity’,” TR Business, April 3, 2020, https://www .trbusiness.com/regional-news/international/la-mers-reformulated-eye -concentrate-promises-calm-and-clarity/185846 (accessed April 3, 2020). 10. Yola Robert, “Holden’s Rebrand Garnered A 70% Boost In Their Women’s Outerwear Business,” Forbes, March 19, 2020, https://www.forbes .com/sites/yolarobert1/2020/03/19/holdens-rebrand-garnered-a-70-boost-in -their-womens-outerwear-business/#6486083d25a4 (accessed April 3, 2020). 11. Cullen Goretzke, The Resurgence of Caveat Emptor: Puffery Undermines the Pro-Consumer Trend in Wisconsin’s Misrepresentation Doctrine, 2003 Wis. L. Rev. 171, 222; Kit Yarrow, “Why Shoppers Just Can’t Resist Clearance Sales,” Time, http://business.time.com/2013/01/07/why -shoppers-just-cant-resistclearance-sales/ (accessed June 11, 2013); Volker Nocke and Martin Peitz, “A Theory of Clearance Sales,” Economic Journal, 117(522), July 2007, 964; Kenneth C. Manning, O.C. Ferrell, and Linda K. Ferrell, “Toward Understanding ‘Clearance’ Promotions,” Working paper; J. Jeffrey Inman, Leigh McAlister, and Wayne D. Hoyer, “Promotion Signal: Proxy for a Price Cut?” Journal of Consumer Research 17, June 1990, 74-81. 12. Valarie A. Zeithaml, “Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence,” Journal of Marketing, 52(July 1988), 2–22. 13. This discussion is based on material from Charley Kyd, “Tempted to Cut Prices? It’s Probably Time to Raise Them,” Today’s Business, Fall 2000, 3. 14. Fare Information,” https://www.southwest.com/html/air/fare-in formation.html (accessed July 27, 2020). 15. Canon, “Cameras,” https://www.usa.canon.com/internet/portal/us /home/products/list/cameras (accessed April 3, 2020). 16. William M. Pride and O. C. Ferrell, Marketing (Boston, MA: Cengage Learning, 2022). 17. Deborah Catalano Ruriani, “Inventory Velocity: All the Right Moves,” Inbound Logistics, November 2005, 36. 18. See Edward W. Davis and Robert E. Speckman, The Extended Enterprise (Upper Saddle River, NJ: Prentice-Hall Financial Times, 2004). 19. See Edward W. Davis and Robert E. Speckman, The Extended Enterprise (Upper Saddle River, NJ: Prentice-Hall Financial Times, 2004), p. 15. 20. “Del Monte Foods Company,” Wikinvest, http://www.wikinvest .com/stock/Del_Monte_ Foods_Company_(DLM) (accessed March 29, 2015).
21. Robert D. Tamilia, O. C. Ferrell, and Karen Hopkins, “Technology Accelerates: 1950 to Present,” Marketing Channels and Supply Chain Networks in North America SpringerBriefs in Business, 2020, 35–52. https://doi .org/10.1007/978-3-030-44870-7_4. 22. Robert Dawson, Secrets of Power Negotiation, 2nd ed. (Franklin Lakes, NJ: Career Press, 1999). 23. U.S. Census Bureau, E-Stats, May 22, 2014, http://www.census.gov /econ/estats/2012_ e-stats_report.pdf. 24. Bob Violino, “What Is RFID?” RFID Journal, http://www.rfidjournal.com/articles/view? 1339 (accessed March 29, 2015). 25. Daniel Palmer, “Starbucks to Track Coffee Using Microsoft’s Blockchain Service,” Coindesk, May 7, 2019, https://www.coindesk.com /starbucks-to-track-coffee-using-microsofts-blockchain-service (accessed April 13, 2020). 26. Blake Morgan, “5 Examples of How AI Can Be Used Across the Supply Chain,” Forbes, September 17, 2018, https://www.forbes.com/sites /blakemorgan/2018/09/17/5-examples-of-how-ai-can-be-used-across-the -supply-chain/#48b0166b342e (accessed April 8, 2019). 27. “Walmart Warehouse Robots Are Latest Tool in Battle With Amazon,” Supply Chain Brain, January 10, 2020, https://www.supplychainbrain .com/articles/30712-walmart-warehouse-robots-are-latest-tool-in-battle -with-amazon (accessed April 3, 2020); Alisha Staggs, “An Up-Close Assessment of Walmart’s Sustainability Index,” GreenBiz, May 17, 2013, http://www.greenbiz.com/blog/2013/05/17/up-close-assessment -walmarts-sustainability-index (accessed April 3, 2020); Elliot Maras, “An Insider’s View of Walmart’s Digital Transformation,” Retail Customer Experience, February 21, 2019, https://www.retailcustomerexperience.com /articles/an-insiders-view-of-walmarts-digital-transformation/ (accessed August 21, 2019); Gunjan Banerji, “Walmart Set to Outpace Amazon for 2019,” The Wall Street Journal, August 15, 2019, https://www.wsj.com /articles/walmart-set-to-surge-past-amazon-11565888272 (accessed August 22, 2019); Ron Miller, “Walmart Is Betting on the Blockchain to Improve Food Safety,” TechCrunch, September 24, 2018, https://techcrunch .com/2018/09/24/walmart-is-betting-on-the-blockchain-to-improve-food -safety/ (accessed August 21, 2019); Walmart, “Location Facts,” https://corporate .walmart.com/our-story/our-locations (accessed August 21, 2019); Matt Leonard, “Walmart Tightens On-Time, In-Full Rate for Suppliers to 87%,” Supply Chain Dive, March 8, 2019, https://www.supplychaindive.com/news /walmart-on-time-in-full-87-suppliers/550083/ (accessed April 3, 2020). 28. The material in this section is based on Davis and Speckman, The Extended Enterprise, pp. 109–129. 29. “Report: 90% of Domestic Fortune 500 Companies Use 3PLs,” Refrigerated & Frozen Foods, April 8, 2019, https://www.refrigeratedfrozenfood .com/articles/96958-report-90-of-domestic-fortune-500-companies-use-3pls (accessed April 3, 2020). 30. David Griner, “The 25 Best Ads of 2018,” Adweek, December 13, 2018, www.adweek.com/creativity/the-25-best-ads-of-2018/ (accessed April 7, 2019); “Taco Bell’s Nacho Fries Are Officially Back on the Menu for $1.29,” QSR, January 24, 2019, www.qsrmagazine.com/news/taco-bells-nacho -fries-are-officially-back-menu-129 (accessed April 7, 2019). 31. Audrey Schomer, “Influencer Marketing: State of the Social Media Influencer Market in 2020,” Business Insider, December 17, 2019, https://www .businessinsider.com/influencer-marketing-report (accessed April 13, 2020). 32. Alana Rudder, “Local & National TV Advertising Costs & How to Advertise 2019,” Fit Small Business, May 20, 2019, https://fitsmallbusiness .com/tv-advertising/ (accessed April 3, 2020). 33. Federal Trade Commission, “FTC Obtains Record $191 Million Settlement from University of Phoenix to Resolve FTC Charges It Used Deceptive Advertising to Attract Prospective Students,” December 10, 2019, https://www.ftc.gov/news-events/press-releases/2019/12/ftc-obtains -record-191-million-settlement-university-phoenix (accessed April 3, 2020). 34. New Belgium Brewery website (http://www.newbelgium.com). 35. Godiva, “Join the GODIVA Rewards Club,” https://www.godiva .com/get-chocolate-rewards?baseURL=get-rewards (accessed April 3, 2020).
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CHAPTER 7 Branding and Positioning 7.1 INTRODUCTION As the elements of the marketing program come together to create the complete offering, marketers must also consider how the marketing program will be used to create effective branding and positioning. These decisions are critical because they create differentiation among competing offerings in the marketplace. This differentiation is the antidote to commoditization; however, it is becoming increasingly difficult for firms to brand and position their offerings in meaningful ways. For the firms that are successful, having a solid branding and positioning strategy is truly priceless. While the concept of a brand may seem relatively simple to understand, branding strategy can actually be quite complex. From a technical point of view, a brand is a combination of name, symbol, term, or design that identifies a specific product. Brands have two parts: the brand name and the brand mark. The brand name is the part of a brand that can be spoken, including words, letters, and numbers (Honda, 7-Eleven, Champion, Tesla, Citi). The brand mark—which includes symbols, figures, or a design—is the part of a brand that cannot be spoken. Good brand marks, such as McDonald’s golden arches, Nike’s swoosh, and Amazon’s smile, effectively communicate the brand and its image without using spoken words. Brand marks are also useful in advertising and product placement, such as when college football broadcasts clearly depict the Nike logo on the clothing and uniforms of both coaches and players. While these technical aspects of branding are important, branding strategy involves much more than developing a clever brand name or unique brand mark. To be truly effective, a brand should succinctly capture the total offering in a way that answers a question in the customer’s mind.1 Good brands are those that immediately come to mind when a customer has a problem to be solved or a need to be fulfilled. Consider these questions that might be asked by a customer: • Where can I find information quickly? • Where can I get a quick meal and make my kids happy? 187 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
188 Part 3: Developing Marketing Strategy
• Where can I buy everything I need, all at decent prices? • Where can I get the best deal on car insurance? • How do I find a value-priced hotel in midtown Manhattan? How do you answer these questions? How many customers do you think would give the following answers: Google, McDonald’s, Walmart, GEICO, and Kayak? To successfully develop a brand, the firm should position the offering (which includes all tangible, intangible, and symbolic elements arising from the marketing program) as the answer to questions like these. Customers tend to buy offerings whose combination of attributes is the best solution to their problems. As shown in Exhibit 7.1, brands may have many different attributes that make up the way customers think about them. For example, the iPhone possesses many different attributes that make up customers’ overall knowledge about the brand: alliances (AT&T, Verizon, Sprint, T-Mobile, Gorilla Glass), company (Apple), extensions (Beats Audio, Incase, accessories), employees (Tim Cook), endorsers (Serena Williams, Taylor Swift, and Oprah Winfrey), events (Apple keynote speeches), and channels (the Apple Store). Other brands are enhanced via strong country-of-origin (BMW, Guinness, IKEA), branded ingredients (Dell computers use Microsoft and Intel components), causes (Ben and Jerry’s), influencers (Glossier), and endorser (Nike) effects.
BEYOND THE PAGES 7.1
Is It Really Made in USA?2 Labeling, in and of itself, is an important consideration in marketing strategy. Consumers in many countries attach high brand value to American-made brands, which is why many U.S. companies use “Made in USA” labels. The concept of “Made in America” was revived and highlighted during the COVID-19 crisis, which demonstrated the importance of a logical mix of local and global product manufacturing. However, one concern for many manufacturers who want to use these labels is the global nature of manufacturing. The Federal Trade Commission (FTC) requires that “all or virtually all” of a product’s components be made in the United States if the label says, “Made in USA.” This labeling issue remains complicated as so many products involve global supply chains. For example, Williams-Sonoma Inc.— the parent company of Williams Sonoma, Pottery Barn, and West Elm, among others—came under fire from the FTC for its “Made in USA” claims in ads and promotional materials for Pottery Barn Teen organic mattress pads that were produced in China. Though initially the company said this was an isolated human error, the FTC later received additional reports of misleading country-of-origin claims from the retailer and launched an investigation, which resulted in a $1 million fine. Labeling issues are not always black and white, however. For instance, the U.S. Department of Agriculture (USDA) Food
Safety and Inspection Service (FSIS) admitted that imported meat products that have been processed in the United States have been labeled as “Product of USA,” which is likely misleading to consumers. However, in an effort to protect the supply chains between the United States, Canada, and Mexico, FSIS is considering a rule to allow foreign cattle processed in the United States to bear a “Product of USA” label. It is unclear if this will meet consumer expectations for what “Product of USA” stands for, however, so the United States Cattlemen’s Association has called on Congress to settle the debate. Additionally, the FTC has been criticized for failing to inflict substantial punishments on companies with false labels. For instance, Patriot Puck, a hockey puck company, Nectar Sleep, a mattress firm, and two California-based tactical gear companies all made misleading American-made claims, yet all four companies faced a financial penalty of $0. Critics of the FTC believe that if there are no repercussions for businesses, they have little incentive to follow the rules. As businesses balance local and global production and marketing strategies, there are likely to be more cases of “Made in USA” being used incorrectly. The FTC and other regulatory entities will have to continue to adapt and clarify labeling requirements to protect consumers and manufacturers and maintain a fair marketplace.
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Chapter 7: Branding and Positioning 189
EXHIBIT 7.1 Potential Brand Attributes
Alliances
Branded Ingredients
Company
Extensions
Other Brands
Employees
People
Influencers
BRAND
Endorsers
Country of Origin
Places
Channels
Things
Events Causes
Third-Party Endorsements
Mobile Apps
Source: From Kotler, Philip, and Kevin Keller, A Framework for Marketing Management, 4th ed., © N/A. Electronically reproduced by permission of Pearson Education Inc., Upper Saddle River, New Jersey.
7.2 STRATEGIC ISSUES IN BRANDING When a firm considers its branding strategy, the marketing program, especially the product, becomes a central focus. Before we examine some of the key strategic issues in branding strategy, however, we need to discuss the closely related topic of corporate branding. Most firms consider their corporate brands to be equally as important as individual product-related brands. In fact, product-related brands and corporate brands are clearly intertwined. Ben & Jerry’s Ice Cream, for example, is an ardent participant in many social causes such as climate and social injustice. In fact, in addition to a product mission and economic mission, the company has a social mission statement. In this case, the company’s corporate brand clearly plays a role in branding and positioning its ice cream products. In some companies, the corporate brand dominates. For example, IBM advertises that it provides problem-solving solutions, though many of its advertisements do not name specific products. Instead, the purpose of the advertisements—which feature the tagline “put smart to work”—is to give potential customers the impression that IBM is a company that understands business and that has the ability to solve a variety of problems. Branding typically starts with individual products, but the principles also apply to both physical and online stores as well as services. For example, Target is a well-known brand, and though “Target” is not a specific product, it represents the service of organizing a great product mix for its customers. Similarly, the Uber brand is not a retail store but a mobile platform that provides the service of connecting riders with transportation. Walmart’s brand focuses on both its stores and a robust online platform. In these cases, the brand represents a larger set of varied
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190 Part 3: Developing Marketing Strategy
This symbol, recognizable around the world, embodies a number of important branding attributes.
products or a connection point to the services of a larger set of vendors. Thus, brands can focus on the larger picture of where we find answers to our needs (e.g., shopping at T.J. Maxx for clothing) or the actual tools that address those needs (e.g., purchasing Adidas shoes that are comfortable for cross training). Both types of branding strategy are important and the focus of this chapter. Corporate branding activities are typically aimed at a variety of stakeholders, including customers, shareholders, advocacy groups, government regulators, and the public at large. These activities are designed to build and enhance the firm’s reputation among these groups, and to rebuild the firm’s reputation when unexpected and unfavorable events occur. Corporate branding and reputation are critical to effective product-related branding and positioning as they create trust between the firm and its stakeholders. Exhibit 7.2 lists the most visible U.S. firms ranked by strongest and weakest public reputations. Note that firms with lower reputation scores, such as Wells Fargo and Facebook, have experienced a number of scandals and legal problems in recent years. The range of scores in Exhibit 7.2 is quite telling of the effects that positive and negative reputations can have on a firm. Wegmans’ (a northeast U.S. grocery chain) reputation score is closely tied to its treatment of employees, community giving, sustainability practices, and focus on organic products. Contrast this to Wells Fargo. Not only was Wells Fargo implicated in a fake account scandal in which its employees opened accounts for customers without their knowledge, but Wells Fargo’s unattainable sales goals fostered an unethical culture. These examples demonstrate the important connections between corporate branding and reputation and the activities that companies use to successfully brand and position their product offerings.
7.2a Basic Branding Decisions To brand or not to brand: There really is no question. Virtually every product is associated with some type of branding. Unbranded, generic products generally don’t exist today, except in some grocery items and perhaps commodities such as sugar, wheat, and corn. The advantages of branding are so compelling that the real question is not “why?” but “how?” Some of the many advantages of branding include:
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Chapter 7: Branding and Positioning 191
EXHIBIT 7.2 The Strongest and Weakest U.S. Corporate Reputations Rank
Company
Reputation Quotient®
The Strongest Reputations 1
Wegmans Food Markets
83.0
2
Amazon
82.3
3
Patagonia
81.4
4
L.L. Bean
80.7
5
Walt Disney
80.4
6
Publix
80.3
7
Samsung
80.0
8
Procter & Gamble
79.8
9
Microsoft
79.7
10
Sony
79.4
The Weakest Reputations 91
Comcast
61.4
92
Bank of America
60.9
93
Goldman Sachs
60.0
94
Facebook
58.1
95
Dish
56.9
96
Wells Fargo
52.7
97
Sears
52.3
98
Trump Org.
50.1
99
Phillip Morris
49.4
100
U.S. Government
48.6
Note: This list only includes the 100 Most Visible Companies as determined by Axios and The Harris Poll. Source: Harris, “The 100 Most Visible Companies,” 2019, https://theharrispoll.com/HarrisPoll_Axios_MostVisible_2019.pdf (accessed April 17, 2020).
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Product Awareness. Brands help consumers to quickly select a product solution that addresses a need. Product Identification. Brands make identifying and locating products easier for customers. Comparison Shopping. Brands assist customers in evaluating competing products. Shopping Efficiency. Brands speed up the buying process and make repeat purchases easier by reducing search time and effort. Risk Reduction. Brands allow customers to buy known products, thereby reducing the risk of purchase. Product Acceptance. New products released under a known brand name are accepted and adopted more quickly. Enhanced Self-Image. Brands can convey status, image, and prestige. Enhanced Product Loyalty. Branding increases psychosocial identification with a product.
In addition to these general benefits of branding, specific branding decisions can also create other benefits. For example, one key branding decision involves the distinction between manufacturer brands and private-label brands (brands owned by the merchants that sell them). Private-label brands are sometimes called store brands (but never generic brands) and include Walmart’s Great Value or Walgreens Nice! brands. Strategically, the choice to sell manufacturer
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192 Part 3: Developing Marketing Strategy
EXHIBIT 7.3 Manufacturer (Name) Brands vs. Private-Label Brands Unique Advantages of Selling Manufacturer (Name) Brands Reduced Costs
Heavy promotion by the manufacturer reduces the marketing costs of the merchant that carries the brand.
Built-In Loyalty
Manufacturer brands come with their own cadre of loyal customers.
Enhanced Image
The image and prestige of the merchant are enhanced.
Lower Inventory
Manufacturers are capable of time-certain delivery, which allows the merchant to carry less inventory and reduce inventory costs.
Less Risk
Poor quality or product failures become attributed to the manufacturer rather than the merchant.
Unique Advantages of Selling Private-Label (Store) Brands Increased Profit
The merchant maintains a higher margin on its own brands and faces less pressure to cut prices to match the competition.
Less Competition
Where manufacturer brands are carried by many different merchants, private-label brands are exclusive to the merchant that sells them.
Total Control
The merchant has total control over the development, pricing, distribution, and promotion of the brand.
Merchant Loyalty
Customers who are loyal to a private-label brand are automatically loyal to the merchant.
brands or private-label brands is not an either-or decision. As Exhibit 7.3 illustrates, both types of brands have important advantages. For that reason, many distributors, wholesalers, and retailers carry both types of brands. For example, sporting good retailers carry manufacturer brands— such as Nike, Under Armor, and Reebok—because customers expect to find them. Hence, manufacturer brands are important in driving customer traffic. They also give customers confidence that they are buying a widely known brand from a respected company. Department stores also carry a number of private label brands because of the increased profit margins associated with them. Macy’s, for example, has followed in the footsteps of Kohl’s and Target to expand its private label brands with the goal of these brands making up a quarter of its revenue.3 A second important branding decision involves individual vs. family branding. A firm uses individual branding when it gives each of its product offerings a different brand name. A number of well-known firms use individual branding, including Sara Lee (Ball Park Franks, Hillshire Farm, Jimmy Dean, Mr. Turkey), Frito-Lay (Doritos, Cheetos, Tostitos, Miss Vickie’s), and Estée Lauder (Aveda, Bobbi Brown, Bumble and Bumble, MAC). The key advantage of individual branding is that the potential poor performance of one product does not tarnish the brand image of other products in the firm’s portfolio. It is also useful in market segmentation when the firm wants to enter many segments of the same market. Procter & Gamble uses this strategy in the laundry detergent market (Ace, Ariel, Gain, Tide). Conversely, family branding occurs when a firm uses the same name or part of the brand name on every product. For example, every cereal in the Kellogg’s portfolio uses the Kellogg’s
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Chapter 7: Branding and Positioning 193
name (Kellogg’s Frosted Flakes, Kellogg’s Rice Krispies). Campbell’s uses the same strategy in its soup portfolio (Campbell’s Tomato Soup, Campbell’s Chunky, Campbell’s Healthy Request) and with many of its other brands such as Pepperidge Farm, Pace, Swanson, and V8. The key advantage of family branding is that the promotion (and brand image) of one product reflects on other products under the same family brand. However, in addition to the obvious risk of releasing a poor product under a family brand, family branding also runs the risk of overextension. Too many brand extensions, especially into unrelated areas, can confuse customers and promote brand switching. For example, Bic, the company known for pens, lighters, and razors, tried to launch disposable underwear, pantyhose, and perfume, but consumers couldn’t make the leap.
7.2b Strategic Brand Alliances As we have stated in previous chapters, relationships with other firms are among the most important competitive advantages that can be held by an organization. Many of these relationships are based on a variety of brand alliances. For example, cobranding is the use of two or more brands on one product. Cobranding leverages the image and reputation of multiple brands to create distinctive products with distinctive differentiation. Cobranding is quite common in processed foods and credit cards. For example, General Mills partners with Hershey’s on its Betty Crocker chocolate cake mixes that feature Hershey’s cocoa. This brand alliance gives Betty Crocker a distinct advantage over competitors like Duncan Hines. Similarly, Taco Bell collaborates with Frito Lay on the Doritos Locos Taco by offering a Dorito taco shell. Even online merchants can combine brand power. For example, Uber and Spotify partnered to offer “ride and listen” opportunities. Cobranding is quite successful because the complementary nature of the brands used on a single product increases perceived quality and customer familiarity. Brand licensing is another type of branding alliance. Brand licensing involves a contractual agreement where a company permits an organization to use its brand on noncompeting products in exchange for a licensing fee. Although this royalty can be quite expensive, the instant brand recognition that comes with the licensed brand is often worth the expense. Licensing is quite common in toys where manufacturers will license the characters and images from popular movies such as Disney+’s The Mandalorian to create a variety of products. Tervis, Lovepop, PopSockets, and Build-A-Bear are just a few brands that produced Baby Yoda merchandise.
7.2c Brand Value What is a brand worth? The answer depends on whether you ask customers or the firm. For customers, brands offer a number of advantages as mentioned above. However, customers also have attitudinal and emotional attachments to brands that create value. One of the most common types of customer brand value is brand loyalty. Brand loyalty is a positive attitude toward a brand that causes customers to have a consistent preference for that brand over all other competing brands in a product category. There are three degrees of brand loyalty: ●●
●●
●●
Brand recognition—exists when a customer knows about the brand and is considering it as one of several alternatives in the evoked set. This is the lowest form of brand loyalty and exists mainly due to the awareness of the brand rather than a strong desire to buy the brand. Brand preference—a stronger degree of brand loyalty where a customer prefers one brand to competitive brands and will usually purchase this brand if it is available. For example, a customer may hold a brand preference for Diet Coke. However, if this brand is not available, the customer will usually accept a substitute such as Diet Pepsi or Coke Zero rather than expending extra effort to find and purchase Diet Coke. Brand insistence—the strongest degree of brand loyalty, occurs when customers will go out of their way to find the brand and will accept no substitute. Customers who are brand insistent will expend a great deal of time and effort to locate and purchase their favorite brand.
Marketers clearly want to develop brand insistence for their products. However, brand loyalty is declining overall because of increasing commoditization and the overuse of sales promotion activities. For example, users of Uber often also use Lyft (and vice versa), indicating good brand
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194 Part 3: Developing Marketing Strategy
recognition but limited loyalty. A recent study revealed the top brands having the highest customer loyalty: Amazon, Google, Samsung, Apple, and Netflix.4 Brand loyalty also remains quite high in many product categories, including cigarettes, mayonnaise, toothpaste, coffee, bath soap, medicines, body lotion, makeup, soft drinks, ketchup, and diapers. Note that most of these examples include products that customers put in their mouths or on their bodies—a common trait of products that enjoy strong brand loyalty. The value of a brand to the firm is often referred to as brand equity. Another way of looking at brand equity is the marketing and financial value associated with a brand’s position in the marketplace. Brand equity usually has ties to brand name awareness, brand loyalty, brand quality, and other attributes shown in Exhibit 7.1. Brand awareness and brand loyalty increase customer familiarity with a brand. Customers familiar or comfortable with a specific brand are more likely to consider the brand when making a purchase. When this familiarity is combined with a high degree of brand quality, the inherent risk in purchasing the brand decreases dramatically. Brand associations include the brand’s image, attributes, or benefits that either directly or indirectly give the brand a certain personality. For example, customers associate Allstate insurance with “Mayhem,” Coca-Cola with happiness, and Jimmy Johns with “freaky fast” delivery. Associations like these are every bit as important as quality and loyalty, and they also take many years to develop. Unfortunately, it is also possible for brand associations (and brand equity) to be negative. For instance, Tide PODS became irreversibly associated with the so-called Tide POD Challenge, where people joked about eating the colorful laundry detergent. Though relatively few people actually ate the PODS intentionally, the media coverage was relentless, causing Procter & Gamble to issue a statement and Tide to release public service announcements.5 For many, Princess Cruise Lines’ brand equity was damaged as several of its cruise ships were the focus of high-profile COVID-19 outbreaks, garnering media coverage and associating the virus with cruise travel.6 Thus, brands are not static and at times can become more of a problem than a solution as a marketing strategy. Although brand equity is hard to measure, it represents a key asset for any firm and an important part of marketing strategy. Exhibit 7.4 lists the world’s most valuable brands. Interestingly, the
EXHIBIT 7.4 The World’s Most Valuable Brands Brand Rank
Brand
Brand Value ($Bil)
Industry
1
Apple
205.5
Technology
2
Google
167.7
Technology
3
Microsoft
125.3
Technology
4
Amazon
97.0
Technology
5
Facebook
88.9
Technology
6
Coca-Cola
59.2
Beverages
7
Samsung
53.1
Technology
8
Disney
52.2
Leisure
9
Toyota
44.6
Automotive
10
McDonald’s
43.8
Restaurants
11
AT&T
41.3
Telecom
12
Louis Vuitton
39.3
Luxury
13
Intel
38.8
Technology
14
Nike
36.8
Apparel
15
Cisco
34.5
Technology
Source: “The World’s Most Valuable Brands,” Forbes, 2019, https://www.forbes.com/powerful-brands/list/ (accessed April 17, 2020).
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Chapter 7: Branding and Positioning 195
majority of them are in the technology industry. Typically, brands like these take years to develop and nurture into the valuable assets that they have come to represent. This reality usually makes it easier and less expensive for firms to buy established brands than to develop new brands from scratch. For example, Microsoft’s purchase of Skype and Facebook’s purchase of Instagram added powerful brands to each company’s portfolio. The equity associated with these brands would have taken Microsoft and Facebook decades to develop on their own. However, as the startup culture permeates many industries, some brands have grown at a faster rate than in the past. For example, Amazon (1994), Google (1998), and Facebook (2004) grew from startup to well known in a much shorter time than companies such as Coca-Cola and AT&T that have grown their brands across decades and centuries. This trend seems to be continuing as Uber (2009), Zoom (2011), and DoorDash (2013) all moved from nonexistent to well-known brand in a short period of time. Only the future will tell us if this trend continues with brands quickly developing and sustaining or declining as technology and consumer preferences evolve. Given the value of brands like these, it is no surprise that firms go to great lengths to protect their brand assets. Registering a brand with the U.S. Patent and Trademark Office is only the first step in protecting the value of a brand. While the U.S. legal system provides many laws to protect brands, most of the responsibility for enforcing this protection falls on the company to find and police abuses. Firms must diligently monitor competitive behavior for signs of potential brand infringement that could confuse or deceive customers. Disney has a reputation for strongly defending its trademarks, even going after small businesses and Etsy sellers.7 Due to the differing and often lax legal systems in other nations, brand abuse is quite common in foreign markets. It is not surprising that patent, copyright, and intellectual property law has become a growth industry both in the United States and around the world. Without these protections in place, firms run the real risk of having their brand become synonymous with an entire product category. Uber, Skype, Band-Aid adhesive bandages, Coca-Cola, FedEx, and Kleenex constantly fight this battle. To protect their brands, firms obtain trademarks to legally designate that the brand owner has exclusive use of the brand and to prohibit others from using the brand in any way. Former brand names that their parent companies did not protect sufficiently include aspirin, escalator, nylon, linoleum, kerosene, and shredded wheat.
7.2d Packaging and Labeling At first glance, the issues of packaging and labeling might not seem like important considerations in branding strategy. Although packaging and labeling strategy does involve different goals than branding, the two often go hand-in-hand in developing a product, its benefits, its differentiation, and its image. Consider, for instance, the number of products that use distinctive packaging as part of their branding strategy. Obvious examples include the brand names and brand marks that appear on all product packaging. The color used on a product’s package or label is also a vital part of branding, such as Gain’s consistent use of bright green on its line of laundry detergents. The size and shape of the label is sometimes a key to brand identification. For example, Heinz uses a unique crown-shaped label on its ketchup bottles. The physical characteristics of the package itself sometimes become part of the brand. Pringles’ potato chip canister, Kikkoman’s angular soy sauce bottles, and the bottles used by Crown Royal whiskey are good examples. Finally, products that use recyclable packaging are gaining favor. For instance, Gerber, the world’s biggest baby food company, introduced a single-material baby food pouch made from recyclable polypropylene. Replacing the previous multilayer packaging with a single-material design is much friendlier for the recycling industry.8 Packaging serves a number of important functions in marketing strategy. Customers take some functions—such as protection, storage, and convenience—for granted until the package fails to keep the product fresh, or they discover that the package will not conveniently fit in the refrigerator, medicine cabinet, or backpack. Packaging can also play a role in product modifications and repositioning. An improved cap or closure, an “easy open” package, a more durable box or container, or the introduction of a more conveniently sized package can create instant market
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196 Part 3: Developing Marketing Strategy
BEYOND THE PAGES 7.2
Barbie Gets a Makeover10 Mattel, Inc. launched Barbie in 1959. Barbie, designed by Mattel cofounder Ruth Handler, became a global icon. The company began marketing versions of Barbie as a nurse, an astronaut, a firefighter, and a pilot. More recently, the company has launched Barbie dolls based on female role models in many fields, from president of the United States to a game developer. Mattel has successfully reinvigorated Barbie’s sales after a period of sharp decline. Mattel’s strategy of taking advantage of trends in the real world has been a success. For instance, Barbie has embraced diversity with increasing representation of race, body type, hair types, and abilities to address potential concerns about negative self-image. The Barbie Fashionistas line includes 176 dolls, 9 body types, 35 skin tones, and 94 hairstyles. The range also includes a doll with a wheelchair, a doll with a prosthetic leg, a doll with no hair, and a doll with vitiligo (a common skin-pigment condition). The Fashionista line has been a success with Mattel facing repeated stockouts of its vitiligo doll.
Beyond Barbie and Ken, Mattel has pursued growth with the introduction of Creatable World, its first line of gender-neutral dolls with mix-and-match outfits and features, in response to shifting gender norms. Instead of being aspirational like Barbie, Mattel says Creatable World dolls are intended to be relatable. Though Mattel acknowledges the generational divide on the subject of gendered toys, Mattel is clearly investing in parents of the future. Overall, Mattel is adapting its product offerings to reflect new digital, social, and environmental impact preferences of consumers that have, in some ways, moved consumers away from purchasing physical toys. Today, Mattel also licenses brands for dolls and action figures based on Jurassic World, DC Comics, WWE, and Disney, among others. Consumers can watch for more brands and more product lines as Mattel continues building on its marketing success for future growth. Though sales have improved, there is still a long road ahead for Mattel to top its record sales of $1.2 billion in 2012. Thus, Mattel is an example of how brands must adapt and change to their environment, if they desire to retain strong brand loyalty and equity across time.
recognition and a competitive advantage. Sometimes, a change in package design can create major problems for a brand. Product labels not only aid in product identification and promotion; they also contain a great deal of information to help customers make proper product selections. Labeling is also an important legal issue as several federal laws and regulations specify the information that must be included on a product’s packaging. The Nutritional Labeling and Education Act of 1990 was one of the most sweeping changes in federal labeling law in history. The law mandated that packaged food manufacturers must include detailed nutritional information on their packaging. The law also set standards for health claims such as “gluten-free,” “low carb,” “low fat,” “light,” “low calorie,” and “reduced cholesterol.” The Food Allergy Labeling and Consumer Protection Act, passed in 2004, required labeling of any food containing peanuts, soybeans, milk, eggs, shellfish, tree nuts, and wheat. The U.S. Supreme Court has ruled that manufacturers bear full responsibility for the content of the labeling and warnings on their packaging. This ruling also applies to manufacturers of products that are inspected and certified by the government, such as foods and pharmaceuticals.9
7.3 DIFFERENTIATION AND POSITIONING Though we have focused solely on branding issues to this point in the chapter, it is vital to remember that branding is intricately tied to differentiation and positioning within the marketing program. People sometimes confuse differentiation and positioning with market segmentation and target marketing. Differentiation involves creating differences in the firm’s product offering that set it apart from competing offerings. Differentiation typically has its basis in distinct product features, additional services, or other characteristics. Positioning refers to creating a mental
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Chapter 7: Branding and Positioning 197
image of the product offering and its differentiating features in the minds of the target market. This mental image can be based on real or perceived differences among competing offerings. Whereas differentiation is about the product and the marketing program, positioning is about customers’ perceptions of the real or perceived benefits that the offering possesses. Although differentiation and positioning can be based on actual product features or characteristics, the principal task for the firm is to develop and maintain a relative position for the product in the minds of the target market. The process of creating a favorable relative position involves several steps:
1. Identify the needs, wants, and preferences desired by the target market. 2. Evaluate the differentiation and positioning of current and potential competitors. 3. Compare the firm’s current relative position vis-à-vis the competition across the needs, wants, and preferences desired by the target market. 4. Incorporate a vision of disruptive technologies and competition to continually update the position in an evolving market. 5. Identify unique differentiation and positioning not offered by the competition that matches the firm’s capabilities. 6. Develop a marketing program to create the firm’s position in the minds of the target market. 7. Continually reassess the target market, the firm’s position, and the position of competing offerings to ensure that the marketing program stays on track and to identify emerging positioning opportunities. The concept of relative position can be addressed using a number of tools. One of the most commonly used tools is perceptual mapping. A perceptual map represents customer perceptions and preferences spatially by means of a visual display. A hypothetical perceptual map for automotive brands is shown in Exhibit 7.5. The axes represent underlying dimensions that customers might use to form perceptions and preferences of brands. Any number of dimensions can be represented using computer algorithms such as multidimensional scaling or cluster analysis. However, simple two-dimensional maps are the most common form because a limited number of dimensions are typically the most salient for consumers. EXHIBIT 7.5 A Hypothetical Perceptual Map of the Automotive Market Expensive/Distinctive Tesla Mercedes
Lincoln
Porsche
BMW
Cadillac
Chrysler Conservative
VW
Nissan Sporty
Buick Chevy Dodge
Ford
Toyota Honda
Affordable/Practical
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198 Part 3: Developing Marketing Strategy
EXHIBIT 7.6 Hypothetical Strategy Canvas for the Ride-Sharing Market High
Medium
Pe r Sa ceiv fet ed y
s on oti om Pr
O er the yS r er vic Re es wa rd sP ro gr am liv
De
US Se Citi rve es d Gl ob Se al C rve itie d s
Rid
Lo
w
eO
Pr
pti
ici
on
ng
s
Low
Lyft
Uber
A second commonly used tool is the strategy canvas, which we discussed in Chapter 4 and Exhibit 4.11. In addition to its usefulness in the planning process, the strategy canvas is an excellent tool for demonstrating the firm’s relative position in terms of the competitive factors that are important to the target market. A hypothetical strategy canvas for the ridesharing market is shown in Exhibit 7.6. The perceptual map and strategy canvas illustrate two basic issues in positioning strategy. First, they indicate products/brands that are similar in terms of relative mental position. In the example perceptual map, customers are likely to see the offerings of Toyota and Honda as being very similar. Positioning a brand to coincide with competing brands becomes more difficult when many brands occupy the same relative space. Second, these tools illustrate voids in the current mindscape for a product category. In the perceptual map, note the empty space in the bottom-left corner. This indicates that consumers do not perceive any current products to be both conservative and inexpensive. This lack of competition within the mindspace might occur because (1) customers have unmet needs or preferences or (2) customers have no desire for a product offering with this combination of dimensions. In the case of the strategy canvas, Uber is reflected as the leader in most categories, as it was established first and has aggressively worked to maintain nearly 70 percent of the ride-sharing market. However, Lyft is seen as having a slight lead in consumer perceptions in the areas of pricing, promotions, and safety.
7.3a Bases for Differentiation Generally, the most important tool of differentiation is the brand. Customer perceptions of a brand are of utmost importance in differentiation because differences among competing brands can be based on real qualities (e.g., product characteristics, features, or style) or psychological qualities (e.g., perception and image). In addition to the brand, other important bases for differentiation include product descriptors and customer support services.
Product Descriptors Firms generally provide information about their products in one of three
contexts, as shown in Exhibit 7.7. The first context is product features, which are factual descriptors of the product and its characteristics. For example, Apple’s Macbook Air includes key features such as an Intel Core i3 processor and 256GB SSD storage. However, features—although they tell
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Chapter 7: Branding and Positioning 199
EXHIBIT 7.7 Using Product Descriptors as a Basis for Differentiation Product
Features
Advantages
Benefits
Apple Macbook Air
Retina display with True Tone 1.1GHz dual-core 10th-generation Intel Core i3 processor Turbo Boost up to 3.2GHz Intel Iris Plus Graphics 8GB 3733MHz LPDDR4X memory 256GB SSD storage Magic Keyboard Touch ID Force Touch trackpad Two Thunderbolt 3 ports
Very lightweight and compact Fast graphics Superior display Out-of-the-box photo, video, and audio editing Long-lasting battery Hassle-free connectivity
Ultimate mobility Rugged entertainment on the road No need to purchase separate photo- or video-editing software Stay connected wherever you are
Tesla Model 3
Dual motor all-wheel drive From 0–60 mph in 3.2 seconds 322-mile range Top speed of 162 mph 15-inch touchscreen display
Long battery life Safe design Autopilot assistance
Enhanced self-image Heart-racing performance Easy to drive Safety
Bounty Select-a-Size Paper Towels
Sheets can be torn in varying sizes More sheets per roll Increased wet strength
Great for any size cleaning job Less waste Superior absorbency Won’t run out as often
More control over cleaning Reduces cost of buying paper towels Can be sized for use as placemats
something about the nature of the product—are not generally the pieces of information that lead customers to buy. Features must be translated into the second context, advantages. Advantages are performance characteristics that communicate how the features make the product behave, hopefully in a fashion that is distinctive and appealing to customers. The advantages of the MacBook Air include a lightweight, compact design, fast graphics, and long battery life. However, as we have said before, the real reason customers buy products is to gain benefits—the positive outcomes or need satisfaction they acquire from purchased products. Thus, the benefits of the MacBook Air include ultimate mobility and rugged entertainment on the road. Other benefits, like increased productivity and connectivity, might also be implied in Apple’s promotional program. One aspect of a product’s description that customers value highly is quality. Product characteristics that customers associate with quality include reliability, durability, ease of maintenance, ease of use, and a trusted brand name. In business markets, other characteristics, such as technical suitability, ease of repair, and company reputation, become included in this list of quality indicators. In general, higher product quality—real or imagined—means that a company can charge a higher price for their product and simultaneously build customer loyalty. In the case of Apple and the MacBook Air, this is certainly true. The relationship between quality and price (inherent in the concept of value) forces the firm to consider product quality carefully when making decisions regarding differentiation, positioning, and the overall marketing program.
Customer Support Services A firm may have difficulty differentiating its products when all
products in a market have essentially the same quality, features, or benefits. In such cases, providing good customer support services—both before and after the sale—may be the only way to differentiate the firm’s products and move them away from a price-driven commodity status. For example, over the past 10 years, bookstores have disappeared at an alarming rate as competition from Amazon and digital alternatives have taken its toll. The stores that have remained in business thrive because of the exceptional, personalized service they provide to their customers. Many local bookstores create customer loyalty by being actively involved in the community, including contributing to local schools, churches, and charities. Many customers value this level of
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200 Part 3: Developing Marketing Strategy
personalization so highly that they will pay slightly higher prices and remain loyal to their bookstore. In fact, to stay in business, Barnes & Noble’s strategy is to operate more like a local, independent bookstore.11 Support services include anything the firm can provide in addition to the main product that adds value to that product for the customer. Examples include assistance in identifying and defining customer needs, delivery and installation, technical support for high-tech systems and software, financing arrangements, training, extended warranties and guarantees, repair, layaway plans, convenient hours of operation, affinity programs (e.g., frequent flyer/buyer programs), and adequate parking. If you buy a Samsung refrigerator, for example, you can expect Lowe’s to provide financing, delivery and installation, and warranty repair service, if necessary. Through research, the firm can discover the types of support services that customers value most. In some cases, customers may want lower prices rather than an array of support services. Low-cost airlines—such as JetBlue and Allegiant Air—and budget hotels—such as Sleep Inn and La Quinta— are good examples. The importance of having the proper mix of support services has increased in recent years, causing many firms to design their customer services as carefully as they design their products. Regardless of the basis for differentiation, reality is often not as important as perception. Firms that enjoy a solid image or reputation can differentiate their offerings based solely on the company or brand name alone. Examples of firms with strong reputations include Patagonia, Disney, and Apple. But what if the firm doesn’t have this ability? What if there are no credible bases for differentiation? In other words, what if your market is commoditized? In this case, creating a perception may be the firm’s only choice. Consider the car rental industry. In the industry’s early years Hertz not only stood in first place but also maintained a vast lead over second-place Avis. The management of Avis, intent on capturing a larger portion of Hertz’s customers, asked its advertising agency to develop an effective positioning strategy relative to Hertz. After searching for any advantage that Avis held over Hertz, the agency concluded that the only difference was that Avis was number two. Avis management decided to claim this fact as an advantage, using the theme “We’re number two. We try harder!” Avis rentals soared, putting the company in a much stronger number-two position.
7.3b Positioning Strategies A firm can design its marketing program to position and enhance the image of its offering in the minds of target customers. To create a positive image for a product, a firm can choose to strengthen its current position or find a new position. The key to strengthening a product’s current position is to monitor constantly what target customers want and the extent to which customers perceive the product as satisfying those wants. Any complacency in today’s dynamic marketplace is likely to result in lost customers and sales. For example, a firm known for excellent customer service must continue to invest time, money, talent, and attention to its product position to protect its market share and sales from competitive activity. This is especially true for firms such as Zappos, Ritz-Carlton, and Nordstrom that pursue competitive advantage based on customer intimacy. Strengthening a current position is all about continually raising the bar of customer expectations. At times, a brand can become too similar to a competing brand. Lush Cosmetics, a U.K.-based cosmetics retailer known for their handmade bath products, has faced competition due to the increasing number of beauty brands. To differentiate itself, Lush advocates for ethical buying, fighting animal testing, and responsible packaging. In fact, many of its products, such as its bubble bars and massage bars, eliminate the need for packaging entirely. Leaning into these values helps set Lush apart from other “clean” beauty brands.12 Some of the most memorable marketing programs involve attempts to move to new positions. One example is Buick’s attempt to reposition the brand because of the aging of its traditional target. The erosion of Buick’s share of the car market has forced the company to focus on and attract younger audiences to the brand. The automaker’s marketing programs have been headlined by the “That’s Not a Buick” tagline.13 In some cases, repositioning requires a focus on new products.
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Apple has continued to show this is true. Apple’s launches of the iPod portable music player and iTunes media library and marketplace were landmark moments for Apple, which had previously struggled. These disruptive products firmly established Apple as an innovator at the head of the pack. Though iTunes and iPods are largely obsolete, they forever changed the music and tech industries.
7.4 MANANGING BRANDS OVER TIME Decisions related to branding and positioning are ongoing strategic issues. So is managing the marketing program over time. To address this issue, we use the traditional product life cycle— shown in Exhibit 7.8—to discuss marketing strategy in terms of the brand or product’s conception, through its growth and maturity, and to its ultimate death. Our use of the product life cycle is based on its ability to describe the strategic issues and key objectives that should be considered during each phase of a brand’s life. We note, however, that the product life cycle has many limitations. For one, most new brands and products never get past development and most successful brands and products never die. Second, the product life cycle really refers to the life of a product/ market, industry, sector, or product category—not to specific brands or firms. Further, the length of each stage and the time involved in the overall cycle depends heavily on the actions of the firms within the industry. Firms and industries constantly reinvent themselves and can adjust to disruptive strategies, which can cause the life cycle to speed up, slow down, or even recycle. Despite these issues, the product life cycle offers a useful framework for discussing marketing strategy over time. Exhibit 7.9 summarizes the strategic considerations for each stage of the life cycle. It is important for firms to consider the stage of their market’s life cycle with respect to planning in the current period, as well as planning for the future. Using the product life cycle as a framework has the distinct advantage of forcing firms to consider the future of their industry and their brand. Netflix, for instance, started as a DVD-by-mail rental service but was able to successfully pivot to streaming as the DVD industry entered its decline.14
EXHIBIT 7.8 Stages of the Product Life Cycle Development Stage
Introduction Stage
Growth Stage
Maturity Stage
Decline Stage
Industry Sales
Dollars
Industry Profits
+ 0 – Time
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202 Part 3: Developing Marketing Strategy
EXHIBIT 7.9 Strategic Considerations During the Product Life Cycle Life Cycle Stages Introduction
Growth
Maturity
Decline
Overall Marketing Goals
Stimulate product awareness and trial
Increase market share by acquiring new customers; discover new needs and market segments
Maximize profit by defending market share or stealing it from competitors
Reduce expenses and marketing efforts to maximize the last opportunity for profit
Product Strategy
Introduce limited models with limited features; frequent product changes
Introduce new models with new features; pursue continuous innovation
Full model line; increase supplemental product offerings to aid in product differentiation
Eliminate unprofitable models and brands
Pricing Strategy
Penetration pricing to establish a market presence or price skimming to recoup development costs
Prices fall due to competition; price to match or beat the competition
Prices continue to fall; price to beat the competition
Prices stabilize at a lower level
Distribution Gradually roll out Strategy product to expand availability; get channel intermediaries on board
Intensify efforts to expand product reach and availability
Extensive product availability; retain shelf space; phase out unprofitable outlets or channels
Maintain a level necessary to keep brand loyal customers; continue phasing out unprofitable channels
Promotion Strategy
Aggressive brand advertising, selling, and sales promotion to encourage brand switching and continued trial
Stress brand differences and benefits; encourage brand switching; keep the brand/product fresh
Reduce to a minimal level or phase out entirely
Advertising and personal selling to build awareness; heavy sales promotion to stimulate product trial
Source: Adapted from William M. Pride and O. C. Ferrell, Marketing (Mason, OH: Cengage Learning, 2020), p. 315–318.
The change in Netflix’s strategy over time also highlights the strong connections between the marketing program and branding. For many years, the Netflix brand stood for easy, convenient access to DVDs through a customizable, and relatively inexpensive, rental program. Distribution and price were the company’s key strengths. Over time, however, movie distributors became threatened by Netflix and became less willing to work with the company over issues such as pricing and distribution rights. This caused Netflix’s operating costs to increase. As the technology shifted away from DVDs and more toward digital distribution, Netflix took the opportunity to begin its move in the same direction. This necessitated changes in the marketing program in terms of program structure, pricing, and distribution. Looking forward, however, Netflix will have to be mindful of streaming competition from Apple TV, Disney+, Hulu, Amazon Prime, and others.
7.4a Development Stage As Exhibit 7.8 indicates, a firm has no sales revenue during the development stage. In fact, the firm experiences a net cash outflow due to the expenses involved in product innovation and development. For most innovations, the firm assumes a great deal of financial, market, and opportunity risk due to the uncertainty involved in developing new products and brands. For example, the pharmaceutical industry understands the challenges of new product development like no other industry. Firms such as Merck, Pfizer, and AstraZeneca spend millions each year developing new drugs. Upon identifying a new drug, it takes years of testing before earning FDA approval. Then, once the new drug is on the market, the firm has only a few years to recoup their investment
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before patent protection expires and the market opens to generic competition. In this highly competitive industry, pharmaceutical firms live or die based on the number and quality of drugs they have in their development pipelines. The development stage usually begins with a concept, which has several components: (1) an understanding of the specific uses and benefits that target customers seek in a new product; (2) a description of the product, including its potential uses and benefits; (3) the potential for creating a complete product line that can create synergy in sales, distribution, and promotion; and (4) an analysis of the feasibility of the product concept, including such issues as anticipated sales, required return on investment, time of market introduction, and length of time to recoup the investment. Given the odds stacked against most new products, it is not surprising that over 80 percent of all new products fail. This unfortunate fact of life underscores the need to correctly identify target customer needs before developing the product strategy. Through effective test marketing, the firm can gauge customer response to a new product before the full-scale launch. New products that closely match customers’ needs and have strong advantages over competing products are much easier to market as the new product enters the introduction stage of its life cycle.
7.4b Introduction Stage The introduction stage begins when development is complete and ends when sales indicate that target customers widely accept the product. The marketing strategy devised during the development stage is fully implemented during the introduction stage and should be tightly integrated with the firm’s competitive advantages and strategic focus. Marketing strategy goals common to the introduction stage include: ●●
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Attracting customers by raising awareness of, and interest in, the product offering through advertising, public relations, and publicity efforts that connect key product benefits to customers’ needs and wants. Inducing customers to try and buy the product through the use of various sales tools and pricing activities. Common examples include free samples of the product and the use of price incentives. Engaging in customer education activities that teach members of the target market how to use the new product. Strengthening or expanding channel and supply chain relationships to gain sufficient product distribution to make the product easily accessible by target customers. Building on the availability and visibility of the product through trade promotion activities that encourage channel intermediaries to stock and support the product. Setting pricing objectives that will balance the firm’s need to recoup investment with the competitive realities of the market.
Although all elements of the marketing program are important during the introduction stage, good promotion and distribution are essential to make customers aware that the new product is available, teach them how to use it correctly, and tell them where to purchase it. Although this is typically a very expensive undertaking, it doesn’t have to be. Tesla, for example, does not buy traditional advertising and instead relies on publicity and word of mouth. The length of the introduction stage can vary. In business markets, new products often have long introduction periods until buyers become convinced to adopt them. In consumer markets, many products experience an immediate upsurge in sales as consumers and retailers take advantage of special introductory offers. After the introduction, the firm must continually track market share, revenues, store placement, channel support, costs, and product usage rates to assess whether the new product pays back the firm’s investment. Even when the firm has patent protection or hard-to-copy technology, it must carefully track competitors’ reactions. Tracking this information is critical if the product is to make the grade, continue along the gradually rising sales curve, and enter the profitable growth stage. Unfortunately, most new product introductions start off very slowly and never enjoy rising demand or profits. Or, they start with a bang and decline rapidly. Failures during introduction are even more expensive than in the development stage, as marketing and distribution costs accrue to the total expenses involved in the product’s launch.
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7.4c Growth Stage The firm should be ready for the growth stage, as sustained sales increases may begin quickly. The product’s upward sales curve may be steep, and profits should rapidly increase, and then decline, toward the end of the growth stage. The length of the growth stage varies according to the nature of the product and competitive reactions. For example, disposable diapers had a long growth stage as they experienced over 30 percent yearly growth for a decade. A short growth stage is typical for new technologies, such as the latest iPhone or new video games. Regardless of the length of the growth stage, the firm has two main priorities: (1) establishing a strong, defensible market position and (2) achieving financial objectives that repay investment and earn enough profit to justify a long-term commitment to the product. Within these two priorities, there are a number of pertinent marketing strategy goals: ●●
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Leverage the product’s perceived differential advantages in terms of branding, quality, price, value, and so on, to secure a strong market position. Establish a clear brand identity through coordinated promotional campaigns aimed at both customers and the trade. Create unique positioning through the use of advertising that stresses the product’s benefits for target customers relative to other available solutions or products. Maintain control over product quality to assure customer satisfaction. Maximize availability of the product through distribution and promotion activities that capitalize on the product’s popularity. Maintain or enhance the product’s ability to deliver profits to key channel and supply chain partners, especially retailers that control shelf space and product placement. Find the ideal balance between price and demand as price elasticity becomes more important as the product moves toward the maturity stage. Always keep an eye focused on the competition.
During the growth stage, the overall strategy shifts from acquisition to retention, from stimulating product trial to generating repeat purchases and building brand loyalty. This is true not only for customers but also for wholesalers, retailers, and other supply chain members. The key is to develop long-term relationships with customers and partners to prepare for the maturity stage. As the market matures, the firm will need loyal customers and good friends in the supply chain in order to remain competitive. Maintaining key relationships is a challenging and expensive proposition. For this reason, the growth stage is the most expensive stage for marketing. Pricing also becomes more challenging during the growth stage. As more competitors enter the market, the firm must balance its need for cash flow with its need to be competitive. The relationship between price and perceived quality is a complicating factor, as is the increasing price sensitivity of customers. It is not surprising during the growth stage to see competitors stake out market positions based on premium or value-based pricing strategies. Other firms solve the pricing dilemma by offering different products at different price points. You can see this strategy in action in the wireless phone market, where each service provider offers tiered service offerings (i.e., minutes and features) at different pricing levels. FedEx implements the same strategy with its tiered service offerings (First Overnight, Priority Overnight, Standard Overnight, 2Day AM, etc.). Another major challenge during the growth stage is the increasing number of competitors entering the market. There is a tendency for many firms to pay less attention to competitors during the growth stage. After all, the market has grown rapidly and there is enough business for everyone to have a piece. Why not worry about competitors later? Because growth will eventually end and the market will become mature. To protect itself, the firm must build a defensible market position as it prepares for market maturity. This position may be based on image, price, quality, or perhaps some technological standard. Eventually, the market will go through a shakeout period and the dominant firms will emerge. In the United States, this process can be seen in the wireless phone, airline, and Internet technology markets.
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7.4d Maturity Stage After the shakeout occurs at the end of the growth stage, the strategic window of opportunity will all but close for the market and it will enter the maturity stage. No more firms will enter the market unless they have found some product innovation significant enough to attract large numbers of customers. The window of opportunity often remains open, however, for new product features and variations. A good example is the introduction of light, dry, ice, microbrew, low-alcohol, and lowcarb products in the beer industry. These variations can be quite important as firms attempt to gain market share. In the face of limited or no growth within the market, one of the few ways for a firm to gain market share is to steal it from a competitor. Such theft often comes only with significant promotional investments or cuts in gross margin because of the lowering of prices. The stakes in this chess match are often very high. For example, just a fractional change in market share in the soft drink industry means millions in additional revenue and profit for the lucky firm. In the typical product life cycle, we expect maturity to be the longest stage. For the firm that has survived the growth stage, maturity can be a relatively status quo period of time. As long as one maintains sales volume to keep market share constant, a longer-term perspective can be taken due to decreasing market uncertainty. Typically, a firm has four general goals that can be pursued during the maturity stage: ●●
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Generate Cash Flow. By the time a market reaches maturity, the firm’s products should be yielding a very positive cash flow. This is essential to recoup the initial investment and to generate the excess cash necessary for the firm to grow and develop new products. Hold Market Share. Marketing strategy should stress holding market share among the dominant brands in the market. Firms having marginal market share must decide whether they have a reasonable chance of improving their position. If not, they should consider pulling out of the market. Steal Market Share. Any firm in a mature market can pursue this goal; however, it is more likely to be used by firms holding weaker market positions. The key to this strategy is to create incentives that encourage brand switching, even if only temporarily. Even small gains in market share can lead to large increases in profits. Increase Share of Customer. Share of customer refers to the percentage of each customer’s needs in a particular area met by the firm. This strategy is quite common in financial services. Likewise, many large grocery chains increase share of customer by adding features ranging from ready-toeat meals to dry cleaning services in an effort to create one-stop shopping for family needs.
To achieve these goals, the firm has at least four general options for strategy selection throughout the maturity stage: (1) develop a new product image, (2) find and attract new users to the product, (3) discover new applications and uses for the product, or (4) apply new technology to the product. For example, SodaStream, which was popular in the 1970s and 1980s, made a comeback in the late 2010s as the brand positioned itself as a way to ditch the plastic bottles associated with soft drinks.15 Finally, as described in Beyond the Pages 7.3, Nintendo used a rebranding strategy to attract casual gamers to its handheld and home gaming systems. Stealing customers away from the competition involves creating incentives for noncustomers to try the firm’s product. This may entail heavy expenditures in sales promotion activities such as product sampling, couponing, or trade promotion to encourage prominent display of the product on the store’s shelves. In some cases, once the brand switch has been accomplished, customers can be locked in through the use of contractual agreements. This is common among wireless phone providers, health clubs, and satellite television providers. A more common approach is to simply match competitive prices, as is the case among many competing retail firms. For example, most pizza chains will accept competitor’s coupons and match their promotional incentives to gain business.
7.4e Decline Stage A product’s sales plateau will not last forever, and eventually a persistent decline in revenue begins. A firm has two basic options during the decline stage: (1) attempt to postpone the decline or (2) accept its inevitability. Should the firm attempt to postpone the decline, the product’s
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206 Part 3: Developing Marketing Strategy
demand must be renewed through repositioning, developing new uses or features for the product, or applying new technology. Coca-Cola revived Coke Zero by renaming it Coke Zero Sugar to help consumers better understand the product. It is now one of Coca-Cola’s strongest growth drivers.16 Postponing a product’s decline in this manner takes a great deal of time and a substantial investment of resources. Many firms, however, do not have the resources or opportunity to renew a product’s demand and must accept the inevitability of decline. In such instances, the firm can either harvest profits from the product while demand declines or divest the product, taking steps to abandon it or sell it to another firm. The harvesting approach calls for a gradual reduction in marketing expenditures and uses a less resource-intensive marketing mix. A harvesting strategy also allows the firm to funnel its increased cash flow into the development of new products. For example, GM phased out the Oldsmobile brand over several years by offering discounts and other special incentives, such as longer product warranties, to allay customer fears of limited product support. A company using the divesting option withdraws all marketing support from the product. It may continue to sell the product until it sustains losses, or arrange for the product to be acquired by another firm. For example, Procter & Gamble sold its Joy Hand Dish and Cream Suds brands to Prestige Value Brands for $30 million.17
BEYOND THE PAGES 7.3
Nintendo Bets Big on the Switch18 Nintendo’s game systems—including Nintendo 64, GameCube, Wii, Game Boy, DSi, and 3DS—are often viewed as being strictly for kids. However, after several years of sales declines, Nintendo embarked on a long-term rebranding strategy to change everyone’s opinions about video games and the gamers that enjoy them. The company discovered that casual gamers, and even nongamers, were a much larger market than hardcore gamers. Since hardcore gamers preferred the Microsoft Xbox and Sony PlayStation systems, Nintendo decided to specifically target casual gamer and nongamer audiences. The shift for Nintendo began as early as 2006 with the redesign of its original DS handheld game system. Dubbed the DS Lite, the handheld was a smaller, lighter, brighter-screened version of the original DS system. To support the launch, Nintendo rebranded many of its popular puzzle and skill-building games under the “Touch Generations” label to be targeted toward adults in their 40s and 50s in the so-called causal gamer market. Unlike younger gamers that enjoy playing for long periods of time, casual gamers prefer to play games in smaller chunks of time, similar to how people play mobile app games. That same year, Nintendo introduced the Wii home gaming console, which was designed to bring families together to play. Both the DS Lite and the Wii quickly became the best-selling gaming platforms in the world. Nintendo believes there is a large segment of dormant gamers in the market who enjoyed playing games as children or young adults. Nostalgia marketing in general has been a
successful strategy for many brands, including Nintendo. In 2016, the company released mini versions of its classic gaming systems, the Nintendo Entertainment System (NES) and the Super NES. The company sold more than 10 million units in the launch. Considering original NES players in the mid1980s are now middle-aged and many with children, it was a good opportunity for retro Nintendo to be introduced to a new generation of players. The following year, Nintendo further refined its strategy with the introduction of the Nintendo Switch, a hybrid console that can act as both a handheld game system and a home console. The hybrid nature of the Switch makes it appealing to a wide variety of audiences. For instance, the portable nature makes it ideal for children, while the dock feature is particularly attractive to adults. The console was also much more appealing to third-party game publishers, so the Switch has more than a thousand titles for purchase in addition to classic Nintendo games. The Switch was such a hit that the year after its release, Nintendo took the top spot in video game publisher software sales for the first time since 2009 with more than 30 million units sold. Nintendo strives to take advantage of key trends in the gaming market and offer games for all ages and market segments. Investing in the Switch has helped Nintendo reestablish itself as a strong competitor in the crowded video game market. The strength of its franchise and the company’s ability to find gaps in the gaming market have helped Nintendo boost sales and grow its player base.
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There are several factors that the firm should take into consideration before deciding on an appropriate marketing strategy during the decline stage: ●●
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Market Segment Potential. The firm might have loyal customer segments that will continue to buy the product. If these segments are viable and profitable, the firm should postpone the decline or slowly harvest the product. The Market Position of the Product. A product in a leading market position with a solid image may be profitable and generate excess cash by attracting customers from competitors’ abandoned products. The Firm’s Price and Cost Structure. If the firm is a low-cost producer in the industry and can maintain its selling price, the product can remain viable even in a declining market. The firm’s cost structure could also be enhanced by no longer having to invest in the product’s marketing program. The Rate of Market Deterioration. The faster the rate of market deterioration, the sooner the firm should divest the product.
Although the firm should carefully consider these factors, it should not be sentimental about dropping a failing product or brand. On the other hand, the firm should not quickly dismiss a renewal attempt, particularly if the firm does not have a better alternative use for its resources. Throughout the product life cycle, it is imperative that the firm stays focused on changes in the market, not on its products or brands. Products and brands have life cycles only because markets and customers change. By focusing on changing markets, the firm can attempt to create new and better quality products to match customers’ needs. Only in this way can a firm grow, prosper, remain competitive, and continue to be seen as a source of solutions by the target market.
LESSONS FROM CHAPTER 7
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Branding strategy: ●●
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is critical to the effective differentiation and positioning of the complete offering. involves selecting the right combination of name, symbol, term, or design that identifies a specific product or firm. has two parts: the brand name (words, letters, and numbers) and the brand mark (symbols, figures, or a design). involves more than developing a brand name or brand mark. To be truly successful, a brand should succinctly capture the product offering in a way that answers a question in the customer’s mind. involves the many different attributes that make up the way customers think about brands: people (employees and endorsers), places (country of origin and channels), things (events, causes, and third-party endorsements), and other brands (alliances, branded ingredients, the company, and extensions). typically starts with individual products, but the principles also apply to both physical and online stores as well as services. also involves corporate branding, which includes activities aimed at a variety of stakeholders to build and enhance the firm’s reputation.
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is important because of the many advantages of branding, including product awareness, product identification, comparison shopping, shopping efficiency, risk reduction, product acceptance, enhanced self-image, and enhanced product loyalty. involves decisions such as selling manufacturer vs. privatelabel brands. Although private-label brands are generally more profitable, manufacturer brands have built-in demand, recognition, and product loyalty. involves decisions related to individual vs. family branding. involves managing strategic brand alliances, such as cobranding or brand licensing, that involve developing close relationships with other firms. involves developing customers’ loyalty to brands. Brand loyalty is a positive attitude toward a brand that causes customers to have a consistent preference for that brand over all other competing brands in a product category. Three levels of loyalty include brand recognition, brand preference, and brand insistence. involves building the brand’s value to the firm with respect to its equity, or the marketing and financial value associated with a brand’s position in the marketplace. also involves taking steps to protect brand names and brand marks from trademark infringement by other firms.
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208 Part 3: Developing Marketing Strategy
Packaging and labeling: ●●
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are important considerations in branding strategy because packaging often goes hand-in-hand in developing a product, its benefits, its differentiation, and its image. include issues such as color, shape, size, and convenience of the package or the product’s container. are often used in product modifications or cobranding to reposition the product or give it new and improved features. are vital in helping customers make proper product selections. can have important environmental and legal consequences.
Differentiation and positioning: ●●
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involves creating differences in the firm’s product offering that set it apart from competing offerings (differentiation), as well as the development and maintenance of a relative position for a product offering in the minds of the target market (positioning). can be monitored through the use of several tools including perceptual mapping (a visual, spatial display of customer perceptions on two or more key dimensions) and the strategy canvas (a visual tool that depicts how the firm stacks up against the competition across several competitive factors that are important to the target market). is fundamentally based on the brand but can include other bases for differentiation including product descriptors (features, advantages, benefits) and customer support services. includes the positioning strategies to strengthen the current position and repositioning.
Managing brands over time: ●●
can be addressed via the traditional product life cycle, which traces the evolution of a product’s or brand’s development and birth, growth and maturity, and decline and death over five stages: development—a time of no sales revenue, negative cash flow, and high risk introduction—a time of rising customer awareness, extensive marketing expenditures, and rapidly increasing sales revenue growth—a time of rapidly increasing sales revenue, rising profits, market expansion, and increasing numbers of competitors maturity—a time of sales and profit plateaus, a shift from customer acquisition to customer retention, and strategies aimed at holding or stealing market share decline—a time of persistent sales and profit decreases, attempts to postpone the decline, or strategies aimed at harvesting or divesting the product can be influenced by shifts in the market, or by the actions of the firms within the industry as they constantly reinvent themselves. ●●
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ENDNOTES 1. These concepts are adapted from Jennifer Rice’s Brand Blog, Mantra Brand Consulting (http://brand.blogs.com). 2. Manatt Phelps and Phillips LLP, “Williams-Sonoma Reaches $`1M Settlement with FTC,” Lexology, April 8, 2020, https://www.lexology.com /library/detail.aspx?g=6dd00dba-7c0a-42de-b053-201e296fb49e (accessed April 17, 2020); Federal Trade Commission, “Complying with the Made in USA Standard,” https://www.ftc.gov/tips-advice/business-center/guidance/complying -made-usa-standard (accessed April 17, 2020); “USDA Admits It May Be Misleading Consumers with ‘Product of USA’ Labeling,” Food Safety News, March 27, 2020, https://www.foodsafetynews.com/2020/03/usda-admits-it-may-be -misleading-consumers-with-product-of-usa-labeling/ (accessed April 17, 2020); Annie Karni, “Companies Falsely Labeled Products ‘Made in U.S.A.’ Their Financial Penalty? $0,” The New York Times, March 5, 2019, https://www.nytimes .com/2019/03/05/us/politics/made-in-the-usa-ftc.html (accessed April 17, 2020). 3. James Brumley, “Macy’s to Expand Its Private Label Business,” The Motley Fool, February 5, 2020, https://www.fool.com/investing/2020/02/05 /macys-to-expand-its-private-label-business.aspx (accessed April 17, 2020). 4. “2019’s Top Brands Ranked by Customer Loyalty,” Marketing Charts, September 23, 2019, https://www.marketingcharts.com/brand-related /top-brands-110227 (accessed April 17, 2020). 5. Jamie Ducharme, “Here’s How Common the Tide Pod Challenge Really Is,” TIME, January 16, 2018, https://time.com/5104225/tide-pod -challenge/ (accessed April 17, 2020). 6. Chris Woodyard and Morgan Hines, “’Inherently High-Risk Setting’: Are Cruise Ships Unsafe—and Will They Change?” USA Today, April 21, 2020, https://www.usatoday.com/story/travel/cruises/2020/04/21 /coronavirus-cruises-cruise-ships-unsafe-can-they-change/5163461002/ (accessed April 29, 2020). 7. Kyle Jahner, “Disney’s Rap as Trademark Bully Revived in Baby Yoda Crackdown,” Bloomberg Law, February 11, 2020, https://news .bloomberglaw.com/ip-law/disney-baby-yoda-crackdown-on-etsy-skims -surface-of-deeper-rifts (accessed April 17, 2020). 8. Rick Lingle, “Gerber Delivers First Single-Material Baby-Food Pouch,” Packaging Digest, April 8, 2020, https://www.packagingdigest.com /sustainable-packaging/gerber-delivers-1-mat-food-pouch-2020-04-08 (accessed April 17, 2020). 9. Eric Greenberg, “Drug Makers Not Preempted from Lawsuits,” Packworld, April 17, 2009, https://www.packworld.com/machinery/ coding-printing-labeling/news/13345098/drug-makers-not-preempted -from-lawsuits (accessed April 30, 2020). 10. Maya Salam, “Mattel, Maker of Barbie, Debuts Gender-Neutral Dolls,” The New York Times, September 25, 2019, https://www.nytimes .com/2019/09/25/arts/mattel-gender-neutral-dolls.html (accessed April 17, 2020); Natalie Sherman, “Is Barbie’s Makeover Working?” BBC, December 21, 2019, https://www.bbc.com/news/business-50829046 (accessed April 17, 2020); Samantha McIntyre, “The Newest Barbie Fashionistas Doll Keeps Selling Out—But We Tracked It Down,” Parenting, February 5, 2020, https:// www.parenting.com/toys/kids/barbie-fashionistas-doll-vitiligo/ (accessed April 17, 2020); Barbie, “The History of Barbie,” https://barbie.mattel.com /en-us/about/our-history.html (accessed April 17, 2020). 11. Sarah Todd, “Barnes & Noble’s Fate Rests in the Hands of a British Indie Bookstore Owner,” Quartz, July 21, 2019, https://qz.com/1651414 /barnes-nobles-new-ceo-wants-the-chain-to-be-more-like-an-indie/ (accessed April 17, 2020). 12. Lush, “Our Values: Naked,” https://www.lushusa.com/stories/article _our-values-naked.html (accessed April 17, 2020). 13. Dale Buss, “Buick Refreshes Its Branding to Appear More Refined and Modern,” Brand Channel, March 13, 2018, https://www.brandchannel .com/2018/03/13/buick-new-logo-031318/ (accessed April 17, 2020). 14. Christopher McFadden, “The Fascinating History of Netflix,” Interesting Engineering, October 12, 2019, https://interestingengineering.com /the-fascinating-history-of-netflix (accessed April 17, 2020).
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 7: Branding and Positioning 209 15. Ciara O’Brien, “SodaStream Jet Megapack—Is There Life in the 1980s Classic?” The Irish Times, November 6, 2019, https://www.irishtimes .com/business/technology/sodastream-jet-megapack-is-there-life-in-the -1980s-classic-1.4071948 (accessed April 17, 2020). 16. Adrianne Pasquarelli and Jessica Wohl, “These Are the Comeback Brands of the Decade,” AdAge, December 25, 2019, https://adage.com /article/year-end-lists-2019/these-are-comeback-brands-decade/2221841 (accessed April 17, 2020). 17. Beverly Grant, “P&G Sells Iconic Brand to Cincinnati Startup in Multimillion-Dollar Deal,” Cincinnati Business Journal, September 4, 2019, https://www.bizjournals.com/cincinnati/news/2019/09/04/p-g-sells-iconic -brand-to-cincinnati-startup-in.html (accessed April 17, 2020).
18. Amanda Abrams, “Nintendo and the Magic of Nostalgia Marketing,” Financial Management, February 1, 2019, https://www.fm-magazine .com/issues/2019/feb/nintendo-nostalgia-marketing.html (accessed April 17, 2020); Kevin Webb, “The Super-Popular Nintendo Switch Just Celebrated Its Second Birthday. Here’s Why It’s Still So Good, 2 Years Later,” Business Insider, April 3, 2019, https://www.businessinsider.com/nintendo -switch-review-year-two-2019-3 (accessed April 17, 2020); Sarah Lacy, “Social Gaming Scores in the Recession,” Bloomberg, April 30, 2009, https:// www.bloomberg.com/news/articles/2009-04-30/social-gaming-scores-in -the-recession (accessed April 17, 2020); Reena Jana, “Nintendo’s New Brand Grame,” Bloomberg, June 22, 2006, https://www.bloomberg.com/news/articles /2006-06-21/nintendos-new-brand-game (accessed April 17, 2020).
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CHAPTER 8 Ethics and Social Responsibility in Marketing Strategy 8.1 INTRODUCTION The importance of marketing ethics and social responsibility has grown in recent years, and their role in the strategic planning process has become increasingly important. Many firms have seen their images, reputations, and marketing efforts destroyed by problems in these areas. The failure to see ethical conduct as part of strategic marketing planning can destroy the trust and customer relationships that are necessary for success. Ethics and social responsibility are also necessary in light of stakeholder demands, and many aspects of ethics can become legal issues. For example, price fixing, bribery, conflicts of interest, fraud, and deceptive advertising and sales practices all have legal implications. Marketing ethics does not just happen by hiring ethical people; it requires strategic decisions that become a part of the overall marketing strategy and culture of the firm. The traditional view of marketing holds that ethics and social responsibility are good supplements to business activities but may not be essential. Some marketers believe that ethics and social responsibility initiatives drain resources that could be better used for other marketing activities. Yet research has shown that ethical behavior can not only enhance a company’s reputation but also contribute significantly to its bottom line.1 As demonstrated by Salesforce’s success in Beyond the Pages 8.1, social responsibility and sustainability are becoming increasingly popular among businesses as a way to reduce a company’s carbon footprint and create a positive image among stakeholders. Ample evidence demonstrates that ignoring stakeholders’ demands for responsible marketing can destroy customers’ trust and even prompt increased government regulation. Irresponsible actions that anger customers, employees, or competitors may jeopardize a firm’s 211 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
212 Part 4: Putting Strategy into Action
financial standing and also lead to legal repercussions. For instance, Wells Fargo was at the center of a fake accounts scandal in which employees opened accounts without permission from clients due to unattainable sales goals. The bank paid $3 billion to settle criminal charges and faces an uphill battle to restore its reputation.2 Today, most CEOs recognize that companies must do better. In this chapter, we look at the dimensions of ethics and social responsibility, sustainability issues in marketing, the role of ethics and social responsibility in connection to marketing strategy, and the challenges of ethical behavior. We also address specific ethical issues within the firm’s marketing program, as well as organizational and selfregulating methods of preventing misconduct. We examine the organizational context of marketing ethics, including codes of ethics and the impact of ethical leadership. Additionally, we show the role of ethics and social responsibility in improving both marketing and financial performance. Finally, we discuss how ethics and social responsibility can be incorporated into strategic planning.
BEYOND THE PAGES 8.1
Salesforce Adopts a Stakeholder Orientation3 Salesforce truly believes in sharing the wealth. Salesforce is a cloud computing organization that provides software, such as customer relationship management applications, to a variety of clients including Southwest, Adidas, and Farmers Insurance. Salesforce also has an alliance with Microsoft, using their Azure public cloud as the provider for Salesforce Marketing Cloud. In recent years, the company has also made its two largest acquisitions to date, MuleSoft and Tableau Software. The various applications in the Salesforce platform bring people and data together to provide information the sales force needs to be successful. Additionally, Salesforce is a known and respected leader in social responsibility. Salesforce employees have engaged in 4 million service hours, and the company has given more than $285 million in grants to worthy causes. Each employee is given $5,000 to support a cause they care about to empower employees. To hold the company accountable to its investors, Salesforce has implemented several policies to ensure objectivity and accountability. Most of the company’s board members are independent, reducing the chance that board members might experience conflicts of interest in their responsibilities. The company has also adopted an ethics code and has an ethics office to ensure that the company’s ethical expectations are met. Additionally, Salesforce views the environment as an important stakeholder and is committed to reaching 100 percent renewable energy. The company continually strives to reduce its environmental impact. Its buildings meet LEED (Leadership in Energy and Environmental
Design) standards and Salesforce communicates its environmental expectations throughout the company and its supply chain. Salesforce also creates products to help its customers measure their environmental impact. The company claims that its cloud-computing model is carbon neutral by offsetting emissions. Salesforce also discloses its carbon emissions data for independent assessment. The company is advocating for policies to set their industry on a path to a more low-carbon economy. Their global sustainability investment has grown to more than $30 trillion. Although Salesforce still has many ways it can improve its efforts toward sustainability, its willingness to disclose information about the sustainability of its operations demonstrates the company’s commitment toward the environment. In 2020, for the 11th time, Salesforce was named as one of the “World’s Most Ethical” companies by the Ethisphere Institute. Much of this has to do with Salesforce’s 1-1-1 philanthropic model, which stands for 1 percent time (in which employees are given 1 percent time to volunteer), 1 percent equity (in which 1 percent of its capital is given to Salesforce .org), and 1 percent product. By integrating corporate social responsibility into the company culture, Salesforce hopes to make a positive difference in communities and nonprofit organizations. All of these ethical initiatives have not diminished Salesforce’s profitability. In fact, it’s quite the contrary. Salesforce has experienced steady growth. Social responsibility has appeared to pay off for the company’s bottom line.
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 213
8.2 ETHICS AND SOCIAL RESPONSIBILITY IN MARKETING STRATEGY In response to customer demands, along with the threat of increased regulation, firms increasingly incorporate ethics and social responsibility into the strategic marketing planning process. Any organization’s reputation can be damaged by poor performance or ethical misconduct. Obviously, stakeholders who are most directly affected by negative events will have a corresponding shift in their perceptions of a firm’s reputation. However, even those indirectly connected to negative events can shift their attitudes toward the firm. Some scandals may lead to boycotts and aggressive campaigns to dampen sales and earnings. For example, strikes have been launched against Amazon, McDonald’s, Instacart, and General Motors over wages. To address low wages at Amazon, the company raised its minimum wage to $15 per hour.4
8.2a Dimensions of Social Responsibility Social responsibility is a broad concept that relates to an organization’s obligation to maximize its positive impact on society while minimizing its negative impact. As shown in Exhibit 8.1, social responsibility consists of four dimensions: economic, legal, ethical, and philanthropic.5
Economic and Legal Responsibilities From an economic perspective, firms must be re-
sponsible to all stakeholders for financial success. The economic responsibility of making a profit serves employees and the community at large due to its impact on employment and income levels in the area that the firm calls home. Firms also have expectations, at a minimum, to obey laws and regulations. This is a challenge because the legal and regulatory environment is hard to navigate and interpretations of the law change frequently. EXHIBIT 8.1 The Pyramid of Corporate Social Responsibility
Philanthropic Responsibilities
Ethical Responsibilities
Legal Responsibilities
Economic Responsibilities
Be a Good Corporate Citizen Contribute resources to the community; improve quality of life
Be Ethical Obligations to do what is right, just, and fair; avoid harm
Obey the Law Law is society’s codification of right and wrong; play by the rules
Be Profitable The foundation upon which all other responsibilities rest
Source: From Archie Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons 34(4) (July/August), p. 42. Copyright © 1991 Elsevier. Reprinted with permission of Elsevier.
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214 Part 4: Putting Strategy into Action
Laws and regulations are designed to keep U.S. companies’ actions within the range of acceptable conduct and fair competition. When customers, interest groups, or competitors become concerned over what they perceive as misconduct on the part of a marketing organization, they may urge their legislators to draft new laws to regulate the behavior or engage in litigation to force the organization to “play by the rules.” Economic and legal responsibilities are the most basic levels of social responsibility for a good reason: Failure to consider them may mean that a firm is not around long enough to engage in ethical or philanthropic activities.
Ethical Responsibilities At the next level of the pyramid, marketing ethics refers to princi-
ples and standards that define acceptable marketing conduct as determined by the public, government regulators, private-interest groups, competitors, and the firm itself. The most basic of these principles have been codified as laws and regulations to induce marketers to conform to society’s expectations of conduct. However, it is important to understand that marketing ethics goes beyond legal issues: Ethical marketing decisions foster trust, which helps build long-term marketing relationships. Marketing ethics includes decisions about what is right or wrong in the organizational context of planning and implementing marketing activities in a global business environment to benefit (1) organizational performance, (2) individual achievement in a work group, (3) social acceptance and advancement in the organization, and (4) stakeholders. This definition of marketing ethics recognizes that ethical decisions occur in a complex social network within a marketing organization. Marketers are often asked by upper-level management to help make the numbers by reaching almost impossible sales targets. In fact, most marketing misconduct is done to help the organization. Being a team player and bending the rules to make targets may result in a promotion. On the other hand, it has destroyed the careers of some of those willing to do anything that they are asked to do. Evidence shows that ignoring ethical issues can destroy stakeholder trust and prompt government intervention. When firms engage in activities that deviate from accepted principles to further their own interests, continued marketing exchanges become difficult, if not impossible. The best way to deal with such problems is during the strategic planning process, not after major problems materialize. Match.com was sued by the FTC for using fake love interest advertisements to allegedly trick users into paying for subscriptions while offering false satisfaction guarantees. People received e-mail advertisements from Match.com that invited them to subscribe to read messages from their admirers; however, the FTC’s Bureau of Consumer Protection alleges that Match.com knew that these messages were from fraudulent accounts created by scammers.6 Discussing and addressing potential problems during the strategic planning process could save a company millions in the long term. As a result, more and more companies create extensive ethics and compliance programs to identify problems early on. For instance, Lockheed Martin, a technology aerospace manufacturer and global security company, has a comprehensive ethics program. These programs address the key ethical risks facing marketing. Every firm has unique risks based on the industry and the firm’s unique marketing strategy. For example, in the direct selling industry, recruiting and compensating sales representatives requires transparent and truthful communication. Therefore, the self-regulatory Direct Selling Association has developed a code of ethics to deal with this as well as other risk areas. Ethical and socially responsible behavior requires commitment. Some firms simply ignore these issues and focus instead on satisfying their economic and legal responsibilities with an eye toward the overall bottom line of profits. Although the firm may do nothing wrong, it misses out on the long-term strategic benefits that can be derived from satisfying ethical and philanthropic responsibilities. Firms that choose to take these extra steps concern themselves with increasing their overall positive impact on society, their local communities, and the environment, with the bottom line of increased goodwill toward the firm, as well as increased profits. The focus on ethical and philanthropic dimensions has the potential to build trust and long-term customer loyalty. These should be the goals of every effective marketing program.
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 215
Daniel Boczarski/Getty Images Entertainment/Getty Images
Philanthropic Responsibilities At the top of the pyramid are philanthropic responsibilities. These responsibilities, which go beyond marketing ethics, are not required of a company, but they promote human welfare or goodwill above and beyond the economic, legal, and ethical dimensions of social responsibility. Many companies demonstrate philanthropic responsibility, which is evidenced by the more than $20 billion in annual corporate donations and contributions to charities.7 Even small companies participate in philanthropy through donations and volunteer support of local causes and national charities, such as Habitat for Humanity, the Red Cross, and the United Way. For example, The Empty Cup, a Knoxville-based coffee house, uses its net profit to support adoption grants for local families in the community.8 More companies than ever are adopting a strategic approach to corporate philanthropy. Many firms link their products to a particular social cause on an ongoing or short-term basis, a practice known as cause-related marketing. Such cause-related programs tend to appeal to consumers because they provide an additional reason to “feel good” about a particular purchase. During the COVID-19 (coronavirus) pandemic—a time when many businesses closed and people found themselves unemployed—mission-based and cause-related marketing increased by more than 40 percent, according to a survey from the Interactive Advertising Bureau.9 For instance, alcoholic beverage brand Crook & Marker urged people to post to social media in a “digital cheers” using #CheersUp. The brand then donated $1 for every social media post to the USBG Bartender Emergency Assistance Program.10 Marketers like these programs because they often increase sales and create feelings of respect and admiration for the companies involved. On the other hand, some companies are beginning to extend the concept of corporate philanthropy beyond financial contributions by adopting a strategic philanthropy approach, the synergistic use of organizational core competencies and resources to address key stakeholders’ interests and achieve both organizational and social benefits. Strategic philanthropy involves employees, organizational resources and expertise, and the ability to link those assets to the concerns of key stakeholders, including employees, customers, suppliers, and social needs. Strategic philanthropy involves both financial and nonfinancial contributions to stakeholders (employee time, goods and services, company technology and equipment, etc.), while also benefiting the company.11 One example is Tesla, which partners with high schools, universities, and nonprofits in California to provide career-oriented workshops, STEM hands-on learning activities, factory tours, and speaking opportunities. This not only supports the communities but also creates a larger pool of talent from which Tesla can recruit.12
Philanthropic activities are not only good for society, they can also be useful in promoting the corporation.
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216 Part 4: Putting Strategy into Action
Another type of philanthropic activity that is gaining in importance is termed social entrepreneurship. Social entrepreneurship occurs when an entrepreneur founds an organization that strives to create social value rather than simply earn profits.13 Grameen Bank in Bangladesh is a popular social enterprise that offers small loans to individuals so they can start their own companies and gain the opportunity to rise out of poverty. Social enterprises can be a for-profit, nonprofit, government entity, or a hybrid organization. TOMS, for instance, is a for-profit and nonprofit hybrid that contributes at least one-third of net annual profits to a giving fund that is used for shoes for children in need as well as grants. The nonprofit arm of the organization manages the giving fund and distributes the shoes. Social entrepreneurship is similar to strategic philanthropy, but a major difference is that companies’ strategic philanthropy programs are not the primary purpose of the organizations or reason for their existence.14 Many social entrepreneurs tend to view marketing as unnecessary since their mission is for social change. However, as with all organizations marketing is necessary to help consumers understand the cause, the organization’s social mission, and how their purchase of products will help advance that mission.15 Philanthropic activities make good marketing tools. Thinking of corporate philanthropy as a marketing tool may seem cynical, but it points out the reality that philanthropy can be very good for a firm. Estée Lauder, for example, has donated $500 million to help individuals impacted by HIV/AIDS through sales of its MAC Viva Glam lipstick range. Estée Lauder believes philanthropy boosts the bottom line and gives purpose and passion to its employees.16
8.2b Sustainability One of the more common ways marketers demonstrate social responsibility is through programs designed to protect and preserve the natural environment. Sustainability includes the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles—all while maintaining the natural environment. Many companies make contributions to sustainability by adopting more eco-friendly business practices and/or supporting environmental initiatives. For instance, Walmart has taken steps to reduce waste and decrease greenhouse gas emissions in its supply chain. Walmart’s example is convincing other large retailers to take similar actions.17 Another green practice many companies adopt involves building new facilities that adhere to Leadership in Energy and Environmental Design (LEED) standards. These standards provide a framework for incorporating greener building materials and more efficient operations into construction.18 Starbucks, for example, has built more than 1,500 LEED certified stores.19 Because buildings produce 40 percent of greenhouse gas emissions, green building construction can have a significant impact toward sustainability. Such efforts generate positive publicity and often increase sales for the companies involved. Many products have been certified as “green” by environmental organizations such as Green Seal and carry a special logo identifying their organization as green marketers. Lumber products at Home Depot, for example, may carry a seal from the Forest Stewardship Council to indicate that they were harvested from sustainable forests using environmentally friendly methods.20 Likewise, most Chiquita bananas are certified through the Rainforest Alliance’s Better Banana Project as having been grown with more environmentally friendly and labor-friendly practices.21 In Europe, companies can voluntarily apply for the EU Ecolabel to indicate that their products are less harmful to the environment than competing products, based on scientifically determined criteria. The emphasis on sustainability has led many firms to engage in green marketing, a strategic process involving stakeholder assessment to create meaningful long-term relationships with customers, while maintaining, supporting, and enhancing the natural environment. In contrast, some companies choose to engage in a deceptive marketing practice called greenwashing, which involves misleading a consumer into thinking that a good or service is more environmentally friendly than it actually is. This generally takes the form of misleading product labels, which can range from making environmental claims that are required by law and are therefore irrelevant (e.g., saying that a product is CFC-free when CFCs have been banned by the government) to puffery (exaggerating environmental claims) to fraud.22 Firms need to be careful when using
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words like green, sustainable, or environmentally friendly so as not to mislead consumers and face potential litigation. The federal government has taken a tougher stand on environmental issues, and as greenwashing becomes more prevalent, it is likely that legal action will increase. Since onethird of consumers rely exclusively on labels to decide if a product is environmentally friendly, it is important that labels tell the truth.23 Some organizations have developed a certification system to help consumers make informed decisions when buying supposedly green products. For example, the Carbon Trust offers a certification that validates claims about reducing carbon output. However, certification organizations are not always trustworthy either. Some of them charge a fee and do not hold products to rigorous standards. The best way for consumers to be informed about eco-friendly products is to do their research before going shopping. Despite the problem of greenwashing, many firms are taking proactive steps to become more sustainable. Dell, for instance, has a robust recycling program to reduce E-waste. Other firms are choosing to experiment with alternative energy solutions as a form of social responsibility. IKEA is using geothermal energy, or energy derived from the natural heat inside the Earth, to power some of its stores, while Walmart uses solar energy at many stores.24 As support for sustainability continues to increase, companies are quickly recognizing that sustainability initiatives are a smart marketing move.
BEYOND THE PAGES 8.2
It’s Not Easy Being Green25 What makes a green product green? This question is actually quite complicated. The growing popularity of eco-friendly products is encouraging businesses to create and sell more green items. However, some businesses are cutting corners by touting their products as green when they really are not—a form of misconduct known as greenwashing. Greenwashers make unjustifiable “green” claims about their products to appeal to the eco-friendly consumer. As a result, many consumers claim they do not know how to ensure that a company is really eco-friendly. One common way that companies engage in greenwashing is by sustainably sourcing one product ingredient while the other ingredients remain unsustainable. This might be akin to a company claiming that its product is green since one of the ingredients is organic cotton, while simultaneously glossing over the fact that the product also consists of nonrecyclable products or chemicals. Sweetgreen, a popular salad restaurant chain, was exposed for greenwashing after it falsely used signs that claimed, “Nothing from inside Sweetgreen goes to the landfill” for nearly a decade. Unfortunately, the subjective nature of greenwashing makes it harder to detect, as consumers themselves differ on what is green and what is greenwashing. For instance, some consumers feel misled by Burt’s Bees’ tagline “True to Nature” when they discover that the brand is actually owned by the Clorox Company. Others are unconcerned as long
as the brand’s claims are true. Being green often requires tradeoffs as well—some of which consumers might find to be unacceptable. The issue of greenwashing has become so pervasive that it has prompted government intervention. The Federal Trade Commission (FTC) has released green guidelines to define what is acceptable in green advertising. The FTC has also begun cracking down on companies for making false claims. Truly Organic Inc. paid $1.76 million to settle an FTC complaint that the company’s products are not organic as advertised. Instead of changing its sourcing, the company changed its name to Truly Beauty. However, guidelines do not have the same effect as laws, particularly as individual consumers may have their own views of what constitutes a “green” product. The best way consumers can avoid greenwashing is to investigate green claims for themselves. Such an investigation could include looking for third-party certification of a product’s “greenness,” paying attention to ingredient lists, and looking for information on trustworthy websites. At the same time, it is important for consumers to realize that all products have some effect on the environment. Rather than looking for a 100 percent green product, consumers could instead look for ways that companies have increased sustainability throughout their operations to decrease their negative environmental impact.
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218 Part 4: Putting Strategy into Action
8.2c Marketing Ethics and Strategy Marketing ethics includes the principles and standards that guide the behavior of individuals and groups in making marketing decisions. Marketing strategy must consider stakeholders—including managers, employees, customers, government regulators, suppliers, shareholders, the community, and special-interest groups—all of whom contribute to accepted standards and society’s expectations. The most basic of these standards have been codified as laws and regulations to encourage companies to conform to society’s expectations of business conduct. These laws were usually passed due to societal concerns about misconduct that was damaging to competition or to consumers. The standards of conduct that determine the ethics of marketing activities require both organizations and individuals to accept responsibility for their actions and to comply with established value systems. Repeated ethical misconduct in a particular business or industry sometimes requires the government to intervene, a situation that can be expensive and inconvenient for businesses and consumers. Early in the twenty-first century, business ethics appeared to be improving after Enron, WorldCom, and the passage of the Sarbanes-Oxley Act in 2002. However, misconduct in the financial and banking sectors created a dramatic erosion of consumer confidence and trust during the Great Recession of 2008. But consumers still have faith in corporate social responsibility. According to the Edelman Trust Barometer, 74 percent of people in the United States believe companies can improve society while increasing profits.26 Marketing deceptions, such as lying or misrepresenting information, increase consumer distrust of some businesses and industries. Without a shared view of appropriate and acceptable business conduct, companies often fail to balance their desires for profits against the wishes and needs of society. Those occupying sales positions have a key responsibility for ethical behavior. Increasingly, it is the sales department that is gaining more influence among all functions in firms.27 This may be because the sales areas are directly responsible for driving revenue. For example, bribery can be used to secure business. Steven Clark, who provided oversight of British Airlines operations at John F. Kennedy International Airport in New York, was indicted for accepting bribes to help a ground handling company obtain contracts with the airline.28 Lying to customers and withholding important information can be another issue. Salespeople have a responsibility to understand the product sold and the long-term impact on customers. Therefore, salespeople cannot turn a blind eye to how it fits into the firm’s business strategy and overall ethical performance. When companies deviate from the prevailing standards of industry and society, the result is customer dissatisfaction, lack of trust, and legal action. The reputation of the firm is one of the most important considerations for consumers. Marketers should be aware of stakeholders and the need to build trust. When marketing activities deviate from accepted standards, the exchange process can break down, resulting in customer dissatisfaction, lack of trust, and lawsuits. A recent study shows that only about 56 percent of global consumers trust businesses today, which can significantly affect the relationship between consumers and business.29 Trust is an important concern for marketers since it is the foundation for long-term relationships. The questionable conduct of high-profile financial institutions and banks has caused many consumers to critically examine the conduct of all companies. Trust must be built or restored to gain the confidence of customers. Exhibit 8.2 describes the trust global consumers have for different institutions. Once trust is lost, it can take a lifetime to rebuild. The way to deal with ethical issues is to address them proactively during the strategic planning process, not after major problems materialize. Given that so much of a company’s success depends on the public’s perceptions of the firm, a firm’s reputation is one of its greatest internal resources that directly affect the success of the marketing strategy. The value of a positive reputation is difficult to quantify, but it is very important and once lost can be difficult to regain. Consider that a significant percentage of Disney’s market value—more than $260 billion—is based on intangible assets such as licensing arrangements, brand value, and goodwill.30 A single negative incident can influence perceptions
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 219
EXHIBIT 8.2 Global Trust in Different Institutions 90 80
75%
70
Percent
60
58%
58%
57% 49%
50
49%
40 30 20 10 0
Business overall
Financial services
Technology Government
Media
NGOs
Source: Edelman, 2020 Edelman Trust Barometer: Global Report, https://cdn2.hubspot.net/hubfs/440941/Trust%20Barometer%202020/ 2020%20Edelman%20Trust%20Barometer%20Global%20Report.pdf (accessed August 3, 2020).
of a firm’s image and reputation for years afterward. Social media, for instance, has increased the visibility of an organization’s actions, making it easy for consumers and the media to spread news of ethical misconduct. In fact, more adults get their news from social media than print newspapers.31 This gives companies even more reason to be transparent and behave ethically in an effort to protect their corporate reputation. Additionally, while consumers get information through social media and online news, they also get misinformation that is not always accurate. In managing the reputation of a firm, an organization needs to respond quickly, which requires monitoring and having a communication plan for responding to negative events or news. Disney has a plan for immediate response to any accidents or negative news associated with its parks. The integrity of a firm’s reputation depends on open and truthful communication. Corporate reputation, image, and branding are more important than ever and are among the most critical aspects of sustaining relationships with key stakeholders. Although an organization does not control its reputation in a direct sense, its actions, choices, behaviors, and consequences do influence its reputation.
8.2d Ethics and Social Responsibility Challenges Although most consider the values of honesty, respect, and trust to be self-evident and universally accepted, business decisions involve complex and detailed discussions in which correctness may not be so apparent. Both employees and managers need experience within their specific industry to understand how to operate in gray areas or to handle close calls in evolving areas, such as Internet privacy. For example, how much personal information should be stored on a firm’s website without customers’ permission? In Europe, a “right to be forgotten” law was passed that allows Internet users in the EU to have unwanted links removed from Google’s search results.32 In the United States, firms have more freedom to decide how to collect and use customers’ personal data, but international legislation impacts U.S. businesses. In 2016, the European Union passed the General Data Protection Regulation (GDPR), requiring businesses to ask consumers for permission to collect data and respond to consumer inquiries about data usage within 72 hours, impacting all companies that do business with the European Union.33
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220 Part 4: Putting Strategy into Action
As businesses continue to push the limits of privacy, the government has begun to crack down on what it sees as privacy infringement. The Federal Trade Commission (FTC) imposed a $5 billion penalty against Facebook for mishandling consumer privacy, by far the largest data privacy or security penalty ever imposed. According to the FTC, Facebook misled users about how much control they had over personal data.34 Issues related to personal privacy, unsolicited e-mail, and misappropriation of copyrighted intellectual property cause ethical problems. Protecting trademarks and brand names becomes more difficult as digital communication and social media expands. Social responsibility differs from marketing ethics in that social responsibility relates to reputation while marketing ethics relates more to decisions that are judged as right or wrong. Social responsibility initiatives that are considered to be authentic and benefit society make it more likely consumers will have a positive image of the firm’s products. For example, support for social issues can be important in the identity of the firm. Avon, a beauty company, has contributed more than $800 million to breast cancer causes, provided education for more than 180 million women about the disease, and funded 20 million breast cancer screenings.35 Social issues relate to not only health issues but problems related to job loss—as seen during the COVID-19 pandemic—poverty, and privacy. These issues relate directly to building relationships with stakeholders. Besides economic success, if important stakeholder concerns are addressed, brand image will be enhanced. Individuals who have limited business experience often find themselves required to make sudden decisions about product quality, advertising, pricing, bribery, hiring practices, privacy, and pollution control. For example, how do advertisers know when they make misleading statements as opposed to simple puffery or exaggeration? Bayer claims to be “the world’s best aspirin”; Gillette razors are “the best a man can get”; and Goya is “Puerto Rico’s favorite pasta.” After settling a lawsuit from multiple consumer groups, General Mills removed “100% Natural” from Nature Valley granola bar packaging over concerns that the label was inaccurate.36 The personal values learned through socialization from family, religion, and school may not provide specific guidelines for these complex business decisions. In other words, a person’s experiences and decisions at home, in school, and in the community may be quite different from the experiences and the decisions that they have to make at work. Moreover, the interests and values of individual employees may differ from those of the company in which they work, from industry standards, and from society in general. When personal values are inconsistent with the configuration of values held by the work group, the potential for ethical misconduct increases. Exhibit 8.3 provides an overview of the most common types of observed misconduct in organizations. Although Exhibit 8.3 documents many types of issues that exist in organizations, due to the almost infinite number of ways that misconduct can occur, it is impossible to identify every conceivable ethical issue. It is also important to note that most of these potential issues are not clearly obvious to customers. However, any type of manipulation, deceit, or even just the absence of EXHIBIT 8.3 Types of Misconduct Observed in Organizations Observed misconduct
47%
Abusive behavior
21%
Lying to employees and external stakeholders
26%
Conflicts of interest
15%
Internet abuse
16%
Health violations
15%
Pressure to compromise standards
16%
Report observed misconduct
69%
Experience retaliation for reporting
44%
Source: Ethics and Compliance Initiative, Global Business Ethics Survey, The State of Ethics & Compliance in the Workplace, March 2018 (Arlington, VA: Ethics and Compliance Initiative, 2018), pp. 6–9.
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 221
transparency in decision making can potentially create issues that become evident to customers, supply chain partners, or other important stakeholders. With that in mind, we now turn our attention to specific ethical issues in the marketing program.
8.3 ETHICAL ISSUES IN THE MARKETING PROGRAM An ethical issue is an identifiable problem, situation, or opportunity that requires an individual or organization to choose from among several actions that must be evaluated as right or wrong, ethical or unethical. Any time an activity causes marketing managers or customers to feel manipulated or cheated, an ethical issue exists, regardless of the legality of that activity. It is therefore imperative that firms become familiar with many of the ethical issues that can potentially occur in the marketing program so that these issues can be identified and resolved when they occur. Some examples of potential ethical issues in the marketing program appear in Exhibit 8.4. These and other issues can develop into legal problems if they are not addressed in the strategic planning process. EXHIBIT 8.4 Potential Ethical Issues in the Marketing Program Overall Misrepresenting the firm’s capabilities Manipulation or misuse of data or information Exploitation of children or disadvantaged groups Invasion of privacy Anticompetitive activities Abusive behavior Misuse of firm resources Product Issues Misrepresentation of goods or services Failure to disclose product defects Counterfeit or gray market products Misleading warranties Reducing package contents without reducing package size Pricing Issues Price deception Reference pricing claims Price discrimination Predatory pricing Fraudulent refund policies Distribution (Supply Chain) Issues Opportunistic behavior among members of the supply chain Exclusive distribution arrangements Slotting fees Tying contracts Failure to honor product and promotional support Promotion Issues False or misleading advertising or selling Bait-and-switch advertising Failure to disclose influencer partnerships Falsified reviews High-pressure sales tactics Entertainment and gift giving Stereotypical portrayals of women, minorities, or senior citizens Failure to honor sales promotion promises
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222 Part 4: Putting Strategy into Action
While customers and other stakeholders may think a firm is engaged in unethical conduct, the final decision is usually determined by legal action or a self-regulatory body such as the Better Business Bureau (BBB). The National Advertising Division (NAD), a division of the Better Business Bureau, reviews complaints about unfair advertising and recommends whether the advertising in question should be discontinued. When Samsung had promotional messaging called into question, the NAD ruled that Samsung’s statement that its OLED television is the “Best TV Ever” is an example of puffery rather than misleading advertising.37 Regardless of the reasons behind specific ethical issues, marketers must be able to identify those issues and decide how to resolve them. Doing so requires familiarity with the many kinds of ethical issues that may arise in marketing. Research suggests that the greater the consequences associated with an issue, the more likely it will be recognized as an ethics issue and the more important it will be in making an ethical decision.38 Let’s look at several potential ethical issues in more detail.
8.3a Product-Related Ethical Issues Product-related ethical issues generally arise when the firm fails to disclose risks associated with a product or information regarding the function, value, or use of a product. These issues are common in many industries, including automobiles, toys, pharmaceuticals, and other industries where safety or design issues come into play. Volkswagen installed a defeat device in vehicles that could detect when the car was being tested and modify its performance levels in order to meet emissions requirements. This was a significant ethical issue. On the road, the cars gave off up to 40 times the allowable limit for emissions in the United States. The company agreed to pay more than $25 billion to compensate consumers.39 Ethical issues can also arise in product design as pressures build to substitute inferior materials or product components to reduce costs. Many companies use Bisphenol A (BPA) as a component in plastics because it makes sound plastic and is relatively inexpensive. However, there have been studies that suggest BPA could negatively impact fetal development, cancers, obesity, and fertility. Although the U.S. Food and Drug Administration claims that BPA is safe in the levels humans usually encounter, the fact that it could harm an individual’s health has convinced many stakeholders to call for a ban on the use of BPA plastics. This is therefore an ethical issue even though it is not currently illegal.40 Similarly, ethical issues can arise when the firm fails to inform customers about changes in quality or quantity of product sold. For example, if a cereal maker reduced the amount of cereal in the package without reducing the package size or the price, the company would have a serious ethical issue on its hands. Another common product-related ethical issue involves counterfeit products. Counterfeit products abound today, particularly in the areas of clothing, audio and video products, and computer software. Any product that can be easily copied is vulnerable to counterfeit activities. Some people argue that only manufacturers become injured when consumers purchase counterfeit products. This is clearly mistaken reasoning. For example, the loss of tax revenues has a huge impact on governments, as they cannot collect both direct and indirect taxes on the sale of counterfeit products. Likewise, counterfeits leach profits necessary for ongoing product development away from the firm, as well as thousands of jobs at legitimate companies. Customers also feel the impact of counterfeit products, as their quality almost never lives up to the quality of the original. Faced with increasing risks for product knockoffs, eBay, Amazon, and Alibaba have technology that uses algorithms to identify fraudulent listings on its site. Companies also hire brand protection firms to identify fake versions of their products on the Internet. Unfortunately, the Internet has made it easier for counterfeiters since consumers do not often have a chance to closely examine the product until after it is shipped to their home.41
8.3b Pricing-Related Ethical Issues Pricing is one of the most heavily watched and regulated of all marketing activities. Given that a difference in price can create such a significant competitive advantage, any effort to artificially give one company an edge over another is subject to legal or regulatory intervention.
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 223
The emotional and subjective nature of price creates many situations where misunderstandings between the seller and buyer cause ethical problems. Firms have the right to price their products to earn a reasonable profit, but ethical issues may crop up when a company seeks to earn high profits at the expense of its customers. Some pharmaceutical companies, for example, have been accused of price gouging, or pricing products at exorbitant levels, and taking advantage of customers who must purchase the medicine to survive or to maintain their quality of life. Likewise, various forms of bait and switch pricing attempt to gain consumer interest with a low-priced product, and then switch the buyer to a more expensive product or add-on service. While there is an endless potential for ethical violations in pricing strategy, four key issues garner the most attention: price discrimination, price fixing, predatory pricing, and superficial discounting. Price discrimination occurs when firms charge different prices to different customers. This is fairly common in consumer markets, such as when cable and satellite companies offer lower prices to new customers, or when fast-food restaurants offer lower-priced meals for children. Price discrimination is very common in business markets where it typically occurs among different intermediaries in the supply chain. In general, price discrimination is illegal, unless the price differential has a basis in actual cost differences in selling products to one customer relative to another (such as volume discounts and competitive price matching). The overriding question in cases of price discrimination is whether the price differential injures competition. The Robinson-Patman Act and the Clayton Act both regulate discriminatory pricing. The intent of these regulations is to provide a level playing field for all competitors. Price fixing occurs when rival firms collaborate to set prices. Although such arrangements are illegal under the Sherman Act, price fixing is exceedingly difficult to prove. Usually, one firm in an industry will be a price leader and others will be the price followers. The Justice Department has determined that, while following a competitor’s lead in an upward or downward trend is acceptable, there can be no signaling of prices to competitors in this process. Sizable fines and prison terms for those convicted of price fixing are the norm. More than 20 generic drug makers, including Teva Pharmaceuticals and Mylan Pharmaceuticals, have been accused of colluding to increase prices to the detriment of consumers.42 Predatory pricing occurs when a firm charges very low prices for a product with the intent of driving competition out of business or out of a specific market. Prices then return to normal once the competitors have been eliminated. Predatory pricing is illegal; however, like price fixing, it is extremely difficult to prove in court. The challenge in predatory pricing cases is to prove that the predatory firm had the willful intent to ruin the competition. The court must also be convinced that the low price charged by the predator is below their average variable cost. The variable cost definition of predatory pricing is a major reason why few lawsuits for predatory pricing are successful. The reality is that large firms with lean, efficient cost structures dominate today’s competitive landscape. These firms have lower variable costs that allow them to legitimately charge lower prices than the competition in many cases. This is the reason that large retailers such as Walmart, Home Depot, and Lowe’s have slowly and methodically put smaller retailers out of business. These large firms are not necessarily guilty of predatory pricing—they are only guilty of being more efficient and competitive than other firms. Superficial discounting occurs when a firm advertises a sale price as a reduction below the normal price when it is not the case. Typically, the firm does not sell the product at the regular price in any meaningful quantities, or the sale price period is excessively long. This pricing tactic is clearly an ethical issue because most customers are not aware that they are being intentionally misled. Most of the legal activity regarding superficial discounting has taken place at the state attorney general level. To avoid legal action, a firm should offer a product at the original price, discount the price in a specified dollar amount for a specified period, and then revert to the original price at the end of that period. If the product is a discontinued item, that fact should be noted in the advertisement.
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224 Part 4: Putting Strategy into Action
8.3c Supply Chain–Related Ethical Issues Managing ethical issues in distribution and supply chain strategy is one of the greatest difficulties in marketing today. The reasons deal with the complexity of most supply chains and the fact that supply chains today are global. For instance, the chocolate industry has been criticized for sourcing from suppliers that use child labor on cocoa plantations. Although The Hershey Company is known for its ethical and responsible behavior, the cocoa industry presents several ethical challenges related to the fair and safe treatment of workers, especially children. Although companies are aware of this issue, the problem persists despite efforts from major players in the industry, including Hershey, Nestlé, Cargill, and Mars.43 The issues that Hershey faces highlight the numerous risks that occur in global supply chains. Although companies often create a supplier code of conduct, they are required to conduct regular audits to ensure that factories are following compliance standards—which in turn can incur significant costs to companies in both time and finances. Apple, for instance, has suppliers agree to a code of conduct and performs factory audits to ensure compliance. The company releases an annual Apple Supplier Responsibility Report to detail its supplier expectations, audit conclusions, and corrective actions the company takes against factories where violations occur.44 Countries with lax labor laws, such as China and Russia, require even more diligent monitoring. Often suppliers hire subcontractors to do some of the work, which increases a company’s network of suppliers and the costs of trying to monitor all of them. Finally, company compliance requirements may conflict with the mission of the procurement office. Because it is the procurement division’s job to procure resources at the lowest price possible, the division may opt to source from less expensive suppliers with questionable ethical practices rather than from more expensive ethical suppliers. Managing supply chain ethics is important because many stakeholders hold the firm responsible for all ethical conduct related to product availability. This requires the company to exercise oversight over all of the suppliers used in producing a product. Walmart created its Sustainability Index to rate and categorize all of its products and suppliers across several sustainability-related issues to assist Walmart in making purchasing decisions. This gives suppliers incentive to improve business practices to continue business with Walmart.45 Developing good supply chain ethics is important because it ensures the integrity of the product and the firm’s operations in serving customers. Fortunately, organizations have developed solutions to promote ethical sourcing practices. First, it is essential for all companies who work with global suppliers to adopt a global supplier code of conduct and ensure that it is effectively communicated to their suppliers. Additionally, companies should encourage compliance and procurement employees to work together to find ethical suppliers at reasonable costs. Marketers must also work to make certain that their company’s supply chains are diverse. This can be difficult because sometimes the best product manufacturers are located in a single country. Although it is expensive to diversify a company’s supply chain, disasters can incapacitate a firm. Third-party verification of supplier ethical standards is becoming an accepted way of maintaining compliance. For instance, Verify is a leading third-party evaluator of suppliers that assures suppliers are meeting the ethical, environmental, quality, and social responsibility standards consistent with the firm’s ethics and compliance program.46 Finally, and perhaps most importantly, companies must perform regular audits on their suppliers and, if necessary, discipline those found to be in violation of company standards. Another supply chain ethics issue relates to diversity. Many companies such as Google and Johnson & Johnson recognize the need for supplier diversity, outlining programs to ensure the company works with minority-, women-, veteran-, persons-with-disabilities-, and LGBTQowned businesses. Google’s supplier diversity program focuses on small businesses with 50 or fewer employees and offers additional benefits such as access to scholarships.47 In 2020, as the Black Lives Matter movement hit a critical peak, Aurora James, a creative director in Brooklyn, urged business leaders to dedicate 15 percent of shelf space to black-owned businesses, which aligns with the African American population in the United States. Sephora was one of the first companies to jump on board. At the time, the beauty retailer worked with 290 brands, but only
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 225
nine were black-owned. Artemis Patrick, Sephora’s chief merchandising officer, said the company’s commitment would start with “a long-term plan diversifying our supply chain.” Rent the Runway, a designer clothing rental company, also committed to the pledge and donated $1 million to support black designers.48 According to one survey, consumers have more favorable attitudes toward companies that have supplier diversity programs. UPS has experienced the benefits of investing in supplier diversity and spends $2.6 billion per year with small and diverse suppliers. In addition to this stakeholder group, it is also important to embrace diversity with employees, customers, and communities.49
8.3d Promotion-Related Ethical Issues Marketing practices that are false or misleading can destroy customers’ trust in an organization. The Federal Trade Commission (FTC) monitors businesses for deceptive practices and takes disciplinary action when needed. Chipotle paid $6.5 million to settle false advertising claims that its restaurants served non-GMO foods exclusively. A class-action lawsuit was filed after consumers in three states claimed to have purchased food at Chipotle that came from animals that consumed GM feed. Chipotle agreed to the settlement and discontinued the advertising claims.50 No matter how vigilant, it is difficult for the FTC to catch all forms of deceptive marketing, particularly in the area of promotion. Ethical issues also arise when firms use ambiguous statements, in which claims are so weak that the viewer, reader, or listener must infer the advertiser’s intended message. Because it is inherently vague, using ambiguous wording allows the firm to deny any intent to deceive. The verb “help” is a good example (as in expressions such as “helps prevent,” “helps fight,” or “helps make you feel”). Molson Coors sued Anheuser-Busch over Bud Light ads that said Coors Light and Miller Lite contained corn syrup. Molson Coors argued that the advertisement was false because, while the company used corn syrup as a fermenting sugar, the end product did not contain the ingredient. Additionally, Molson Coors argued this could be confused by consumers with high fructose corn syrup, which many consumers avoid. A federal appeals court sided with Anheuser-Busch, stating it was up to consumers to decide.51 Consumers may view such advertisements as unethical because they fail to communicate all the information needed to make a good purchasing decision or because they deceive the consumer outright. In another example, the FTC and other agencies closely monitor promotions for work-at-home business ventures. Consumers lose millions of dollars each year responding to ads for phony business opportunities. Personal selling provides many opportunities for ethical misconduct. Bribery occurs when an incentive (usually money or expensive gifts) is offered in exchange for an illicit advantage. Even a bribe that is offered to benefit the organization is usually considered unethical. Because it jeopardizes trust and fairness, it hurts the organization in the long run. As a result, laws have been passed to prevent bribery. The U.S. Foreign Corrupt Practices Act (FCPA) prohibits American companies from making illicit payments to foreign officials in order to obtain or keep business. Under the U.K. Bribery Act, companies can be found guilty of bribery even if the bribery did not take place within the United Kingdom, and company officials without explicit knowledge about the misconduct can still be held accountable. The law applies to any business with operations in the United Kingdom.52 The U.K. Bribery Act has convinced many multinational organizations to update their ethical codes of conduct to avoid ambiguity in this area. Airbus paid $4 billion in penalties for using third-party business partners to bribe government officials to secure aircraft sales, violating the FCPA and U.K. Bribery Act, among other laws.53 Fraudulent activity has dramatically increased in the area of direct marketing. Each year consumers report more than $1 billion in losses resulting from fraud, many of them from directmarketing scams. Identity theft, including credit card fraud, tax fraud, and mobile phone fraud, is one of the most common types of consumer fraud.54 Other common types of marketing fraud include those involving prizes, sweepstakes, lotteries; Internet auctions; credit cards; and shop-athome and catalog sales.
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226 Part 4: Putting Strategy into Action
8.4 MANAGING AND CONTROLLING ETHICAL ISSUES Given the conflicting priorities among concerned stakeholders and the nature of most marketing decisions, even the best-designed marketing programs will eventually encounter ethical issues. Since ethical issues can never be completely eliminated, most enlightened firms instead take steps to manage and control ethical issues before they arise. In this section, we look at a number of ways that firms can go about this process.
8.4a Regulating Marketing Ethics Many firms attempt to regulate themselves in an effort to demonstrate ethical responsibility and prevent regulation by federal or state governments. In addition to complying with all relevant laws and regulations, many firms choose to join trade associations that have self-regulatory programs. Although such programs are not a direct outgrowth of laws, many became established to stop or delay the development of laws and regulations that would restrict the associations’ business practices. Some trade associations establish codes of conduct by which their members must abide or risk rebuke or expulsion from the association. Perhaps the best-known self-regulatory association is the Better Business Bureau (BBB). The BBB’s local bureaus oversee businesses and charities across the United States and Canada, and help resolve problems for millions of consumers each year.55 Each bureau works to champion good business practices within a community, although it usually does not have strong tools for enforcing its rules of business conduct. When a firm violates what the BBB believes to be good business practices, the bureau warns consumers through local newspapers or broadcast media. If the offending organization is a member of the BBB, it may be expelled from the local bureau. The BBB also has a website (https://www.bbb.org) to help consumers identify businesses that operate in an ethical manner. BBB members who use the site agree to binding arbitration with regard to online privacy issues. Self-regulatory programs like the BBB have a number of advantages over government regulation. Establishment and implementation of such programs are usually less costly, and their guidelines or codes of conduct are generally more practical and realistic. Furthermore, effective
BEYOND THE PAGES 8.3
Evrnu Changes Fashion56 Companies are increasingly aware of the need to be socially responsible in their business practices, and sustainability efforts are growing to meet this need. On a trip to China, Stacy Flynn saw firsthand how much the apparel industry pollutes the environment when she stepped out of the car and could barely see through the smog generated by the local textile industry. Inspired, Flynn started working on producing recycled fibers and collaborating with apparel makers to turn textile waste into sustainable pieces. She and her cofounder eventually developed the private company Evrnu, a research and development firm whose technology is able to convert postconsumer apparel waste into new fibers at a molecular level. As a privately held company, Evrnu is able to retain tight control over the direction of the company while choosing the investors it partners with. One of these investors is Closed
Loop Partners, an investment firm focused on sustainable manufacturing. Evrnu is licensing its NuCycl technology, which converts pre- and post-consumer textile materials into recyclable new fibers to companies such as Adidas and Target. With these new partnerships, Evrnu has raised more than $9.1 million in investments. Garment waste has reached more than 21 million tons per year. According to the World Wildlife Fund, it takes about 2,700 liters of water to produce the cotton needed to make one t-shirt. Evrnu is ready to change these numbers. Its process uses 98 percent less water than would be consumed making new cotton apparel. Evrnu has already garnered the interest of large apparel companies such as Levi Strauss who, in partnership with Evrnu, has developed the first jeans made from regenerated fiber.
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 227
self-regulatory programs reduce the need to expand government bureaucracy. However, selfregulation also has several limitations. Nonmember firms are under no obligation to abide by a trade association’s industry guidelines or codes. Moreover, most associations lack the tools or authority to enforce their guidelines. Finally, these guidelines are often less strict than the regulations established by government agencies. Still, in many cases, government oversight is essential to ensure the public’s trust.
8.4b Ethics Dilemmas Related to Technology Advancements in technology have a significant impact on business ethics and social responsibility. When technologies emerge, there are new opportunities for marketing as well as new challenges. For instance, big data—large volumes of complex data—has been fueled by the increasing number of data sources such as smart devices, social media, supply chain tracking, sales transactions, and more. Big data calls for sophisticated analytics in order to glean actionable insights that can lead to cost and time reductions as well as effective decision making.57 However, data privacy and the ethical use of personal data are now major public concerns. Examples such as this show how technology leads to new processes, products, and economic progress as well as new challenges. Existing ethical culture and ethics initiatives should provide the framework for ensuring ethical conduct when it comes to technology, but it’s important to identify new risk areas on an ongoing basis. Ethical issues and questions need to be addressed around the development and implementation of technologies used by the marketing function. Artificial intelligence (AI), for example, has been implemented by many organizations in e-mail marketing for predictive personalization, smart segmentation, optimized subject lines and e-mail content, frequency optimization, A/B testing, and more.58 However, since AI needs to be programmed with ethical decision-making abilities, it’s essential that businesses monitor AI implementations to avoid unintentional conflicts such as discrimination due to algorithmic bias. For instance, ads for jobs with high salaries on platforms such as Google and Facebook are served disproportionately to men, according to several studies.59 While enabled technology can solve problems that are beyond human ability, such as complex data analysis, it does not have the ability to internalize human principles and values. Because of this, unintentional ethical consequences may arise. Human control and use of technology require the consideration of principles and values. Principles provide propositions that serve as a foundation for decision making while values are important to express beliefs about what is right or wrong. It is difficult for machines to be programmed with these attributes.
8.4c Codes of Conduct To meet the public’s escalating demands for ethical marketing, firms need to develop plans and structures for addressing ethical considerations. Although there are no universal standards that can be applied to organizational ethics programs, most companies develop codes, values, or policies to guide business behavior. It would be very naive to think that simply having a code of ethics would solve any ethical dilemmas a firm might face. In fact, the majority of firms that experience ethical or legal problems usually have stated ethics codes and programs. Often, the problem is that top management, as well as the overall corporate culture, has not integrated these codes, values, and standards into daily operations. Without ethics training and uniform standards and policies regarding conduct, it is hard for employees to determine what conduct is acceptable within the company. In the absence of such programs and standards, employees will generally make decisions based on their observations of how coworkers and superiors behave.60 To improve ethics, many organizations have developed codes of conduct (also called codes of ethics) that consist of formalized rules and standards that describe what the company expects of its employees. Most large corporations have formal codes of conduct, but codes are not effective unless they are properly implemented. In addition, codes must be periodically revised to identify and eliminate weaknesses in the company’s ethical standards and policies.
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228 Part 4: Putting Strategy into Action
EXHIBIT 8.5 Key Considerations in Developing and Implementing a Code
of Ethical Conduct
1.
Examine high-risk areas and issues.
2.
State values and conduct necessary to comply with laws and regulations. Values are an important buffer in preventing serious misconduct.
3.
Identify values that specifically address current ethical issues.
4.
Consider values that link the organization to a stakeholder orientation. Attempt to find overlaps among organizational and stakeholder values.
5.
Make the code of conduct understandable by providing examples that reflect values.
6.
Communicate the code frequently and in language that employees can understand.
7.
Revise the code every year with input from a wide variety of internal and external stakeholders.
Most codes address specific ethical risk areas in marketing. For instance, clothing retailer H&M’s code of ethics has a zero tolerance policy for bribery and corruption.61 Codes of conduct promote ethical behavior by reducing opportunities for unethical behavior; however, codes of conduct do not have to be so detailed that they take every situation into account. Instead, the code should provide guidelines that enable employees to achieve organizational objectives in an ethical manner. The American Marketing Association Code of Ethics, for example, does not cover every possible ethical issue, but it provides a useful overview of what marketers believe are sound principles for guiding marketing activities.62 This code serves as a helpful model for structuring an organization’s code of conduct. Exhibit 8.5 lists the key considerations in developing and implementing a code of ethical conduct. Research has found that corporate codes of ethics often have five to seven core values or principles in addition to more detailed descriptions and examples of appropriate conduct. Six core values are considered to be highly desirable in any code of ethical conduct: (1) trustworthiness, (2) respect, (3) responsibility, (4) fairness, (5) caring, and (6) citizenship.63 These values will not be effective without distribution, training, and the support of top management in making them a part of the corporate culture and the ethical climate. Employees need specific examples of how these values can be implemented. Codes of conduct will not resolve every ethical issue encountered in daily operations, but they help employees and managers deal with ethical dilemmas by prescribing or limiting specific activities. Many firms have a code of ethics, but sometimes they do not communicate their code effectively. A code placed on a website or in a training manual is useless if the company does not reinforce it on a daily basis. By communicating both the expectations of proper behavior to employees as well as punishments they face if they violate the rules, codes of conduct curtail opportunities for unethical behavior and thereby improve ethical decision-making.
8.4d Ethical Leadership There is increasing support that ethical cultures emerge from strong leadership. Many agree that the character and success of the most admired companies emanate from their leaders. The reason is simple: Employees look to the leader as a model of acceptable behavior. As a result, if a firm is to maintain ethical behavior, top management must model its policies and standards. In fact, maintaining an ethical culture is near impossible if top management does not support ethical behavior. For example, in an effort to keep earnings high and boost stock prices, many firms have engaged in falsifying revenue reports, sometimes involving the marketing area to overstate sales in a specific quarter. Channel stuffing involves shipping surplus inventory to wholesalers and
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 229
retailers at an excessive rate, typically before the end of a quarter. The practice may conceal declining demand for a product or inflate financial statement earnings, which misleads investors.64 Top executives in these firms may encourage the behavior because they hold stock options and can receive bonus packages tied to the company’s performance. Thus, higher reported revenues mean larger executive payoffs. Marketing is often seen as the most flexible area to influence sales and earnings. In the realm of marketing ethics, great leaders (1) create a common goal or vision for the company; (2) obtain buy-in, or support, from significant partners; (3) motivate others to be ethical; (4) use the resources that are available to them; and (5) enjoy their jobs and approach them with an almost contagious tenacity, passion, and commitment.65 Along with strong ethical leadership, a strong corporate culture in support of ethical behavior can also play a key role in guiding employee behavior. Ninety-four percent of respondents to a survey conducted by business consulting firm LRN said it was very important for them to work for an ethical company.66 Organizational culture, coworkers and supervisors, and the opportunity to engage in unethical behavior influence ethical decision-making. Ethics training can affect all three types of influence. Full awareness of the philosophy of management, rules, and procedures can strengthen both the organizational culture and the ethical stance of peers and supervisors. Such awareness also arms employees against opportunities for unethical behavior and lessens the likelihood of misconduct. If adequately and thoughtfully designed, ethics training can ensure that everyone in the firm (1) recognizes situations that might involve ethical decision-making, (2) understands the values and culture of the firm, and (3) can evaluate the impact of ethical decisions on the firm in the light of its value structure.67
8.5 RELATIONSHIP TO MARKETING AND FINANCIAL PERFORMANCE One of the most powerful arguments for including ethics and social responsibility in the strategic planning process is the evidence of a link between ethics, social responsibility, and financial performance.68 An ethical climate calls for organizational members to incorporate the interests of all stakeholders, including customers, in their decisions and actions. Hence, employees working in an ethical climate will make an extra effort to better understand the demands and concerns of customers. One study found that ethical climate is associated with employee commitment to quality and intra-firm trust.69 Employee commitment to the firm, customer loyalty, and profitability have also been linked to increased social responsibility. These findings emphasize the role of an ethical climate in building a strong competitive position. For example, Wegmans is one of the most successful food retailers in the nation. The company has strong employee benefits including health coverage, paid vacation, an employee assistance program, adoption assistance and dependent care savings accounts, wellness screenings, and more.70 Social responsibility has been found to be important in the reputation of a firm and brand image.71 Firms that take a stakeholder approach to relationships and look beyond firm-centric interests by considering the long-run interests of society pays dividends. Customers, employees, suppliers, and communities value firms that address issues such as sustainability, social issues, consumer protection, and corporate governance. To be successful, top management should concentrate on efforts that can have the greatest impact on selected stakeholders. Both value to stakeholders and the firm are important when looking at social responsibility. Then the benefits to firm reputation and brand image can improve performance measures such as sales and profits. Developing the right partners and initiatives should be managed like any other strategic effort. During the COVID-19 pandemic, many firms made decisions that helped the public get through economic and social hardships. For instance, Reebok urged customers to nominate community heroes for a free pair of shoes. In addition, Reebok donated $10,000 to a fund to support fitness teachers and instructors who faced unemployment.72 In general, leaders need to view social responsibility beyond a “feel good” or short-term activity. It should be an opportunity to do good
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230 Part 4: Putting Strategy into Action
and support the performance of the firm, and it should be a part of the marketing strategy related to developing long-term customer relationships. As employees perceive an improvement in the ethical climate of their firm, their commitment to the achievement of high-quality standards also increases. They become more willing to personally support the quality initiatives of the firm. These employees often discuss quality-related issues with others both inside and outside of the firm, and gain a sense of personal accomplishment from providing quality goods and services. These employees exhibit effort beyond both expectations and requirements in order to supply quality products in their particular job or area of responsibility. Conversely, employees who work in less ethical climates have less commitment to providing such quality. These employees tend to work only for the pay, take longer breaks, and are anxious to leave work every day.
8.5a Stakeholder Orientation A natural progress from a market orientation is to view all stakeholders as important. The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder orientation. This orientation contains three sets of activities: (1) the organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups, (2) the distribution of this information throughout the firm, and (3) the organization’s responsiveness as a whole to this intelligence.73 This is very similar to the step involved in a market orientation, but the firm becomes more concerned about all stakeholders, including employees, suppliers, shareholders, regulators, and the community. Generating data about stakeholders begins with identifying the stakeholders who are relevant to the firm. Relevant stakeholder communities should be analyzed on the basis of the power that each enjoys as well as by the ties between them. Next, the firm should characterize the concerns about the business’s conduct that each relevant stakeholder group shares. This information can be derived from formal research, including surveys, focus groups, Internet searches, or press reviews. The responsiveness of the organization to stakeholder intelligence consists of the initiatives that the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues. Such activities are likely to be specific to a particular stakeholder group (e.g., family-friendly work schedules) or to a particular stakeholder issue (e.g., pollution-reduction programs). These processes typically involve the participation of the concerned stakeholder groups. Kraft, for example, includes special-interest groups and university representatives in its programs to become sensitized to present and future ethical issues. A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees. To gauge a given firm’s stakeholder orientation, it is necessary to evaluate the extent to which the firm adopts behaviors that typify both the generation and dissemination of stakeholder intelligence and responsiveness to it. A given organization may generate and disseminate more intelligence about certain stakeholder communities than about others and, as a result, may respond to that intelligence differently.
8.5b Marketing Financial Performance A climate of ethics and social responsibility also creates a large measure of trust among a firm’s stakeholders and enhances the reputation of the firm in a positive direction. The most important contributing factor to gaining trust is the perception that the firm and its employees will not sacrifice their standards of integrity.74 In an ethical work climate, employees can reasonably expect to be treated with respect and consideration by their coworkers and superiors. Furthermore, trusting relationships with key external stakeholders can contribute to greater efficiencies and productivity in the supply chain, as well as a stronger sense of loyalty among the firm’s customers. Customers want to develop relationships with firms that provide quality products and engage in socially responsible conduct.75
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 231
Research indicates a strong association between social responsibility and customer loyalty in that customers are likely to keep buying from firms perceived as doing the right thing. Further, a direct association exists between corporate social responsibility and customer satisfaction, profits, and market value.76 According to the CGS U.S. Consumer Sustainability Survey, most Americans consider sustainability when making a purchase and prefer to purchase from purposedriven brands.77 By gauging customer satisfaction, continuously improving the quality and safety of products, and by making customer information easily accessible and understandable, ethical and socially responsible firms are more likely to serve customers’ needs satisfactorily. Recognition is growing that the long-term value of conducting business in an ethical and socially responsible manner far outweighs short-term costs.78
8.6 INCORPORATING ETHICS AND SOCIAL RESPONSIBILITY INTO STRATEGIC PLANNING Companies that fail to incorporate ethics and social responsibility into their organizational culture may pay the price with poor marketing performance and the potential costs of legal violations, civil litigation, and damaging publicity when questionable activities are made public. As seen in Exhibit 8.6, a strong organizational culture is correlated with favorable business outcomes. Because marketing ethics and social responsibility are not always viewed as organizational performance issues, many managers do not believe they need to consider them in the strategic planning process. Individuals also have different ideas as to what is ethical or unethical, leading them to confuse the need for workplace ethics and the right to maintain their own personal values and ethics. Although the concepts are undoubtedly controversial, it is possible—and desirable—to incorporate ethics and social responsibility into the planning process. Management of ethics and social responsibility are two different areas from a strategic perspective. It is a mistake to assume these areas can be managed the same way. While consumers and others may view them as the same, it has been found that they are managed differently in an organization.79 Senior managers view the two areas from different strategic perspectives. While these areas overlap, marketing ethics involves more internal decisions related to implementing principles, values, and norms embedded in decisions about right or wrong decisions. On the other hand, social responsibility decisions are more voluntary decisions about issues such as
% Employees Observing Favorable Outcomes
EXHIBIT 8.6 The Impact of a Strong Organizational Culture 85% 66%
15% 0% Weak
Weak-leaning
Strong-leaning
Strong
Strength of Organizational Culture Note: Favorable outcomes include employees’ recognizing and adhering to organizational values, feeling prepared to handle key risks, reporting suspected wrongdoing, and reduced levels of misconduct overall. Source: Ethics and Compliance Initiative, Global Differences in Employees’ Views of E&C Program Maturity: 2019 Global Business Ethics Survey (Arlington, VA: Ethics and Compliance Initiative, 2019), p. 4.
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232 Part 4: Putting Strategy into Action
philanthropy, social issues, employee well-being, and corporate governance. These decisions are often made by top managers with the oversight of the board of directors. Marketing ethics relates more to required behavior based on formal internal oversight by marketing managers as well as ethics and legal compliance officers. This involves codes of ethics, policies, and informal values and expectations to develop boundaries for acceptable conduct. But ethical decisions can be made about how to manage social responsibility issues such as sustainability. Many firms integrate ethics and social responsibility into their strategic planning through ethics compliance programs or integrity initiatives that make legal compliance, ethics, and social responsibility an organization-wide effort. According to the Ethics & Compliance Initiative, large companies with effective ethics and compliance programs had a misconduct rate of 33 percent compared to 62 percent for those that did not have an effective program.80 Such programs establish, communicate, and monitor a firm’s ethical values and legal requirements through codes of conduct, ethics offices, training programs, and audits. One of the best examples of this process in action occurs at Texas Instruments (TI). As a large multinational firm, TI manufactures computers, calculators, and other high-technology products. Its code of ethics resembles that of many other organizations. The code addresses issues related to policies and procedures; government laws and regulations; relationships with customers, suppliers, and competitors; the acceptance of gifts, travel, and entertainment; political contributions; expense reporting; business payments; conflicts of interest; investment in TI stock; handling of proprietary information and trade secrets; use of TI employees and assets to perform personal work; relationships with government officials and agencies; and the enforcement of the code. TI’s code emphasizes that ethical behavior is critical to maintaining long-term success and that each individual is responsible for upholding the integrity of the company.81 For maximum effectiveness, the marketing plan should include distinct elements of ethics and social responsibility. Marketing strategy and implementation plans should be developed that reflect an understanding of (1) the risks associated with ethical and legal misconduct, (2) the ethical and social consequences of strategic choices, and (3) the values of organizational members and stakeholders. To help ensure success, top managers must demonstrate their commitment to ethical and socially responsible behavior through their actions—words are simply not enough. In the end, a marketing plan that ignores social responsibility or is silent about ethical requirements leaves the guidance of ethical and socially responsible behavior to the work group, which risks ethical breakdowns and damage to the firm.
LESSONS FROM CHAPTER 8
●●
Marketing ethics and social responsibility:
●●
●●
●●
●● ●●
have grown in importance over the last few years because many firms have seen their image, reputation, and marketing efforts destroyed by problems in these areas. have become necessities in light of stakeholder demands and changes in federal law. improve marketing performance and profits. are important considerations in the development of marketing strategy.
●●
●●
●●
Social responsibility: ●●
●●
is a broad concept that relates to an organization’s obligation to maximize its positive impact on society while minimizing its negative impact. includes the economic responsibility of making a profit to serve shareholders, employees, and the community at large.
includes the legal responsibility of obeying all laws and regulations. includes the ethical responsibility to uphold principles and standards that define acceptable conduct as determined by the public, government regulators, private interest groups, competitors, and the firm itself. includes the philanthropic responsibility to increase the firm’s overall positive impact on society, the local community, and the environment. includes activities related to sustainability, or programs designed to protect and preserve the natural environment. as it relates to sustainability includes green marketing activities and avoiding the deceptive practice of greenwashing.
Marketing ethics: ●●
includes the principles and standards that guide the behavior of individuals and groups in making marketing decisions.
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Chapter 8: Ethics and Social Responsibility in Marketing Strategy 233
●●
●●
●●
●●
●●
●●
requires that both organizations and individuals accept responsibility for their actions and comply with established value systems. can lead to violations of public trust when ethical standards are not upheld. differs from social responsibility in that social responsibility relates to reputation while marketing ethics relates more to decisions that are judged as right or wrong. involves complex and detailed decisions in which correctness may not be so clear cut. deals with experiences and decisions made at work, which may be quite different from the ethical decisions made away from work. comes into play any time that an activity causes managers, employees, or customers in a target market to feel manipulated or cheated.
Ethical issues in the marketing program: ●●
●●
●●
●●
●●
●●
●●
include identifiable problems, situations, or opportunities that require an individual or organization to choose from among several actions that must be evaluated as right or wrong. come into play any time that an activity causes managers, employees, or customers in a target market to feel manipulated or cheated. have the potential to become legal issues if they are not addressed in the strategic planning process. include product-related issues such as failure to disclose risks associated with a product, substituting inferior materials or components to reduce costs, and counterfeit products. include pricing-related issues such as price gouging, baitand-switch tactics, price discrimination, price fixing, predatory pricing, and superficial discounting. include supply chain–related issues such as sourcing from suppliers who engage in unfair labor practices, sourcing components that damage the natural environment, and the need to conduct regular supply chain audits. include promotion-related issues such as communication that deceives, manipulates, or conceals facts in order to create a false impression, exaggerated claims or statements about a product or firm that cannot be substantiated, ambiguous statements in which claims are so weak that the viewer, reader, or listener must infer the advertiser’s intended message, product-labeling issues such as false or misleading claims on a product’s package, and selling abuses such as intentionally misleading customers by concealing facts or bribery.
●●
●●
●●
●● ●● ●● ●● ●●
A code of conduct (code of ethics): ●●
●●
●●
is best done via self-regulatory mechanisms, such as the Better Business Bureau or an industry association, rather than waiting for government regulation to control marketing activities.
is not truly effective unless it has the full support of top management. should have six core values: (1) trustworthiness, (2) respect, (3) responsibility, (4) fairness, (5) caring, and (6) citizenship. will not resolve every ethical issue encountered in daily operations, but it can help employees and managers deal with ethical dilemmas by prescribing or limiting specific activities.
The connection between ethics/social responsibility and marketing performance: ●●
●●
●●
●●
●●
can cause employees to make an extra effort to better understand the demands and concerns of customers. can cause customers to become more loyal to the firm and increase their purchases from the firm. can be important in the reputation of a firm and brand image. shows that social responsibility should be an opportunity to do good and support the performance of the firm, and it should be a part of the marketing strategy related to developing long-term customer relationships. can lead to increased trust among the firm’s stakeholders. The most important contributing factor to gaining trust is the perception that the firm and its employees will not sacrifice their standards of integrity.
Stakeholder orientation: ●●
●●
Managing and controlling ethical issues: ●●
is important with advancements in technology because when technologies emerge, there are new opportunities for marketing as well as new challenges. can be handled by establishing a code of conduct (i.e., code of ethics), but only if the code becomes integrated into daily decision-making. depends to a great extent on the ethical leadership exhibited by top management. Great ethical leaders: create a common goal or vision for the company obtain buy-in, or support, from significant partners motivate others to be ethical use the resources that are available to them enjoy their jobs and approach them with an almost contagious tenacity, passion, and commitment.
●●
refers to the degree to which a firm understands and addresses stakeholder demands. is composed of three sets of activities: (1) the organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups, (2) the distribution of this information throughout the firm, and (3) the organization’s responsiveness as a whole to this intelligence. consists of the initiatives that the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues.
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234 Part 4: Putting Strategy into Action
The connection between ethics/social responsibility and strategic planning: ●●
●●
●●
●●
●●
is so strong that firms that fail to incorporate ethics and social responsibility into their organizational cultures may pay the price with poor marketing performance and the potential costs of legal violations, civil litigation, and damaging publicity when questionable events are made public. shows that while management of ethics and social responsibility overlap, marketing ethics involves more internal decisions related to implementing principles, values, and norms embedded in decisions about right or wrong decisions while social responsibility decisions are more voluntary decisions about issues such as philanthropy, social issues, employee well-being, and corporate governance. is typically done through ethics compliance programs or integrity initiatives that make legal compliance, ethics, and social responsibility an organization-wide effort. should be vested in the marketing plan, which should include distinct elements of ethics and social responsibility. is based on an understanding of (1) the risks associated with ethical and legal misconduct, (2) the ethical and social consequences of strategic choices, and (3) the values of organizational members and stakeholders.
ENDNOTES 1. Isabelle Maignan, Tracy L. Gonzalez-Padron, G. Tomas M. Hult, and O. C. Ferrell, “Stakeholder Orientation: Development and Testing of a Framework for Socially Responsible Marketing,” Journal of Strategic Marketing, 19(4) (July 2011), 313–338. 2. Emily Flitter, “The Price of Wells Fargo’s Fake Account Scandal Grows by $3 Billion,” The New York Times, February 21, 2020, https://www .nytimes.com/2020/02/21/business/wells-fargo-settlement.html (accessed April 28, 2020). 3. Salesforce, “Ethisphere Institute Recognizes Salesforce as One of the World’s Most Ethical Companies,” February 25, 2020, www.salesforce .com/company/newspress/stories/2020/2/ethisphere-salesforce/ (accessed April 28, 2020); Jordan Novet and Ari Levy, “Salesforce Is Paying Top Dollar for Growth—and Not Just in the Cloud,” CNBC, June 10, 2019, www.cnbc .com/2019/06/10/salesforces-pays-up-for-growth-for-tableau-mulesoft-and -others.html (accessed April 28, 2020); Salesforce.org, http://www.salesforce .org/ (accessed April 28, 2020); Salesforce, “Sustainability,” https://www .salesforce.com/company/sustainability/ (accessed April 28, 2020). 4. Laurel Wamsley, “Amazon Sets $15 Minimum Wage for U.S. Employees, Including Temps,” NPR, October 2, 2018, https://www.npr .org/2018/10/02/653597466/amazon-sets-15-minimum-wage-for-u-semployees-including-temps (accessed April 28, 2020). 5. Archie Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, 34(4) (July/August 1991), 39–48. 6. Davie Sebastian, “FTC Accuses Match.com of Tricking Users,” The Wall Street Journal, September 26, 2019, p. B1. 7. National Philanthropic Trust, “Charitable Giving Statistics,” https:// www.nptrust.org/philanthropic-resources/charitable-giving-statistics/ (accessed April 28, 2020).
8. The Empty Cup, “Our Story,” www.theemptycup.org/our-story (accessed April 28, 2020). 9. Jacob Tierney, “Billboard Advertising Shifts During Pandemic,” Trib Live, April 27, 2020, https://triblive.com/local/regional/billboard-advertising -shifts-during-pandemic/ (accessed April 28, 2020). 10. Robert Williams, “Hard Seltzer Brand Plans ‘Biggest Digital Cheers in History’ to Bartenders,” Mobile Marketer, March 31, 2020, https://www .mobilemarketer.com/news/hard-seltzer-brand-plans-biggest-digital -cheers-in-history-to-bartenders/575165/ (accessed April 28, 2020). 11. Debbie Thorne McAlister, O. C. Ferrell, and Linda Ferrell, Business and Society: A Strategic Approach to Social Responsibility, 5th ed. (Chicago, IL: Chicago Business Press, 2015). 12. Tesla, “Impact Report,” 2018, https://www.tesla.com/ns_videos /tesla-impact-report-2019.pdf (accessed April 28, 2020). 13. Samer Abu-Saifan, “Social Entrepreneurship: Definition and Boundaries,” Technology Innovation Management Review, February 2012, 22–27. 14. Sean Stannard-Stockton, “The Effective Strategic Philanthropist,” Tactical Philanthropy, March 16, 2011, http://www.tacticalphilanthropy .com/2011/03/theeffective-strategic-philanthropist/ (accessed February 25, 2015); Sean Stannard-Stockton, “The Social Entrepreneur,” Tactical Philanthropy, March 15, 2011, http://www.tacticalphilanthropy.com/2011/03 /the-effective-social-entrepreneur/ (accessed February 25, 2015). 15. Ira Kalb, “Marketing: The Missing Ingredient in Social Entrepreneurship,” The Huffington Post, April 1, 2015, http://www.huffingtonpost .com/ira-kalb/marketing-themissing-ing_b_6973658.html (accessed April 3, 2015). 16. Estée Lauder Companies, “MAC Viva Glam Turns 25,” May 1, 2019, https://www.elcompanies.com/en/news-and-media/newsroom/company -features/2019/mac-viva-glam-turns-25 (accessed April 28, 2020). 17. Christine Birkner, “Green Global Brands,” Marketing News, September 30, 2011, 12–16. 18. U.S. Green Building Council, LEED website, http://www.usgbc.org /leed (accessed March 31, 2015). 19. Kate Rogers, “Starbucks to Build 10,000 ‘Greener’ Stores by 2025,” CNBC, September 13, 2018, https://www.cnbc.com/2018/09/13/starbucks -to-build-10000-greener-stores-by-2025.html (accessed April 28, 2020). 20. Home Depot, “Eco Options,” http://www.ecooptions.homedepot .com/ (accessed March 31, 2015). 21. PR Newswire, “Chiquita Achieves Major Milestone in Environmental and Social Certification of Banana Farms,” Chiquita, November 16, 2000, http://investors.chiquita.com/phoenix.zhtml?c=119836&p=irol-news Article&ID=132904 (accessed March 31, 2015). 22. Traci Watson, “Eco-Friendly Claims Go Unchecked,” USA Today, June 22, 2009, A1. 23. Linda Ferrell and O. C. Ferrell, Ethical Business (London: Dorling Kindersley Limited, 2009), 38–39. 24. Krista Mahr, “Digging Deep for Smarter Heat,” Time, September 20, 2010, 74; Walmart, “Walmart to Generate Solar Energy at More Than 75 Percent of Its Stores in California,” September 21, 2011, http://news.walmart .com/news-archive/2011/09/21/walmart-to-generate-solar-energy-at-more -than-75-percent-of-its-stores-in-california (accessed March 31, 2015). 25. Jeff Bercovici, “Your $14 Salad’s Not as Eco-Friendly as Advertised— but Sweetgreen’s Trying,” Los Angeles Times, January 15, 2020, https:// www.latimes.com/business/technology/story/2020-01-15/sweetgreen -green-image (accessed April 28, 2020); Stuart Kaplow, “FTC Finds Truly Organic Is Not,” Green Building Law Update, October 27, 2019, https:// www.greenbuildinglawupdate.com/2019/10/articles/green-washing/ftc -finds-truly-organic-is-not/ (accessed April 28, 2020); Paul Keegan, “The Trouble with Green Ratings,” CNNMoney, July 13, 2011, http://money .cnn.com/2011/07/12/technology/problem_green_ratings.fortune/index .htm (accessed April 28, 2020); Gwendolyn Bounds, “Misleading Claims on ‘Green’ Labeling,” The Wall Street Journal, October 26, 2010, https://www .wsj.com/articles/SB10001424052702303467004575574521710082414
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236 Part 4: Putting Strategy into Action /four-brands-on-board-as-evrnu-closes-on-commercialisation/ (accessed January 29, 2019); “Evrnu Company Profile,” PitchBook, https://pitchbook .com/profiles/company/115382-80 (accessed January 29, 2019); Evrnu, “The Problem: Textile Waste,” Evrnu, https://www.evrnu.com/ (accessed January 29, 2019); Evrnu, “EvernuTM and Levi Strauss & Co. Create First Jeans. Made from Post-Consumer Cotton Garment Waste,” May 11, 2016, https://www .evrnu.com/blog-posts/2016/5/10/evrnu-and-levi-strauss-co-create-first -jeans-made-from-post-consumer-cotton-garment-waste (accessed January 29, 2019); Eliza Jordan, “Stacy Flynn with Evrnu Is Creating New Fabrics from Recycled Ones,” Whitewall, August 7, 2018, https://www.whitewall.art /fashion/stacy-flynn-evrnu-creating-new-fabrics-recycled-ones (accessed January 30, 2019); PR Newswire, “World Economic Forum Circular Awards Names Closed Loop Partners First Runner Up for Circular Economy Investor in Davos,” January 23, 2018, https://www.prnewswire.com/news-releases /world-economic-forum-circular-awards-names-closed-loop-partners -first-runner-up-for-circular-economy-investor-in-davos-300586368.html (accessed January 30, 2019); World Wildlife Fund, “The Impact of a Cotton T-Shirt,” WWF, January 16, 2013, www.worldwildlife.org/stories/the-impact -of-a-cotton-t-shirt (accessed January 30, 2019). 57. SAS, “Big Data: What It Is and Why It Matters,” https://www.sas .com/en_us/insights/big-data/what-is-big-data.html (accessed May 4, 2020). 58. Connext Digital, “How Artificial Intelligence Is Reshaping Email Marketing,” January 22, 2019, https://connextdigital.com/how-artificial -intelligence-is-reshaping-email-marketing/ (accessed May 4, 2020). 59. Alex P. Miller and Kartik Hosanagar, “How Targeted Ads and Dynamic Pricing Can Perpetuate Bias,” Harvard Business Review, November 8, 2019, https://hbr.org/2019/11/how-targeted-ads-and-dynamic-pricing -can-perpetuate-bias (accessed May 4, 2020). 60. O. C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 9th ed. (Mason, OH: Cengage Learning, 2013). 61. H&M, “Code of Ethics: Suppler/Business Partner,” https://about .hm.com/content/dam/hm/about/documents/en/CSR/Policies/Code%20 of%20Ethics%20business%20partners_en.pdf (accessed April 28, 2020). 62. American Marketing Association, “Statement of Ethics,” http:// www.marketingpower.com/AboutAMA/Pages/Statement%20of%20Ethics .aspx (accessed March 31, 2015). 63. McAlister, Ferrell, and Ferrell. 64. Stephen Taub, “SEC Probing Harley Statements,” CFO.com, July 14, 2005, http://www.cfo.com/article.cfm/4173321/c_4173841?f=archives& origin=archive (accessed March 31, 2015). 65. Thomas A. Stewart, Ann Harrington, and Maura Griffin Sol, “America’s Most Admired Companies: Why Leadership Matters,” Fortune, March 3, 1998, 70, 71. 66. LRN, “LRN Ethics Study: Employee Engagement,” https://assets .hcca-info.org/Portals/0/PDFs/Resources/library/EmployeeEngagement_ LRN.pdf (accessed April 28, 2020). 67. Diane E. Kirrane, “Managing Values: A Systematic Approach to Business Ethics,” Training and Development Journal, 44(11) (November 1990), 53–60. 68. O. C. Ferrell, Isabelle Maignan, and Terry Loe, “Corporate Ethics + Citizenship = Profits,” The Bottom Line: Good Ethics Is Good Business (Tampa, FL: Center for Ethics, University of Tampa, 1997).
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CHAPTER 9 Marketing Implementation and Control 9.1 INTRODUCTION Throughout the history of business, many firms and their top executives have emphasized strategic planning at the expense of strategic implementation. Historically, and perhaps even more in today’s startup business culture, this emphasis on planning occurs because many executives believe that strategic planning, by itself, is the key to marketing success. This belief is logical because a firm must have a plan before it can determine where it is going. Although many firms are quite good at devising strategic marketing plans, they are often unprepared to cope with the realities of implementation. Marketing implementation is the process of executing the marketing strategy by creating and performing specific actions that will ensure the achievement of the firm’s marketing objectives. Strategic planning without effective implementation can produce unintended consequences that result in customer dissatisfaction and feelings of frustration within the firm. Likewise, poor implementation will most likely result in the firm’s failure to reach its organizational and marketing objectives. Unfortunately, many firms repeatedly experience failures in marketing implementation. Out-of-stock items, cumbersome call or chat service practices, delays in product delivery, malfunctioning websites, and unfriendly or inattentive employees are examples of implementation failure that occur all too frequently. These and other examples illustrate that even the bestplanned marketing strategies are a waste of time without effective implementation to ensure their success. To track the implementation process, firms must have ways of evaluating and controlling marketing activities as well as monitoring performance to determine whether marketing goals and objectives have been achieved. Implementation, evaluation, and 237 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
238 Part 4: Putting Strategy into Action
control go hand-in-hand in determining the success or failure of the marketing strategy, and ultimately the entire firm. One of the most important considerations in implementing and controlling marketing activities involves gaining the support of employees. Because a marketing strategy cannot implement itself, all firms depend on employees to carry out marketing activities. As a result, the firm must devise a plan for implementation, just as it devises a plan for marketing strategy.
BEYOND THE PAGES 9.1
Managing Risk Through Culture1 Given the many examples of corporate misconduct and lapses in managerial judgment in recent years, top executives have become keenly aware of the importance of managing corporate risk. The risks faced by today’s organizations come in many forms (e.g., pandemic, regulatory, financial, insurance, operational, product liability, strategic, and reputational risks). As top executives try to better understand the stakes in enterprise risk management, they are beginning to realize that managing risk involves more than making the right decisions in the boardroom. True risk management involves assessing the risk culture of the entire firm. Experts define risk culture as a system of values and behaviors within an organization that shape risk decisions. An organization’s risåk culture influences everyone, whether they are aware of it or not. It is this lack of awareness that creates potential problems. Even seemingly small decisions can have implications for corporate risk. The key is to ensure that all employees have a common understanding of risk and how it is potentially connected to their day-to-day activities. Sadly, the evidence suggests that most organizations do a poor job of nurturing their risk cultures. While 91 percent of firms with a risk program self-rated as excellent include risk management in C-suite discussions, the vast majority of programs rated as fair or poor do so only half of the time or less. Additionally, complex risks are surfacing faster and faster due to disruptive technology (e.g., artificial intelligence) and data breaches. Formal risk training and an open dialogue about risk are important so organizations can ensure that well-informed and consistent decisions about risk occur throughout the firm. How can an organization inspire a risk culture? Some suggested guidelines include: ●●
Set the Tone at the Top and the Middle. A key axiom of management is that leaders communicate their priorities through what they measure, discuss, praise, and criticize. These aspects of “setting the tone” are important because they provide examples for other employees to
follow. However, this tone must emanate from all managers, not just those in the boardroom. The organization and its leaders must have a clearly articulated risk policy as well as clear penalties for noncompliant behavior. ●● Understand the Difference Between Good and Bad Risk. Risk management has the potential to stifle an organization’s creativity. Thus, it is critical that all employees understand the difference between acceptable risk based on innovation and reckless behavior that jeopardizes the organization. The firm must also encourage and be willing to tolerate mistakes, and then learn from them. ●● Promote Open Communication About Risk. Creating the proper risk culture requires consistent messages to employees about risk, and the importance of managing risk as a part of daily operations. This means that collaboration is essential to mitigate the ambiguity and competitiveness that typically lead to overly risky decisions. ●● Give Employees Incentives to Manage Risk. Giving proper incentives to manage risk is important. However, it is often more important to eliminate any incentives that reward reckless behavior. This applies to everyone in the organization—from the boardroom to the mailroom. ●● Consider the Risk Cultures of Potential Partners. To manage risk fully, an organization must ensure that its vendors, suppliers, and strategic partners share its risk tolerances. Risk should always be a consideration in choosing new partners or suppliers. Note that this also applies to the company’s most important partners—its employees. Risk should always be a consideration in the hiring process. Having a strong risk culture means that everyone knows the principles and boundaries within which the organization operates. It means that risk is openly discussed and weighed in all decisions. It ensures that everyone stays on the right path. However, creating this type of culture takes a great deal of patience and time. But then again, the crises that result from poor risk management are often far more costly in terms of time, money, and corporate reputation.
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In this chapter, we examine the critical role of marketing implementation and control in the strategic planning process. First, we discuss a number of important strategic issues involved in implementation, including the major components of implementation that must work together for a strategy to be executed successfully. Then, we examine the advantages and disadvantages of major marketing implementation approaches. This discussion also describes how internal marketing can be used to motivate employees to implement marketing strategy. Finally, we look at the marketing evaluation and control process.
9.2 STRATEGIC ISSUES IN MARKETING IMPLEMENTATION Marketing implementation is critical to the success of any firm because it is responsible for putting the marketing strategy into action. Simply put, implementation refers to the “how” part of the marketing plan. Marketing implementation is a broad concept, and for that reason it is often misunderstood. Some of this misunderstanding stems from the fact that marketing strategies almost always turn out differently than expected. In fact, all firms have two strategies: their intended strategy and a realized strategy.2 Intended marketing strategy is what the firm wants to happen—it is the firm’s planned strategic choices that appear in the marketing plan itself. The realized marketing strategy, on the other hand, is the strategy that actually takes place. More often than not, the difference between the intended and the realized strategies is a matter of the implementation of the intended strategy. This is not to say that a firm’s realized marketing strategy is necessarily better or worse than the intended marketing strategy, just that it is different in execution and results. Such differences are often the result of internal or external environmental factors that change during implementation.
9.2a The Link Between Planning and Implementation One of the most interesting aspects of marketing implementation is its relationship to the strategic planning process. Many firms assume that planning and implementation are interdependent but separate issues. In reality, planning and implementation intertwine within the marketing planning process. Many of the problems of marketing implementation occur because of its relationship to strategic planning. The three most common issues in this relationship are interdependency, evolution, and separation.
Interdependency Many firms assume that the planning and implementation process is a oneway street. That is, strategic planning comes first, followed by implementation. Although it is true that the content of the marketing plan determines how it will be implemented, it is also true that how the marketing strategy is to be implemented determines the content of the marketing plan. Certain marketing strategies will define their implementation by default. For example, a firm such as Southwest Airlines with a strategy of improving customer service may turn to employee training programs as an important part of that strategy’s implementation. Through profit sharing, many Southwest employees are also stockholders with a vested interest in the firm’s success. As the COVID-19 (coronavirus) pandemic hit the United States, thanks to profit sharing, eligible Southwest employees received a bonus equal to six weeks of pay at a time when many people around the world became unemployed.3 Employee training and profit-sharing programs are common in firms that depend on their employees’ commitment and enthusiasm to ensure quality customer service. However, employee training, as a tool of implementation, can also dictate the content of the firm’s strategy. Perhaps a competitor of Southwest, who is in the process of implementing its own customer service strategy, realizes that it does not possess adequate resources to offer profit
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Long waiting lines are a common symptom that can be tied to problems in strategy, implementation, or both.
sharing and extensive training to its employees. Maybe the company simply lacks the financial resources or the staff required to implement these activities. Consequently, the company will be forced to go back to the planning stage and adjust its customer service strategy. These continual changes in marketing strategy make implementation more difficult. Clearly, a SWOT (strengths, weaknesses, opportunities, and threats) analysis conducted with an eye toward what the company can reasonably implement can reduce, but not completely eliminate, this problem.
Evolution All firms face a simple truth in planning and implementation: Important environmental
factors constantly change. As the needs and wants of customers change, as competitors devise new marketing strategies, and as the firm’s own internal environment changes, the firm must constantly adapt. Disruption in the market is an environmental factor that also drives change and adaptation. In some cases, these changes occur so rapidly that once the firm decides on a marketing strategy, it quickly becomes out of date. Because planning and implementation are intertwined, both must constantly evolve to fit the other. The process is never static because environmental changes require shifts in strategy, which require changes in implementation, which require shifts in strategy, and so on. A related problem is that executives often assume there is only one correct way to implement a given strategy. This is simply not true. Just as strategy often results from trial and error, so does marketing implementation. Firms that are truly customer-oriented must be flexible enough to alter their implementation on the fly to fully embrace customer intimacy and respond to changes in customers’ preferences. In the airline industry, for example, competitors quickly alter their pricing strategies when one firm changes fares. Subscription services (e.g., Netflix, Hulu, and Dollar Shave Club) have also learned this lesson, as they must demonstrate their value to customers regularly or risk losing customers. Many subscription companies have adopted a “customer success” mindset that helps them to focus on keeping their customers successful in using products that change rapidly and can lose relevance to customers that don’t understand them or recognize the value of new product features. These rapid changes require that firms be flexible in both marketing strategy and implementation, often aided through a plan that focuses on the success of customers.
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EXHIBIT 9.1 The Separation of Planning and Implementation
Very Much Time Spent on Planning
Time Spent on Implementation Very Little Chief Executive Officer
Mid-Level Marketing Managers
Frontline Marketing Managers
Separation The ineffective implementation of marketing strategy is often a self-generated
problem that stems from the way that planning and implementation are carried out in most firms. As shown in Exhibit 9.1, middle- or upper-level managers often do strategic planning; however, the responsibility for implementation almost always falls on lower-level managers and frontline employees. Top executives often fall into a trap of believing that a good marketing strategy will implement itself. Because there is distance between executives and the day-to-day activities at the frontline of the firm, they often do not understand the unique problems associated with implementing marketing strategy. Conversely, frontline employees—who do understand the challenges and hurdles of implementation—usually have a limited voice in planning the strategy. Another trap that top executives often fall into is believing that frontline managers and employees will be excited about the marketing strategy and motivated to implement it. However, because they are separated from the planning process, these managers and employees often fail to identify with the firm’s goals and objectives, and thus fail to fully understand the marketing strategy.4 It is unrealistic for top executives to expect frontline managers and employees to be committed to a strategy they had no voice in developing, or to a strategy that they do not understand or feel is inappropriate.5
9.2b The Elements of Marketing Implementation Marketing implementation involves a number of interrelated elements and activities, as shown in Exhibit 9.2. These elements must work together for strategy to be implemented effectively. Because we examined marketing strategy issues in previous chapters, we now look briefly at the remaining elements of marketing implementation.
Shared Goals and Values Shared goals and values among all employees within the firm are the “glue” of successful implementation because they bind the entire organization together as a single, functioning unit. When all employees share the firm’s goals and values, all actions will be more closely aligned and directed toward the betterment of the organization. Without a common direction to hold the organization together, different areas of the firm may work toward different outcomes, thus limiting the success of the entire organization. For example, one of the reasons
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EXHIBIT 9.2 The Elements of Marketing Implementation
Marketing Strategy
Marketing Structure
Shared Goals
Systems
Resources
Leadership
People
Source: Adapted from Lawrence R. Jaunch and William F. Glueck, Strategic Management and Business Policy, 3rd ed. (New York: McGraw-Hill, 1988), p. 305.
Zappos has a reputation for stellar customer service is the fact that its employees are committed to Zappos’s values. The company conducts a culture interview during the hiring process to make sure employees are a good fit for the company.6 Other firms, such as Google, HubSpot, and Warby Parker, are well known for their efforts to ensure that employees share and are committed to corporate goals and values. Institutionalizing shared goals and values within a firm’s culture is a long-term process. The primary means of creating shared goals and values is through employee training and socialization programs.7 Although creating shared goals and values is a difficult process, the rewards are worth the effort. Some experts have argued that creating shared goals and values is the single most important element of implementation because it stimulates organizational commitment where employees become more motivated to implement the marketing strategy, to achieve the firm’s goals and objectives, and to serve more fully the needs of the firm’s customers.8 One thing that firms need to consider as they adapt to a less central workspace for employees is how shared goals, values, and culture are developed. Most successful marketing companies operate across regional, national, or global markets with employees located in various locations. Couple this with an increasingly remote workforce that conducts operations offsite or from home—a practice hastened by the COVID-19 pandemic—and developing shared goals and values becomes an increasing challenge. Companies that operate with remote workforces need to purposefully build culture via technology tools, clearly setting expectations related to work and customer service, pairing virtual teams to work on projects across distance, and—where possible—bringing teams together for in-person meet-ups on a regular basis.9 In many ways, companies that work with many remote employees are forced to take action that helps to develop a healthy culture and common values more than those that just expect it to happen because everyone works in the same location.
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Marketing Structure Marketing structure refers to the methods of organizing a firm’s marketing activities. Marketing structure establishes formal lines of authority as well as the division of labor within the marketing function. One of the most important decisions that firms make is how to divide and integrate marketing responsibilities. This decision typically comes down to the question of centralization versus decentralization. In a centralized marketing structure, the top of the marketing hierarchy coordinates and manages all marketing activities and decisions. Conversely, in a decentralized marketing structure, the frontline of the firm coordinates and manages marketing activities and decisions. Typically, decentralization means that frontline marketing managers have the responsibility of making day-to-day marketing decisions. Both centralized and decentralized marketing structures have advantages. Centralized structures are cost-efficient and effective in ensuring standardization within the marketing program. These advantages can be particularly critical to firms whose competitiveness depends on maintaining tight control over marketing activities and expenses.10 For example, firms employing a strategy of operational excellence, such as Walmart or Dell, may find a centralized structure beneficial to ensuring operational efficiency and consistency. Decentralized marketing structures have the important advantage of placing marketing decisions closer to the frontline where serving customers is the number-one priority. By decentralizing marketing decisions, frontline managers can be creative and flexible, allowing them to adapt to changing market conditions.11 For this reason, firms that employ a strategy of customer intimacy, such as Chick-fil-A, Trader Joe’s, RitzCarlton, or Nordstrom, may decentralize to ensure that they can respond to customers’ needs in a timely manner. The decision to centralize or decentralize marketing activities is a trade-off between reduced costs and enhanced flexibility. However, there is no one correct way to organize the marketing function. The right marketing structure will depend on the specific firm, the nature of its internal and external environments, and its chosen marketing strategy.12 Systems and Processes Organizational systems and processes are collections of work activi-
ties that absorb a variety of inputs to create information and communication outputs that ensure the consistent day-to-day operation of the firm.13 Examples include information systems, technology platforms, strategic planning, capital budgeting, procurement, order fulfillment, efficient delivery, manufacturing, quality control, returns of online purchases, and performance measurement. As we discussed in Chapter 6, many of these systems and processes are outsourced to other firms. However, their important role in implementation means that the firm must be very diligent in how these activities are managed.
Resources A firm’s resources can include a wide variety of assets that can be brought together during marketing implementation. These assets may be tangible or intangible. Tangible resources include financial resources, manufacturing capacity, facilities, delivery vehicles (e.g., trucks, planes, and drones), and equipment. Although not quite as obvious, intangible resources such as marketing expertise, mobile app intuitiveness, the ability to create or respond to disruption, customer loyalty, brand equity, corporate goodwill, and external relationships/strategic alliances are equally important. In Chapter 7, we addressed the importance of branding and corporate reputation in the marketing program. These issues are similarly important in the implementation of the strategy, especially in leveraging strategic partnerships to ensure that marketing activities are done effectively and efficiently. Regardless of the type of resource, the amount of resources available can make or break a marketing strategy. However, a critical and honest evaluation of available resources during the planning phase can help ensure that the marketing strategy and marketing implementation are within the realm of possibility. Upon completion of the marketing plan, the analyst or planner must seek the approval of needed resources from top executives. This makes the communication aspects of the actual marketing plan document critical to the success of the strategy. Top executives allocate scarce resources based on the ability of the plan to help the firm reach its goals and objectives.
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People (Human Resources) The quality, diversity, and skill of a firm’s human resources can also make or break the implementation of the marketing strategy. Consequently, human resource issues have become more important to the marketing function, especially in the areas of employee selection and training, evaluation and compensation policies, and employee motivation, satisfaction, and commitment. In fact, the marketing departments of many firms have taken over the human resources function to ensure that employees have a correct match to required marketing activities.14 A number of human resource activities are vitally important to marketing implementation: ●●
●●
●●
Employee Selection and Training. One of the most critical aspects of marketing implementation is matching employees’ skills and abilities to the marketing tasks to be performed.15 It is no secret that some people are better at some jobs than others. We all know individuals who are natural salespeople. Some individuals are better at working with people, while others are better at working with tools or computers. The key is to match these employee skills to marketing tasks. Employee diversity is an increasingly important aspect of selection and training practices. As the U.S. population becomes more ethnically diverse, many firms take steps to ensure that the diversity of their employees matches the diversity of their customers. Many firms also face challenges with generational diversity because younger generations bring new perspectives to the workplace. Gen Z, which accounts for roughly a quarter of the U.S. population, is the most ethnically and racially diverse generation in history. They are more likely to form an opinion of a company based on ethics, practices, and social impact rather than on product or service quality.16 In many cases, these younger employees have better training, more technological sophistication, and fewer political inclinations than their older bosses. Managers must recognize these issues and adapt selection and training practices accordingly. Employee Evaluation and Compensation. Employee evaluation and compensation are also important to successful marketing implementation. An important decision to be made in this area is the choice between outcome- and behavior-based systems.17 An outcome-based system evaluates and compensates employees based on measurable, quantitative standards such as sales volume or gross margin. This type of system is fairly easy to use, requires less supervision, and works well when market demand is fairly constant, the selling cycle is relatively short, and all efforts directly affect sales or profits. Conversely, behavior-based systems evaluate and compensate employees based on subjective, qualitative standards such as effort, motivation, teamwork, and friendliness toward customers. This type of system ties directly to customer satisfaction and rewards employees for factors they can control. However, behavior-based systems are expensive and difficult to manage because of their subjective nature and the amount of supervision required. Many firms use a hybrid approach that includes a mix of salary based on behavioral controls and variable compensation (e.g., bonuses or commission) based on outcome controls. The choice between outcome- and behavior-based systems, or a hybrid mix, depends on the firm and its products, markets, and customers’ needs. The important point is to match the employee evaluation and compensation system to the activities that employees must perform to implement the marketing strategy. Employee Motivation, Satisfaction, and Commitment. Other important factors in the implementation of marketing strategy are the extent to which employees have the motivation to implement the strategy, their overall feelings of job satisfaction, and the commitment they feel toward the organization and its goals.18 For example, one of the major contributors to Patagonia’s success is the strong social culture fostered by the company’s leaders. Patagonia provides its employees with things such as subsidized childcare, generous maternity and paternity leave, and time off for personal activities. In return, Patagonia’s employees reward the company with exceptionally strong motivation and commitment.19
Though factors such as employee motivation, satisfaction, and commitment are critical to successful implementation, they are highly dependent on other elements of implementation,
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especially training, evaluation/compensation systems, and leadership. Marketing structure and processes can also have an impact on employee behaviors and attitudes. The key is to recognize the importance of these factors to successful marketing implementation and to manage them accordingly.
Leadership The leadership provided by a firm’s managers and the behaviors of employees
go hand in hand in the implementation process. Leadership—often called the art of managing people—includes how managers communicate with employees as well as how they motivate their people to implement the marketing strategy. Today’s business leaders must be courageous enough to take a long-term view of corporate success—one that often sacrifices short-term gains for the sake of the future. Leaders have responsibility for establishing the corporate culture necessary for implementation success.20 A good deal of research has shown that marketing implementation is more successful when leaders create an organizational culture characterized by open communication between employees and managers. In this way, employees are free to discuss their opinions and ideas about the marketing strategy and implementation activities. This type of leadership also creates a climate where managers and employees have full confidence and trust in each other. Today’s technology and social media platforms allow many leaders a greater chance to interact with their employees. In the past, a business leader was distant from frontline workers and teams. Today, leaders can host town hall meetings or listening sessions and engage with smaller teams via videoconferencing tools such as Zoom or GoToMeeting, making the CEO and other leaders much more known and involved than in the past. Also, leader LinkedIn posts, Twitter feeds, and other outward communications provide a channel for leaders to communicate more regularly and in more creative ways (e.g., video, meme, or voice) than a traditional memo or brochure. Thus, connected leaders can more quickly inform and update their employees throughout normal business operations and during times of change.
9.3 APPROACHES TO MARKETING IMPLEMENTATION Whether good or bad, all leaders possess a leadership style, or way of approaching a given task. Managers can use a variety of approaches in implementing marketing strategies and motivating employees to perform implementation activities. In this section, we examine four of these approaches: implementation by command, implementation through change, implementation through consensus, and implementation as organizational culture.21
9.3a Implementation by Command Under this approach, the firm’s top executives develop and select the marketing strategies, which are transmitted to lower levels where frontline managers and employees implement them. Implementation by command has advantages: ●● ●●
It makes decision-making much easier. It reduces uncertainty as to what is to be done to implement the marketing strategy.
Unfortunately, this approach suffers from disadvantages: ●● ●●
It places less emphasis on the feasibility of implementing the marketing strategy. It also divides the firm into strategists and implementers: Executives who develop the marketing strategy are often far removed from the targeted customers it is intended to attract.
For these reasons, implementation by command can create employee motivation problems. Many employees are not motivated to implement strategies in which they have little input or confidence. This response is human nature—think of a child who is told to do something “because I [a parent]
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BEYOND THE PAGES 9.2
Microsoft: Embracing the Competition23 Microsoft is continually recognized as one of the world’s most admired companies by Fortune. Key attributes that contribute to this ranking include innovation, people management, use of corporate assets, social responsibility, and global competitiveness. Despite receiving this recognition over the past several years, Microsoft has not always had the greatest reputation in Silicon Valley. Satya Nadella became Microsoft’s CEO in 2014, replacing Steve Ballmer who had held the position for more than 14 years. This change in leadership was a pivotal moment for the company’s future. One competitor said that dealing with Microsoft during Ballmer’s time as CEO felt like “straight-up war.” Nadella has taken the company in a totally new direction. The plan that he put in place was simple: begin working alongside competitors rather than fighting against them. For instance, by setting aside its previous “Windows first” mentality with smartphones, Microsoft engineers were able to contribute to Apple and Google’s mobile operating systems. Under Nadella, Microsoft has embraced open-source software projects and collaboration. Weeks after Nadella started as CEO, Microsoft created a cloud service called Azure that works with iOS apps. While Microsoft had cloud resources under the former
CEO, Nadella made cloud a strategic priority. Microsoft also allowed the Linux operating system onto their servers, and it is now used by half of all computer systems operating on their cloud. Microsoft’s main goal is to increase the amount of activity on their cloud servers. Sales reps are given commission when they join with other companies that increase the activity. These little incentives have been changing the culture from the inside and changing how the employees see Microsoft. Additionally, by embracing the competition, Nadella has positioned Microsoft to be a collaborative partner rather than a threat to other companies. Case in point, Microsoft Azure has the ability to work in conjunction with company’s onpremise data centers rather than replacing them. Microsoft has partnered with companies that were previously viewed as competitors such as Dropbox, Red Hat, Salesforce, and Amazon. By embracing open-source projects and partnerships, Nadella has transformed Microsoft, destroying the usversus-them mentality. So far, Nadella’s strategy of embracing competition has paid off for all stakeholders. In fact, Microsoft is one of the most valuable public companies in the world.
say so.” Often, the child will ignore or not work hard to follow the command if the child doesn’t understand it or why it is important. However, implementation by command is quite common in franchise systems, where strict adherence to high-level standards is required. For example, McDonald’s use of this approach creates a great deal of ongoing tension between the corporate office and its franchisees around the globe. In some cases, the tensions become so hostile that franchisees have flatly refused to implement some corporate strategies. CEO Chris Kempczinski has a questionable track record with franchisees after leading a number of costly initiatives such as store remodels that cost up to $750,000 with the company and franchise splitting the expense. Strategies such as implementing fresh beef increased service times, and the expansion of the dollar menu decreased franchisee margins. Thus, often implementation by command runs counter to maintaining relationships with franchisees, which is important because these individuals are crucial to McDonald’s business model.22
9.3b Implementation Through Change Implementation through change is similar to the command approach except that it focuses explicitly on implementation. The basic goal of implementation through change is to modify the firm in ways that will ensure the successful implementation of the chosen marketing strategy. For example: ●● ●●
The firm’s structure can be altered. Employees can be transferred, hired, or fired.
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●● ●● ●●
New technology can be adopted. The employee compensation plan can be changed. The firm can merge with another firm.
Changes such as mergers and acquisitions are common in many industries, particularly in pharmaceuticals and technology. Given the enormous expense of developing new drugs, many pharmaceutical firms have decided that it is easier and less expensive to offer new products or enter new markets by acquiring firms that already possess those capabilities. Many technology firms follow a similar path and look to startup firms as innovation incubators that develop new apps and functionality with a goal of being purchased by a larger company such as Google, Amazon, or Microsoft. The manager who implements through change is more of an architect and politician, skillfully crafting the organization to fit the requirements of the marketing strategy. There are many good historical examples of implementation through change: Reed Hastings (Netflix), Fred Smith (FedEx), and Steve Jobs (Apple) come to mind. One of the best success stories, however, is Samsung. Once recognized as a cheap, high-volume supplier of computer chips, circuit boards, and electronic components, Samsung has emerged as a dominant player in the consumer electronics market. The major change at Samsung was a shift in operational focus from production to marketing. Samsung also changed by dropping its 50-plus low-budget brands in favor of a single master Samsung brand. The shift has been so successful that Samsung is one of the top electronics manufacturers in the world by revenue and is more successful than Sony, Intel, and other electronics manufacturers in many different product categories.24 Because many business executives are reluctant to give up even a small portion of their control (as is the case with the next two implementation approaches), they often favor implementation through change. The approach achieves a good balance between command and consensus, and its successes are quite evident in business today. However, despite these advantages, implementation through change still suffers from the separation of planning and implementation. By clinging to this power-at-the-top philosophy, employee motivation often remains an issue. Likewise, the changes called for in this approach often take a great deal of time to design and implement (e.g., it took Samsung over a decade to reach the top of the electronics market). This can create a situation where the firm becomes stagnant while waiting on the strategy to take hold. As a result, the firm can become vulnerable to changes in the marketing environment.
9.3c Implementation Through Consensus Upper- and lower-level managers work together to evaluate and develop marketing strategies in the consensus approach to implementation. The underlying premise of this approach is that managers from different areas and levels in the firm come together as a team to collaborate and develop the strategy. Each participant has different opinions as well as different perceptions of the marketing environment. The role of the top manager is that of a coordinator, pulling different opinions together to ensure the development of the best overall marketing strategy. Through this collective decision-making process, the firm agrees on a marketing strategy and reaches a consensus as to the overall direction of the firm. Implementation through consensus is more advantageous than the first two approaches in that it moves some of the decision-making authority closer to the frontline of the firm. For this reason, this implementation approach is used extensively in service organizations. This approach is based on the simple truth that lower-level employees have a unique perspective on the marketing activities necessary to implement the firm’s strategy. These employees are also more sensitive to the needs and wants of the firm’s customers. In addition, because they are involved in the strategic process, these employees often have a stronger motivation and commitment to the strategy to see that it is properly implemented. Modern predictive analytics allows leaders and their teams to project and consider possible financial outcomes when planning. Teams
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248 Part 4: Putting Strategy into Action
must balance human insight with data intelligence to come to a consensus on the best plan. Also, a focus on data analytics allows the plan to be monitored and adapted based on actual, real-time results that indicate areas that work well and areas that need improvement. Implementation through consensus tends to work best in complex, uncertain, and highly unstable environments. The collective strategy-making approach works well in this environment because it brings multiple viewpoints to the table. However, implementation through consensus often retains the barrier between strategists and implementers. The end result of this barrier is that the full potential of the firm’s human resources is not realized. Thus, for implementation through consensus to be truly effective, managers at all levels must communicate openly about strategy on an ongoing, rather than an occasional, basis.
9.3d Implementation as Organizational Culture Under implementation as organizational culture, marketing strategy and its implementation become extensions of the firm’s mission, vision, and organizational culture. In some ways, this approach is similar to implementation through consensus, except that the barrier between strategists and implementers completely dissolves. When personnel see implementation as an extension of the firm’s culture, employees at all levels have permission to participate in making decisions that help the firm reach its mission, goals, and objectives. With a strong organizational culture and an overriding corporate vision, the task of implementing marketing strategy is about 90 percent complete.25 This occurs because all employees adopt the firm’s culture so completely that they instinctively know what their role is in implementing the marketing strategy. At The Ritz-Carlton, for example, the firm’s culture is supported and sustained through daily 15-minute meetings among employees—called “lineups”—where they share stories and educate each other on better ways to serve customers. Ritz-Carlton employees can design their own work procedures and are empowered to attend to guest’s requests with the ability to spend up to $2,000 to settle customer complaints.26 This extreme form of decentralization is often called empowerment. Empowering employees means allowing them to make decisions on how to best perform their jobs. Many companies are embracing social media and group media messaging platforms, such as Slack, as ways to connect the entire company in real time from the frontlines to the executive level. This approach allows for regular updates, communication of changing practices, reporting of success with customers, and much more. However, a strong organizational culture and a shared corporate vision are needed for this approach to work, to ensure that empowered employees make the right decisions and continue to engage in connection efforts. Although creating a strong culture does not happen overnight, it is absolutely necessary before employees can be empowered to make decisions. Employees must be trained and socialized to accept the firm’s mission and to become a part of the firm’s culture.27 Despite the enormous amount of time involved in developing and using this approach to implementation, its rewards of increased effectiveness, efficiency, and increased employee commitment and morale are often well worth the investment. To summarize, firms and their managers can use any one of these four approaches to implement marketing strategy. Each approach has advantages and disadvantages as outlined in Exhibit 9.3. The choice of an approach will depend heavily on the firm’s resources, its current culture, and the manager’s personal preferences. Many managers don’t want to give up control over decision making. For these managers, connecting implementation and culture may be out of the question. Regardless of the approach taken, one of the most important issues that a manager must face is how to deal with the people who have responsibility for implementing the marketing strategy. To examine this issue, we now turn our attention to internal marketing—an increasingly popular approach to marketing implementation.
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EXHIBIT 9.3 Advantages and Disadvantages of Implementation Approaches Implementation by Command Basic Premise:
Marketing strategies are developed at the top of the organizational hierarchy and then passed to lower levels where frontline managers and employees are expected to implement them.
Advantages:
Reduces uncertainty and makes decision-making easier. Good when a powerful leader heads the firm. Good when the strategy is simple to implement.
Disadvantages:
Does not consider the feasibility of implementing the strategy. Divides the firm into strategists and implementers. Can create employee motivation problems.
Implementation Through Change Basic Premise:
The firm is modified in ways that will ensure the successful implementation of the chosen marketing strategy.
Advantages:
Specifically considers how the strategy will be implemented. Considers how strategy and implementation affect each other. Used successfully by a large number of firms.
Disadvantages:
Clings to a “power-at-the-top” mentality. Requires a skilled, persuasive leader. Changes can take time to design and implement, leaving the firm vulnerable to changes in the marketing environment.
Implementation Through Consensus Basic Premise:
Different areas of the firm come together to “brainstorm” and develop the marketing strategy. Through collective agreement, a consensus is reached as to the overall direction of the firm.
Advantages:
Considers multiple opinions and viewpoints. Increases firm-wide commitment to the strategy. Moves some decision making closer to the front line of the firm. Useful in complex, uncertain, and unstable environments.
Disadvantages:
Some managers will not give up their authority. Can lead to groupthink. Slows down the strategy development and implementation process. Requires open horizontal and vertical communication.
Implementation as Organizational Culture Basic Premise:
Marketing strategy is a part of the overall mission and vision of the firm; therefore, the strategy is embedded in the firm’s culture. Top executives manage the firm’s culture to ensure that all employees are well versed in the firm’s strategy.
Advantages:
Eliminates the barrier between strategists and implementers. Increases employee commitment to organizational goals. Allows for the empowerment of employees. Can make marketing implementation much easier to accomplish.
Disadvantages:
Must spend more money on employee selection and training. Creating the necessary culture can be painful and time-consuming. Quickly shifting to this approach can cause many internal problems.
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250 Part 4: Putting Strategy into Action
9.4 INTERNAL MARKETING AND MARKETING IMPLEMENTATION As more firms come to appreciate the importance of employees to marketing implementation, they have become disenchanted with traditional implementation approaches. Several factors have caused this change: U.S. businesses losing out to foreign competitors, high rates of employee turnover and its associated costs, and continuing problems in the implementation of marketing strategy. These problems have led many firms to adopt an internal marketing approach to marketing implementation. The practice of internal marketing comes from service industries, where it was first used as a means of making all employees aware of the need for customer satisfaction. Internal marketing refers to the use of a marketing-like approach to motivate, coordinate, and integrate employees toward the implementation of the firm’s marketing strategy. The goals of internal marketing are to (1) help all employees understand and accept their roles in implementing the marketing strategy, (2) create motivated and customer-oriented employees, and (3) deliver external customer satisfaction.28 Note that internal marketing explicitly recognizes that external customer satisfaction depends on the actions of the firm’s internal customers—its employees.
9.4a The Internal Marketing Approach In the internal marketing approach, every employee has two customers: external and internal. As an example, for retail store managers the people who shop at the store are external customers, whereas the employees who work in the store are the manager’s internal customers. For implementation to be successful, the store manager must serve the needs of both customer groups. If the internal customers do not receive proper information and training about the strategy and are not motivated to implement it, then it is unlikely that the external customers will be satisfied completely. This same pattern of internal and external customers takes place throughout all levels of the firm. Even the CEO is responsible for serving the needs of internal and external customers. Thus, unlike traditional implementation approaches where the responsibility for implementation rests with the frontline of the firm, the internal marketing approach places this responsibility on all employees regardless of their level within the firm. In the end, successful marketing implementation comes from an accumulation of individual actions where all employees have responsibility for implementing the marketing strategy. Walmart founder Sam Walton was keenly aware of the importance of internal marketing. He visited Walmart stores on a regular basis, talking with customers and employees about how he could better serve their needs. He felt so strongly about the importance of his associates (his term for store personnel) that he always allowed them the opportunity to voice their concerns about changes in marketing activities. Sam had strong convictions that if he took good care of his associates, they would take good care of Walmart’s customers. To this day, Walmart conducts daily team meetings and virtual meetings to include large groups of its associates in the internal marketing process.
9.4b The Internal Marketing Process The process of internal marketing is straightforward and rests on many of the same principles used in traditional marketing that is focused externally. As shown in Exhibit 9.4, internal marketing is an output of and input to both marketing implementation and the external marketing program. That is, neither the marketing strategy nor its implementation can be designed without a consideration for the internal marketing program. The product, price, place (distribution), and promotion elements of the internal marketing program are similar to the elements in the external marketing program. Internal products refer generally to marketing strategies that must be “sold” internally. More specifically, however, internal products refer to any employee tasks, behaviors, attitudes, or values necessary to ensure implementation of the marketing strategy.29
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EXHIBIT 9.4 The Internal Marketing Process
Corporate Mission, Goals, and Objectives
Marketing Goals, Objectives, and Strategy
Marketing Implementation
Internal Marketing Program
External Marketing Program
Product Price Distribution Promotion
Product Price Distribution Promotion
Target Groups within the Organization
External Customer Groups or Targets
Source: Adapted from Nigel F. Piercy, Market-Led Strategic Change (Stoneham, MA: Butterworth-Heinemann, 2008), pp. 496–501.
Implementation of a marketing strategy, particularly a new strategy, typically requires changes on the part of employees. They may have to work harder, change job assignments, or even change their attitudes and expand their abilities. The increased effort and changes that employees must exhibit in implementing the strategy are equivalent to internal prices. Employees pay these prices through what they must do, change, or give up when implementing the marketing strategy. Internal distribution refers to the internal interactions that disseminate the marketing strategy throughout the firm. Planning sessions, webinars, conference calls or video conferences, team messages, and personal conversations are all examples of internal distribution. Internal distribution also includes employee education, e-training, and socialization programs designed to assist in the transition to a new marketing strategy. Finally, all communication aimed at informing and persuading employees about the merits of the marketing strategy comprise internal promotion. Internal promotion can take the form of executive speeches, video presentations, blogs, podcasts, or internal company newsletters. Given the growing diversity of today’s employees, it is unlikely that any one medium will communicate with all employees successfully. Firms must realize that telling employees important information once in a single format is not good communication. Until the employees “get the strategy,” communication has not taken place.
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252 Part 4: Putting Strategy into Action
Successfully using an internal marketing approach requires an integration of five main factors already discussed in this chapter.
1. The recruitment, selection, and training of employees must be considered an important element of marketing implementation, with marketing having input to these human resource and personnel activities as necessary. This ensures that employees will be matched to the marketing tasks to be performed. 2. Top executives must be completely committed to the strategy and the overall marketing plan. It is naive to expect employees to be committed when top executives are not. Simply put, the best-planned strategy in the world cannot succeed if the employees responsible for its implementation do not believe in it or have a commitment to it.30 3. Employee compensation programs must be linked to the implementation of the marketing strategy. This means that employees should be rewarded on the basis of behaviors consistent with the marketing strategy. 4. The firm should be characterized by open communication among all employees, regardless of their level in the firm. Through open, interactive communication, employees come to understand the support and commitment of top executives, and how their jobs fit into the overall marketing implementation process. 5. The firm’s structure, policies, and processes should match the marketing strategy to ensure that the strategy can be implemented in the first place. On some occasions, the firm’s structure and policies constrain the ability of employees to implement the strategy effectively. Embracing internal efforts and eliminating constraints empowers employees to creatively finetune the strategy or its implementation, but empowerment should be used only if the firm’s culture can support it. However, if a company uses empowerment correctly as a part of the internal marketing approach, the firm can experience more motivated, satisfied, and committed employees, as well as enhanced customer satisfaction and improved marketing performance.31
9.5 EVALUATING AND CONTROLLING MARKETING ACTIVITIES A marketing strategy can achieve its desired results only if implemented properly. Properly is the key word. It is important to remember that a firm’s intended marketing strategy often differs from the realized strategy (the one that actually takes place). This also means that actual performance is often different from expectations. Typically, there are four possible causes for this difference:
1. The marketing strategy was inappropriate or unrealistic. 2. The implementation was inappropriate for the strategy. 3. The implementation process was mismanaged. 4. The internal and/or external environments changed substantially between the development of the marketing strategy and its implementation. To reduce the difference between what actually happened and what the company expected—and to correct any of these four problems—marketing activities must be evaluated and controlled on an ongoing basis. Managers should strive to use data analytics to provide information for strategic decisions. Although the best way to handle implementation problems is to recognize them in advance, no manager can successfully recognize all of the subtle and unpredictable warning signs of implementation failure. With that in mind, it is important that the potential for implementation failures be managed strategically by having a system of marketing controls in place that allows the firm to spot potential problems before they cause real trouble. Exhibit 9.5 outlines a framework for marketing control that includes two major types of control: formal controls and informal controls.32 Although
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EXHIBIT 9.5 A Framework for Marketing Control Formal Controls: Control Activities Initiated by Management Input controls—actions taken prior to implementation of the strategy ●●
Employee recruitment, selection, and training processes
●●
Human resource allocations
●●
Allocation of financial resources
●●
Capital outlays
●●
Investment in physical store and the online/mobile experience
●●
Research and development expenditures
Process controls—actions taken during implementation of the strategy ●●
Employee evaluation and compensation systems
●●
Employee authority and empowerment
●●
Internal communication programs
●●
Lines of authority/structure (organizational chart)
●●
Management commitment to the marketing plan
●●
Management commitment to employees
●●
Monitoring of important metrics via dashboards
Output controls—evaluated after implementation of the strategy ●●
Formal performance standards (for example, sales, market share, and profitability)
●●
Marketing audits
Informal Controls: Unwritten Control Activities Initiated by Employees Employee self-control—control based on personal expectations and goals ●●
Job satisfaction
●●
Organizational commitment
●●
Employee effort
●●
Commitment to the marketing plan
Social control—small-group control based on group norms and expectations ●●
Shared organizational values
●●
Social and behavioral norms in work groups
Cultural control—cultural control based on organizational norms and expectations ●●
Organizational culture
●●
Organizational stories, rituals, and legends
●●
Cultural change
Source: Adapted from Bernard J. Jaworski, “Toward a Theory of Marketing Control: Environmental Context, Control Types, and Consequences,” Journal of Marketing, 52 (July 1988), 23–39.
we discuss each type of marketing control separately, most firms use combinations of these control types to monitor strategy implementation.
9.5a Formal Marketing Controls Formal marketing controls are activities, mechanisms, or processes designed by the firm to help ensure the successful implementation of the marketing strategy. The elements of formal control influence the behaviors of employees before and during implementation, and to assess
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254 Part 4: Putting Strategy into Action
performance outcomes at the completion of the implementation process. These elements are referred to as input, process, and output controls, respectively.
Input Controls Actions taken prior to the implementation of the marketing strategy are input controls. The premise of input control is that the marketing strategy cannot be implemented correctly unless the proper tools and resources are in place for it to succeed. Recruiting, selecting, and training employees are among the most important input controls. Another critical input control deals with financial resources. These control activities include resource allocation decisions (manpower and financial), capital outlays for needed facilities and equipment, investment in online and mobile experience, and increased expenditures on research and development. Contributing too many or too few financial resources can make or break a marketing strategy or its implementation. For instance, social gaming company Zynga—which was at one point Facebook’s most successful app developer—overspent on facilities (they paid $228 million for their headquarters) and acquisitions (they paid $180 million to purchase OMGPOP) while chasing growth. The company’s reckless spending resulted in the shutdown of some of the company’s games and a series of layoffs.33 Process Controls Process controls include activities that occur during implementation, de-
signed to influence the behavior of employees so they will support the strategy and its objectives. Although the number of process controls is potentially limitless and will vary from one firm to the next, Exhibit 9.5 provides some examples of universal process controls that all firms must employ and manage well. The process control that stands out above all others is management commitment to the strategy. Several research studies have confirmed that management commitment to the marketing strategy is the single most important determinant of whether the strategy will succeed or fail.34 This commitment is critical because employees learn to model the behavior of their managers. If management is committed to the marketing strategy, it is more likely that employees will be committed to it as well. Commitment to the marketing strategy also means that managers must be committed to employees and support them in their efforts to implement the strategy. In essence, managers that lead by example through words and action often have more success in implementing strategy than those who do not. Another important process control is the system used to evaluate and compensate employees. In general, employees should be evaluated and compensated based on criteria relevant to the marketing strategy.35 For example, if the strategy requires that salespeople increase their efforts at customer service, they should be rewarded on the basis of this effort, not on other criteria such as sales volume or the number of new accounts created. Technology has enabled many ways to monitor and measure things such as customer satisfaction via artificial intelligence (AI) tools that accurately predict customer sentiment across voice, chat, and even facial recognition mediums. Further, the degree of authority and empowerment granted to employees is another important process control. Although some degree of empowerment can lead to increased performance, employees given too much authority often become confused and dissatisfied with their jobs.36 Having good internal communication programs—another type of process control—can help to alleviate these problems.
Output Controls Output controls ensure that marketing outcomes are in line with anticipated
results. The primary means of output control involves setting performance standards against which actual performance can be compared. To ensure an accurate assessment of marketing activities, all performance standards should be based on the firm’s marketing objectives. Some performance standards are broad, such as those based on sales, profits, or expenses. We say these are broad standards because many different marketing activities can affect them. Other performance standards are quite specific, such as many customer service standards (e.g., number of customer complaints, repair service within 24 hours, overnight delivery by 10:00 a.m., on-time airline arrivals). In most cases, how the firm performs relative to these specific standards will determine how well it performs relative to broader standards.
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Chapter 9: Marketing Implementation and Control 255
But how specific should performance standards be? Standards should reflect the uniqueness of the firm and its resources, as well as the critical activities needed to implement the marketing strategy. In setting performance standards, it is important to remember that employees are always responsible for implementing marketing activities, and ultimately the marketing strategy. For example, if an important part of increasing customer service requires that employees connect to a live chat with a customer within five seconds, then a performance standard should be set for this activity. Traditionally, standards for the performance of marketing personnel are typically the most difficult to establish and enforce. Today, the use of sensors, AI, and data analytics is making it much more manageable to set realistic standards that can not only be met by employees but also measured by the company to ensure that important goals and standards are consistently met. One of the best methods of evaluating whether performance standards have been achieved is to use a marketing audit to examine systematically the firm’s marketing objectives, strategy, and performance.37 The primary purpose of a marketing audit is to identify problems in ongoing marketing activities and to plan the necessary steps to correct these problems. A marketing audit can be long and elaborate, or it can be short and simple. Exhibit 9.6 displays a sample marketing audit. In practice, the elements of the audit must match the elements of the marketing strategy. The marketing audit should also be used to gauge the success of ongoing implementation activities— not just when problems arise. Regardless of the organization of the marketing audit, it should aid the firm in evaluating marketing activities by:
1. Describing current marketing activities and their performance outcomes. 2. Gathering information about changes in the external or internal environments that may affect ongoing marketing activities. 3. Exploring different alternatives for improving the ongoing implementation of marketing activities. 4. Providing a framework to evaluate the attainment of performance standards, as well as marketing goals and objectives. 5. Utilizing technology to help bring together diverse sources of data into useable metrics, insights, and actions for improvement that aid, but do not overwhelm, those auditing the strategy. The information in a marketing audit is often obtained through a series of questionnaires that are given to employees, managers, customers, and/or suppliers. In some cases, outside consultants perform this ongoing evaluation. Using outside auditors has the advantages of being more objective and less time consuming for the firm. However, outside auditors are typically quite expensive. A marketing audit can also be disruptive, especially if employees are fearful of the scrutiny. Key performance indicators (KPIs) should be embedded at the onset of a marketing strategy to facilitate real-time measurement and evaluation. With massive amounts of real-time performance and sales data available, it’s important to identify successes and failures in ongoing marketing activities and adjust the strategy accordingly. Marketing analytics uses big data and measurement methods enabled by technology to interpret the effectiveness of a firm’s marketing strategy. Marketers can use analytics and customer relationship management software to collect data. Analytics dashboards, data management tools that visually communicate important information, can provide a report of findings and make them readily accessible across the team. The end result of marketing analytics is marketing information systems and decision support systems that assist in decision making. For example, Wave Analytics is an IT company that provides self-service analytics so decision makers can gain knowledge and take action. Data can be found in a variety of places: sales data, web analytics (e.g., Google Analytics), customer relationship management software (e.g., Salesforce), social media, third-party data sources, and more. Consumer feedback is another important tool in assessing performance. Both online and brick-and-mortar retailers utilize ratings and reviews systems that can be monitored by marketers
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256 Part 4: Putting Strategy into Action
EXHIBIT 9.6 A Sample Marketing Audit Marketing Activities 1.
In what specific marketing activities is the company currently engaged? ●●
●●
Product activities: research, concept testing, test marketing, quality control, etc. Customer service activities: installation, training, maintenance, technical support, complaint handling, etc.
●●
Logistics activities: fulfilling orders, packaging, shipping, on-time delivery, processing returns, etc.
●●
Pricing activities: financing, billing, cost control, discounting, etc.
●●
Distribution activities: availability, channels used, customer convenience, etc.
●●
Promotion activities: media, sales promotion, personal selling, public relations, etc.
2.
Are these activities conducted solely by the company, or are some provided by outside contractors (either domestically or offshore)? If outside contractors are used, how are they performing? Should any of these outside activities be brought in-house?
3.
What marketing activities do our competitors conduct that we do not offer? What additional marketing activities do customers want, need, or expect?
Standard Procedures for Each Marketing Activity 1.
Do written procedures and protocols exist for each marketing activity? If so, are these procedures (in manuals or online sources) up to date? Do employees fully understand and follow these procedures (and where to locate them online)?
2.
What oral or unwritten procedures exist for each marketing activity? Should these procedures be formally included in the written procedures or should they be eliminated?
3.
Do marketing personnel regularly interact with other functional areas to establish standard procedures for each activity?
Performance Standards for Each Marketing Activity 1.
What specific quantitative standards exist for each activity?
2.
What qualitative standards exist for each activity?
3.
How does each activity contribute to customer satisfaction within each marketing program element (i.e., product, pricing, place [distribution], promotion)?
4.
How does each activity contribute to marketing goals and objectives?
5.
How does each activity contribute to the goals and objectives of the company?
Performance Metrics for Each Marketing Activity 1.
What are the internal, profit-based measures (metrics) for each marketing activity?
2.
What are the internal, time-based measures (metrics) for each marketing activity?
3.
How is performance (data) monitored and evaluated internally by management?
4.
How is performance (experience) monitored and evaluated externally by customers?
Evaluation of Marketing Personnel 1.
Are the company’s current recruiting, selection, and retention efforts consistent (matched) with the requirements of the marketing activities?
2.
What are the nature and content of employee training activities? Are these activities consistent with the requirements of the marketing activities?
3.
How are customer-contact personnel supervised, evaluated, and rewarded? Are these procedures consis(continued) tent with customer requirements?
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Chapter 9: Marketing Implementation and Control 257
EXHIBIT 9.6 A Sample Marketing Audit
(Continued )
4.
What effect do employee evaluation and reward policies have on employee attitudes, satisfaction, and motivation?
5.
Are current levels of employee attitudes, satisfaction, and motivation adequate?
Evaluation of Customer Support Systems 1.
Are the quality and accuracy of customer service materials (e.g., websites, apps, streaming content, brochures, etc.) consistent with the image of the company and its products?
2.
Are the quality and appearance of physical facilities (e.g., offices, furnishings, layout, store decor, etc.) consistent with the image of the company and its products?
3.
Are the quality and usefulness of online content and apps (e.g., intuitive, current, visually appealing, effective, etc.) consistent with the company’s image and value proposition?
4.
Are the quality and appearance of customer service equipment (e.g., repair tools, work orders, iPads, delivery vehicles, etc.) consistent with the image of the company and its products?
5.
Is the record-keeping system accurate? Is the information always readily available when it is needed? What technology could be acquired to enhance record keeping abilities (e.g., bar code scanners, RFID, sensors, or smartphones)?
for trends. In many cases, marketers can use feedback such as those collected in reviews to address problems or understand what features of their product mixes should be promoted or modified. Despite their drawbacks, marketing audits are usually quite beneficial for the firms that use them. They are flexible in that the scope of the audit can be broad (to evaluate the entire marketing strategy) or narrow (to evaluate only a specific element of the marketing program). The results of the audit can be used to reallocate marketing efforts, correct implementation problems, or even to identify new opportunities. The end results of a well-executed marketing audit are usually better marketing performance and increased customer satisfaction.
9.5b Informal Marketing Controls Formal marketing controls are overt in their attempt to influence employee behavior and marketing performance. Informal controls, on the other hand, are more subtle. Informal marketing controls are unwritten, employee-based mechanisms that subtly affect the behaviors of employees, both as individuals and in groups. Here, we deal with personal objectives and behaviors, as well as group-based norms and expectations. There are three types of informal control: employee self-control, social control, and cultural control.
Employee Self-Control Through employee self-control, employees manage their own behaviors (and thus the implementation of the marketing strategy) by establishing personal objectives and monitoring their results. The type of personal objectives that employees set depends on how they feel about their jobs. If they have high job satisfaction and a strong commitment to the firm, they are more likely to establish personal objectives that are consistent with the aims of the firm, the marketing strategy, and the firm’s goals and objectives. Employee self-control also depends on the rewards employees receive. Some employees prefer the intrinsic rewards of doing a good job rather than the extrinsic rewards of pay and recognition. Intrinsically rewarded employees are likely to exhibit more self-control by managing their behaviors in ways that are consistent with the marketing strategy. Social Control Social, or small group, control deals with the standards, norms, and ethics
found in workgroups within the firm.38 The social interaction that occurs within these workgroups can be a powerful motivator of employee behavior. The social and behavioral norms of workgroups provide the “peer pressure” that causes employees to conform to expected standards
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258 Part 4: Putting Strategy into Action
of performance. If employees fall short of these standards, the group will pressure them to align with group norms. This pressure can be both positive and negative. Positive group influence can encourage employees to increase their effort and performance in ways consistent with the firm’s goals and objectives. However, the opposite is also true. If the workgroup’s norms encourage slacking or shirking of job responsibilities, employees will feel pressured to conform or risk being ostracized for good work.
Cultural Control Cultural control is similar to social control, only on a much broader scale.
Here, we are interested in the behavioral and social norms of the entire firm. One of the most important outcomes of cultural control is the establishment of shared values among all members of the firm. Marketing implementation is most effective and efficient when every employee, guided by the same organizational values or beliefs, has a commitment to the same organizational goals.39 Companies such as Lockheed Martin, Publix, and Salesforce have strong organizational cultures that guide employee behavior. Unfortunately, cultural control is difficult to master, in that it takes a great deal of time to create the appropriate organizational culture to ensure implementation success. It is important to note that the formal controls employed by the firm affect, to a great extent, the informal controls that occur within an organization. However, the premise of informal control is that some aspects of employee behavior cannot be influenced by formal mechanisms, and therefore must be controlled informally through individual and group actions. Formal and informal controls overlap to promote risk management principles in today’s astute organizations.
9.5c Scheduling Marketing Activities Through good planning and organization, marketing managers can provide purpose, direction, and structure to all marketing activities. However, the manager must understand the problems associated with implementation, understand the coordination of the various components of implementation, and select an overall approach to implementation before actually executing marketing activities. Upon taking these steps, the marketing manager with the responsibility for executing the plan must establish a timetable for the completion of each marketing activity.
BEYOND THE PAGES 9.3
Harnessing the Power of AI for Marketing Success40 Artificial intelligence (AI) has the ability to analyze large amounts of data in conjunction with predictive analytics algorithms and machine learning to create personalized communication, product recommendations, content, and strategies. For instance, Microsoft and Kroger partnered to create connected stores that use customer shopping lists and order histories to display hyper-targeted ads on in-store screens, supporting an omnichannel retail strategy. The screens show personalized items that are on sale and display coupons through QR codes that can be scanned by smartphones. AI is powerful because it is often much faster and more accurate and adaptive than humans. Companies utilize AI, for example, to analyze social media and product reviews to gather feedback for their brand, which is incredibly beneficial for large companies with significant online chatter. AI can identify pictures of products even if the name of the product or brand is not included in the picture or interpret the tone
of the post to identify whether customers have positive or negative associations with products or brands. Stitch Fix, an online personal styling service, curates personalized clothing for each customer by using data from customer surveys, their Pinterest boards, and the preferences of similar customers. It would be inefficient for a human to singlehandedly achieve the same result. AI can improve an organization’s ability to transform marketing resources into sales. Sephora uses AI software to let customers test beauty products digitally through the Sephora app. The app is able to make personalized recommendations based on pictures, and customers are able to order products directly from the app. Additionally, AI can enhance an organization’s ability to glean insights from customer data to fine tune marketing strategies. This requires marketing analytics professionals that understand how to turn insights into meaningful action.
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Chapter 9: Marketing Implementation and Control 259
Successful implementation requires that employees know the specific activities for which they are responsible and the timetable for completing each activity. Creating a master schedule of marketing activities can be a challenging task because of the wide variety of activities required to execute the plan, the sequential nature of many activities (some take precedence over others and must be performed first), and the fact that time is of the essence in implementing the plan.41 The basic steps involved in creating a schedule and timeline for implementation include:
1. Identify the Specific Activities to Be Performed. These activities include all marketing program elements contained within the marketing plan. Specific implementation activities, such as employee training, structural changes, or the acquisition of financial resources, should be included as well. 2. Determine the Time Required to Complete Each Activity. Some activities require planning and time before they can come to fruition. Others can occur rather quickly after the initiation of the plan. 3. Determine Which Activities Must Precede Others. Many marketing activities must be performed in a predetermined sequence (such as creating an advertising campaign from copywriting, to production, to delivery). These activities must be identified and separated from any activities that can be performed concurrently with other activities. 4. Arrange the Proper Sequence and Timing of All Activities. In this step, the manager plans the master schedule by sequencing all activities and determining when each activity must occur. 5. Assign Responsibility. The manager must assign one or more employees, teams, managers, or departments to each activity and charge them with the responsibility of executing the activity. A simple but effective way to create a master implementation schedule is to incorporate all marketing activities into a spreadsheet, like the one shown in Exhibit 9.7. A master schedule such as this can be simple or complex depending on the level of detail included within each activity. The EXHIBIT 9.7 A Hypothetical Three-Month Marketing Implementation Schedule
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260 Part 4: Putting Strategy into Action
master schedule will also be unique to the specific marketing plan tied to it. As a result, a universal template for creating a master schedule does not truly exist. Although some activities must be performed before others, other activities can be performed concurrently with other activities or later in the implementation process. This requires tight coordination between departments—marketing, production, advertising, sales, and so on—to ensure the completion of all marketing activities on schedule. Pinpointing those activities that can be performed concurrently can greatly reduce the total amount of time needed to execute a given marketing plan. Because scheduling can be a complicated task, most firms use sophisticated project management techniques, such as PERT (program evaluation and review technique), CPM (critical path method), or a variety of specialized cloud-based software programs that aid in planning and team coordination (e.g., Asana or Trello), to schedule the timing of marketing activities.
LESSONS FROM CHAPTER 9
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Marketing implementation: ●●
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is critical to the success of any firm because it is responsible for putting the marketing strategy into action. has been somewhat ignored throughout the history of business as most firms have emphasized strategic planning rather than strategic implementation. is the process of executing the marketing strategy by creating and performing specific actions that will ensure the achievement of the firm’s marketing objectives. goes hand in hand with evaluation and control in determining the success or failure of the marketing strategy, and ultimately for the entire firm. is usually the cause for the difference between intended marketing strategy—what the firm wants to happen— and realized marketing strategy—the strategy that actually takes place. maintains a relationship with strategic planning that causes three major problems: interdependency, evolution, and separation.
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Approaches to implementing marketing strategy include: ●●
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The elements of marketing implementation include: ●●
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Marketing strategy—the firm’s planned product, pricing, distribution, and promotion activities. Shared goals and values—the glue of implementation that holds the entire firm together as a single, functioning unit. Marketing structure—how the firm’s marketing activities are organized. Systems and processes—collections of work activities that absorb a variety of inputs to create information and communication outputs that ensure the consistent dayto-day operation of the firm. Resources—include a wide variety of tangible and intangible assets that can be brought together during marketing implementation.
People—the quality, diversity, and skill of a firm’s human resources. The people element also includes employee selection and training, evaluation and compensation, motivation, satisfaction, and commitment. Leadership—how managers communicate with employees, as well as how they motivate their employees to implement the marketing strategy. Implementation by command—marketing strategies are developed and selected by the firm’s top executives, then transmitted to lower levels where frontline managers and employees are expected to implement them. Implementation through change—focuses explicitly on implementation by modifying the firm in ways that will ensure the successful implementation of the chosen marketing strategy. Implementation through consensus—upper- and lowerlevel managers from different areas of the firm work together to evaluate and develop marketing strategies. Implementation as organizational culture—marketing strategy and implementation are seen as extensions of the firm’s mission, vision, and organizational culture. Employees at all levels can participate in making decisions that help the firm reach its mission, goals, and objectives.
Internal marketing: ●●
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refers to the use of a marketing-like approach to motivate, coordinate, and integrate employees toward the implementation of the firm’s marketing strategy. explicitly recognizes that external customer satisfaction depends on the actions of the firm’s internal customers— its employees. If the internal customers are not properly educated about the strategy and motivated to implement it, then it is unlikely that the external customers will be satisfied completely. places the responsibility for implementation on all employees regardless of their level within the firm.
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Chapter 9: Marketing Implementation and Control 261
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is based on many of the same principles used in traditional external marketing. The product, price, distribution, and promotion elements of the internal marketing program are similar to the elements in the external marketing program.
In evaluating and controlling marketing activities: ●●
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the firm’s intended marketing strategy often differs from the realized strategy for four potential reasons: (1) the marketing strategy was inappropriate or unrealistic, (2) the implementation was inappropriate for the strategy, (3) the implementation process was mismanaged, or (4) the internal and/or external environments changed substantially between the development of the marketing strategy and its implementation. it is important that the potential for implementation failures be managed strategically by having a system of marketing controls in place. firms design and use formal input, process, and output controls to help ensure the successful implementation of the marketing strategy. firms use output controls, or performance standards, extensively to ensure that marketing outcomes are in line with anticipated results. key performance indicators (KPIs) should be embedded at the onset of a marketing strategy to facilitate real-time measurement and evaluation. marketing analytics, which uses big data and measurement methods enabled by technology to interpret the effectiveness of a firm’s marketing strategy, can be used to assist in decision making. employees individually (self-control), in workgroups (social control), and throughout the firm (cultural control) use personal objectives and group-based norms and expectations to informally control their behaviors.
Scheduling marketing activities: ●●
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requires that employees know the specific activities for which they are responsible and the timetable for completing each activity. can be a challenging task because of the wide variety of activities required to execute the plan, the sequential nature of many marketing activities, and the fact that time is of the essence in implementing the plan. involves five basic steps: (1) identifying the specific activities to be performed, (2) determining the time required to complete each activity, (3) determining which activities must precede others, (4) arranging the proper sequence and timing of all activities, and (5) assigning responsibility to employees, managers, teams, or departments.
ENDNOTES 1. Accenture, “2019 Global Risk Management Study: Defining the Risk Function’s Sphere of Control,” December 3, 2019, https://www.accenture .com/us-en/insights/financial-services/global-risk-study (accessed April 23, 2020); Deloitte, “Reimagine Risk: Thrive in Your Evolving Ecosystem,” April 11, 2019, https://www2.deloitte.com/us/en/insights/topics/risk-management /cro-risk-management-survey-results.html (accessed April 23, 2020); John Michael Farrell and Angela Hoon, “What’s Your Company’s Risk Culture,” BusinessWeek Online, May 12, 2009, http://www.businessweek.com /managing/content/may2009/ca20090512_720476.htm; Kevin Kelly, “The Key to Risk: It’s All About Emotion,” Forbes, February 23, 2009, http://www .forbes.com/2009/02/23/riskculture-crisis-leadership-management _innovation.html; Karen E. Klein, “Using Risk Management to Beat the Downturn,” BusinessWeek Online, January 9, 2009, http://www.businessweek.com /smallbiz/content/jan2009/sb2009018_717265.htm; Arvin Maskin, “Creating a Culture of Risk Avoidance,” BusinessWeek Online, March 6, 2009, http:// www.businessweek.com/managing/content/mar2009/ca2009036_914216 .htm; Max Rudolph, “What Do Risk Officers Worry About?” Reuters, May 18, 2012, http://blogs.reuters.com/great-debate/2012/05/18/what-do-risk -officers-worry-about. 2. Orville C. Walker Jr. and Robert W. Ruekert, “Marketing’s Role in the Implementation of Business Strategies: A Critical Review and Conceptual Framework,” Journal of Marketing, 51 (July 1987), 15–33. 3. Zach Wichter, “Southwest Employees Get Six-Week Bonus from Profit-Sharing,” The Points Guy, February 6, 2020, https://thepointsguy.com /news/southwest-employees-get-six-week-bonus-from-profit-sharing/ (accessed April 23, 2020). 4. Frank V. Cespedes, Organizing and Implementing the Marketing Effort (Reading, MA: Addison-Wesley, 1991), p. 19. 5. Robert Howard, “Values Make the Company: An Interview with Robert Haas,” Harvard Business Review, 68 (September–October 1990), 132–144. 6. Zappos, “20 Years, 20 Milestones: How Zappos Grew Out of Just Shoes,” June 5, 2019, https://www.zappos.com/about/stories/zappos -20th-birthday (accessed April 23, 2020). 7. Michael D. Hartline, James G. Maxham, III, and Daryl O. McKee, “Corridors of Influence in the Dissemination of Customer-Oriented Strategy to Customer Contact Service Employees,” Journal of Marketing, 64 (April 2000), 35–50. 8. Ibid. 9. Zapier, “How to Build Culture in a Remote Team,” March 18, 2020, https://zapier.com/learn/remote-work/how-build-culture-remote-team/ (accessed April 30, 2020). 10. Cespedes, Organizing and Implementing the Marketing Effort, p. 622–623. 11. Robert W. Ruekert, Orville C. Walker Jr., and Kenneth J. Roering, “The Organization of Marketing Activities: A Contingency Theory of Structure and Performance,” Journal of Marketing, 49 (Winter 1985), 13–25. 12. Hartline, Maxha, and McKee. 13. Michael Hammer and James Champy, Reengineering the Corporation: A Manifesto for Business Revolution (New York: Harper Business, 1993), p. 35. 14. Myron Glassman and Bruce McAfee, “Integrating the Personnel and Marketing Functions: The Challenge of the 1990s,” Business Horizons, 35 (May–June 1992), 52–59. 15. Michael D. Hartline and O. C. Ferrell, “Service Quality Implementation: The Effects of Organizational Socialization and Managerial Actions on Customer-Contact Employee Behaviors,” Marketing Science Institute Working Paper Series, Report No. 93–122 (Cambridge, MA: Marketing Science Institute, 1993).
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262 Part 4: Putting Strategy into Action 16. Deloitte, “Welcome to Generation Z,” https://www2.deloitte.com /content/dam/Deloitte/us/Documents/consumer-business/welcome-to -gen-z.pdf (accessed February 18, 2020). 17. Richard L. Oliver and Erin Anderson, “An Empirical Test of the Consequences of Behavior- and Outcome-Based Sales Control Systems,” Journal of Marketing, 58 (October 1994), 53–67. 18. Hartline, Maxham, and McKee. 19. Bruce Anderson, “Why Patagonia CHRO Dean Carter Sees Onsite Child Care as a Bedrock Benefit,” LinkedIn Talent Blog, September 10, 2019, https://business.linkedin.com/talent-solutions/blog/company-culture/2019 /why-patagonia-offers-onsite-child-care (accessed April 23, 2020). 20. W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Press, 2005). 21. The material in this section has been adapted from L. J. Bourgeois III and David R. Brodwin, “Strategic Implementation: Five Approaches to an Elusive Phenomenon,” Strategic Management Journal, 5 (1984), 241–264; Steven W. Floyd and Bill Wooldridge, “Managing Strategic Consensus: The Foundation of Effective Implementation,” Academy of Management Executive, 6 (November 1992), 27–39. 22. Kate Taylor, “McDonald’s New CEO Has a Tumultuous Relationship with Franchisees, But Some Are Cheering for His Promotion After the Sudden Firing of His Predecessor,” Business Insider, November 4, 2019, https:// www.businessinsider.com/mcdonalds-ceo-shakeup-higlights-franchisee -battle-2019-11 (accessed April 23, 2020). 23. “World’s Most Admired Companies,” Fortune, 2020, https://fortune .com/worlds-most-admired-companies/ (accessed April 23, 2020); Maggie McGrath, ed., “The Just 100,” Forbes, December 10, 2018, https://www .forbes.com/justcompanies/#44d0738b2bf0 (accessed April 23, 2020); Jordan Novet, “How Satya Nadella Tripled Microsoft’s Stock Price in Just Over Four Years,” CNBC, July 18, 2018, www.cnbc.com/2018/07/17/how-microsoft -has-evolved-under-satya-nadella.html (accessed April 23, 2020); Alex Konrad, “Exclusive CEO Interview: Satya Nadella Reveals How Microsoft Got Its Groove Back.” Forbes Magazine, December 11, 2018, www.forbes.com /sites/alexkonrad/2018/12/10/exclusive-ceo-interview-satya-nadella -reveals-how-microsoft-got-its-groove-back/#791f3197acbc (accessed April 23, 2020); Matt Weinberger, “The Rise of Satya Nadella, the CEO Who Led Microsoft to Becoming More Valuable Than Apple Again in Under 5 Years,” Business Insider, December 2, 2018, www.businessinsider.com/the -rise-of-microsoft-ceo-satya-nadella-2016-1#nadella-quickly-won-over -microsoft-employees-by-making-big-changes-quickly-in-an-effort-to -right-the-course-and-win-back-customers-22 (accessed April 23, 2020); Jordan Novet, “How Microsoft Bounced Back,” CNBC, December 3, 2018, https://www.cnbc.com/2018/12/03/microsoft-recovery-how-satya-nadella -did-it.html (accessed April 23, 2020). 24. “Brand-Led Marketing: Samsung Viewpoint,” Marketing Week, July 2, 2009, p. 18; Karlene Lukovitz, “Fastest-Growing Brands Are ‘IdealDriven’,” Marketing Daily, January 18, 2012, http://www.mediapost.com /publications/article/ 165965/fastest-growing-brands-are-ideal-driven.html.
25. Bourgeois and Brodwin. 26. Micah Solomon, “How to Bring Ritz-Carlton Caliber Customer Service to Any Type of Business,” Forbes, February 23, 2020, https://www .forbes.com/sites/micahsolomon/2020/02/23/how-to-bring-ritz-carlton -caliber-customer-service-to-any-type-of-business/#693409e4657d (accessed April 23, 2020). 27. Hartline, Maxham, and McKee. 28. Mohammed Rafiq and Pervaiz K. Ahmed, “Advances in the Internal Marketing Concept: Definition, Synthesis and Extension,” Journal of Services Marketing, 14 (2000), 449–463. 29. Mohammed Rafiq and Pervaiz K. Ahmed. 30. Hartline and Ferrell. 31. Hartline, Maxham, and McKee; Bernard J. Jaworski, “Toward a Theory of Marketing Control: Environmental Context, Control Types, and Consequences,” Journal of Marketing, 52 (July 1988), 23–39. 32. Sujan Patel, “Growth Isn’t Everything: 8 Lessons Learned From 6 Failed Companies,” Sujan Patel, October 20, 2019, https://sujanpatel.com /business/7-lessons-from-5-failed-companies/ (accessed April 23, 2020). 33. Hartline, Maxham, and McKee; Bernard J. Jaworski; Brian P. Niehoff, Cathy A. Enz, and Richard A. Grover, “The Impact of TopManagement Actions on Employee Attitudes and Perceptions,” Group & Organization Studies, 15 (September 1990), 337–352. 34. Michael D. Hartline and O. C. Ferrell, “The Management of Customer-Contact Service Employees: An Empirical Investigation,” Journal of Marketing, 60 (October 1996), 52–70. 35. Ibid. 36. Ben M. Enis and Stephen J. Garfein, “The Computer-Driven Marketing Audit,” Journal of Management Inquiry, 1 (December 1992), 306–318; Philip Kotler, William Gregor, and William Rodgers, “The Marketing Audit Comes of Age,” Sloan Management Review, 30 (Winter 1989), 49–62. 37. Jaworski. 38. Ibid. 39. Hartline, Maxham, and McKee. 40. Jonathan Zhang, Jifeng Mu, and David Gilliland, “How to Harness AI Technology for Marketing Success,” California Management Review, November 26, 2019, https://cmr.berkeley.edu/2019/11/ai-marketing/ (accessed April 30, 2020); Cindy Zhou, “How Artificial Intelligence Can Help Transform Customer Engagement and Sales,” Destination CRM, March 1, 2018, https://www.destinationcrm .com/Articles/Columns-Departments/Customer-Experience/How-Artificial -Intelligence-Can-Help-Transform-Customer-Engagement-and-Sales-123447 .aspx (accessed February 18, 2019); Billy Duberstein, “Inside Kroger and Microsoft’s New Smart-Grocery Partnership,” The Motley Fool, January 17, 2019, https://www.fool.com/investing/2019/01/17/inside-kroger-and-microsofts-new -smart-grocery-par.aspx (accessed February 18, 2019); Will Thiel, “The Role Of AI In Customer Experience,” Pointillist, 2018, https://www.pointillist.com/blog /role-of-ai-in-customer-experience/ (accessed February 18, 2019). 41. Jack R. Meredith and Scott M. Shafer, Introducing Operations Management (New York: John Wiley and Sons, 2003), p. 458.
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CHAPTER 10 Developing and Maintaining Long-Term Customer Relationships 10.1 INTRODUCTION To this point in the text, we have examined the process of strategic planning from its initial stages through the implementation of the marketing plan. Now, however, we take the opportunity to step back from the process to look at it holistically. Firms often lose sight of the big picture as they rush to complete product development and test marketing or put the finishing touches on a media campaign. All of the activities involved in developing and implementing the marketing program have one key purpose: to develop and maintain long-term customer relationships. However, as we have seen, implementing a marketing strategy that can effectively satisfy customers’ needs and wants has proven difficult in today’s rapidly changing business environment. The simple fact is that thorough research, strong competitive advantages, and a well-implemented marketing program are often not enough to guarantee success. In times past, developing and implementing the “right” marketing strategy was all about creating a large number of transactions with customers to maximize the firm’s market share. Companies paid scant attention to discovering customers’ needs and finding better ways to solve customers’ problems. In today’s economy, however, that emphasis has shifted to developing strategies that attract and retain customers over the long term. As illustrated in Beyond the Pages 10.1, 1-800-Flowers does this effectively through a comprehensive understanding of its customers, including their expectations, motivations, and behaviors. With this knowledge in hand, firms like 1-800-Flowers can then offer the right marketing program to increase customer satisfaction and retain customers over the long term. Overall, marketers are using data to help them better understand how customers use their products and then leverage that information to help customers use their products more successfully, getting more value from the product and services. 263 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
264 Part 4: Putting Strategy into Action
In this chapter, we examine how the marketing program can be leveraged as a whole to deliver quality, value, and satisfaction to customers. We begin by reviewing the strategic issues associated with the customer relationship management process. Developing long-term customer relationships is one of the best ways to insulate the firm against competitive inroads and the rapid pace of environmental change and product commoditization. Next, we address the critical topics of quality and value as we concern ourselves with how the entire marketing program is tied to these issues. Finally, we explore key issues with respect to customer satisfaction, including customer expectations and metrics for tracking customer satisfaction over time.
BEYOND THE PAGES 10.1
1-800-Flowers Focuses on Customers1 Customer service. Trust. One-to-one customer interactions. Customer loyalty. These are the foundations of the steady growth of 1-800-Flowers for more than 40 years. When the company was founded, founder and former CEO Jim McCann used a laser-like focus on customers to make 1-800-Flowers the number-one floral retailer in the world. In addition to flowers, the company offers fruit baskets, popcorn, gourmet food products, and other gifts under brands such as Harry & David, The Popcorn Factory, Shari’s Berries, Fruit Bouquets, and Cheryl’s. The company earns more than $1.25 billion in annual sales across its 16 brands. 1-800-Flowers put great effort into creating a 360-degree, holistic view of each customer. The company collects customer information at every customer touchpoint—sales, loyalty programs, surveys, direct mail advertising, sales promotions (contests and sweepstakes), and affiliate programs (with florists, credit card companies, and airlines)—and uses it to create customized communications and product offerings for the millions of customers in its database. 1-800-Flowers uses a sophisticated segmentation system that analyzes transactional behaviors (recency, frequency, and monetary) and combines it with gift buying behaviors. This information is tied to each customer’s psychographic profile to create targeted messages for each customer segment. The company then uses a variety of metrics—financial, customer retention and acquisition, brand awareness, purchase intentions, and customer recommendations—to measure performance.
To increase customer loyalty, 1-800-Flowers uses Celebrations Passport, a paid membership program that eliminates shipping fees, service charges, and order minimums for its most frequent customers. Programs such as these have been seen at Amazon (Amazon Prime) and Sephora (Sephora FLASH). In addition to increasing customer loyalty, the Celebrations Passport program allows the company to collect more in-depth information from customers. 1-800-Flowers also offers a satisfaction guarantee, which the company refers to as its 100 percent Smile Guarantee. For 1-800-Flowers, the key to success has been its ability to integrate and leverage the massive amount of data that it collects from its customers. The company has also invested in artificial intelligence (AI) and augmented reality (AR) to enhance its service. For instance, 1-800-Flowers integrated an intelligent virtual assistant into its customer service process to provide 24/7, personalized customer support. In addition, its AR feature allows shoppers to better visually select flower arrangements with 3D imaging. Despite investments in emerging technologies, the founder’s old-school approach to understanding customers is still at the core of everything the company does, which has been carried forward with current CEO Chris McCann. The company is focused on building relationships rather than chasing sales.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 265
10.2 MANAGING CUSTOMER RELATIONSHIPS As we briefly mentioned in Chapter 1, creating and maintaining long-term customer relationships requires that organizations see beyond the transactions that occur today to look at the longterm potential of a customer. To do this, the organization must strive to develop a relationship with each customer rather than generate a large number of discrete transactions. Before a relationship can be mutually beneficial to both the firm and the customer, it must provide value to both parties. This is one of the basic requirements of exchange noted in Chapter 1. Creating this value is the goal of customer relationship management (CRM), which is defined as a business philosophy aimed at defining and increasing customer value in ways that motivate customers to remain loyal.2 In essence, CRM is about retaining the right customers. It is important to note that CRM does not focus solely on end customers. Rather, CRM involves a number of different stakeholder groups: ●● ●●
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Customers. The end users of a product, whether they be businesses or individual consumers. Employees. Firms must manage relationships with their employees if they are to have any hope of fully serving customers’ needs. This is especially true in service firms where employees are the service in the eyes of customers. Retaining key employees is a vital part of CRM. Supply Chain Partners. Virtually all firms buy and sell products upstream and/or downstream in the supply chain. This involves the procurement of materials or the sale of finished products to other firms. Either way, maintaining relationships with key supply chain partners is critical to satisfying customers. External Stakeholders. Relationships with key stakeholders must also be managed effectively. These include investors, government agencies, the media, nonprofit organizations, or facilitating firms that provide goods or services that help a firm achieve its goals.
Delivering good value to customers requires that firms use CRM strategies to effectively manage relationships with each of these groups. This effort includes finding ways to integrate all of these relationships toward the ultimate goal of customer satisfaction. To support the goals of CRM, many businesses invest in CRM systems, such as those offered by Salesforce or Zendesk, to track customer data and provide information about customers to develop sales success and long-term relationships. Prior to CRM systems, centralizing information required extensive data entry and overcoming data silos across departments. Features of Salesforce’s CRM software include sales forecasting, contact management, collaboration, and reporting. Salespeople and managers rely on CRM systems because they increase sales productivity, customer retention, and forecasting accuracy. Modern CRM systems are increasingly connected, utilizing mobile apps, geo-location information, and communication tracking tools to make sure that the sales process is working efficiently. Since companies have unique tracking needs, Salesforce also offers supplemental services such as social media analytics.3 To fully appreciate the concepts behind customer relationship management, organizations must develop a new perspective on the customer—one that shifts the emphasis from “acquiring customers” to “maintaining clients” as shown in Exhibit 10.1. Although this strategic shift has been underway for some time in business markets, technological advancements allow CRM to be fully embraced in consumer markets as well. Firms that are exceptionally good at developing customer relationships are said to possess relationship capital—a key asset that stems from the value generated by the trust, commitment, cooperation, and interdependence among relationship partners. Strong relationships develop and mature with respect to both customer experience and customer value outcomes. Sellers that can provide both a great experience for customers and deliver consistent value are more likely to build relationship capital than those that only focus on one (or the other) aspect. With respect to competitive advantages, many see relationship capital as the most important asset that an organization can possess, as it represents a powerful advantage that can be leveraged to make the most of marketing opportunities.4
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266 Part 4: Putting Strategy into Action
EXHIBIT 10.1 Strategic Shift From Acquiring Customers to Maintaining
Clients
Acquiring Customers
Maintaining Clients
Potential customers are “prospects”
Customers are “clients”
Mass marketing
One-to-one marketing
Acquire new customers
Build relationships with current customers
Discrete transactions
Continuous transactions
Increase market share
Increase share of customer
Differentiation based on groups
Differentiation based on individual customers
Segmentation based on homogeneous needs
Segmentation based on heterogeneous needs
Short-term strategic focus
Long-term strategic focus
Standardized products
Mass customization
Lowest-cost provider
Value-based pricing strategy
One-way mass communication
Two-way individualized communication
Competition
Collaboration
10.2a Developing Relationships in Consumer Markets Developing long-term customer relationships can be an arduous process. Over the life of the relationship, the firm’s goal is to move the customer through a progression of stages, as shown in Exhibit 10.2. The objective of CRM is to migrate customers from having a simple awareness of the firm and its product offering through levels of increasing relationship intensity to the point where the customer becomes a true advocate for the firm and/or its products. Note that true CRM attempts to go beyond the creation of satisfied and loyal customers. Ultimately, the firm will possess the highest level of relationship capital when its customers become true believers or advocates for the company and its products. Customer advocacy represents action on behalf of the customer to spread either positive or negative information about a company across their social media and online rating platforms.5 For example, Tesla, which is known for its electric vehicles and alternative power solutions, is a great example of a firm that enjoys the highest levels of customer advocacy. Tesla owners exhibit a cult-like love for the brand that most other companies do not possess. Tesla has a referral program to encourage its owners to share their experience with others.6 Other firms such as Starbucks, Apple, and Cisco also enjoy a high degree of customer advocacy. In consumer markets, one of the most viable strategies to build customer relationships is to increase the firm’s share of customer rather than its market share. This strategy involves abandoning the old notions of acquiring new customers and increasing transactions to focus instead on more fully serving the needs of current customers. Financial services are a great example of this strategy in action. Most consumers purchase financial services from different firms. They bank at one institution, purchase insurance from a different institution, and handle their investments through another. To counter this fact of life, many companies now offer all of these services under one roof. For example, Regions Financial Corporation offers retail and commercial banking, trust, securities brokerage, mortgage, and insurance products to customers in a network of more than 1,500 offices and 2,000 ATMs in 16 states across the South, Midwest, and Texas.7 Regions tries to more fully serve the financial needs of its current customers, thereby acquiring a larger share of each customer’s financial business. By creating these types of relationships, customers have little incentive to seek out competitive firms to fulfill their financial services needs. Focusing on customers requires an understanding that all customers have different needs; therefore, not all customers have equal value to a firm. The most basic application of this idea is the 80/20 rule: 20 percent of customers provide 80 percent of business profits. Although this idea is not new, advances in technology and data collection techniques now allow firms to profile
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 267
EXHIBIT 10.2 Stages of Customer Relationship Development Relationship Stage
CRM Goals
Examples
Awareness
Product advertising Prospect for new customers. Promote customer knowledge Personal selling (cold calls) and education about the prod- Word of mouth uct or company.
Initial purchase
Stimulate interest in the product. Get product or company into customers’ evoked set of alternatives. Stimulate product trial.
Advertising Product sampling Personal selling
Repeat customer
Fully satisfy customers’ needs and wants. Completely meet or exceed customers’ expectations or product specifications. Offer incentives to encourage repeat purchase.
Good product quality and value-based pricing Good service before, during, and after the sale Frequent reminders and incentives
Client
Create financial bonds that limit the customer’s ability to switch products or suppliers. Acquire more of each individual customer’s business. Personalize products to meet evolving customer needs and wants.
Frequent customer cards Frequent-flier programs Broad product offering
Community
Create social bonds that prevent product or supplier switching. Create opportunities for customers to interact with each other in a sense of community.
Membership programs Affinity programs Ongoing personal communication
Advocacy
Create customization or structural bonds that encourage the highest degree of loyalty. Become such a part of the customer’s life that the customer is not willing to end the relationship. Think of customers as partners.
Customer events and reunions Long-term contracts Brand-related memorabilia
Success
Develop systems that help customers to use the product better to gain more value. Keep customers up to date on product innovations and new features useful to them.
AI-driven communications Product update education Analysis of product use and recommendations
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268 Part 4: Putting Strategy into Action
customers in real time. In fact, the ability to track customers in detail can allow the firm to increase sales and loyalty among the bottom 80 percent of customers. The goal is to rank the profitability of individual customers to express their lifetime value (LTV) to the firm. Some customers—those that require considerable handholding or those that frequently return products—are simply too expensive to keep given the low level of profits they generate. These bottom-tier customers can be “fired” or required to pay high fees for additional service. Banks and brokerages, for example, slap hefty maintenance fees on small accounts. This allows the firm to spend its resources to more fully develop relationships with its profitable customers. The firm’s top-tier customers (those that fall into the top 20 percent) are the most obvious candidates for retention strategies. These customers are the most loyal and the most profitable, so the firm should take the necessary steps to ensure their continuing satisfaction and success. Customers that fall just outside of this tier, or second-tier customers, can be encouraged to be better customers or even loyal customers with the right incentives. Exhibit 10.3 outlines strategies that can be used to enhance and maintain customer relationships. The most basic of these strategies is based on financial incentives that encourage increased sales and loyalty. However, financial incentives are easily copied by competitors and are not typically good for retaining customers in the long run. To achieve this ultimate goal, the firm must turn to strategies aimed at closely tying the customer to the firm. These structural connections are the most resilient to competitive action and the most important for maintaining long-term customer relationships. EXHIBIT 10.3 Strategies for Enhancing and Maintaining Customer Relationships
Increasing Relationship Intensity Financial Incentives
Social Bonding
Strategy
Using financial incentives to increase customer loyalty
Examples
• Volume discounts • Coupons • Frequent-customer programs
Enhanced Customization
Structural Bonding
Using social and psychological bonds to maintain a clientele
Using intimate customer knowledge to provide oneto-one solutions or mass customization
Creating customized product offerings that create a unique delivery system for each client
• Membership
• Customer reminder
• Structured, lock-step
programs • Customer-only events • Community outreach programs
notifications • Personal recommendations • Personal shopping programs
Used by
• Airlines • Grocery retailers • Music clubs
• Health clubs • Churches • Credit cards
• • • •
Advantages
• Effective in the
• Difficult for
• Promotes strong loyalty
short term • Easy to use
competitors to copy • Reduces brand switching
and greatly reduces brand switching • Very difficult for competitors to copy customer knowledge
• Social bonds take
• Can be quite expensive
time to develop • Customer trust is critical and must be maintained at all times
to deliver • Takes time to develop
Disadvantages
• Easily imitated • Hard to end incentives once started • Can promote continual brand switching
Auto service centers Electronic retailers Department stores Professional services
programs
• Automated electronic transactions
• Contractual relationships
• Colleges and universities • Banks • Bundled telecom services • Ultimate reduction in brand switching
• Products become intertwined in customers’ lifestyles
• Customer resistance • Time-consuming and costly to develop
Source: Based on Leonard L. Berry and A. Parasuraman. Marketing Services: Competing Through Quality (New York: The Free Press, 1991), p. 136–148; Valerie Zeithaml, Mary Jo Bitner, and Dwayne Gremler. Services Marketing: Integrating Customer Focus Across the Firm. (New York: McGraw-Hill/Irwin, 2013), pp. 160–166. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 10: Developing and Maintaining Long-Term Customer Relationships 269
10.2b Developing Relationships in Business Markets Relationship management in business markets is much like that in consumer markets. The goal is to move business buyers through a sequence of stages, where each stage represents an increasing level of relationship intensity. Although business relationships may not approach the cult-like, emotional involvement found in some consumer markets, businesses could nonetheless become structurally bound to their supply chain partners. These relationships can give both parties an advantage with respect to relationship capital: One firm maintains a loyal and committed customer; the other maintains a loyal and committed supplier. Both parties may also consider each other to be strong partners or advocates within the entire supply chain. Although our discussion certainly involves generalizations (e.g., some consumer marketers are better at building relationships than many business marketers), relationship development in business markets can be more involving, more complex, and much riskier than relationships in consumer markets. This occurs because business buyers typically have fewer options to choose from, and the financial risks are typically higher. Business relationships must be built on win–win strategies that focus on cooperation and improving the value of the exchange for both parties, not on strict negotiation strategies where one side wins and the other side loses. The concept of customer success plays a role in helping to maintain and grow business relationships as business buyers seek consistent value from the products they purchase. This concept is true of consumer markets as well, but a focus on quantifying what the product provides, in terms of value outcomes (e.g., efficiency, cost savings, or increased production), is what motivates business purchase decisions and the relationships that underlie them. Many companies turn to a customer success model to grow customer relationships. Customer success represents efforts to help customers to gain more value from products and utilize new features, services, and additional, complementary products that provide added value to the customer. For example, Hulu employs customer success managers to help grow relationships with its advertising clients. The success manager onboards new clients, evaluates campaign metrics, and educates clients on platform features. The goal with a role like this is to reduce churn and ensure client value outcomes. Companies such as Hulu have found that focusing on success of current customers creates relationship capital that is a strategic asset, keeping customers from thinking seriously about competitive offerings. Business relationships have become increasingly complex, as decisions must be made with an eye toward the entire supply chain, not just the two parties involved. In these cases, the relationships that are developed enhance the ability of the entire supply chain to better meet the needs of final customers. Over the past several years, a number of changes have occurred in business relationships, including: ●●
●●
●●
●●
●●
A Change in Buyers’ and Sellers’ Roles. To build stronger relationships, buyers and sellers have shifted away from competitive negotiation (trying to drive prices up or down) to focus on true collaboration. This represents a major change for many companies. An Increase in Sole Sourcing. Supplier firms will continue to sell directly to large customers or move to selling through systems suppliers that put together a set of products from various suppliers to deliver a comprehensive solution. The continuing growth in online e-procurement systems is one result of this trend. An Increase in Global Sourcing. More than ever, buyers and sellers scan the globe in search of suppliers or buyers that represent the best match with their specific needs and requirements. The relationship building process is so costly and complex that only the best potential partners will be pursued. An Increase in Team-Based Buying Decisions. Increasingly, teams from both buying and supplying firms make purchase decisions. These teams consist of employees from different areas of expertise that are central to the success of both firms. Increasingly, senior management of both firms will be represented on these teams as economic buyers, for both sides play a major role in setting goals and objectives. An Increase in Productivity Through Better Integration. Firms that closely align their buying and selling operations have the capacity to identify and remove any inefficiency in the process. This increased productivity leads to a reduction in both hard and soft costs, thereby
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270 Part 4: Putting Strategy into Action
●●
●●
enhancing the profitability of both firms. This integration can be extended throughout the supply chain. In the future, only the most efficient supply chains will survive, particularly as more procurement moves into the electronic arena. An Increase in Subscription-Based Sales Models. In the past, companies sold and delivered an actual product to their business customers. Today, many business purchases involve a cloud-based technology platform, digitized service component, or an evolving solution that requires continuing delivery and realization of value for the purchaser to retain the subscription. An Increase in Product Innovation. Products that rely on digital delivery as a part or all of their offering are frequently changed and innovated. Related to subscription-based sales models, products that change regularly (often updated multiple times per month) offer new value for customers, but also become more complex. Thus, evolving products may contain value that isn’t realized by customers unless the seller educates and informs them about the new features and options.
These fundamental changes in the structure of most business relationships will lead to dramatic changes in the way that organizations work together. Only those firms willing to make strategic, as opposed to cosmetic, changes in the way they deal with their customers or suppliers are likely to prosper as we move forward in this century.
10.3 QUALITY AND VALUE: THE KEYS TO DEVELOPING CUSTOMER RELATIONSHIPS To build relationship capital, a firm must be able to fulfill the needs of its customers better than its competitors. It must also be able to fulfill those needs by offering high-quality goods and services that are a good value relative to the sacrifices customers must make to acquire them. When it comes to developing and maintaining customer relationships, quality is a double-edged sword. If the quality of a good or service is poor, the organization obviously has little chance of satisfying customers or maintaining relationships with them. The adage of “trying something at least once” applies here. A firm may be successful in generating first-time transactions with customers, but poor quality guarantees that repeat purchases will not occur. On the other hand, good quality is not an automatic guarantee of success. Think of it as a necessary but insufficient condition of successful customer relationship management. It is at this point where value becomes critical to maintaining long-term customer relationships.
10.3a Understanding the Role of Quality Quality is a relative term that refers to the degree of superiority of a firm’s goods or services. We say that quality is relative because it can only be judged in comparison to competing products, or when compared to an internal standard of excellence. The concept of quality also applies to many different aspects of a firm’s product offering. The total product offering of any firm consists of at least three interdependent components, as illustrated in Exhibit 10.4: the core product, supplemental products, and symbolic/experiential attributes.
The Core Product The heart of the offering, the core product, is the firm’s raison d’etre, or justification for existence. As shown in Exhibit 10.4, the core can be a tangible good—such as a Chevy truck—or an intangible service—such as the Verizon Wireless communication network. Virtually every element of the marketing program has an effect on the quality (or perceived quality) of the core product; however, the firm’s product and branding strategies are of utmost importance. Since the core product is the part of the offering that delivers the key benefits desired by customers, the form utility offered by the core product is vital to maintaining its quality. For
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 271
EXHIBIT 10.4 Components of the Total Product Offering Core Product
Supplemental Products
Symbolic and Experiential Attributes
Chevrolet Silverado 1500
Transportation Hauling/towing
Accessories Financing Replacement parts
“The strongest, most advanced Silverado ever” “Chevy Runs Deep”
Verizon Wireless
Communication
Phone options Rate plan options 5G
“America’s most reliable network” “5G Built Right”
John Deere Lawn Tractor
Lawn and garden maintenance
Accessories Financing Delivery
John Deere signature green color “Nothing Runs Like a Deere”
Michelin Tires
Tires Safety
Broad availability Installation Financing
“A Better Way Forward” “Because a lot is riding on your tires” The Michelin Man
Waldorf Astoria New York
Lodging
Restaurants Room service Childcare
“Live Unforgettable”
example, the quality of an entrée in a restaurant depends on the form utility created through the combination of quality raw ingredients and expert preparation. In service offerings, the core product is typically composed of three interrelated dimensions:8 ●●
●●
●●
People. The interaction among the customer, the firm’s employees, and other customers present during service delivery. Processes. The operational flow of activities or steps in the service delivery process. Processes can be done through technology or face-to-face interaction. Physical Evidence. Any tangible evidence of the service including written materials, the service facility, people, or equipment. Includes the environment in which the service is delivered.
As a whole, service firms struggle daily with maintaining the quality of their core service offerings. Because services are so people-intensive, effective implementation of the marketing strategy (through shared goals, employee motivation, and employee skills) is a major factor that helps to ensure consistency and quality. The quality of service also depends more on issues such as responsiveness to customer requests, consistent and reliable service over time, and the friendliness and helpfulness of the firm’s employees. The quality of tangible goods depends more on issues such as durability, style, ease of use, comfort, or suitability for a specific need. Whether the core product is a good or a service, the firm has little chance of success if its core product is of inferior quality. However, even providing a high-quality core product is not enough to ensure customer satisfaction and long-term customer relationships. This occurs because customers expect the core product to be of high quality or at least at a level necessary to meet their needs. When the core product meets this level of expected quality, the customer begins to take it for granted. For example, customers take their Internet service for granted because they expect it to work every time. They only take notice when clarity becomes an issue, or when the service is unavailable. The same thing can be said for a grocery retailer who consistently delivers high quality food and service. Over time, the core product no longer stands out at a level that can maintain the customer relationship in the long term. It is at this point where supplemental products become critical.
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272 Part 4: Putting Strategy into Action
Supplemental Products Supplemental products are goods or services that add value to the
Yulai Studio/Shutterstock.com
core product, thereby differentiating the core product from competing product offerings. In most cases, supplemental products are extra features or benefits that enhance the total product experience; however, they are not necessary for the core product to function correctly. In many product categories, the true difference between competing products or brands lies in the supplemental products provided by the firm. For example, every Airbnb host is capable of delivering the core product—a room with a bed in which to spend the night. Although the quality of the core product varies among listings, the important differences lie in the supplemental products. Premium Airbnb listings offer many features—such as rental of the entire house or apartment, luxury furniture, free Wi-Fi, and a hot tub—that basic Airbnb listings for single rooms do not. Wireless phone service is another example. All wireless firms can fulfill their customers’ communication needs; however, customers use supplemental products such as different phone options, rate plans, and special packages that combine talk time, texting, and data usage levels to differentiate one product offering from another. In business markets, supplemental services are often the most important factor in developing long-term relationships. Services such as financing, training, installation, and maintenance must be of top quality to ensure that business customers will continue to maintain a relationship with the supplier firm. It is interesting to note that companies do not market many products with the core product in mind. When was the last time an automaker touted a car or truck on its ability to fulfill your transportation needs (i.e., getting you from Point A to Point B)? Rather, they focus on supplemental product attributes such as special financing, roadside assistance, and warranties. Supplemental products such as these depend heavily on the product, pricing, and distribution elements of the marketing program. For example, in addition to selling a wide range of name brand products, Amazon also offers its own credit card and free shipping on many orders of $35 or more, or free shipping with an Amazon Prime membership. These supplemental services, along with 24/7 access and competitive pricing, make Amazon a formidable competitor in many different product categories.
Car dealerships offer a variety of supplemental products and services such as window tinting, upgraded tires, all-season floor mats, splash guards, and more.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 273
Symbolic and Experiential Attributes Marketers also use symbolic and experiential differences—such as image, prestige, and brand—to differentiate their products. These features are created primarily through the product and promotional elements of the marketing program. Without a doubt, the most powerful symbolic and experiential attributes are based on branding. In fact, many brands—such as Gucci, BMW, Louis Vuitton, and Chanel—only need their names to get the message across. These brands have immense power in differentiating their products because they can project the entire product offering (core, supplemental, and symbolic/experiential) with one word or phrase. Other types of products don’t necessarily rely on branding but on their uniqueness to convey their symbolic and experiential nature. Major sporting events, such as the Olympics, Super Bowl, NCAA Final Four, or Tour de France, are certainly good examples of this. Even local athletic events, such as high school football games, can have symbolic and experiential qualities if the rivalry is intense. 10.3b Delivering Superior Quality Delivering superior quality day in and day out is one of the most difficult things that any organization can do with regularity. In essence, it is difficult to get everything right—even most of the time. Most businesses struggle with improving the quality of their products, whether they are the core product or supplemental products. As we discussed in Chapter 1, this has happened because (1) customers have very high expectations about quality, (2) most products today compete in mature markets, and (3) many businesses compete in markets with little real differentiation among product offerings. As products become further commoditized, it becomes difficult for marketers to make their products stand out among a crowd of competitors. A great deal of research has been conducted to determine how businesses can improve the quality of their products. These four issues stand out:9 ●●
●●
●●
Understand Customers’ Expectations. According to a Salesforce survey, customer expectations are at an all-time high, and consumers are likely to switch brands for a better experience.10 It is not surprising that the basis of improving quality is also the starting point for effective customer relationship management. The delivery of superior quality begins with a solid understanding of customers’ expectations. This means that marketers must stay in touch with customers by conducting research to better identify their needs and wants. Although this research can include large-scale efforts such as surveys or focus groups, it can also include simple and inexpensive efforts such as customer comment cards or having managers interact in a positive fashion with customers. Advances in technology have greatly improved the ability to collect and analyze information from individual customers. Tools such as big data and AI hold great promise in enabling firms to better understand customers’ expectations and needs. Translate Expectations Into Quality Standards. Firms that can successfully convert customer information into quality standards ensure that they hear the voice of the customer. If customers want better ingredients, friendlier employees, or faster delivery, then standards should be set to match these desires. It is often the case, however, that managers set standards that meet organizational objectives with no consideration for customer expectations. This commonly occurs when managers set standards based on productivity, efficiency, or cost reductions rather than quality or customer service. In these cases, the temptation is to focus on internal benchmarks such as cost control or speed rather than customer benchmarks such as quality and satisfaction. Uphold Quality Standards. The best quality standards are of little use if they are not delivered accurately and consistently. At issue is the ability of managers and employees to deliver quality that is consistent with established standards. Greeting customers by name, having a human answer the phone, and delivering a hot pizza within 30 minutes are all examples of quality standards that may, or may not, be achieved. Successfully achieving these standards depends mostly on how well the strategy is implemented. However, it also depends on the ability of the firm to fully fund the quality effort. For example, many retailers— including Walmart—at one time had standards for opening additional checkout lanes when
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274 Part 4: Putting Strategy into Action
●●
there were more than three people in line. However, these retailers failed to deliver on this standard due to the expense of staffing additional employees to operate the registers. A response has been the addition of self-checkout lines to bring balance to customer wait times and service expectations. Don’t Overpromise. It goes without saying that customers will be disappointed if an organization fails to deliver on its promises. The key is to create realistic customer expectations for what can and cannot be delivered. All communication to customers must be honest and realistic with respect to the degree of quality that can be delivered. Intentionally misleading customers by making promises that cannot be kept is a guaranteed recipe for disaster.
Of these four issues, having a thorough understanding of customer expectations is the most critical because it sets the stage for the entire quality improvement effort. Customer expectations are also vital to ensuring customer satisfaction. We will look more closely at customer expectations later in this chapter.
10.3c Understanding the Role of Value Earlier, we stated that quality is a necessary, but insufficient, condition of effective customer relationship management. By this we mean that exceptionally high product quality is of little use to the firm or its customers if the customers cannot afford to pay for it or if the product is too difficult to obtain. In the context of product utility (want satisfaction), sacrificing time, place, possession, and psychological utility for the sake of form utility may win product design awards, but it will not always win customers. Value is critical to maintaining long-term customer relationships because it allows for the necessary balance among the five types of utility and the elements of the marketing program. As a guiding principle of marketing strategy, value is quite useful because it includes the concept of quality but is broader in scope. It takes into account every marketing program element and can be used to consider explicitly customer perceptions of the marketing program in the strategy development process. Value can also be used as a means of organizing the internal aspects of marketing strategy development.
BEYOND THE PAGES 10.2
Using AI to Enhance Customer Service11 As consumers, we are supposed to be living the good life. After all, we have access to an unprecedented variety and assortment of goods and services from around the globe. Everything we need is practically at arm’s length and available 24/7. If things are so great, then why do we still suffer from poor service, long wait times, ignored complaints, and the feeling that we are just another number to most firms? To address these issues, many companies are turning to artificial intelligence (AI). Our own demands for convenient, fast, and low-priced products are at odds with our demands for better customer service. As firms look to drive down costs and increase speed, they focus more on internal efficiency benchmarks based on costs and time-based measures of performance. This means they focus less on customer-driven benchmarks such as
quality, value, or satisfaction, which is why AI assistance is so appealing. AI has the ability to automate tasks, improve response time, personalize the customer experience, predict customer needs, guide employees, and simplify processes, allowing human agents to focus on more important work. As an AI example, IBM’s Watson Assistant helped companies save $24 million in costs over a three-year period. Examples of companies employing AI customer service include:
Delta Delta airlines has a robust call center with 7,000 employees that handle millions of customer calls. To ease the strain, the company implemented an AI-powered business chat tool that offers users information or solutions to easy-to-handle issues such as questions about upcoming trips or baggage (continued)
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 275
rules. More complex problems are elevated to human agents. In this case, Delta is using AI to supplement its customer service team rather than replace it, allowing its agents to handle more complex tasks while responding to a higher volume of inquiries overall.
answers over time—and responds to more than 25,000 inquiries per month. The tool was developed based on a chatbot that was designed for Allstate agency owners to help them better answer client questions.
Comcast David’s Bridal David’s Bridal, the largest bridal retailer in the United States, adopted an AI chatbot to enhance its customer service efforts on mobile messaging. The bot, named Zoey, provides personalized service and helps human agents to do the same. Customers can book appointments, ask questions, get advice, and place orders via Zoey. David’s Bridal found that nearly half of customers opted for support through mobile messaging rather than waiting on hold for phone support. Additionally, customers who opted for mobile messaging had a 90 percent success rate on first contact compared to 73 percent on the phone. Moving appointment booking out of stores and into the hands of an AI bot freed up employees to focus on building relationships with guests in the store.
Allstate Allstate Business Insurance uses an AI chatbot called ABIE to answer questions from small business owners in real time. The system learns and adapts—adding new questions and
Comcast uses AI technology at the center of its Xfinity customer support. The company leverages the AI used in its devices, such as its voice-controlled X1 remote, to enhance the customer service experience. Comcast discovered, for example, that there are more than 7,500 different ways a customer might request to view their bill, which is one of the many reasons the cable provider looked to AI solutions. Comcast deployed RealTime Assist to proactively message customers about service appointments, which helped improve customer satisfaction. In one year, more than 8 million customers interacted with the tool If business can learn anything from these examples, it’s that AI can greatly enhance customer satisfaction. Customers demand personalized assistance, better quality, more attention, and increased value for their money. Customer expectations are simply too high—and competitors too plentiful—for businesses to ignore.
In Chapter 6, we defined value as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. To see how each marketing program element is related to value, we need to break down customer benefits and costs into their component parts, as shown below and in Exhibit 10.5: Perceived Value 5
(Core Product Quality 1 Supplemental Product Quality 1 Experiential Quality) (Monetary Costs 1 Nonmonetary Costs)
Different buyers and target markets have varying perspectives on value. Although monetary cost is certainly a key issue, some buyers place greater importance on other elements of the value equation. To some, good value is about product quality. To these customers, the product element of the marketing program is the most crucial to achieving good value. To others, value hinges on the availability and quality of supplemental products. Here, the firm’s product, customer service, pricing, and distribution strategies come together to create value. For other buyers, good value is all about convenience. These customers place greater emphasis on distribution issues such as wide product availability, multiple locations, 24/7 access, or even home delivery to achieve good value. The relationships among marketing program elements must constantly be managed to deliver good value to customers. It is important for managers to remember that any change in one program element will have repercussions for value throughout the entire marketing program.
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276 Part 4: Putting Strategy into Action
EXHIBIT 10.5 Connections Between Value and the Marketing Program Marketing Program Elements Value Components
Distribution Strategy
Product Strategy
Pricing Strategy
Promotion Strategy
Core Product Quality
Product features Brand name Product design Quality Ease of use Warranties Guarantees
Image Prestige
Availability Exclusivity
Image Prestige Reputation Personal selling
Supplemental Product Quality
Value-added features Accessories Replacement parts Repair services Training Customer service Friendliness of employees
Financing Layaway Image Prestige
Availability Exclusivity Delivery Installation On-site training
Friendliness of employees Personal selling
Experiential Quality
Entertainment Uniqueness Psychological benefits
Image Prestige
Convenience Retail atmosphere Retail décor 24/7 availability Overnight delivery
Image Prestige Reputation Personal selling
Monetary Transactional Costs
Quality Exclusive features
Selling price Delivery charges Installation charges Taxes Licensing fees Registration fees
Delivery charges Installation charges Taxes
Image Prestige Reputation Personal selling
Monetary Life Cycle Costs
Durability Reliability Product design
Maintenance costs Cost of consumables Repair costs Costs of replacement parts
Availability of consumables Availability of replacement parts Speed of repairs
Reputation Personal selling
Nonmonetary Costs
Durability Reliability Minimize opportunity costs
Guarantees Return policy
Convenience Wide availability 24/7 access
Reputation Reinforce purchase decision
Core Product, Supplemental Product, and Experiential Quality The relationship be-
tween quality and value is most apparent in the quality of the customer benefits depicted in the top portion of the value equation. Here, good value depends on a holistic assessment of the quality of the core product, supplemental products, and experiential attributes. Although each can be judged independently, most customers look at the collective benefits provided by the firm in their assessments of value. Consequently, firms are able to create unique combinations of core, supplemental, and experiential benefits that help drive value perceptions. Consider a hotel stay at the Hyatt versus Motel 6. Despite their obvious differences, both can deliver the same value to different customers at different points in time. The Hyatt may offer better form utility and comfort, but Motel 6 may be less expensive and closer to attractions. The overall perception of value is driven by customer needs, expectations, and the sacrifices required in obtaining the benefits provided by each firm.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 277
Monetary and Nonmonetary Costs Customer costs include anything that the customer must give up to obtain the benefits provided by the firm. The most obvious cost is the monetary cost of the product, which comes in two forms: transactional costs and life cycle costs. Transactional costs include the immediate financial outlay or commitment that must be made to purchase the product. Other than the purchase price of the product, examples of these costs include sales taxes, usage taxes, licensing fees, registration fees, and delivery or installation charges. For example, appliance or furniture retailers can increase value by offering free delivery or installation when their competitors charge for these services. Life cycle costs include any additional costs that customers will incur over the life of the product, such as the costs of consumable supplies, maintenance, and repairs. Hyundai and Kia, for example, offer long-term warranties on their cars, vans, and SUVs that significantly reduce life cycle costs for their customers. Product quality, warranties, and the availability of repair services all play into the equation when customers judge monetary costs. Firms that have the capability to reduce transactional or life cycle costs can often provide a better value than their competitors. Nonmonetary costs are not quite as obvious as monetary costs, and customers sometimes ignore them. Two such costs include the time and effort customers expend to find and purchase goods and services. These costs are closely related to a firm’s distribution activities. To reduce time and effort, the firm must increase product availability, thereby making it more convenient for customers to purchase the firm’s products. The growth in nonstore and electronic retailing is a direct result of firms taking steps to reduce the time and effort required to purchase their products, thereby reducing customers’ nonmonetary costs. The sheer number of products that customers can have delivered directly to their homes is a testament to the growing importance of customers’ time. Offering good basic warranties or extended warranties for an additional charge can reduce risk, another nonmonetary cost. Retailers reduce risk by maintaining liberal return and exchange policies. Personal safety and security risks come into play when customers purchase products that are potentially dangerous such as tobacco products, alcohol, and firearms. The final nonmonetary cost, opportunity cost, is harder for the firm to control. Customers incur opportunity costs because they forgo alternative products in making a purchase. Some firms attempt to reduce opportunity costs by promoting their products as being the best or by promising good service after the sale. To anticipate opportunity costs, marketers must consider all potential competitors, including total budget competitors that offer customers alternatives for spending their money. 10.3d Competing on Value After breaking down value into its component parts, we can better understand how a firm’s marketing strategy can be designed to optimize customer value. By altering each element of the marketing program, the firm can enhance value by increasing core, supplemental, or experiential quality and/or reducing monetary or nonmonetary costs. This effort must be based on a thorough understanding of customers’ needs and wants, as well as an appreciation for how the firm’s customers define value. In consumer markets, retailers offer good examples of how value can be delivered by altering one or more parts of the value equation. Convenience stores offer value to customers by reducing nonmonetary costs (time and effort) and increasing monetary prices. These high-priced (in dollars) stores stay in business because customers value their time and effort more than money in many situations. Online retailers offer a similar mix of value by reducing time and effort costs and offering easy access to a wide variety of products. Customers who want the best quality may be willing to spend large sums of money and/or spend more time searching because they consider their nonmonetary costs to be less important. These consumers are likely to shop at major retailers rather than discount chains. Finally, specialty stores, such as Anthropologie or Banana Republic, offer an attractive mix of value in terms of quality clothing, fashionable styling, excellent service, and attractive décor, albeit at higher monetary prices. Those in business markets often define value in terms of product specifications, availability, and conformity to a delivery schedule, rather than in terms of price, experience, or convenience.
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278 Part 4: Putting Strategy into Action
Business customers must ensure that the products purchased will work right the first time, with minimal disruption to ongoing operations. In some cases, products have value not only because of their features or quality but also because the buying firm has a long-standing relationship with the supplying firm. Business buyers tend to become loyal to suppliers that consistently meet their expectations, solve their problems, and cause them no headaches. All of this is not to say that monetary considerations and good experiences are not important. In fact, unlike most consumers, business buyers are keenly aware of total transactional and life cycle costs as they seek to reduce the total lifetime expenditure associated with a particular purchase. Business customers will quite often pay more in up-front costs if the total lifetime cost can be reduced. In addition, product experience needs to be acceptable, but what the product does is typically more important than the experience of using the product or working with the selling company. It is important to note that the value many products offer is not static. In some cases, the value of a product is “what you see is what you get.” Products like industrial fasteners (e.g., screws, rivets, and bolts), cleaning products, and many consumable goods contain a certain value when manufactured that doesn’t change after the end user purchases it. However, a growing number of products have value that is subject to a value consumption gap that comes from the changing nature of value. For example, Netflix continually updates its streaming library, but if the subscriber is not aware of a new series or movie, then it offers little value to the customer. In a digital and subscription-based product setting, value can change frequently after the customer makes a purchase, but often the customer is unaware of or even confused by the changing product. Thus, successful companies address this value consumption gap via programs to educate and improve the customer’s success in using their products and services. Obviously, different market segments will have different perceptions of good value. The key is for the marketer to understand the different value requirements of each segment and adapt the marketing program accordingly. From a strategic perspective, it is important to remember that each marketing program element is vital to delivering value. Strategic decisions about one element alone can change perceived value for better or worse. If a decision lowers overall value, the firm should consider modifying other marketing program elements to offset this decrease. For example, an increase in price may have to be offset by an increase in customer benefits to maintain the value ratio.
10.4 CUSTOMER SATISFACTION: THE KEY TO CUSTOMER RETENTION In the final part of this chapter, we look at customer satisfaction and the role it plays in maintaining long-term customer relationships. To maintain and manage customer satisfaction from a strategic point of view, managers must understand customer expectations and the differences between satisfaction, quality, and value. They must also make customer satisfaction measurement a long-term, continuous commitment of the entire organization.
10.4a Understanding Customer Expectations Although customer satisfaction can be conceived in a number of ways, it is typically defined as the degree to which a product meets or exceeds the customer’s expectations about that product. Obviously, the key to this definition lies in understanding customer expectations and how they are formed. Marketing researchers have discovered that customers can hold many different types of expectations as shown in Exhibit 10.6. Customer expectations can vary based on the situation. For example, expectations are likely to be very high (i.e., closer to the ideal end of the range) in situations where personal needs are very high. In highly involving situations such as weddings, birthdays, or funerals, customers will demand a great deal from the firm.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 279
EXHIBIT 10.6 Range of Customer Expectations
Type of Expectation
Descriptive Example
Typical Situations
Expectation Range
Ideal Expectations
“Everyone says this is the best laptop on the market. I want to get my daughter something special for her birthday.”
Highly involving purchases Special occasions Unique events
High (Desired)
Normative Expectations
“As expensive as this laptop is, it ought to have a lot of storage and RAM.”
Shopping comparisons Value judgments
Experience-Based Expectations
“I bought this brand of laptop last time, and it served me very well.”
Frequent purchase situations Brand loyalty
Minimum Tolerable Expectations
“I know it’s not the best laptop out there. I only bought it because it was inexpensive.”
Price-driven purchases Low-involvement purchases
Low (Adequate)
Source: Adapted from James H. Myers, Measuring Customer Satisfaction (Chicago, IL: American Marketing Association, 1999); Valarie A. Zeithaml, Leonard L. Berry, and A. Parasuraman, “The Nature of Determinants of Customer Expectations of Service,” Journal of the Academy of Marketing Science, 21 (January 1993), 1–12.
Expectations also tend to be higher when customers have many alternatives for meeting their needs. This connection between expectations and alternatives is one reason that serving customers in highly commoditized markets is so challenging. Other situations can cause customer expectations to be lower (i.e., closer to the tolerable end of the range), such as when the purchase is not involving, or when the monetary or nonmonetary prices are low. Customers can also become more tolerable of weak or poor performance when they have fewer product alternatives, or when the poor performance is beyond the control of the firm (e.g., bad weather, excessively high demand, natural disasters).
The Zone of Tolerance The difference between the upper and lower end of the range of possible
customer expectations is an important strategic consideration in managing customer satisfaction. Marketers often refer to the upper end of expectations as desired performance expectations (what customers want) and the lower end of the range as adequate performance expectations (what customers are willing to accept). As shown in Exhibit 10.7, the extent of the difference between desired and adequate performance is called the zone of tolerance.12 The width of the zone of tolerance represents the degree to which customers recognize and are willing to accept variability in performance (i.e., quality, value, or some other measurable aspect of the marketing program). Performance can fall above the zone of tolerance, within the zone of tolerance, or below it: ●●
●●
●●
Customer delight—occurs when actual performance exceeds the desired performance expectation. This level of performance is rare and quite surprising when it occurs. Therefore, customers find it to be memorable. Customer satisfaction—occurs when actual performance falls within the zone of tolerance. Satisfaction levels vary based on where performance falls within the zone (high or low). Customer dissatisfaction—occurs when actual performance falls below the adequate performance expectation. Depending on the severity of the performance level, customers may go beyond dissatisfaction to become frustrated or even angry. This too can be memorable for customers.
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280 Part 4: Putting Strategy into Action
EXHIBIT 10.7 The Zone of Tolerance
Customer Delight
Customer Satisfaction
Customer Dissatisfaction
(Performance Exceeds Desired Expectations)
(Performance Within Zone of Tolerance)
(Performance Falls Below Adequate Expectations)
Marketing Performance
Desired Expectations
Desired Expectations
Desired Expectations
Adequate Expectations Marketing Performance
Marketing Performance
Adequate Expectations Adequate Expectations
Typical Zone of Tolerance (Performance Factors of Average Importance)
Wide Zone of Tolerance (Performance Factors of Less Importance)
Narrow Zone of Tolerance (Performance Factors of Highest Importance)
We addressed these three issues in Chapter 5 as being a consequence of the buying process. Now, with the marketing plan developed and implemented, we can think of these issues in a strategic sense by considering the zone of tolerance as a moving target. If the zone is narrow, the difference between what customers want and what they are willing to accept is also narrow. This means that the marketer will have a relatively more difficult time matching performance to customer expectations. Hence, customer satisfaction is harder to achieve when the zone of tolerance is narrow. Conversely, customer satisfaction is relatively easier to achieve when the zone of tolerance is wide. In these instances, the marketer’s hurdle is lower and the satisfaction targets are easier to hit. Delighting the customer by exceeding desired expectations is an exceedingly difficult task for any marketer. And, causing customer dissatisfaction by failing to meet even adequate expectations is a situation that should be avoided at all times. Customers will typically hold different expectation levels and zones of tolerance for different factors of performance. In a restaurant, for example, customers might have a narrow zone of tolerance for food quality, an even narrower zone of tolerance for service quality, an average zone of tolerance for wait time, and a relatively wide zone of tolerance for cleanliness. From the marketer’s point of view, two issues are important. First, the firm must clearly understand the relevant performance factors about which customers will hold performance expectations. Customers can have expectations for just about anything, though there are typically only a few factors that are critical for most customers. Many firms look first at factors dealing with product strategy; however, critical performance factors can cut across the entire
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 281
marketing program. Second, the firm must track expectations and performance over time. Tracking performance levels vis-à-vis expectations and the zone of tolerance is a useful diagnostic tool for both strategic planning and the management of customer satisfaction. The approach is also useful for tracking the effectiveness of improvements and in assessing the performance of new goods or services. In the end, tracking both expectations and performance is an important way to ensure that customer satisfaction remains stable or improves over time. Mobile push surveys and analytic advances in analyzing customer written review comments have helped marketers to find ways to better measure and track customer satisfaction. This is important because declining customer satisfaction suggests a need for immediate corrective action.
Managing Customer Expectations Many marketers ask two key questions as they work
toward managing customer expectations: (1) Why are customer expectations unrealistic? and (2) Should we strive to delight our customers by consistently exceeding their desired expectations? Although it is true that customers are more demanding today than ever (especially American consumers), their expectations are typically not that unrealistic. Most customers are looking for the basics of performance—things that a firm is supposed to do or has promised to do.13 For example, online orders should arrive on time, meals in a restaurant should taste good and be prepared as ordered, new cars should be hassle free throughout the warranty period, and your soft drink should be bubbly when you open it. On these and other basic factors of performance, it is essentially impossible for the firm to exceed customer expectations. These basic factors represent the bare minimum: If the firm wants to exceed expectations, it has to go above and beyond the call of duty. The second question about delighting the customer is a bit more controversial. Firms should always strive to exceed adequate expectations. After all, this is the basic delineation between satisfaction and dissatisfaction. The tougher question is whether the firm should try to exceed desired expectations. The answer depends on several issues. One is the time and expense involved in delighting customers. If delighting a customer does not translate into stronger customer loyalty or long-term customer retention, then it is not likely to be worth the effort. It may also not be a good investment if delighting one customer lowers performance for other customers. Another issue is whether continually delighting customers raises their expectations over time. To be effective, customer delight should be both surprising and rare, not a daily event. Firms should look for small ways to delight customers without elevating expectations beyond what can reasonably be delivered. Finally, the firm must be aware of whether its initiatives to delight the customer can be copied by competitors. If customer delight is easily copied, it ceases to be a key means of differentiation for the firm.
10.4b Satisfaction Versus Quality Versus Value Now that we better understand customer expectations, let’s look at how satisfaction differs from quality and value. The answer is not so obvious because the concepts overlap to some extent. Since customer satisfaction is defined relative to customer expectations, it becomes difficult to separate satisfaction from quality and value because customers can hold expectations about quality or value or both. In fact, customers can hold expectations about any part of the product offering, including seemingly minor issues such as parking availability, crowding, or room temperature in addition to major issues such as quality and value. To solve this dilemma, think of each concept not in terms of what it is, but in terms of its size. The most narrowly defined concept is quality, which customers judge on an attribute-by-attribute basis. Consider a meal at a restaurant. The quality of that meal stems from specific attributes: the quality of the food, the drink, the atmosphere, and the service are each important. We could even go so far as to judge the quality of the ingredients in the food. In fact, many restaurants, such as Sweetgreen, promote themselves based on the quality of their ingredients.
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282 Part 4: Putting Strategy into Action
BEYOND THE PAGES 10.3
Dealing With Declining Customer Loyalty14 Research indicates that brand loyalty is declining. In fact, more than half of customers stop buying from a company because a competitor provided a better experience. However, even satisfied customers often switch to a different brand on occasion. Though customer satisfaction and customer loyalty are closely connected, they are not the same thing. Overall, there is a fundamental shift in the way people shop, with convenience rising as a top priority. This shift greatly contributes to brand switching. Customer expectations are at an all-time high; however, customer satisfaction by itself tells a firm very little about where it stands with customers. There are two issues at work: relative satisfaction and customer expectations. Relative satisfaction tells a firm where it ranks against the competition. For example, Chick-fil-A’s satisfaction rating of 86 out of 100 says little about the firm and its products until that score is compared with competitors such as Panera (81), Wendy’s (77), and McDonald’s (69). Comparisons like this are important because customers make similar comparisons when making purchase decisions. A customer may be satisfied with a specific product or company but will switch if they believe they will be better satisfied (via higher quality,
a better user experience, or a better value) by another firm. For this reason, satisfied customers are not necessarily loyal customers. In many ways, convenience has been crippling to loyalty. An in-store grocery shopper may see several shelves of products to pick from, but an online grocery shopper may only view the first row of the search results. Eighty percent of product searches on Kroger’s website, for instance, are generic with no brand name attached (e.g., eggs, milk, peanut butter). This can make it difficult for companies to keep their brand top of mind for consumers. To combat declining loyalty, brands must fight to keep up with consumer expectations with personalized and proactive communication. It’s also important to be included in the narrowing set of options customers have to pick from. For example, earning the distinction of “Amazon’s Choice” or “Bestseller” can greatly improve visibility for shoppers on Amazon. Additionally, leaning into discounts, samples, and word-of-mouth can help brands steal customers from the competition. To retain loyal customers and attract new ones, companies will have to adjust their strategies to meet or exceed expectations.
When customers consider the broader issue of value, they begin to include things other than quality: the price of the meal, the time and effort required getting to the restaurant, parking availability, and opportunity costs. In this case, even the best meal in a great restaurant can be viewed as a poor value if the price is too high in terms of monetary or nonmonetary costs. When customers consider satisfaction, they will typically respond based on their expectations of the item in question. If the quality of the food is not what the customer expected, then the customer will be dissatisfied with the food. Similarly, if the value of the meal is not what the customer expected, the customer will be dissatisfied with the value. Note that these are independent judgments. It is entirely possible for a customer to be satisfied with the quality of the meal but dissatisfied with its value. The opposite is also true. However, most customers do not make independent judgments about satisfaction. Instead, customers generally think of satisfaction based on the totality of their experience without overtly considering issues like quality or value. We are not saying that customers do not judge quality or value. Rather, we are saying that customers think of satisfaction in more abstract terms than they do quality or value. This happens because customers’ expectations—hence their satisfaction—can be based on any number of factors, even factors that have nothing to do with quality or value. Continuing with our restaurant example, it is entirely possible for a customer to receive the absolute best quality and value, yet still be dissatisfied with the experience. The weather, other customers, a bad date, and a bad mood are just a few examples of non-quality and non-value factors that can affect customers’ expectations and cloud their satisfaction judgments.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 283
10.4c Customer Satisfaction and Customer Retention Customer satisfaction is the key to customer retention. Fully satisfied customers are more likely to become loyal customers, or even advocates for the firm and its products. Satisfied customers are less likely to explore alternative suppliers, and they are less price sensitive. Therefore, satisfied customers are less likely to switch to competitors. Satisfied customers are also more likely to spread positive word-of-mouth about the firm and its products. However, the way that customers think about satisfaction creates some interesting challenges for marketers. It is one thing to strive for the best in terms of quality and value, but how can a firm control the uncontrollable factors that affect customer satisfaction? Certainly, marketers cannot control the weather or the fact that their customers are in a bad mood. However, there are several things that marketers can do to manage customer satisfaction and leverage it in their marketing efforts: ●●
●●
●●
●●
●●
●●
Understand What Can Go Wrong. Managers, particularly those on the frontline, must understand that an endless number of things can and will go wrong in meeting customers’ expectations. Even the best strategies will not work in the face of customers who are in a bad mood. Although some factors are simply uncontrollable, managers should be aware of these factors and be ready to respond if possible. Focus on Controllable Issues. The key is to keep an eye on the uncontrollable factors but focus more on things that can be controlled. Core product quality, customer service, atmosphere, experiences, pricing, convenience, distribution, and promotion must all be managed in an effort to increase share of customer and maintain loyal relationships. It is especially important that the core product be of high quality. Without that, the firm stands little chance of creating customer satisfaction or long-term customer relationships. Manage Customer Expectations. As we have seen, managing customer expectations is more than promising only what you can deliver. To manage expectations well, the firm must educate customers on how to be satisfied by the firm and its products. These efforts can include in-depth product training, educating customers on how to get the best service from the company, telling customers about product availability and delivery schedules, and giving customers tips and hints for improving quality and service. For example, the U.S. Postal Service routinely reminds customers to mail early during the busy holiday season in November and December. This simple reminder is valuable in managing customers’ expectations regarding mail delivery times. Offer Satisfaction Guarantees. Companies that care about customer satisfaction back up their offerings by guaranteeing customer satisfaction or product quality. Exhibit 10.8 provides several examples of customer satisfaction guarantees. Guarantees offer a number of benefits. For the firm, a guarantee can serve as a corporate vision, creed, or goal that all employees can strive to meet. A good guarantee is also a viable marketing tool that can be used to differentiate the firm’s product offering. For customers, guarantees reduce the risk of buying from the firm and give the customer a point of leverage if they have a complaint. Make It Easy for Customers to Complain. Over 90 percent of dissatisfied customers never complain—they just go elsewhere to meet their needs. To counter this customer defection, marketers must make it easy for customers to complain. Whether by mail, phone, e-mail, or in person, firms that care about customer satisfaction will make customer complaints an important part of their ongoing research efforts. However, tracking complaints is not enough. The firm must also be willing to listen and act to rectify customers’ problems. Complaining customers are much more likely to buy again if the firm handles their complaints effectively and swiftly. Invest in Customer Success. Designing technology-based programs or ones with a more personal touch that help customers to overcome the value consumption gap aids in customer retention. For products with an evolving value proposition, many customers will stop using a product as it changes and evolves from what they originally purchased, unless they are educated on how the changes will help them. However, customers that see the new value opportunities and start adopting/using new features are more likely to be satisfied.
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284 Part 4: Putting Strategy into Action
EXHIBIT 10.8 Examples of Customer Satisfaction Guarantees Hampton Inn If you’re not satisfied, we don’t expect you to pay. That’s our commitment and your guarantee. That’s 100% Hampton®. L.L.Bean We stand behind all our products and are confident that they will perform as designed. If you are not 100% satisfied with one of our products, you may return it within one year of purchase for a refund. After one year, we will consider any items for return that are defective due to materials or craftsmanship. Airbnb Property damage protection of up to $1 million USD for every host and every listing— at no additional cost. Midas We believe that auto care should be a hassle-free experience. For over 50 years, we have built trusted customer relationships based on Midas reliability and professional service. And because we know that quality parts and services are important to you, we stand behind them with our guarantees. In fact, we guarantee all our work. And, we’re known for our lifetime-guaranteed brake pads, shoes, mufflers, and shocks and struts. Our limited lifetime guarantee is valid for as long as you own your car. Patagonia We guarantee everything we make. If you are not satisfied with one of our products at the time you receive it, or if one of our products does not perform to your satisfaction, return it to the store you bought it from or to Patagonia for a repair, replacement or refund. Damage due to wear and tear will be repaired at a reasonable charge. Publix Supermarkets We will never knowingly disappoint you. If for any reason your purchase does not give you complete satisfaction, the full purchase price will be cheerfully refunded immediately upon request.
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Create Relationship Programs. As we discussed earlier, firms can use relationship strategies to increase customer loyalty. Today, loyalty or membership programs are everywhere: banks, restaurants, supermarkets, and even drugstores. The idea behind all of these programs is to create financial, social, customization, and/or structural bonds that link customers to the firm. Make Customer Satisfaction Measurement an Ongoing Priority. If you don’t know what customers want, need, or expect, everything else is a waste of time. A permanent, ongoing program to measure customer satisfaction is one of the most important foundations of customer relationship management.
10.4d Customer Satisfaction Measurement There are a number of different methods for measuring customer satisfaction. The simplest method involves the direct measurement of performance across various factors using simple rating scales. For example, a customer might be asked to rate the quality of housekeeping services in a hotel using a 10-point scale ranging from poor to excellent. While this method is simple and allows the firm to track satisfaction, it is not diagnostic in the sense that it permits the firm to determine how satisfaction varies over time. To do this, the firm can measure both expectations and performance at the same time. Exhibit 10.9 illustrates how this might be done for a hypothetical health club.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 285
EXHIBIT 10.9 Measuring Expectations and Performance for a Hypothetical Health Club The Lowest Adequate Level of Service I Expect Is: When it comes to….
Low
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The Highest Desired Level of Service I Expect Is: Low
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The Actual Performance of This Health Club is: Low
High
The quality and variety of exercise equipment provided
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The amount of time I have to wait for a specific piece of exercise equipment
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The quality and variety of exercise classes offered
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The availability of specific exercise classes
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The availability of facilities, such as racquetball or basketball courts, the running track, or the pool
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Having a clean, attractive, and inviting facility
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Having a comfortable atmosphere (temperature, lighting, music)
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The overall helpfulness and friendliness of the staff
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Having convenient hours of operation
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Having plenty of available parking
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The ongoing measurement of customer satisfaction has changed dramatically over the last decade. Although most firms track their customer satisfaction ratings over time, firms that are serious about customer relationship management have adopted more robust means of tracking satisfaction based on actual customer behavior. Advances in technology, which allow firms to track the behaviors of individual customers over time, provide the basis for these new metrics. Some of these new metrics include:15 ●●
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Lifetime Value of a Customer (LTV). The net present value of the revenue stream generated by a specific customer over a period of time. LTV recognizes that some customers are worth more than others. Companies can better leverage their customer satisfaction programs by focusing on valuable customers and giving poor service or charging hefty fees to customers with low LTV profiles to encourage them to leave. Average Order Value (AOV). A customer’s purchase dollars divided by the number of orders over a period of time. The AOV will increase over time as customer satisfaction increases and customers become more loyal. E-commerce companies use AOV quite often to pinpoint customers that need extra incentives or reminders to stimulate purchases. Customer Acquisition/Retention Costs. It is typically less expensive to retain current customers than to acquire new customers. As long as this holds true, a company is better off keeping its current customers satisfied.
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286 Part 4: Putting Strategy into Action
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Customer Conversion Rate. The percentage of visitors or potential customers that actually buy. Low conversion rates are not necessarily a cause for concern if the number of prospects is high. Customer Retention Rate. The percentage of customers who are repeat purchasers. This number should remain stable or increase over time. A declining retention rate is a cause for immediate concern. Customer Churn Rate. The percentage of customers who do not repurchase (sometimes called the attrition rate). This number should remain stable or decline over time. An increasing attrition rate is a cause for immediate concern. Customer Recovery Rate. The percentage of customers who leave the firm (through churn) that can be lured back using various offers or incentives. Companies that sell products via contract or subscriptions (e.g., wireless phone service, satellite radio, or television) frequently offer special incentives to lure back former customers. Referrals. Dollars generated from customers referred to the firm by current customers. A declining referral rate is a cause for concern. Social Communication. Companies can track satisfaction by monitoring customers’ online commentary. The number of blogs, newsgroups, chat rooms, and general websites where customers praise and complain about companies is staggering.
Firms have many research methods at their disposal. Customer satisfaction surveys can be executed through a variety of methods including focus groups, e-mail, apps, point-of-purchase, or the mail. For example, HappyOrNot, a customer satisfaction company, has a Smiley Terminal designed for brick-and-mortar retailers where in-store shoppers can press a smiley face to indicate how satisfied they were with their shopping experience.16 Additionally, the focus group is used as a means of understanding customer requirements during product development, and companies use focus groups more often to measure customer satisfaction. Focus groups allow firms to more fully explore the subtleties of satisfaction, including its emotional and psychological underpinnings. AI has changed the ways marketers can collect customer feedback. An emerging application for AI is using facial recognition to analyze facial expressions to gauge customer satisfaction. Similarly, emotional tracking tools exist to analyze voice, eye movements, and text-based sentiment. AI and advanced analytic techniques are able to quickly and efficiently scour online reviews, social media, and YouTube videos for customer comments that reflect sentiments toward products. This type of qualitative information has traditionally been hard to analyze, yet with advances in analysis tools it has become a valuable resource to gain deeper understanding of customer satisfaction and dissatisfaction with products and services. Sentiment analysis is often built into social media management platforms—such as Sprout Social—though many businesses also employ online reputation management software that aggregates customer reviews from various sites such as Yelp, Tripadvisor, and Google. By better understanding the roots of customer satisfaction, marketers should be better able to develop marketing strategies that can meet customers’ needs.
LESSONS FROM CHAPTER 10
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The “right” marketing strategy: ●●
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is not necessarily about creating a large number of customer transactions in order to maximize market share. is one that attracts and retains customers over the long term. considers customers’ needs, wants, and expectations in order to ensure customer satisfaction and customer retention.
develops long-term relationships with customers in order to insulate the firm against competitive inroads and the rapid pace of environmental change.
Customer relationship management: ●●
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requires that firms look beyond current transactions to examine the long-term potential of a customer. is based on creating mutually beneficial relationships where each party provides value to the other party.
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 287
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is a business philosophy aimed at defining and increasing customer value in ways that motivate customers to remain loyal to the firm. is about retaining the right customers. involves a number of stakeholders in addition to customers including employees, supply chain partners, and external stakeholders such as government agencies, investors, the media, nonprofits, and facilitating firms. is supported by CRM systems that track customer data and provide information about customers to develop sales success and long-term relationships. shifts the firm’s marketing emphasis from “acquiring customers” to “maintaining clients.” involves the creation of relationship capital—the ability to build and maintain relationships with customers, suppliers, and partners based on trust, commitment, cooperation, and interdependence.
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CRM in consumer markets: ●●
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is a long-term process with the goal of moving consumers through a series of stages ranging from simple awareness, through levels of increasing relationship intensity, to the point where consumers become true advocates for the firm and its products. attempts to go beyond the creation of satisfied and loyal customers to create true believers and sponsors for the company. can lead to customer advocacy, action on behalf of the customer to spread either positive or negative information about a company across their social media and online rating platforms.
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is based on the understanding that all customers have different needs; therefore, not all customers have equal value to the firm. involves estimating the worth of individual customers to express their lifetime value (LTV) to the firm. Some customers are simply too expensive to keep given the low level of profits they generate. not only involves strategies to retain top-tier customers; it also involves finding ways to encourage second-tier customers to be even better customers. involves the use of four types of relationship strategies: financial incentives, social bonding, enhanced customization, and structural bonding.
CRM in business markets: also involves moving buyers through a sequence of stages, where each stage represents an increasing level of relationship intensity. ●●
As one of the keys to customer relationship management, quality:
is usually based on strategies that increase share of customer rather than market share. abandons old notions of acquiring new customers and increasing transactions to focus more on fully serving the needs of current customers.
is based more on creating structural bonds with customers or supply-chain partners. creates win–win scenarios where both parties build relationship capital; one firm maintains a loyal and committed customer, the other maintains a loyal and committed supplier. may call for a customer success model, which represents efforts to help customers to gain more value from products and utilize new features, services, and additional, complimentary products that provide added value to the customer. is typically more involving, more complex, and much riskier due to the nature of business buying, the presence of long-term contractual obligations, and the sheer dollars involved in many business purchases. leads to many changes in the way that companies conduct business, including a change in buyers’ and sellers’ roles, as well as increases in sole sourcing, global sourcing, team-based buying decisions, and productivity through better integration of operations, subscription-based sales models, and product innovation.
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is a relative term that refers to the degree of superiority of a firm’s goods or services. is a double-edged sword: Good quality can successfully generate first-time transactions, but poor quality guarantees that repeat purchases will not occur. is not an automatic guarantee of success—it is a necessary but insufficient condition of customer relationship management. is affected by every element in the marketing program. However, the firm’s product and branding strategies are of utmost importance. depends heavily on the form utility offered by the core product. In service offerings, the core product is typically based on a combination of people, processes, and physical evidence. is often taken for granted in the core product because customers expect the core product to be of high quality, or at least at a level necessary to meet their needs. is critical in supplemental products that add value to the core product. In most cases, these supplemental products, not the core product, are responsible for product differentiation. is often found in the symbolic and experiential attributes of a product. Characteristics such as image, prestige, or brand have immense power in differentiating product offerings. is hard to maintain with regularity because (1) customers have very high expectations about quality, (2) most products today compete in mature markets, and (3) many businesses compete in markets with very little real differentiation among product offerings.
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288 Part 4: Putting Strategy into Action
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is difficult to continuously improve over time. Delivering superior quality involves understanding customers’ expectations, translating expectations into quality standards, upholding quality standards, and avoiding the tendency to overpromise.
As one of the keys to customer relationship management, value: ●●
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is critical to maintaining long-term customer relationships because it allows for the necessary balance among the five types of utility and the elements of the marketing program. is a useful guiding principle of marketing strategy because it takes into account every marketing program element and can be used to consider explicitly customer perceptions of the marketing program in the strategy development process. is defined as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. breaks down into customer benefits (e.g., core product quality, supplemental product quality, experiential quality) and customer costs (monetary and nonmonetary costs). can vary across different situations or points in time depending on a customer’s expectations and needs. depends on much more than the selling price of a product. Value perceptions are also affected by transaction costs (taxes, fees, other charges), life-cycle costs (maintenance, repairs, consumables), and nonmonetary costs (time, effort, risk, opportunity costs). can be subject to a value consumption gap that comes from the changing nature of value because the value many products offer is not static. can be altered by changing one or more parts of the marketing program. If a change lowers overall value, the firm should consider modifying other marketing program elements to offset this decrease.
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Customer satisfaction: ●●
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are at the core of customer satisfaction. can be described as ideal (essentially perfect performance), normative (“should be” or “ought to be” performance), experience-based (based on past experiences), or minimum tolerable (lowest acceptable performance). can be examined strategically by considering the zone of tolerance between desired performance expectations and adequate performance expectations. The zone of tolerance represents the degree to which customers recognize and are willing to accept variability in performance. as measured against the zone of tolerance can lead to three outcomes: customer delight—actual performance exceeds desired expectations ●●
is defined as the degree to which a product meets or exceeds the customer’s expectations about that product. is typically judged by customers within the context of the total experience, not just with respect to quality and value. Customer satisfaction can also include any number of factors that have nothing to do with quality or value. is the key to customer retention. Fully satisfied customers are: more likely to become loyal customers or even advocates for the firm less likely to explore alternative suppliers less price sensitive less likely to switch to competitors more likely to spread good word-of-mouth about the firm and its products. creates some interesting challenges for marketers. Some of the steps that marketers can take to manage customer satisfaction include: understand what can go wrong focus on controllable issues manage customer expectations offer satisfaction guarantees make it easy for customers to complain invest in customer success create relationship programs make customer satisfaction measurement an ongoing priority can be measured using simple rating scales to directly measure performance across various factors in the marketing program. can be tracked diagnostically by measuring both expectations and performance at the same time. is now tracked using a number of new metrics based on actual customer behavior, including lifetime value of a customer; average order value; customer acquisition/ retention costs; customer conversion, retention, churn, and recovery rates; referrals; and social communication. can be measured by a variety of research methods and emerging tools such as AI, facial recognition, sentiment analysis, reputation management software, and more. ●●
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Customer expectations: ●●
customer satisfaction—actual performance falls within the zone of tolerance customer dissatisfaction—actual performance falls below adequate expectations are typically not unrealistic. Customers are looking for the basics of performance—things that the firm is supposed to do or has promised to do. can be increased over time if the firm is not mindful of its initiatives aimed at delighting customers on a continuous basis. ●●
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Chapter 10: Developing and Maintaining Long-Term Customer Relationships 289
ENDNOTES 1. 1-800-Flowers, “About Us: Our Story,” https://pwa.www .1800flowers.com/about-us-company-overview (accessed April 27, 2020); “1-800-FLOWERS.COM, Inc. Reports Strong Fiscal 2020 First Quarter Revenue Growth, Improved EPS and Adjusted EBITDA,” Business Wire, October 31, 2019, https://www.businesswire.com/news/home/20191031005331 /en/1-800-FLOWERS.COM-Reports-Strong-Fiscal-2020-Quarter-Revenue (accessed April 27, 2020); Barbara Ortutay, “Flower Shop Launches First Facebook Store,” NBC News, July 29, 2009, http://www.nbcnews.com /id/32203105/ns/tech_and_science-tech_and_gadgets/t/flower-shop -launches-first-facebook-store/ (accessed April 27, 2020); Rebecca Reisner, “Mixing Up the Bouquet at 1-800-Flowers.com,” Bloomberg, April 7, 2009, https://www.bloomberg.com/news/articles/2009-04-07/mixing -up-the-bouquet-at-1-800-flowers-dot-combusinessweek-business-news -stock-market-and-financial-advice (accessed April 27, 2020); 1-800-Flowers, Inc., https://www.1800flowersinc.com/news-and-media (accessed April 27, 2020); 1-800-Flowers, Inc., “1-800-Flowers.com Continues to Innovate The Customer Experience as Valentine’s Day Gifting Begins,” January 28, 2020, https://www.1800flowersinc.com/news-and-media/newsroom /press-releases/2020/01-28-2020-130332662 (accessed April 27, 2020). 2. Jill Dyché, The CRM Handbook (Boston, MA: Addison-Wesley, 2002), p. 4–5. 3. Trevir Nath, “How Salesforce CRM Works,” Investopedia, February 4, 2020, https://www.investopedia.com/articles/professionals/012915 /how-salesforce-crm-works.asp (accessed April 27, 2020). 4. “Relationships Rule,” Business 2.0, May 2000, 303–319. 5. Glen L. Urban, “The Emerging Era of Customer Advocacy,” MIT Sloan Management Review, January 15, 2004, https://sloanreview.mit.edu /article/the-emerging-era-of-customer-advocacy/ (accessed May 1, 2020). 6. Tesla, “Referral Program,” https://www.tesla.com/support/referral -program (accessed April 27, 2020). 7. Regions, “Company Profile,” https://ir.regions.com/company /company-profile (accessed April 27, 2020). 8. Adapted from Valarie Zeithaml, Mary Jo Bitner, and Dwayne Gremler, Services Marketing, 6th ed. (Boston, MA: McGraw-Hill/Irwin, 2013), pp. 25–27. 9. This material is adapted from Valarie A. Zeithaml, A. Parasuraman, and Leonard L. Berry, Delivering Quality Service: Balancing Customer Perceptions and Expectations (New York: The Free Press, 2001). 10. Salesforce, “Customer Expectations Hit All-Time Highs,” https://www.salesforce.com/research/customer-expectations/ (accessed April 27, 2020).
11. IBM, “AI for Customer Service,” https://www.ibm.com/watson /ai-customer-service (accessed April 27, 2020); “How Delta Is Leveraging Apple’s Business Chat, AI for Better Customer Service,” PYMNTS, July 12, 2019, https://www.pymnts.com/call-center-commerce/2019/delta-apple -business-chat-artificial-intelligence-customer-service/ (accessed April 27, 2020); Dan Berthiaume, “David’s Bridal Marries AI With Human Customer Service Reps,” Chain Store Age, January 21, 2020, https://chainstoreage.com /davids-bridal-marries-ai-human-customer-service-reps (accessed April 27, 2020); Mike Thomas, “25 AI Insurance Companies You Should Know,” Built In, April 10, 2020, https://builtin.com/artificial-intelligence/ai-insurance (accessed April 27, 2020); Tyler Wilson, “AI Technologies Fuel Xfinity Customer Support Platforms,” The Spokesman-Review, February 24, 2019, https://www.spokesman.com/stories/2019/feb/24/ai-technologies-fuel -xfinity-customer-support-plat/ (accessed April 27, 2020). 12. Information in this section is based on James H. Myers, Measuring Customer Satisfaction (Chicago, IL: American Marketing Association, 1999); Valarie A. Zeithaml, Leonard L. Berry, and A. Parasuraman, “The Nature and Determinants of Customer Expectations of Service,” Journal of the Academy of Marketing Science, 21 (January 1993), 1–12. 13. A. Parasuraman, Leonard L. Berry, and Valarie A. Zeithaml, “Understanding Customer Expectations of Service,” Sloan Management Review, 32 (Spring 1991), 42. 14. Danny Klein, “Chick-fil-A’s Customer Satisfaction Scores Reign Supreme,” QSR, June 2019, https://www.qsrmagazine.com/fast-food/chick -fil-s-customer-satisfaction-scores-reign-supreme (accessed April 27, 2020); Chris Lawton, “The Cost of Convenience: Declining Brand Loyalty,” American Marketing Association, November 1, 2019, https://www.ama.org /marketing-news/the-cost-of-convenience-declining-brand-loyalty/ (accessed April 27, 2020); Salesforce, “Customer Expectations Hit All-Time Highs,” Salesforce, https://www.salesforce.com/research/customer-expectations/ (accessed April 27, 2020); Daniel Keyes, “Brands Should Be Concerned About Customer Loyalty,” Business Insider, March 14, 2019, https://www .businessinsider.com/most-us-consumers-not-brand-loyal-2019-3 (accessed April 27, 2020). 15. Adapted from Judy Strauss, Adel El-Ansary, and Raymond Frost, E-Marketing, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), p. 435–437. 16. HappyOrNot, “Smiley Terminal,” https://www.happy-or-not .com/en/smiley-terminal/ (accessed May 1, 2020).
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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CASE 1 Tesla Races Ahead With Nontraditional Marketing Strategy* SYNOPSIS: Tesla, the leader in electric vehicles, has managed to become one of the most valuable car makers in the United States without any traditional advertising and an Internet-focused downstream distribution strategy. Tesla also leads with an extensive corporate social responsibility strategy that includes focusing on the safety of both employees and consumers, supporting a diverse work environment, sourcing responsibly produced materials, and contributing to education. Ethics and social responsibility, sustainability, distribution strategy, THEMES: promotion strategy, product strategy, pricing strategy, competitive advantage
T
esla, an all-electric vehicle and energy generation products company, is widely admired for its industry-altering innovation built around its core vision of moving the world toward sustainable energy. Though Tesla got its start with electric vehicles (EVs) in 2003, the company has branched out to create a variety of renewable energy technologies from solar roof tiles to clean energy storage. Today, Tesla is the most valuable car maker in the world. Remarkably, the automaker reached this status with a $0 advertising budget. Tesla has a gift for attracting publicity due to its promotion tactics, such as its launch events, and headline-worthy achievements. For instance, despite facing more competition than ever before, Tesla is growing substantially and has repeatedly posted quarterly profits after years of losses. However, despite the company’s success, Tesla has attracted both skepticism and criticism from the public as well as investors, largely due to CEO Elon Musk’s outspoken nature, which has damaged the company’s reputation and stock price more than once. This case analyzes how Tesla established itself as a leader in EVs. *Kelsey Reddick and Zachary Youngstrom prepared this case under the direction of O. C. Ferrell for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management, © 2022.
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292 Part 5: Cases
C1.1 TESLA’S MARKETING MIX C1.1a Tesla’s Product Strategy Tesla did not invent the EV, but it was the first to create a viable EV for consumers and has set the standard of what an electric car should be. In 2003 Martin Eberhard and Marc Tarpenning set out to create a high-end performance EV, targeting wealthy car enthusiasts. Though many assume Elon Musk created Tesla, he didn’t join the company until 2004 after investing $30 million and becoming the chair of the board of directors. The company spent years testing and designing components and prototypes of what would become the Roadster. The team hit a major snag in late 2007 when they realized the design of their transmission could not work and had to evaluate new options. This left them with nearly finished vehicles they could not ship. Eberhard resigned as CEO that year and was replaced by Ze’ev Drori who pushed the company forward to get the long-awaited Roadsters on the road. Shortly after the Roadster was introduced in June 2008, Musk succeeded Drori to become Tesla’s CEO. Before the Roadster, companies were challenged by the tasks of creating a battery that could sufficiently power a vehicle and a motor that was effective and affordable. Though Tesla was successful in achieving these goals, the price of the Roadster, around $100,000 at the time of its launch, and the long battery charging times were massive barriers to widespread consumer adoption. Tesla needed sales to continue its business. In 2009, Tesla was struggling financially with less than $10 million to its name. The company was saved by Daimler AG, the automotive company behind Mercedes, which bought a 10 percent stake of Tesla for $50 million, and the United States Department of Energy, which gave Tesla a $465 million loan. To remain financially stable, Tesla filed an IPO in 2010, raising $226 million. To follow up on the launch of its first EV, in 2012 Tesla introduced the Model S, the world’s first premium all-electric sedan, which was significantly more affordable than the Roadster at $76,000. The vehicle had a record 0–60 mph acceleration time of 2.28 seconds, according to Motor Trend, and had the longest driving range of any EV, pushing standards even higher. That same year, Tesla introduced its first freestanding charging stations called Superchargers. Now, there are more than 16,500 Superchargers at more than 1,800 locations. Although the company had finally gotten its feet under itself, Tesla didn’t post a quarterly profit until 2014. Tesla is fighting to accelerate the world’s transition to sustainable energy, which is the company’s core vision. Recognizing that this goal cannot be achieved by one company, Tesla made the move to open source Tesla patents in 2014 in order to make them accessible to anyone wanting to design EVs. Musk believes that Tesla’s competition is not the small percentage of EVs being produced but rather the large number of gasoline-fueled vehicles saturating the market. However, Tesla faces plenty of competition with EVs, too, with mainstream automakers GM and Ford aiming to increase their slices of the EV market. Additionally, Tesla must keep an eye on smaller companies such as Nikola Motor Company, which produces electric semi-trucks and has introduced a pickup truck. Building on the success of its sedan, Tesla introduced the Model X in 2015, which became the safest SUV ever tested. It earned 5-star safety ratings across every category from the National Highway Traffic Safety Administration, the first vehicle to ever hit that mark. That same year, Tesla began rolling out an auto-pilot feature for partial autonomous driving, which enabled the cars to self-drive with active driver supervision. With three successful vehicle launches under its belt, Tesla began to focus on the energy side of its business, unveiling Solar Roof solar tiles as well as Powerwall and Powerpack industry batteries to store converted solar energy. To support this focus on energy, Tesla strategically acquired SolarCity, a solar energy service company, in 2016 for $2.6 billion. To seal the deal, the company changed its name from Tesla Motors to Tesla, Inc. in 2017, signifying the company’s shift from a car manufacturer to a sustainable energy solution company. Tesla’s energy solutions enable homeowners, businesses, and utilities to manage renewable energy generation, storage, and consumption. Tesla solar roof tiles are designed to look like normal roof tiles and cost $42,500 for a 2,000 square-foot house. Not only is Tesla Solar more affordable than a new roof and solar panels combined, but the product is three times stronger than standard roofing tiles. To test whether or not
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its energy solutions could provide 100 percent renewable energy, Tesla converted the American Samoan island of Ta’u to a solar and battery microgrid in 2016. Previously, the island operated on diesel generators, but with the new microgrid the island can operate for three days without sun. Tesla introduced the Model 3 in 2017, its most affordable vehicle yet, starting at $70,000. By 2018, the Model 3 had become the number-one selling plug-in car in the world, passing the Nissan Leaf by 2,000 units. Government tax incentives had made EVs more attractive to buyers, but once Tesla sold 200,000 units at the end of 2018, it marked the end of the $7,500 government tax credit. Because this made Tesla vehicles more expensive to consumers, the company lowered the price of its Model 3, Model S, and Model X by $2,000. In 2019 Tesla achieved Musk’s goal of creating a more affordable EV for the broader market when it released a base model of the Model 3 at a price point of $35,000 for a limited time. Tesla covers several vehicle segments with premium sedans, SUVs, a compact SUV, a compact crossover, and a pickup truck. To address more of the consumer market, Tesla unveiled its first compact crossover, the Model Y, and a new kind of pickup truck, the Cybertruck, in 2019. Tesla claims its pickup truck has superior durability and passenger protection with a “nearly impenetrable” body, according to the Tesla website. Though the angular, futuristic design is polarizing, it allows Tesla’s truck to stand apart from mainstream truck makers like GM. The Cybertruck marks Tesla’s first attempt to gain credibility in the light-duty pickup truck market. Musk has said that it would consider a more conventional design in the future. In addition to addressing more of the consumer market, Tesla is investing in heavy-duty trucks and high passenger-density urban transport. For example, Tesla Semi, an electric semi trailer truck, is designed to save owners at least $200,000 over a million miles based on fuel costs alone. The truck accelerates faster than a traditional semi and can drive faster uphill. Plus, the Semi includes safety features such as Enhanced Autopilot to help truck drivers avoid collisions. Working to cover more forms of transport greatly expands Tesla’s footprint and improves the carbon footprint of the transportation industry as a whole. Tesla aims for its vehicles to be completely self-driving while recognizing the regulatory hurdles the company will have to jump. By replacing drivers with artificial intelligence (AI), car companies are assuming new ethical and legal responsibilities they did not have previously. AI-powered cars will have to be programmed to make ethical decisions. Although Tesla’s partially autonomous autopilot feature, which is currently available in its vehicles, has been connected to several crashes and more than one death, the company has repeatedly insisted that drivers who use the feature are safer than other drivers. The system issues hands-off alerts to encourage drivers to avoid overreliance on the feature. Musk’s vision for high passenger-density urban transport goes hand in hand with his vision for autonomous, self-driving vehicles. He describes a world of ride-sharing where Tesla owners can add their fully autonomous vehicle to a shared fleet of self-driving taxis in order to generate income for the owner. He believes this is how Tesla vehicles will become more affordable to all.
C1.1b Tesla’s Pricing Strategy Tesla uses a premium pricing strategy with vehicles ranging from $40,000 to $200,000. In 2006, Elon Musk spelled out Tesla’s master plan for sustainability: build and sell the Tesla Roadster in order to build more affordable models while providing zero-emission electric power generation options. Though the company got its start creating high-end performance EVs with the Roadster, Tesla achieved CEO Elon Musk’s goal of creating a more affordable EV for the broader market with the Model 3, which has become the all-time best-selling EV globally. Tesla offers no-haggle pricing, meaning the list price is exactly what buyers pay. The Model 3 is challenging the dominance of German brands BMW, Audi, and Mercedes in Europe, even with its higher prices. In fact, The Model 3 became the best-selling car in the Netherlands and Norway in 2019, and Tesla became the best-selling car brand in Iceland in 2020. EVs are even more appealing to consumers in Europe than in the United States because gasoline carries significantly higher taxes. Tesla will have to focus its attention on both Europe and China as it moves toward the future.
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C1.1c Tesla’s Distribution Strategy In the supply chain there is an “upstream” (e.g., suppliers) and “downstream” (e.g., wholesalers and retailers). Tesla has invested many resources into its upstream supply chain by focusing on its in-house battery cell production and vehicle production at its Gigafactories. This is one of Tesla’s key competitive advantages. Downstream, Tesla has a unique retail distribution compared to competitors. The company sells online with no agency dealerships. Customers pick up their vehicles at a Tesla-owned regional distribution center. Interestingly, Tesla showrooms are strictly used for promotion, not purchases. Tesla has struggled to meet delivery and production deadlines, especially with the Model 3 as it was the first time the company produced a mass-market car. Tesla blamed production issues on the inefficiency of its supply chain. The company was sourcing parts from across the globe but wanted to build and assemble all in one place. To improve production, Tesla brought battery cell production in-house in 2014 with Gigafactory 1 outside of Sparks, Nevada, a facility designed to significantly reduce battery cell costs, creating thousands of jobs. The cost of battery cells declined through economies of scale and the reduction of waste. This ultimately makes the vehicles more affordable for consumers. Spending years developing its battery technology and perfecting its production process has given Tesla a competitive advantage. Rivals are now fighting to catch up to the scale and efficiency Tesla has achieved. In 2015, Tesla acquired Riviera Tool & Die in order to streamline the production of the Model 3. Later that year, Tesla sold $738 million in shares in order to raise enough money for several infrastructure projects, including a battery factory and production facility. Tesla began production of solar cells and modules at Gigafactory 2 in Buffalo, New York, in 2016. The company added new production lines to support electrical components for Supercharger and energy storage products, creating nearly 800 jobs. Tesla committed to creating 5,000 jobs in New York State by 2027. After many supply chain improvements, Tesla finally reached its goal of producing 5,000 Model 3s per week in 2018. Building off the success of Gigafactory 1 and 2, Tesla opened a third Gigafactory outside of Shanghai, China, in 2019. With Gigafactory 3, Tesla can finally operate at the kind of scale Musk has always promised. Though Tesla is infamous for missing deadlines, its Gigafactory 3 in China opened early, showing Tesla’s commitment to improving its reputation. Prices of Tesla vehicles in China shifted as a result of the U.S-China trade war that started in July 2018, but, after building Gigafactory 3, Chinese authorities announced Tesla cars would be exempt from a 10 percent vehicle tax. Tesla was the only foreign company to be exempt. It is projected that up to 70 percent of vehicles in China could be electric by 2040, making the country very important to Tesla’s success. Now, Tesla also has Gigafactory locations in Berlin, Germany, and Austin, Texas. Though Tesla has made strides in improving its supply chain and production facilities, the company has attracted criticism from its own employees who have had irregular schedules due to production line issues and unexpected maintenance. Tesla laid off 7 percent of its full-time employees, cutting more than 3,000 jobs across the company in 2019 ahead of a projected dip in sales industry-wide. Unfortunately, Tesla is not alone. GM and Ford both experienced major layoffs in 2019. Tesla’s layoffs were a move toward streamlining the company as a result of pressure from shareholders to remain profitable. Downstream, Tesla has shifted the majority of its sales online. Tesla stores act more as showrooms rather than dealerships. This unusual strategy cuts the tension in car buying, eliminating the car salesperson. According to the Federal Trade Commission (FTC), the car buying process is one of the worst complaint categories for consumers, so Tesla may be giving customers exactly what they want. This commitment to online sales sets Tesla apart from traditional automakers. In fact, only 35 percent of car dealers say they are likely to sell cars online.
C1.1d Tesla’s Promotion Strategy Tesla has effortlessly attracted the attention of consumers, sparking interest almost exclusively through public relations. The company is well-known for its launch events where Musk addresses massive crowds including industry insiders and the media. For instance, after its Cybertruck
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unveiling, Tesla secured nearly 150,000 vehicle orders even though the company invested $0 in traditional advertising or endorsements. Additionally, Tesla has mastered the art of attracting free publicity. For example, Musk, also the CEO of aerospace company SpaceX, used the Falcon Heavy rocket launch in 2018 to release a Tesla Roadster in space. Media outlets continue to reference the publicity stunt years later. Additionally, at its Cybertruck unveiling, while demonstrating the strength of the vehicle’s windows, the glass shattered, which many people suggested was a coordinated stunt. Brands hopped into the conversation on social media to put in their two cents—including Denny’s, Steak-umm, Pepsi, YouTube, and Cars.com—giving Tesla even more exposure. Within six months, Tesla secured more than 600,000 preorders. Not all of Tesla’s publicity, however, has been positive. For instance, Tesla’s history of leadership challenges has followed it in the media. In 2007 Eberhard resigned as CEO and joined the company’s advisory board. His replacement, Drori, is credited with advancing the Roadster from struggling prototype into a viable product. As the company was finally shipping its first Roadsters, Eberhard and Tarpenning broke all ties with Tesla and later suggested they had been forced out of the company. Shortly after their departure, Musk took over Drori’s role as CEO in 2008. The next year, Eberhard sued Tesla and Musk, alleging his leadership had been unfairly blamed for Tesla’s early struggles. Eberhard accused Musk of taking credit for the Roadster and accused Tesla of wrongfully denying Eberhard of his severance. Musk offered Eberhard a small severance package that included $100,000, six months of health insurance, the option to buy 250,000 shares of Tesla common stock, and a seat on the advisory board, but the company’s general counsel rescinded the package after Eberhard created a blog post discussing Tesla employees who he believed to be unfairly treated. Tesla denied the allegations, and Eberhard dropped his suit later that year. Though the fight wasn’t good for Tesla’s image, it didn’t attract much attention as Tesla had yet to become a household name. Many years later, Musk made a series of public statements online that damaged his reputation as well as the reputation of the company. For example, Musk projected Tesla would sell up to 200,000 Model 3 sedans in the second half of 2017, a gross overestimation. Ultimately, the company only produced 55,000 during that time. Later that year Musk announced on Twitter a plan to take the company private using money from Saudi Arabia’s sovereign wealth fund. The plan, which eventually crumbled, caused rapid trading, increasing the company’s stock price by 10 percent, and resulted in a lawsuit from the Securities and Exchange Commission (SEC). Many viewed this as a lapse in ethical judgment. The SEC charged Musk with securities fraud due to the false and misleading tweet. Musk settled with the SEC and agreed to step down as chair of Tesla. Though Musk remained CEO, his chair position was filled by Robyn Denholm, an Australian business executive. Both Musk and Tesla paid a $20 million fine. Part of the agreement included the appointment of two independent board members, Oracle founder Larry Ellison and former Kellogg executive Kathleen Wilson-Thompson. Tesla’s reputation took another blow in 2018 when the Department of Justice investigated the company under suspicion that the company had misled investors about production capacity. After Musk published a tweet about production capacity, the SEC filed a motion for contempt because it violated Tesla’s previous agreement with the SEC. The investigation resulted in the mandated oversight of Musk’s Twitter account by Tesla’s legal team. As a leader of a public company, Musk has the responsibility to behave in an ethical way, even when posting from his personal accounts. Also in 2018, Musk attracted negative publicity for smoking marijuana on Joe Rogan’s podcast. Though the brunt of the fallout impacted his other company, SpaceX, which is a U.S. military contractor, Tesla still felt its effects. The interview concerned Tesla’s business partner, Panasonic. Panasonic, which partnered with Tesla to invest in Gigafactory 2, is based in Japan where the use of marijuana is a serious crime. The incident hurt the already strained relationship. Many media outlets suggest Musk violated Tesla’s code of conduct because he was under the influence while representing the company. The incident negatively impacted the company’s stock. Musk has become a celebrity in his own right due to his outspoken and charismatic nature. Though many companies have benefited from this phenomenon, such as Apple with Steve Jobs or Microsoft with Bill Gates, Tesla has had to reign in Musk who has been both an asset as well as a liability for the company.
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Musk’s Twitter rants have continued to attract negative publicity and performance for the company. In March 2020, just as the COVID-19 pandemic began to affect U.S. businesses, Musk tweeted, “The coronavirus panic is dumb.” Musk pushed to keep its California factory open even though there was a local shelter-in-place order, putting employees at risk. Musk then announced that the company would work on making ventilators for California and New York hospitals. One month later, Musk tweeted that the lockdown was “fascist.” The next blow was just a few days later when Musk posted that Tesla stock prices were too high, causing Tesla’s market value to decrease by $14 billion. Musk’s tweets have proven to be detrimental to both Tesla’s reputation and Tesla’s financial performance, showing a lack of regard for shareholder interest. In addition to ongoing leadership troubles, Tesla has faced a series of ethical controversies in the workplace. For example, on June 4, 2018, Business Insider reported that inefficiency at Tesla’s Nevada Gigafactory had led the company to scrap $150 million in raw materials. Martin Tripp, who was identified as the leaker, claims he suggested to his bosses that scrap should be reduced in order to be less wasteful and create a safer working environment. He wrote an e-mail to Musk that went unanswered. He decided to share data from the company’s internal production database with Business Insider and was later fired and sued for $167 million. Tripp filed a counterclaim, saying Musk defamed him when he told media outlets that Tripp had threatened a mass shooting. The security manager at Tesla’s Gigafactory, Sean Gouthro, filed a whistleblower report with the SEC against Tesla. Gouthro says Tesla behaved unethically in tracking down the leaker, claiming Tesla’s security team hacked Tripp’s phone, had Tripp followed, misled police, and installed a device to monitor employees’ personal communications. Though the legal battle is ongoing, Tesla denies the allegations. Despite all of this negative publicity, capitalizing on earned media rather than investing in paid media has been a winning strategy for Tesla. As competition increases from mainstream automakers such as Ford and General Motors, it may reverse its no-advertising stance; however, only time will tell.
C1.2 CORPORATE SOCIAL RESPONSIBILITY AT TESLA Tesla’s corporate social responsibility (CSR) strategy addresses stakeholders’ interests by monitoring and reporting on the company’s product and operational impact, emphasizing consumer safety and responsible sourcing, and focusing on its employees and building a strong organizational culture.
C1.2a Product and Operational Impact Tesla believes that consumers should not have to compromise on price or performance when it comes to choosing sustainable products. The company’s products are intended to reduce the environmental impacts of transportation and energy use and production, thus reducing greenhouse gas (GHG) emissions. Collectively, the 550,000 Tesla vehicles sold have resulted in an emissions savings of 4 million metric tons of carbon dioxide. Tesla’s annual carbon dioxide emissions are approximately 3 percent of Ford’s worldwide facility emissions. Additionally, Supercharger stations have saved 75 million gallons of gasoline. Across all of its solar installations, Tesla has generated more than 13 Terawatthours (TWhs) of emissions-free electricity. Governments around the globe support this shift toward electrification as well, and many offer monetary incentives to consumers to adopt EVs and other energy-efficient products.
C1.2b Focusing on Consumer Safety A focus on occupant safety has always been at the center of Tesla’s mission. The company’s vehicles feature advanced safety features such as automatic emergency braking, lane departure and collision warnings, obstacle-aware acceleration, blind spot warnings, and more. Despite its best efforts to create safe vehicles, Tesla is not immune to accidents. Two vehicle fires negatively impacted Tesla’s reputation for vehicle safety in 2013, just as the company was finally getting its feet under itself. Musk defended the vehicles, stating in a company blog post that the risk of fire in a
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Model S was five times less than the average gasoline car. Tesla used the media attention to its advantage, touting the safety features in the vehicle that contributed to the safety of the two drivers. Regardless of the statistics, Tesla made the ethical decision to prioritize both the safety of its customers as well as its customer’s peace of mind by outfitting vehicle bodies with a triple underbody shield. Not only did new vehicles come with a titanium underbody shield and aluminum deflector plates, but Tesla offered to retrofit the shields to existing Tesla customers for free. With consumer safety in mind, Tesla decided to deploy vehicles with partial autonomy in 2015 rather than waiting for full autonomy to be tested and approved by regulators. Musk wrote in a company blog post that he felt it was of moral importance to not delay the technology because he believes self-driving Tesla vehicles are safer than vehicles driven by people. This makes driving safer for both Tesla customers as well as all other drivers on the road. Every quarter, Tesla voluntarily releases a vehicle safety report, creating transparency with the public.
C1.2c Prioritizing Employee Safety Similar to its approach to consumer safety, Tesla takes the safety of its employees seriously. For example, the company requires production employees to participate in a multi day training program before they can enter the factory floor. Additionally, Tesla provides on-the-job training and tracks performance daily so that improvements can be made quickly and efficiently. To achieve its goal of having the safest car factory in the world, Tesla’s Global Environmental, Health and Safety team created a strategy based on three pillars: do the basics right, engage stakeholders, and reduce risk. Despite its proactive efforts in the past, Tesla dug in its heels during the COVID-19 pandemic in 2020. Musk tweeted that the COVID-19 virus was less serious than people thought and continued to keep his factory in California open, despite the shelter-in-place order from California government officials. After a Tesla employee tested positive for COVID-19, Tesla announced that it would reduce its workforce at the factory by 75 percent. The workforce reduction was closely followed by a 10 percent pay cut for standard employees and up to 30 percent for managers and directors at a time when many major companies fought to maintain wages. Though the county sheriff ’s department eventually forced the factory to close, less than two months later Musk announced the factory would reopen in defiance of the regional public health order and sued Alameda County. These decisions put the lives of 10,000 Tesla employees at risk as well as the lives of others in the local community. Prioritizing profit over public health is a major ethical issue.
C1.2d Creating Employee Advocates Employees are important to Tesla because they have the potential to become advocates for the company. For example, to get more of its vehicles into the hands of its employees, Tesla allowed employees to apply unused vacation time toward the purchase of new Tesla cars. Everyone who works at the company is awarded shares of Tesla stock and can buy additional stock at a discount through the employee stock purchase program. This provides value to employees and incentivizes them to work harder. Tesla effectively monitors employee happiness. Tesla hosted a “Merch Madness” pop-up shop at its Gigafactory 2 featuring heavily discounted company merchandise, boosting morale after a series of companywide layoffs. This effectively pushed more Tesla-branded apparel into the world while reassuring employees. Tesla also has a history to responding quickly to criticism. After receiving negative feedback from employees for not providing steady work after temporary factory shutdowns in 2018, Tesla introduced employee loans that allow workers to borrow money from Salary Finance, a tech startup, at affordable rates that can easily be paid back directly from paychecks. Tesla’s goal is to improve employee financial well-being, so employees stay with the company instead of searching for higher wages. Additionally, Tesla offers alternative transportation programs to employees with the goal of reducing the carbon impact of its employees. Tesla encourages ride sharing through a variety of carpooling services and has a bike-to-work program in the United States. The company operates a network of commuter shuttles to and from work. In the San Francisco Bay Area, almost 4,000 employees take shuttles to work a day, and in Nevada, about 2,000 employees ride shuttles to
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Gigafactory a day. In addition, Tesla has hundreds of charging stations at their facilities to encourage Tesla employees to go electric. These efforts simultaneously reduce carbon impact while providing valuable perks for employees.
C1.2e Supporting a Diverse Work Environment Tesla strives to recruit and retain the best talent regardless of race, color, religion, sex, sexual orientation, gender expressions, gender identity, age, national origin, disability, or protected veteran status. To support a diverse work environment, Tesla created employee resource groups led by its team members to help employees build relationships and share ideas. The groups include Black@ Tesla, Intersectionality@Tesla, LGBTQ@Tesla, Teslatinos, Veterans Taskforce, and Women In Tesla. The company backs this up with anti-discrimination and anti–sexual harassment training for employees. Additionally, recruiting teams take unconscious bias training to help identify and limit unintentional prejudice that could influence hiring.
C1.2f Sourcing Responsibly Produced Materials To extend its principles of integrity, Tesla has a supplier code of conduct and a human rights and conflict minerals policy to outline expectations of all suppliers and partners. The code of conduct outlines Tesla’s stance on human rights and labor issues, health and safety, the environment, ethics, and responsible mineral sourcing. Tesla, which conducts audits to ensure its standards are upheld, has a zero-tolerance policy toward human rights abuses in its supply chain. Additionally, its conflict minerals policy sets due diligence practices for its suppliers to create a more transparent supply chain. The company’s suppliers are expected to provide parts and products that are “conflict free,” meaning they do not benefit armed groups in the Democratic Republic of the Congo.
C1.2g Contributing to Education Tesla strongly supports education in the communities in which it operates. Tesla partners with high schools, universities, and nonprofit organizations in California to provide career-oriented workshops, STEM hands-on learning activities, factory tours, and speaking opportunities. In Nevada, Tesla is investing $37.5 million in K–12 education to prepare students for manufacturing and engineering careers at Tesla and other companies. Tesla also launched a high school graduate apprenticeship, the Manufacturing Development Program, to educate and recruit talent from high schools across the state to become Production Associates at Gigafactory 1. Additionally, Tesla START, a 12-week training program in select markets, was designed to provide students with the skills necessary for a career at a Tesla Service Center. This not only supports the communities but also creates a larger pool of talent from which Tesla can recruit.
C1.3 THE FUTURE FOR TESLA Tesla and Musk are now household names not only in the United States but also around the world. Even with no advertising budget, Tesla has flourished. The company has made significant gains and has firmly established itself as a leader in EVs. Tesla has become profitable, achieving record sales numbers, and has gained resources to propel its global expansion. In 2020, Tesla became the world’s most valuable automaker. The stock skyrocketed before a 5-for-1 stock split, indicating a positive outlook from investors. By creating the first commercially viable EV, Tesla has set the standard of what an EV should be and has caused major car companies to shift their EV production into high gear.
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Case 1: Tesla Races Ahead With Nontraditional Marketing Strategy 299
QUESTIONS 1. In what ways does Tesla address the interests of its stakeholders through its corporate social responsibility strategy? 2. How would you describe Tesla’s marketing strategy? 3. How does Tesla’s distribution strategy differ from other automakers?
SOURCES Aarian Marshall, “Tesla Turns a Profit—and Builds a Chinese Factory Very Fast,” Wired, October 23, 2019, https://www .wired.com/story/tesla-turns-profit-builds-chinese-factory -fast/ (accessed November 7, 2019); Andrew Greiner, Ivory Sherman, Tiffany Baker, Allie Schmitz, and Jen Tse, “The History of Tesla and Elon Musk: A Radical Vision for the Future of Autos,” CNN, March 22, 2019, https://www.cnn.com /interactive/2019/03/business/tesla-history-timeline/index .html (accessed November 7, 2019); Andrew J. Hawkins, “Tesla’s Autopilot Lulled Driver Into a State of ‘Inattention’ in 2018 Freeway Crash,” The Verge, September 4, 2019, https:// www.theverge.com/2019/9/4/20849499/tesla-autopilot -crash-culver-city-2018-ntsb-report (accessed December 2, 2019); Brett Smith, “Why Tesla’s Weird New Cybertruck Could Be a Hit,” CNN, November 29, 2019, https://www.cnn .com/2019/11/29/perspectives/cybertruck-tesla-elon-musk /index.html (accessed December 2, 2019); Charles Morris, “The Definitive Story of Tesla’s Beginnings, Told by Co-Founder Marc Tarpenning,” Evannex, June 18, 2017, https://evannex.com/blogs/news/the-definitive-story-of-tesla -s-beginnings-told-by-co-founder-marc-tarpenning (accessed November 13, 2019); Chuck Squatriglia, “Tesla’s Founder Sues Tesla’s CEO,” Wired, June 11, 2009, https://www.wired .com/2009/06/eberhard/ (accessed November 7, 2019); Darrell Etherington, “Tesla’s New Solar Roof Costs Less Than a New Roof Plus Solar Panels, Aims for Install Rate of 1K per Week,” TechCrunch, October 25, 2019, https://techcrunch .com/2019/10/25/teslas-new-solar-roof-costs-less-than-a -new-roof-plus-solar-panels-aims-for-install-rate-of-1k-per -week/ (accessed November 7, 2019); David Robinson, “Tesla’s Solar Energy Business Takes a Turn for the Worse,” Buffalo News, April 29, 2020, https://buffalonews.com/2020/04/29 /teslas-solar-energy-business-takes-a-turn-for-the-worse-2/ (accessed May 12, 2020); Diana Bradley, “Brands React to Elon Musk’s Live Cybertruck Demo Gone-Wrong,” PR Week, November 22, 2019, https://www.prweek.com/article /1666729/brands-react-elon-musks-live-cybertruck-demo -gone-wrong (accessed May 18, 2020); Elisabeth Behrmann and Wout Vergauwen, “Tesla Model 3 Passes VW Polo as No. 1 Seller in Dutch Market,” Automotive News Europe, October 2, 2019, https://europe.autonews.com/automakers/tesla-model -3-passes-vw-polo-no-1-seller-dutch-market (accessed November 7,
2019); Elizabeth Lopatto, “Tesla and Elon Musk Broke the Law in Labor Dispute, Judge Rules,” The Verge, September 27, 2019, https://www.theverge.com/2019/9/27/20887897/tesla -elon-musk-tweets-union-nlrb-illegal (accessed November 7, 2019); Emily Chasan, “Tesla’s First Impact Report Puts Hard Number on CO2 Emissions,” Bloomberg, April 17, 2019, https://www.bloomberg.com/news/articles/2019-04-17/tesla -s-first-impact-report-puts-hard-number-on-co2-emissions (accessed December 2, 2019); Eric Loveday, “Tesla Cybertruck Pre-orders Soar to Over 600,000,” Inside EVs, April 2, 2020, https://insideevs.com/news/407596/tesla-cybertuck -orders-million/ (accessed May 12, 2020); Eric Reed, “History of Tesla: Timeline and Facts,” TheStreet, September 13, 2019, https://www.thestreet.com/technology/history -of-tesla-15088992 (accessed November 7, 2019); Fred Lambert, “Tesla Becomes the Best-Selling Car Brand in Iceland,” Electrek, April 1, 2020, https://electrek.co/2020/04/01/tesla -best-selling-car-brand-iceland/ (accessed May 12, 2020); Fred Lambert, “Tesla’s Massive Powerpack Battery in Australia Cost $66 Million and Already Made up to ~$17 Million,” Electrek, September 24, 2018, https://electrek.co/2018/09/24 /tesla-powerpack-battery-australia-cost-revenue/ (accessed November 7, 2019); Graham Rapier, “Tesla Encouraged Its Employees to Buy Cars Using Their Paid Vacation Days,” Business Insider, March 8, 2019, https://www.businessinsider .com/tesla-encouraged-workers-buy-cars-using-vacation -days-2019-3 (accessed November 7, 2019); Jack Stewart, “Tesla Cuts 3,000 Jobs, Bracing for an Uncertain Future,” Wired, January 18, 2019, https://www.wired.com/story/tesla -layoffs-cost-cutting/ (accessed November 7, 2019); Julia Carrie Wong, “Elon Musk Downplays Coronavirus as Tesla Factory Stays Open Amid Crisis,” The Guardian, March 19, 2020, https://www.theguardian.com/technology/2020/mar /19/elon-musk-coronavirus-tesla-factory-california (accessed May 12, 2020); Julia Carrie Wong, “Tesla Countersued by ‘Whistleblower’ It Accused of Sabotage and Shooting Threat,” The Guardian, July 31, 2018, https://www.theguardian.com /technology/2018/jul/31/tesla-whistleblower-lawsuit-elon -musk-martin-tripp (accessed November 7, 2019); Lora Kolodny, “Tesla Gigafactory Employees Stood in Line for ‘Merch Madness,’ a Chance to Buy Company Swag on the Cheap,” CNBC, March 22, 2019, https://www.cnbc .com/2019/03/22/tesla-gigafactory-employees-lined-up-to -buy-swag-at-merch-madness.html (accessed November 7, 2019); Lora Kolodny, “Tesla Rolls Out Employee Loan Benefit as Factory Workers Cope With Unpredictable Hours,” CNBC, May 2, 2019, https://www.cnbc.com/2019/05/02/tesla -adds-employee-loan-benefit-workers-describe-unpredictable -hours.html (accessed November 7, 2019); Maggie Angst, Rex Crum, and John Woolfolk, “Tesla Defies Bay Area Coronavirus Orders, Restarts Fremont Plant,” Mercury News, May 11, 2020, https://www.mercurynews.com/2020/05/11/tesla -defies-bay-area-coronavirus-orders-restarts-fremont-plant/ (accessed May 12, 2020); Matt Robinson and Zeke Faux,
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300 Part 5: Cases
“When Elon Musk Tried to Destroy a Tesla Whistleblower,” Bloomberg Businessweek, March 13, 2019, https://www .bloomberg.com/news/features/2019-03-13/when-elon -musk-tried-to-destroy-tesla-whistleblower-martin-tripp (accessed November 7, 2019); Matt Lavietes, “Tesla’s Move to Online Sales Gives Customers What They Want: No Car Salesman,” CNBC, April 4, 2019, https://www.cnbc .com/2019/04/05/tesla-online-sales-gives-customers-what -they-want-no-car-salesman.html (accessed May 18, 2020); Michelle Castillo, “Elon Musk May Have Violated Tesla’s Business Conduct Policy by Smoking Weed,” CNBC, September 7, 2018, https://www.cnbc.com/2018/09/07/elon-musk -may-have-violated-tesla-conduct-policy-by-smoking-weed .html (accessed November 7, 2019); Neha Malara and Noel Randewich, “Tesla Overtakes GM as Most Valuable U.S. Automaker, Short Sellers Burned,” Reuters, October 24, 2019, https://www.reuters.com/article/us-tesla-stock/tesla-over takes-gm-as-most-valuable-us-automaker-short-sellers -burned-idUSKBN1X31NG (accessed November 13, 2019); Neil Winton, “Tesla Intensifies Thrust Into Europe as Model 3 Enters U.K. Market,” Forbes, August 29, 2019, https://www .forbes.com/sites/neilwinton/2019/08/29/tesla-intensifies -thrust-into-europe-as-model-3-enters-uk-market /#734615ab467f (accessed November 7, 2019); Sean O’Kane and Andrew J. Hawkins, “Tesla Ekes out a Profit as All Eyes Turn to Its China Gigafactory,” The Verge, October 23, 2019, https://www.theverge.com/2019/10/23/20928982/tesla -q4-earnings-profit-model-3-china-gigafactory (accessed November 7, 2019); Sean O’Kane, “Tesla Posts Back-to-Back Profits for the First Time,” The Verge, January 30, 2019, https://www.theverge.com/2019/1/30/18203886/tesla-earnings -q1-revenue-profit-record-model-3 (accessed November 7, 2019); Sean O’Kane, “Tesla’s Fourth Gigafactory Will Be in Berlin, Elon Musk Says,” The Verge, November 12, 2019, https://www.theverge.com/2019/11/12/20961812/elon -musk-berlin-tesla-ceo-fourth-gigafactory-construction
(accessed November 13, 2019); Sherisse Pham and Peter Valdes-Dapena, “Tesla Furloughs Staff and Slashes Salaries as Covid-19 Pandemic Worsens,” CNN, April 8, 2020, https://www .cnn.com/2020/04/08/business/tesla-staff-furloughs-corona virus/index.html (accessed May 12, 2020); Tesla, “All Our Patent Are Belong to You,” June 12, 2014, https://www.tesla .com/blog/all-our-patent-are-belong-you (accessed November 13, 2019); Tesla, “Cybertruck,” https://www.tesla.com /cybertruck (accessed December 2, 2019); Tesla, “Impact Report,” 2019, https://www.tesla.com/ns_videos/tesla-impact -report-2019.pdf (accessed November 7, 2019); Tesla, “Master Plan, Part Deux,” July 20, 2016, https://www.tesla .com/blog/master-plan-part-deux (accessed November 7, 2019); Tesla, “Solar Roof,” https://www.tesla.com/solarroof (accessed November 7, 2019); Tesla, “Tesla Adds Titanium Underbody Shield and Aluminum Deflector Plates to Model S,” March 28, 2014, https://www.tesla.com/blog /tesla-adds-titanium-underbody-shield-and-aluminum -deflector-plates-model-s (accessed November 7, 2019); Tesla, “Tesla Gigafactory 2,” https://www.tesla.com/gigafactory2 (accessed November 7, 2019); Tesla, “The Secret Tesla Motors Master Plan (Just Between You and Me),” August 2, 2006, https://www.tesla.com/blog/secret-tesla-motors-master -plan-just-between-you-and-me (accessed November 7, 2019); Tesla, “About Tesla,” https://www.tesla.com/about (accessed November 7, 2019); Tim Higgins and Takashi Mochizuki, “Tesla Needs Its Battery Maker. A Culture Clash Threatens Their Relationship,” The Wall Street Journal, October 8, 2019, https://www.wsj.com/articles /tesla-needs-its-battery-maker-a-culture-clash-threatens -their-relationship-11570550526?mod=djemwhatsnews (accessed November 7, 2019); Zachary Shahan, “Tesla Model 3 = 7th Best Selling Car in USA,” Clean Technica, January 19, 2020, https://cleantechnica.com/2020/01/19 /tesla-model-3-7th-best-selling-car-in-usa/ (accessed May 12, 2020).
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CASE 2 Businesses Sink or Swim in the Face of COVID-19 Crisis* SYNOPSIS: The COVID-19 (coronavirus) pandemic caused a major shift in the global economy, sending businesses of all sizes into bankruptcy, upending the supply chain, and altering consumer behavior. While some industries were well-suited to the new normal, others had to quickly adapt to stay afloat. THEMES: Strategic philanthropy, crisis preparedness, marketing mix, advertising, consumer behavior, environmental threats, supply chain, global economy, corporate social responsibility
T
he global economy was upended in 2020 as a result of the COVID-19 (coronavirus) pandemic. The respiratory disease, identified in 2019, posed a serious public health risk because it spread easily from person to person, and there was little to no immunity against the new virus. For these reasons, international travel was limited, people across the globe were ordered to stay at home, nonessential businesses were closed, students attended school online, major events were canceled, and many people began to work remotely. This seismic shift was felt deeply and immediately as the virus hit the United States in early 2020. Many businesses struggled to adapt while others thrived from new patterns in consumer behavior. Even as businesses began to reopen across the country, many experienced a new normal.
*Kelsey Reddick, Callie Kyzar, and Caleb Yarbrough prepared this case under the direction of O. C. Ferrell for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management, © 2022.
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C2.1 COVID-19’S IMPACT ON BUSINESS While the COVID-19 (coronavirus) pandemic sent businesses of all sizes into bankruptcy and upended the global supply chain, many businesses experienced unprecedented success as a result of new patterns in consumer behavior. The strain of this global crisis revealed the delicate nature of the economic ecosystem. Many organizations took their workforce online. This was good business for video-conferencing platforms such as Zoom and collaboration software such as Microsoft Teams. Daily downloads of the Zoom platform increased more than 30 times year-over-year with total users reaching more than 300 million. This sudden shift to a digital workforce revealed that many businesses were ill-prepared to go online. For instance, as more individuals work remotely, a secure network is even more critical as many Wi-Fi connections are susceptible to data breaches. Organizations turned to virtual private networks (VPNs) to establish secure, encrypted connections. Though many organizations resisted a remote workforce in the past, the pandemic proved that working from home could be efficient and effective. Morgan Stanley CEO James Gorman said the bank would likely need less commercial real estate post-pandemic. Not all businesses were suited to work from home, however, resulting in millions filing for unemployment. At a time when unemployment was nearing a 50-year low, COVID-19 caused the unemployment rate to skyrocket to a record 14.7 percent, the worst since the Great Depression. Even restaurants, many of which remained open for pickup and delivery, suffered greatly. Though online and nonstore sales were up 21.2 percent year over year, overall retail sales were down 21.6 percent, according to the U.S. Census Bureau.
C2.1a Changing Consumer Behavior During the outbreak, the Centers for Disease Control and Prevention (CDC) encouraged individuals to limit face-to-face contact by avoiding crowded places and mass gatherings and maintaining a six-foot distance from others outside of the home. Beyond social distancing measures, many state and local governments issued stay-at-home orders that closed nonessential businesses and ones where close contact with others was likely (e.g., gyms, theaters, and salons) and urged people to leave their homes only for essential needs (e.g., groceries, banking, gas, and medicine). Many people began to work from home while millions lost their jobs, and students attended school exclusively online. These stay-at-home orders spread across the country at the end of March to at least 42 states, 3 counties, 10 cities, the District of Columbia, and Puerto Rico. COVID-19 changed day-to-day consumer behaviors and preferences. According to a Shopkick survey, 76 percent of shoppers said they changed the way they shopped because of COVID-19 concerns. For instance, Americans spent more on frozen food, snacks, household supplies, and home entertainment but less on apparel, travel, transportation, and out-of-home entertainment. Overall, consumers cut spending and started saving more of their money. Because of the desire to limit exposure to the virus, consumers visited grocery stores less but spent more per visit as shoppers stocked up. Stockpiling and strain on grocery store inventory made consumers less brand sensitive, with 85 percent of shoppers saying brand names were not important where necessities were concerned. During this time, many households tried online grocery shopping for the first time. Though many grocery retailers such as Walmart and Kroger already had these services in place, the unprecedented spike in demand was an operational strain on stores. Experts predict the demand for online grocery will likely remain elevated in the long term. Though many state economies reopened within a few months—and some states never closed at all—the impacts on consumer behavior were long-lasting. The pandemic affected consumer perspectives on a variety of issues such as retail spending and transportation. According to an IBM survey, many consumers planned to reduce the use of public transportation and ridesharing services (e.g., Uber and Lyft) in the wake of the virus. Additionally, 40 percent of those surveyed said they would be more likely to use contactless payment options such as tap-to-pay credit cards and digital wallet apps on their phones.
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Case 2: Businesses Sink or Swim in the Face of COVID-19 Crisis 303
C2.1b Struggling Industries Some called the pandemic the “retail apocalypse” as consumers became unemployed or furloughed during the crisis. As sales for brick-and-mortar stores slowed to a halt, many small businesses shuttered for good while retail giants filed for bankruptcy, including True Religion, J. Crew, Neiman Marcus, and JCPenney. Pier 1 Imports filed for bankruptcy, hoping to find a prospective buyer to save the company, but failed to do so, resulting in the closure of all 540 stores. This had a substantial impact on U.S. gross domestic product (GDP), as the retail sector makes up $2.6 trillion of the U.S. GDP. Macy’s was removed from the S&P 500 and was downgraded to junk status as a result of COVID-19. Though e-commerce increased, it was not enough to save many retailers. Roughly 100,000 stores are estimated to close between 2020 and 2025 due to changes in retail precipitated by the pandemic, according to UBS, an investment banking company. The fitness industry, which was valued at $94 billion, experienced varying impacts from the pandemic. For example, Planet Fitness laid off 98 percent of its workforce whereas Beachbody, an online-based multilevel marketing fitness company, saw a 200 percent increase in online subscriptions as people began to work out from home. Additionally, workout equipment sales boomed. Peloton, an exercise equipment and media company, had a 50 percent increase in stock price as many people invested in stationary bikes and joined online cycling classes. However, local gyms in particular were hard hit. California gyms struggled to survive as California had one of the strictest lockdown policies in the country. Though some gyms found ways to keep operations going, such as personal training over video conference, most were not poised to switch to digital fitness. It’s anticipated that the once-crowded brick-and-mortar fitness industry will feel these impacts for a long time while virtual and digital fitness companies will benefit. The restaurant industry, an $863 billion industry according to the National Restaurant Association, sustained one of the heaviest blows. Restaurants resorted to curbside pickup, delivery, and drive-thru options as the crisis prevented dine-in, but many people avoided eating out altogether. Additionally, because COVID-19 originated in Wuhan, China, it sparked a xenophobic reaction, causing Americans to eat less at Chinese restaurants during the early months of the outbreak. Interest in Chinese food recovered as people relied more on takeout and delivery. Though food delivery services, such as Uber Eats and DoorDash, experienced an increase in demand amid the COVID-19 crisis, they had a difficult time turning a profit due to the cost of promotions and the expense of additional safety equipment. At the same time, pressure increased for the companies to reduce commissions in light of the crisis. While these companies benefited from a prime food delivery market, they had to improve profitability and focus on sustaining the high demand in the long term. Many Americans opted to cook meals at home rather than ordering from restaurants. To adapt, some restaurants got creative. For example, Comedor, an Austin-based restaurant, created a web-based platform called Assembly Kitchen to sell meal kits along with corresponding instructional videos for assembly at home. As stay -at-home orders lifted, many state and local governments restricted restaurant capacity to enforce social distancing, which weighed heavily on restaurants that struggled to break even with reduced seating. The travel and tourism industries were also severely impacted. In addition to decreased domestic travel, travelers who visited China, Iran, the United Kingdom, the European Schengen area, and the Republic of Ireland within a 14-day window were banned from entering the United States. With less demand for travel and government restrictions on international travel, many airlines went bankrupt and looked to the government for assistance. Government stimulus provided billions in aid for airlines to cover payroll grants and loans. Because of the uncertainty around the outbreak and a vaccine, people delayed the purchase of future travel as well. According to Oxford Economics and Hotel Effectiveness, 70 percent of hotel employees were laid off or furloughed as travel and events came to a halt. Resort hotels reduced staffing levels from 90 employees on average per hotel to only five employees. Home sharing, such as Airbnb, saw a steep decline in new bookings and a sharp rise in cancelations. Cruise lines also found themselves in dire straits with not only widespread cancellations but also suffered from negative publicity as a result of outbreaks aboard ships. For instance, after several Diamond Princess passengers caught COVID-19, all 3,700 passengers and crew members were quarantined aboard the ship. Eventually, 712 passengers
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304 Part 5: Cases
tested positive. It took months to return all of the crew members to their home port due to a nosail order from the CDC. Royal Caribbean, the world’s second-largest cruise line, reported more than $1.4 billion in losses. Spring is usually a popular time for buying and selling homes, but the uncertainty surrounding the economy during the pandemic slowed the housing market. Buying and selling real estate usually involves many in-person interactions due to open houses, appraisals, inspections, and closing. States were left to make their own determinations whether real estate business was essential. Some states ruled that real estate agents had to work from home and conduct virtual showings, while others allowed real estate transactions to proceed as usual. Mortgage rates dropped significantly; however, some creditors made mortgage credit harder to get by raising down payment and credit score requirements. For example, Chase Bank required borrowers to have a credit score of 700 as well as a 20 percent down payment to be considered for a mortgage. The housing market supply reached near record lows in the United States at a time when demand was at an all-time high, meaning house prices remained high. Previous recessions have proven that housing isn’t purely tied to the stock market as the decision to buy a house is a basic need. Additionally, as working from home became the norm, many companies reevaluated their real estate needs and permanently shuttered offices in major cities, impacting the commercial real estate market.
C2.1c Thriving Industries The virus accelerated the adoption of certain technologies in business such as cloud technology, cybersecurity, and artificial intelligence (AI). Amazon, Microsoft, Google, and Oracle, the big players in cloud technology, raced to reduce prices to lure more customers. Amazon, for instance, cut some prices by up to 90 percent. Cybersecurity systems, such as VPNs and firewalls, also became a necessity as the workforce went remote. Additionally, since primary research methods such as focus groups dwindled during the outbreak, companies sought alternative solutions to understanding consumer wants and needs, such as predictive analytics. As many Americans were stuck at home, home entertainment experienced a sizeable boost. The Disney+ streaming service, which had launched only a few months prior to shutdowns in the United States, benefited from the number of captive families. The platform reached 54.5 million subscribers by May, surpassing Hulu, which is also owned by Disney. In the streaming war battle between Netflix, Amazon Prime, Hulu, and Disney+, among others, many declared Netflix the winner during the COVID-19 pandemic. In the first quarter of 2020 alone, Netflix added 15.8 million subscribers worldwide, a new record for the company. Additionally, while newer platforms such as Apple TV+ experienced production delays, Netflix already had a full arsenal of original content plus more ready to release. Netflix’s resiliency was an asset during a time when the streaming market was becoming increasingly crowded. Other forms of home entertainment were also boosted during the pandemic. Video game hardware, software, and accessories, as well as game card sales, increased to record highs. Since more Americans were home during the day when they would normally be at work or school, sales of snacks and frozen foods increased. Market penetration increased as consumers experimented with new foods. For example, Fig Newton and Nutter Butter saw a 40 percent increase in new consumers. Nestlé sales increased during the first quarter by 29.4 percent due to e-commerce growth, premium brand growth such as Starbucks and Nescafé, and frozen food growth such as DiGiorno, Stouffer’s, and Hot Pockets. Pharmaceutical companies were positively impacted by the pandemic in many ways. Johnson & Johnson (J&J), which has faced a string of negative publicity in connection with its nowdiscontinued baby powder, was able to significantly improve its image during the COVID-19 crisis. J&J developed one of the first vaccine candidates, beginning preclinical tests as early as March. They also started to build a factory to produce the vaccine and committed to bringing it to the public on a not-for-profit basis. As consumers stockpiled essentials, over-the-counter medications, such as Tylenol, saw a spike in demand.
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Case 2: Businesses Sink or Swim in the Face of COVID-19 Crisis 305
C2.2 SHIFTING STRATEGIES In the face of a new economy, many brands had to adjust their marketing mix to remain competitive. For example, Impossible Foods adjusted its distribution strategy by speeding up its retail expansion as the coronavirus pandemic upended the restaurant industry, getting its plant-based burger meat alternative into 1,700 Kroger grocery stores nationwide. Shortages in animal products drove trials of meat alternatives such as Impossible Foods. Previously, the company’s burger product was primarily sold through restaurants such as Burger King, Qdoba, and White Castle. Some restaurants, such as Panera Bread, started selling grocery items such as milk, fresh produce, and cream cheese as restaurant sales suffered from dining room closures. Modern Market Eatery, a Colorado-based restaurant chain, created grocery boxes, making many products available to customers that were sold out at grocery stores due to the complexity of the supply chain. Companies also adjusted their product strategies. Pathr, a spatial intelligence platform, uses machine learning to track location and movement data. This startup saw an opportunity to address social distance analytics and began tracking the effectiveness of social distancing efforts to help retailers and business owners identify areas of improvement. They researched transmissions of the virus, safe distances, and what kind of contact is bad contact. They created a simulator to allow businesses to identify how people move through their stores, so they could prepare to reopen. COVID-19 also had an impact on consumer prices. Just as professional sports were canceled, so were recreational and competitive amateur and youth leagues, causing a record drop in the prices for sporting goods. As airline and hotel sales plunged, so did fares and lodging costs. With Americans abandoning their daily commute, demand for gasoline plummeted along with global oil prices. In fact, oil prices plummeted below zero for the first time as a result of excess supply and a lack of storage for the product. Additionally, since many people found themselves driving less often and many people faced unemployment, car sales dropped. In response, new passenger vehicle prices dropped to lure in customers. Promotion strategies were also forced to change. Nearly three-quarters of advertising executives said the coronavirus pandemic impacted advertising more than the Great Recession of 2008, according to a survey by the Interactive Advertising Bureau, and almost two-thirds of advertisers changed the messaging in their campaigns because of the pandemic. For example, Unilever changed its “Dirt Is Good” campaigns of Omo and Persil laundry detergents to “Home Is Good” to encourage people to stay inside. Companies also attempted to endear customers with free goods and services. Krispy Kreme gave free doughnuts to graduates who wore caps and gowns. The effort’s word-of-mouth momentum and earned media coverage were so great, the company disabled paid media. Companies also redirected promotional investments. For instance, Wahl, a grooming company, which noticed an increase in traffic to its online how-to videos, worked to build its content library as more people began cutting their own hair at home.
C2.3 DISRUPTION IN THE SUPPLY CHAIN Early on in the pandemic, empty shelves were found in grocery stores due to panic buying and stockpiling, in addition to a crippled supply chain. Though people only needed approximately 40 percent more toilet paper, sales increased by 70 percent. Suppliers ramped up production to meet the increased demand but only moderately so, anticipating an overstock of toilet paper. Additionally, though food was abundant, the global food supply chain became dislocated. Dairy Farmers of America estimated that producers dumped as much as 3.7 million gallons of milk every day during the pandemic (approximately 5 percent of the U.S. milk supply). A dairy processing plant in Cleveland reported that before the pandemic they produced three batches of milk for Starbucks every day, but during the crisis, Starbucks only needed one batch every three days. However, cows need to be milked multiple times a day, regardless of whether there is a need, which led to plants collecting more milk than they could process and store. Because of the complex nature of the supply chain, this milk was not easily redirected to consumers.
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306 Part 5: Cases
The closing of restaurants, hotels, and schools left many farmers without buyers for more than half of their crops. One farmer said he destroyed millions of pounds of beans and cabbage. Farmers replanted the same crops in hopes that by the time the next crop was ready to harvest the economy would be ready to take their goods. Many farmers were able to donate some of the surplus to food banks, but their perishable food intake was still limited to the charities’ refrigerator and volunteer capacity. Because of the global nature of the economy, a variety of other supply chains were impacted as well. Due to the pandemic, many toy factories shut down in China where 85 percent of the world’s toys are manufactured. The factories that were able to remain open were still limited due to labor and raw material shortages, operating at a fraction of total capacity. Because of this, toy companies experienced delays and trouble fulfilling retail orders. Other businesses that rely on China manufacturing, such as Apple, struggled. Apple was also impacted by the lockdown in Malaysia, which affected suppliers that make chips and circuit boards for the company. To mitigate shortages, Apple limited iPhone purchases in select regions such as the United States, the United Kingdom, and China. Companies that invested in mapping their supply chains prior to the crisis to identify which suppliers and parts had the potential to be at risk during a disruption were better prepared.
C2.4 SOCIAL RESPONSIBILITY AND STRATEGIC PHILANTHROPY According to Interactive Advertising Bureau, there was a 42 percent jump in mission-based marketing and a 41 percent increase in cause-related marketing during the pandemic. Across industries, companies stepped up corporate social responsibility efforts. For example, HewlettPackard worked with the owners of its 3D printers to make medical equipment needed on the front lines more available. Additionally, they posted free downloads of the 3D designs for face shields, hands-free door openers, and face mask adjusters online to accelerate production. Many companies overhauled their production lines to make personal protective equipment and other essential products. For instance, the perfume and cosmetic factories for LVMH French luxury giant made hand sanitizing gel to send to French hospitals for free. They were able to do it quickly because they already had the ingredients on hand and used existing product components. This served as a perfect example of strategic philanthropy—the use of an organization’s core competencies and resources to deal with key stakeholders to bring about organizational and societal benefits. Another example is found in Penguin Random House, which opened its online catalog of books to teachers and librarians to encourage reading at home. They provided ways to use their products on streaming services and made remote learning and story time available for children through social media to keep them engaged in reading. Many organizations showed their support in the form of corporate giving. Danone, the parent company behind brands such as Dannon yogurt, donated $1.5 million to food banks and food rescue organizations. Kraft Heinz donated $12 million in cash as well as food products. For instance, the company gave Feeding America $4.7 million worth of products such as Kraft Macaroni and Cheese, in addition to $1.9 million in cash. In addition to making resources available to medical professionals and consumers, some brands looked internally for ways to support the safety, mental health, and financial well-being of their employees. Social distancing negatively impacted the mental health of many people. Starbucks announced it would expand mental health benefits for all employees and their eligible family members to include up to 20 therapy sessions. Many CEOs took elective pay cuts to continue to pay workers rather than laying off employees. The CEO of Yum! Brands, the company behind KFC, Pizza Hut, and Taco Bell, among others, gave up his entire 2020 salary to fund bonuses for general managers as well as an employee medical relief fund to support franchise restaurant workers and corporate employees with a COVID-19 diagnosis or for those
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Case 2: Businesses Sink or Swim in the Face of COVID-19 Crisis 307
caring for an individual suffering from COVID-19. Companies such as Hormel, Walmart, and Kroger increased bonuses at a time when most organizations were eliminating employees. The way companies treated employees during the COVID-19 pandemic stands to define those organizations for years to come.
C2.5 CRISIS PREPAREDNESS With a massive global disruption now in living memory, marketers must keep risk-mitigation strategies top of mind to better prepare them for the future. Crisis management, which is the process of handling a high-impact event characterized by ambiguity, calls for a quick response to access potential damage and take action. There are risks associated with both making the wrong decision and failing to take action, creating a high degree of uncertainty. Even the most prepared companies may not handle a crisis perfectly, resulting in both success and failure outcomes. In order to adapt quickly with new tactical decisions, businesses must engage in ongoing scenario planning. Creating a task force only after a crisis has been identified may be too little, too late. It’s also effective to create an internal dialogue about crisis management strategy to identify blind spots and unintended consequences. Organizations should also proactively establish communication channel strategies to reach various stakeholders with relevant messages. For instance, each communication needs a defined audience, purpose, and a tailored message. During the pandemic, the actions of businesses were closely monitored and scrutinized by the public. When businesses did not respond quickly or adequately, consumers were quick to share their dissatisfaction on social media and class action lawsuits resulted, creating a whirlwind of negative publicity for many organizations. For instance, some companies postponed events or issued vouchers rather than offering cash refunds. The airline industry issued an estimated $10 billion in vouchers. United, Delta, American, and Southwest would not issue cash refunds for travelers taking proactive action to cancel tickets, reserving refunds for flights the airline chose to cancel. This example demonstrates the importance of consumer-friendly policies as well as the need for media relations. Designated spokespeople, for example, can help communication feel clear and consistent to the public and give journalists a go-to contact for inquiries. The far-reaching impacts of a crippled supply chain impacted endless industries, making procurement a major area for improvement. Identifying areas of the supply chain (e.g., suppliers, parts, and products) that would be at risk during a disruption prior to a crisis could help organizations quickly secure additional inventory from existing suppliers or switch to new suppliers to secure the materials necessary to avoid stockouts. Samsung assembled a task force to secure supplies quickly, leveraging experience from the Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS) epidemics. If companies do not invest in supply chain mapping, they will be at risk when crisis strikes again. As consumer shopping shifted heavily toward online channels, the value of omnichannel could not be ignored. Omnichannel, which integrates all the places and ways consumers and retail firms manage the flow of communications and products, proved to be a winning strategy during the COVID-19 pandemic. Retailers with both a brick-and-mortar and online presence had an advantage as online-only retailers faced inventory stockouts while brick-and-mortar retailers could tap into store inventory. Retailers returned inventory to their distribution centers or offered customers contactless pickup at retail locations. For example, even though Office Depot remained open as an essential business, it implemented contactless curbside pickup service to address customer and employee safety concerns. This put more selling power at the store level and helped differentiate it from competitors like Staples and Amazon. Having an efficient cross-channel strategy in place helps businesses meet the needs of their customers while sidestepping channel disruptors. As organizations better equipped themselves to support a digital workforce and delivery of goods and services over digital platforms, the adoption of technologies such as cloud solutions and predictive analytics made businesses more flexible and agile. Companies that have not invested
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308 Part 5: Cases
in these technologies may consider fast-tracking their digital transformation to stay ahead of the next crisis. For instance, telemedicine, which was early in its adoption prior to the COVID-19 pandemic, became widespread. Many hospitals and doctor’s offices chose to integrate telemedicine technology long-term, which may improve customer trust for those resistant to the technology. Companies also had to pivot their product strategies to survive. For example, laundromat Clean Rite Center based in New York City switched its business model from self-service to full-service with “no contact” cleaning, using a mobile app payment system. The ability to adapt quickly was an asset. Some companies were even able to release new products. VSCO, a photography mobile app, launched a video-based storytelling tool, VSCO Montage, for members only to increase its paid subscriber base at a time when the company had to lay off staff to reduce its reliance on outside capital. Businesses of all sizes should plan ahead for crises such as a pandemic or natural disaster and take swift action at the first sign of a potential disruption. Frequent communication with stakeholders about crisis efforts such as employee and customer safety measures, adjusted business hours, and new services can also greatly improve consumer trust.
C2.6 THE NEW NORMAL Even as businesses reopened, Americans returned to work, and supply chains recovered, the world experienced a new normal. Many businesses shuttered for good, working from home became mainstream, shopping shifted online, consumers cooked at home more often, and the adoption of new technologies was accelerated. After experiencing the COVID-19 crisis, government, businesses, and consumers will be better prepared to handle a future pandemic. One thing that marketers learned is that consumers can be more resilient than expected and are willing to adapt to changing situations. For example, many stores reduced their hours and had limited inventories, but consumers continued to support them throughout the pandemic. The full long-term impacts of COVID-19 on business are still evolving as the global economy finds its balance and consumer confidence increases. The uncertainty that characterizes a global pandemic will have long-lasting impacts on consumer perceptions, so it remains to be seen which new consumer patterns will remain and which will not as the new normal evolves.
QUESTIONS 1. How did COVID-19 impact the global food supply chain? 2. Identify prominent changes in consumer behaviors and preferences and how these events will change businesses in the future. 3. How can businesses adapt quickly to crises with new tactical decisions?
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Case 2: Businesses Sink or Swim in the Face of COVID-19 Crisis 309
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Could Go Bankrupt Because of the COVID-19 Crisis, According to an Aviation Consultancy. See the Carriers That Have Already Collapsed Because of the Pandemic,” Business Insider, May 12, 2020, https://www.businessinsider.com /coronavirus-airlines-that-failed-bankrupt-covid19-pandemic -2020-3 (accessed May 20, 2020); American Hotel & Lodging Association, “COVID-19’s Impact on the Hotel Industry,” https://www.ahla.com/covid-19s-impact-hotel-industry (accessed May 20, 2020); Centers for Disease Control and Prevention, “Coronavirus Disease 2019 (COVID-19): Travelers Prohibited From Entry to the United States,” https://www .cdc.gov/coronavirus/2019-ncov/travelers/from-other -countries.html (accessed May 20, 2020); Curtis Tate, “Diamond Princess Cruise Ship Leaves Japan Months after Coronavirus Outbreak to Get Last of Crew Home,” USA Today, May 18, 2020, https://www.usatoday.com/story/travel/cruises /2020/05/18/diamond-princess-cruise-ship-crew-leave -japan-after-coronavirus-ordeal/5212477002/ (accessed May 20, 2020); Taylor Dolven, “Royal Caribbean Reports $1.4 Billion in Losses and Cancels Cruises Through July,” Miami Herald, May 20, 2020, https://www.miamiherald.com/news /business/tourism-cruises/article242863706.html (accessed May 20, 2020); Quicken Loans, “How COVID-19 Has Affected Real Estate and the Housing Market,” March 26, 2020, https://www.quickenloans.com/learn/coronavirus-affecting -housing-market (accessed May 20, 2020); Jeff Andrews, “How Coronavirus Is Impacting the Housing Market,” Curbed, April 23, 2020, https://www.curbed.com /2020/3/6/21163523/coronavirus-economic-impact -housing-market (accessed May 20, 2020); Dana Mattioli and Konrad Putzier, “When It’s Time to Go Back to the Office, Will It Still Be There?” The Wall Street Journal, May 16, 2020, https://www.wsj.com/articles/when-its-time-to-go-back -to-the-office-will-it-still-be-there-11589601618?mod =djemwhatsnews (accessed May 18, 2020); Microsoft, “COVID-19 Will Accelerate Digital Adoption, Investments in Cloud, AI and Cybersecurity: Aarthi Subramanian, Group Chief Digital Officer, Tata Sons,” May 15, 2020, https://news .microsoft.com/en-in/covid-19-accelerated-digital-transformation-aarthi-subramaniam-tata-sons/ (accessed May 15, 2020); David Jeans, “Oracle Takes Aim at Amazon in New Cloud Price War Sparked by Covid-19,” Forbes, May 19, 2020, https://www.forbes.com/sites/davidjeans/2020/05/18/ oracle-takes-aim-at-amazon-in-new-cloud-price-war-covid -19/#4f0b6db72880 (accessed May 20, 2020); Steve King, “Why COVID-19 Is Accelerating the Adoption of AI and Research Tech,” Forbes, May 11, 2020, https://www.forbes.com /sites/steveking/2020/05/11/why-covid-19-is-accelerating -the-adoption-of-ai-and-research-tech/#2fc32ba62140 (accessed May 20, 2020); David Lidsky, “COVID-19 Helped Netflix Win the Streaming Wars Before They’d Barely Begun,” Fast Company, April 21, 2020, https://www.fastcompany .com/90491829/covid-19-helped-netflix-win-the-streaming -wars-before-theyd-barely-begun (accessed May 20, 2020); Jessica Bursztynsky, “Disney Says It Now Has 54.5 Million
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CASE 3 Gainsight Provides a Data-Driven Customer Relationship Platform to Retain Subscription Customers* SYNOPSIS: This case provides an overview of a growing company that has developed from a start-up into a maturing and sustainable firm by developing a new market. Gainsight provides a customer relationship platform that utilizes a variety of customer data inputs to help employees called customer success managers to proactively develop and maintain value for customers across experience and outcome based relationships. The new market and new service/sales role have expanded based on market need and Gainsight’s leadership. THEMES: Customer retention, customer value delivery, reduction of customer churn, market and category creation, start-up to growth phase, business operations, subscription SaaS model
*Bryan W. Hochstein, Assistant Professor of Marketing, University of Alabama, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management, © 2022.
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G
ainsight, founded in 2009, provides software that helps businesses increase sales by maintaining and enhancing customer relationships. Gainsight entered the Software as a Service (SaaS) market to help firms retain customers. SaaS is a software distribution model where a third party, such as Gainsight, hosts applications and provides services directly to the firm’s customers that assist in business operations. The SaaS market can be segmented three ways: public cloud, private cloud, and a hybrid cloud. A public cloud is operated by a third-party cloud service provider and delivered over the Internet. A private cloud is owned and used exclusively by one business or organization. A hybrid cloud is a mixture of the two services. The SaaS market can also be divided into enterprise resource planning, customer relationship management (CRM), human resource management, supply chain management, and more. Of these, CRM has the largest market share. Gainsight has developed a SaaS business model to provide a platform and infrastructure for firms to use in customer management. The firm has more than 600 employees and has been ranked as one of the fastest growing firms in the United States. Gainsight was founded to develop data-driven solutions to assist firms in retaining and growing customers. The need for strategies to increase customer retention and reduce customer churn (loss of a customer’s continued business) was seen as a business opportunity in an emerging issue in the SaaS market. Churn rate is the rate customers fail to renew a subscription to a service and, if not managed well, is a problem for SaaS companies. For example, churn rate varies by industry, but a 5–7 percent churn rate is typically considered acceptable. However, according to a recent study, SaaS companies—with firms such as Dell, Oracle, GE, Hitachi, Microsoft, and others—have churn rates as high as 30 percent. Thus, the concept of customer success was first developed to address the churn problem through selling firm investment in customers to help develop success with products and recurring value that help to retain customers. As such, Gainsight created a product to help in this area. To accomplish this task, the role of customer success manager (CSM) was created, and Gainsight developed software to help those in this new job. A CSM is responsible for developing customer relationships that foster customer retention and loyalty through helping customers to use the products they purchase more effectively. The role of a CSM is to use data as a basis to proactively engage customers, address customer issues, and resolve problems to promote the “health” of each customer. Customer health is a metric driven by data insights, which Gainsight’s product is designed to compile, that indicates a customer’s potential for churn. CSMs essentially spend their days facilitating actions that improve each customer’s health score to ensure downstream renewal of product subscriptions. The upside benefit is that healthy customers not only renew but also tend to expand their use of products via increased purchases. CSMs are powerful growth engines that help make customers more profitable. In a recent survey of high-tech companies, more than 40 percent reported having a CSM. The CSM position is expected to continue to grow with business customers turning to more subscription-based services such as delivery of goods, maintenance programs, and operations of supply inventory management. Sellers have identified that recurring-revenue businesses depend greatly on the value available to the customer, their ability to realize the value, and ultimately their ongoing satisfaction with using a product. CSMs make sure all of these things happen, so CSMs are becoming critical in this line of business. However, CSMs can get a bad rap for being too sales driven. Some customers feel that CSMs are only there to promote sales and question if they are looking out for the customer’s interest. This problem comes from the unclear understanding of the CSM role (is it sales or service?) because to many it is new, as Gainsight went to market with a product to serve the needs of a job that barely existed at the time. Thus, much is still being sorted out concerning the CSM role. Much like consumer disruptors, such as Uber and Airbnb, Gainsight had to communicate its solution to an existing, yet developing, market.
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Case 3: Gainsight Provides a Data-Driven Customer Relationship Platform to Retain Subscription Customers 313
C3.1 THE NEED FOR MARKET DISRUPTION Gainsight didn’t just invent a market; rather, one emerged as how companies retain customers is fundamentally changing. The advent of cloud-based SaaS products has transformed the assignment of upfront risk from the buyer to the seller. In the past, most sales resulted in the transfer of a product or service to a buying firm with a large upfront “buy-in” (e.g., product or software purchase, infrastructure build out, and/or increased staffing) and long-term licensing agreements. In these situations, customers were stuck because of high switching costs and long-term structural commitments to purchased products. This fact made it simple for sellers to retain customers that had few viable options to switch from heavy upfront investment in new products. The day of customers being stuck, essentially guaranteeing long-term commitment, is quickly disappearing. Today customers have increasing power because they assume less risk when using cloud-based solutions; thus, a market existed for Gainsight. The onus of risk has moved to the selling firm from the buying firm, empowering buyers with more flexible options. This change has caused major problems for companies. For instance, Salesforce.com realized that its cloud-based CRM system was easy to sell, but that retaining customers was difficult for a variety of reasons (e.g., complexity of the product and low switching costs). Salesforce was gaining many new client subscriptions, but most of them ended in non-renewed subscriptions. At one point, Salesforce’s CEO asserted that if they remained as successful as they had been, they would be out of business in 18 months. This reference to a churn rate that was larger than the number of new customers was a common problem for similar companies offering cloud-based solutions. Most SaaS firms are faced with the same dilemma; they can find new clients, but there is no guarantee that those clients will see ongoing value and keep renewing their subscriptions. To illustrate how this works, think of consumer subscriptions. Many people subscribe to services such as Netflix, Spotify, Pandora, Amazon Prime, or Hulu. If customers renew monthly, without much thought, they presumably get enough value for what is paid. But many customers also respond to “freemium” offers that provide a short-term subscription for free, only to charge the customer after a short window of time. According to research in Harvard Business Review, only 2 to 5 percent of those who sign up with a freemium offer actually continue with the paid service. Presumably, the 95–98 percent that churn do not see enough potential for ongoing value to commit to the monthly subscription. When consumers keep the service, they become subscribers, but when they don’t, they become churned customers. In B2B SaaS firms, such as Salesforce.com, the problems are similar, and the plague of churned clients has led to a new philosophy of client retention and a focus on helping customers to be successful by continually seeing value in using products. The question was how to best meet this new requirement.
C3.2 ADDRESSING MARKET NEED For Gainsight, the first step was to create a new role to help companies effectively retain their customers. This was a tough task because the specific role of CSM was not found in college classrooms or business books. Of course, classes and books did address customer relationship management (CRM). CRM holds that to maintain positive relationships with customers, salespeople and other employees try to develop customer trust in their firm. CRM focuses on using information about customers to enhance and extend the duration of customer relationships. However, historically, CRM programs were used to manage customer transactions and were not built with the management of long-term and individual customer retention of customers in mind. Gainsight proposed something related, yet different. The CSM role isn’t focused primarily
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on selling and increased individual sales revenue, but rather on the concept of proactive value creation intended to help customers be more successful to drive overall firm retention goals. To be effective, Gainsight argued that CSMs should sell through their actions but not sell directly (i.e., ask for the sale). Rather, they first needed to be a trusted advisor to their customers if they were to become respected enough to help customers thrive with complex software products. In short, the primary mission of CSMs is to provide customer experience and value outcomes that help customers, which then sets the customer up for a desire to renew and opportunities to grow in product use. For a start-up that creates a new marketing job category, such as Gainsight, convincing companies to try something new is the most important building block to long-term sustainability. It wasn’t easy, but early in the company’s history, the need to address subscription-based retention was becoming obvious. The previous story of Salesforce.com and its churn problem (a problem plaguing most SaaS firms) became well known, so firms from large to small started examining what Gainsight was providing. For example, enterprise companies such as Adobe, Cisco, IBM, and GE were having problems. Likewise, small (start-ups) and medium sized (maturing) businesses were also struggling with churn. The problem was so rampant that start-up firms in Silicon Valley were being challenged by investors to address the churn problem before funding would be considered. Fortunately, for Gainsight, the market they were addressing was based on a real need, and for many companies, Gainsight’s Customer Success (CS) platform was the answer to these problems. Today, Gainsight continues to address the changing environment and is a growing, thriving industry leader in CS. Their expanding list of clients includes many household names and many new and rising stars. Gainsight has published several books on Customer Success and hosts annual conferences across the globe that draws thousands eager to learn about this new business practice. The importance of strong customer relationships and a flexible platform to manage them became most apparent during the COVID-19 crisis. As many companies struggled to keep customer contact intact due to changing work conditions, those with a product like Gainsight were able to easily move to remote work environments and still keep customer contact orderly, efficient, and effective. This application and other recent market-solidifying initiatives are focusing awareness of CS and CSM in universities and across new industries that see the importance of better serving and connecting with customers.
C3.3 GAINSIGHT VALUES As Gainsight has grown, it has purposefully worked to develop a “soul.” Nick Mehta, Gainsight CEO, describes the company’s purpose: “To be living proof you can win in business while being human first. We serve a movement that realizes that your customer is not a transaction or a deal or an opportunity or a lead. Your customer is a bunch of human beings just like you. And just like you, they want to succeed with what they do. In a way, Customer Success, and Gainsight, are about bringing humanity back into this technology-driven world.” Gainsight lives out its purpose through the following values: ●● ●●
●● ●● ●●
Golden Rule: We believe in treating people the way we would want to be treated. Success for All: We believe in a tireless pursuit of balancing success for our customers, teammates, families, investors, and community. Childlike Joy: We believe in bringing the inner child in us to work every day. Shoshin: We believe in a beginner’s mind. Stay Thirsty: We believe in a totally internally-driven strive for greatness.
These values are more than just words. A rap video by CEO Nick Mehta, a CSM remix of Taylor Swift’s “Blank Space,” and case studies of customer satisfaction all demonstrate the culture of the company. As an employer, Gainsight’s more than 600 employees also rate the company
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Case 3: Gainsight Provides a Data-Driven Customer Relationship Platform to Retain Subscription Customers 315
highly, with a Glassdoor rating of 4.4. With regard to leadership, 96 percent report approval of Gainsight’s CEO. Overall, Gainsight has found a way to disrupt, as well as respond to, a market in need of a new B2B service role while maintaining their core beliefs and “success for all” mission. All that Gainsight has done seems to be paying off. A recent LinkedIn report finds that CSM is the third fastest growing job across its platform. Microsoft reorganized its sales operation to include thousands of new CSM roles where none existed previously. Gainsight’s customer base continues to grow, with more than 40,000 business professionals across multiple cross-functional disciplines using their products and services. On LinkedIn, the title of CSM has seen a growth rate of over 700 percent as a title reported by its members. If all continues as Gainsight and the CSM community hopes, the term customer success management will soon be common, with many people either working in the role or working with people that perform the job. In the end, it seems that hard work, dedication, and commitment to principles still work.
C3.4 THE CHALLENGES OF GROWING FROM START-UP TO MARKET LEADER Gainsight has encountered some challenges as it has grown from a start-up into a maturing industry leader. All start-ups encounter growing pains, and Gainsight is no different. The common problems, such as financing, lack of awareness, hiring dedicated staff, and expanding across continents/cultures, all apply to Gainsight. However, Gainsight has had to overcome the interesting problem of developing a new market and developing leaders that mature into leaders capable of remaining for the long-term future of a new market. The first topic has already been covered in this case, but growing a new market was central to how Gainsight developed as a company (not just related to its product). For early Gainsight employees, the challenge and excitement of winning small clients and convincing them of the importance of a new solution was the reason they worked at Gainsight. To many it is a thrill to be a thought leader that helps solve problems in new ways. However, this internal drive also caused Gainsight to experience challenges when leaders that thrive in a developing market grow less motivated in a maturing market. The typical solution is to allow these leaders to move on to other new and exciting opportunities, but Gainsight has worked to find ways to develop these leaders into finding equally interesting challenges in a maturing company and market. For Gainsight, this difficult process was worth it because keeping talent and experience has proven beneficial to its growth and continuity across its growing customer base.
C3.5 EVENT MARKETING PROGRAM One way that Gainsight built a new market was through developing a CS community. Gainsight’s industry conference Pulse was first held in 2013 and about 300 people attended. These people were from across the customer success market and they came together to share best practices and networks and to celebrate this new and exciting career path. Gainsight has put a huge emphasis on growing the attendance of the conference every year to be parallel with the growth in the profession. Today, the conference has grown to more than 10,000 annual attendees at worldwide events in San Francisco, London, and Sydney. The conference hosts over 150 speakers from prevalent and well-known companies such as Google, IBM, Adobe, Salesforce, and Baker Hughes. Gainsight wants Pulse to be the Customer Success industry conference, not the Gainsight user conference. This distinction indicates that the conference is intended to be more than a sales rally for Gainsight, but rather a gathering point for a growing industry. Gainsight uses Eventbrite, a
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platform that allows customers to create, share, find, and attend events, as their registration provider. With the help of Eventbrite, CRM, and marketing automation software, Gainsight has been able to calculate the impact that the Pulse conference had on their business. Pulse helps Gainsight keep track of how many prospective customers are attending their conference. Not only that, but Pulse also provides Gainsight with the opportunity to build relationships with those prospects, which hopefully turns them into customers. About 65 percent of the Pulse conference attendees are potential customers. And that number continues to grow as people are finding that customer success is becoming more essential.
C3.6 COVID-19 As mentioned before, Gainsight helps businesses grow faster by reducing employee turnover, increasing customer loyalty, and driving customer advocacy. Gainsight’s product helps businesses track their customer’s “health.” The COVID-19 (coronavirus) pandemic caused many companies to lose customers as their customers closed or went out of business. Many companies that lost customers had to cut expenses, many of which were subscription services. Thus, COVID-19 hit Gainsight and its customers hard, as many had to downsize to remain viable. The effect of the coronavirus on certain industries was clear. Retail and service industries closed and travel/tourism was severely limited. The SaaS industry was also dramatically affected by COVID-19; it is just not as easily seen. The SaaS industry survives by gaining new customers, helping them adapt to new services, helping them to see value that leads to expansion of services, and consistently retaining existing customers. However, COVID-19 derailed these business strategies, as customer business declined for non-product and relationship reasons. However, Gainsight was able to adapt and help its existing customers and also gain customers that embraced the flexible and remote nature of Gainsight’s products that enabled continued operations and customer management, despite COVID-19. The long-term effects of COVID-19 are yet developing, but Gainsight remains confident that helping customers to be successful is a long-term strategy that will endure any crisis and that will rebound as new businesses and products emerge in a post-COVID-19 environment.
C3.7 THE FUTURE: TRANSITIONING FROM MARKET DEVELOPMENT TO PROFITABILITY Current-day Gainsight is a company still in transition. As the customer success market has become accepted and is growing, Gainsight has been in a near constant growth phase. In this phase of business development, profitability is sacrificed for growth of market share, client base, and product development. However, eventually, to become a long-term business success, profits are required to finance operations (after start-up funding ends). Gainsight is at the point of transitioning from rapid-growth start-up into a sustainable market leader. This transition is not without difficulty, as changing the overall employee mindset from “let’s do it” to “is it profitable” can be a challenge. At this turning point, strong leadership helped to retain employees and educate them on new goals and objectives. However, many employees departed during this transition. This reality allowed Gainsight to hire executives and leaders more experienced in “maturing” company operations, as opposed to those adept in “growth” company operations. Currently, Gainsight is working through the common challenges and opportunities of a growing company that seeks to maintain its soul, while also providing value for its stakeholders. The balance is tricky, but Gainsight’s focus on its customer, employee, and industry success has positioned them well to continue growing into a sustainable company.
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QUESTIONS 1. Describe how Gainsight’s strong customer success management results in reduced churn. 2. Why do you think CSM roles are growing so rapidly? 3. Explain the pros and cons of a “freemium” service model.
SOURCES Andris A. Zoltners, P. K. Sinha, and Sally E. Lorimer, “What Is a Customer Success Manager?” Harvard Business Review, November 18, 2019, https://hbr.org/2019/11/what-is-a -customer-success-manager (accessed April 8, 2020); Gainsight, “5 Reasons Why Customer Success Is Existential During a Downturn,” March 17, 2020, https://www.gainsight .com/blog/5-reasons-why-customer-success-is-existential -during-a-downturn/ (accessed April 9, 2020); Gainsight, “Company,” https://www.gainsight.com/company/ (accessed
June 11, 2019); Gainsight, “Gainsight Customers,” https:// www.gainsight.com/customers/ (accessed June 11, 2019); Gainsight, “Hundreds of Customers Like You,” https://www .eventbrite.com/l/Gainsight/ (accessed April 9, 2020); Grant Suneson, “Industries Hit Hardest by Coronavirus in the US Include Retail, Transportation, and Travel,” USA Today, March 20, 2020, https://www.usatoday.com/story/money/2020 /03/20/us-industries-being-devastated-by-the-coronavirus -travel-hotels-food/111431804/ (accessed April 9, 2020); Lincoln Murphy, “SaaS Churn Rate: What’s Acceptable?” Customer Centric Growth, https://sixteenventures.com/saas -churn-rate (accessed June 10, 2019); Market Watch, “Global software-as-a-service (SaaS) Market 2019 Industry Growth, Size, Share, Global Forecasts Analysis,” March 26, 2020, https://www.marketwatch.com/press-release/global-software -as-a-service-saas-market-2019-industry-growth-size-share -global-forecasts-analysis-2020-03-26 (accessed April 8, 2020); Vineet Kumar, “Making ‘Freemium’ Work,” Harvard Business Review, May 2014, https://hbr.org/2014/05/making -freemium-work (accessed June 11, 2019).
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CASE 4 Apple Bites Back* SYNOPSIS: Few companies have been able to master the arts of product innovation, a “cool” brand image, and customer evangelism like Apple. After nearly collapsing under a cloud of bankruptcy in the mid-1990s, the company was revived through product innovation, a masterful marketing program, and an entrepreneurial corporate culture. This case reviews Apple’s history, remarkable comeback, and battle to stay on top with an eye toward the marketing strategies that created the company’s success. The case also examines many of the challenges faced by a company that continually pushes the boundaries of marketing practice to stay on top of the consumer electronics and computer industries. THEMES: Product innovation, marketing program, prestige pricing, competition, changing technology, differentiation, customer loyalty, foreign sourcing, intellectual property, privacy issues, corporate culture, sustainability
F
ew companies have fans who sleep outside its doors in order to be the first to snag its newest products, but this is common at Apple Inc. In 1997, Apple was near bankruptcy with a share price on $3.30. By comparison, in 2020 Apple stock reached more than $500 a share before a 5-for-1 stock split. Apple is one of the world’s most valuable companies—more valuable than Microsoft, Alphabet, and Amazon—and has a cult-like status among tech enthusiasts. Many companies have tried to copy Apple’s strategies, but none have discovered what it is that makes Apple such an icon. Some believe Apple’s success stems from a combination of several factors, including the leadership qualities of former CEO Steve Jobs, a corporate culture of enthusiasm and innovation, and the revolutionary products for which Apple has become known. While every organization has to acquire resources and develop a business strategy to pursue its objectives, Apple has excelled in its management. One of the company’s most important resources is its employees, and the company has effectively recruited, trained, and compensated employees to create loyalty. Another resource is suppliers, and Apple has created a highly efficient and effective supply chain with most of its production in China. Apple has also mastered core research
*Jennifer Sawayda, Callie Kyzar, and Harper Baird prepared this case under the direction of O. C. Ferrell for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation, © 2022.
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and development skills that have allowed the company to translate its technological capabilities into products that consumers want and are willing to pay a premium price to acquire. The capstone of Apple’s strategy is its retail stores that have become a role model for its competitors to sell consumer electronics. Such factors have allowed Apple to revolutionize the technology and retail industries. This case examines the marketing strategies that have contributed to Apple’s success. It analyzes how Apple has used a combination of smart marketing tactics to create an effective business and marketing strategy. We start by providing a brief history of Apple Inc. and its products. Next, this case examines how Apple uses certain pricing, promotion, and distribution strategies to create a loyal fan base of Apple users and how the corporate culture at Apple influences its marketing. We then analyze several marketing challenges for Apple, including competition, privacy, pricing, intellectual property, supply chain management, and sustainability. Finally, we focus on Apple as it moves forward.
C4.1 THE HISTORY OF APPLE, INC. When Apple was founded in 1976, it would have been unrecognizable to its diehard fans of today. Apple’s first product, the Apple I, was essentially a computer kit that lacked a graphic user interface as well as a keyboard and display (users had to provide their own). Cofounders Steve Jobs and Steve Wozniak released the Apple I for $666.66. Apple Inc., known then as Apple Computer, was officially born. Jobs and Wozniak continued to create innovative products. Because Steve Jobs viewed Apple computers from the user’s point of view, these products resonated with consumers. A few years later, Apple had more than $1 million in sales. The company was off to a promising start. Yet Apple’s initial success did not last. Its downturn started during the 1980s with a series of product flops and CEO changes. Steve Jobs was ousted in 1985 due to internal conflicts within the company. By the mid-1990s, the company was approaching bankruptcy. Dell Computer founder Michael Dell commented about Apple’s future, saying, “I’d shut it down and give the money back to the shareholders.” The return of Steve Jobs in 1997 instituted major changes for Apple. The company successfully adopted a market orientation in which it was able to gather intelligence about customers’ current and future needs for certain features—even before the customers themselves knew they needed them. Apple expanded into the electronics industry and began to release innovative products that resonated deeply with customers. For instance, the creation of the iPod and iTunes met customer needs for an efficient way to download a variety of music and listen to it on the go. While iTunes has since been phased out, it was a landmark moment for both Apple and the music industry. Apple has become skilled at recognizing strategic windows of opportunity and acting upon them before the competition. In 2007, the same year that Apple introduced the iPhone, Jobs announced that Apple Computer, Inc. would be renamed Apple Inc. Some perceived this to be a shift away from computers toward consumer electronics. However, it may be more accurate to say that Apple is reinventing computers. In an effort to protect intellectual property, Jobs became a proponent of using litigation against rival companies suspected of patent infringement. As competition in the smartphone category heated up, Apple sued Nokia, HTC, and Samsung in 2009, 2010, and 2011, respectively. Perhaps the most notable lawsuits were made against Samsung, where both companies filed suits against each other across nine countries over a three-year period. In total, Apple and Samsung filed more than 40 patent infringement lawsuits and countersuits related to intellectual property rights. The companies decided to end litigation outside of the United States, choosing to focus instead on cases that are still active in the United States. Today, Apple continues to remain vigilant in protecting its technology and ensuring information remains proprietary. In October 2011, Apple Inc. lost its iconic leader with the death of Steve Jobs. Apple’s current CEO Tim Cook takes a more traditional approach in his management style yet still maintains the secretive nature of the company. Yet, while Cook seems to possess the skills necessary for the CEO
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position, some fear he lacks the creative skills that made Jobs such a visionary. Apple is attempting to design products to continue expanding its customer base and remain relevant in the industry. Cook contends that the Apple Watch is a top contributor to the company’s growth. Apple followed up this win with the introduction of AirPods, wireless Bluetooth earbuds, in 2016 and the HomePod digital assistant in 2018. Thanks to its innovative products and marketing strategies, Apple has grown into one of the most admired and successful brands in the world. To millions of consumers, the Apple brand embodies quality, prestige, and innovation.
C4.2 APPLE’S PRODUCTS Although the Apple products of today are high in demand, this was not always the case. Apple went through its share of product failures in its past. Several of these failures can be attributed to poor predictions of consumer behavior. For instance, even though Apple products are generally priced high, the Apple Lisa and Cube were judged as too expensive for the mass market. Apple has become the leader in developing new products that enhance its product mix and add depth to its product lines. While introducing new products is expensive and risky, Apple has reinvented the concept of a new product. While many Apple products provide a function that was already on the market, Apple products are different, distinctive, and are often viewed as superior to the competition. After introducing new products such as the iPhone, Apple Watch, and HomePod, these products undergo product modification, or changes to the products’ features, quality, or aesthetics, on a regular basis to create the illusion that consumers have to have the newest model. For example, each modified version of the iPhone has new features and creates new benefits and the perception of an improved product. Few companies have been able to exploit the concept of product modification as effectively as Apple. Today, Apple has honed its ability to produce iconic products that consumers desire. The company’s product strategy is based on innovative designs, ease of use, and seamless integration. Not only has Apple created highly successful products that have catapulted it into prominence, but also new products keep coming, sometimes to the surprise of consumers and competitors. Some of its popular products are described below.
C4.2a Mac Apple first made a name for itself in the personal computer industry, and even though it has since expanded into the consumer electronics industry, its Mac computers are still a strong asset to Apple’s product mix. Many computer owners identify themselves as either Mac or PC users. Major differences between Macs and PCs lie with their processors and interfaces. Mac enthusiasts often prefer the superior video and graphic software as well as the look and feel of Macs. Mac laptops also tend to last longer than the average two-year life span of other laptops. For these reasons, Macs are priced much higher than other PCs. Apple sells two types of Macs: desktop and laptop computers. Desktop Macs include the iMac, iMac Pro, Mac Pro, and Mac Mini, while its laptops include the MacBook Pro and MacBook Air.
C4.2b iPhone The Apple iPhone debuted in 2007 and quickly became a favorite among mobile phone users. The iPhone combined smartphone technology with a straightforward operating system, an easy-touse touch screen, iPod features, and a simple design. Each new generation is highly anticipated by Apple fans eager to use the iPhone’s newest features. The iPhone has been a resounding success, especially in the United States and China. In 2020, Apple released the iPhone SE, a sign of a new direction for the smartphone market as a whole to offer lower-budget models. With a more approachable price point, Apple can attract new audiences.
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C4.2c iPad In April 2010 Apple introduced the iPad, a tablet computer designed for simple interaction with electronic media and the Internet. Sometimes described as a larger iPhone, the iPad targets the product gap between smartphones and laptops. It had a 9.7-inch touch screen, accelerometers, ambient light sensors, speakers, a microphone, and GPS capabilities. Newer generations included technology upgrades and two-way cameras for video calling. The iPad was incredibly popular; Apple sold more than one million iPads in four weeks. Less than six months later, retailer Best Buy reported that the iPad had reduced laptop sales by 50 percent. Less than two years after its release, consumers had purchased more than 25 million iPads. However, the growth in tablet computers is diminishing. Analysts believed tablet sales would continue growing at a rapid rate, but the tablet market eventually became saturated with fewer than expected customers upgrading their current tablets to newer versions. However, while Samsung and Amazon both report a decline in tablet sales in 2019, Apple reported growth with its newest model.
App Store The App Store (iOS) was launched in 2008 to provide applications for Apple’s
mobile products. In its first year, the App Store had 1.5 million downloads and then continued to grow rapidly. By 2014 the number had increased to 75 billion downloads, largely fueled by the growth of the iPhone, iPod touch, and iPad. The App Store made downloading applications easier, which encouraged downloads. Smartphone consumers between the ages of 25 and 44 use an average of 29 apps per month. The majority of all apps cost less than $2. Independent developers can distribute their original apps through the App Store, and Apple shares profits with them. The App Store has earned developers more than $120 billion since its inception.
C4.2d Apple Watch In 2015, the Apple Watch—the number-one smartwatch in the world—was released, making waves in wearable technology. While the wearable computing device originally functioned as an extension of the iPhone, current models have their own cell signal. It functions as a watch, phone, fitness tracker, and health tool all in one. With its easy-to-use interface and broad selection of apps, Apple has dominated the smartwatch category with 47 percent of the market share. It’s next closest competitor, Samsung, only holds 13 percent of the market.
C4.2e Apple Services Apple has developed many other high-tech services that make it a formidable player in the technology field. Apple’s services have been a source of growth for the company in recent years. For example, its iCloud service, which shares personal information across all Apple devices through cloud-based storage, is a source of recurring revenue. iCloud is another incentive for users to buy more Apple products. Apple TV, a device that lets users stream a variety of digital media directly to their televisions, is another Apple product that connects to the cloud. Apple Pay is a digital wallet service users can use to make payments through their smartphone devices. Introduced in 2014, Apple Pay expanded throughout the United States and internationally. The service substitutes for the need to carry around credit and debit cards. When consumers want to check out, they can use the smartphone to communicate the payment information to the terminal and make the transaction. Building off of this success, Apple introduced the Apple Card in 2019, both a digital and a physical credit card. The Apple Card is built into the iPhone Wallet. Its enhanced security and privacy features mean Apple, unlike regular credit card companies, will not knowingly purchase data for its customers. Additionally, the card uses one-time unique dynamic security codes, replacing the static three-digit CVV. Apple Music is an app offering that allows subscribers to stream music on demand. Released in 2015, the service provided costs $9.99 per month for its individual plan with a three-month free trial. Apple Music drew the ire of musicians at the beginning of its service, particularly
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singer Taylor Swift, because it initially planned to avoid paying artists for the free trial. Apple changed its mind and agreed to compensate artists. Rather than being a public relations disaster for Apple, the incident helped create awareness about its new service offering. Apple has now surpassed Spotify in paid subscribers in the United States, according to The Wall Street Journal. Apple TV+, a streaming service, was launched in 2019. While it was late to the streaming game—with long-established competitors such as Netflix, Hulu, and Amazon Prime—Apple has more than 10 million subscribers. Unlike other services, Apple TV+ launched with original content only, lacking the back catalog of content that other platforms offer. Apple invested heavily in premium originals, such as The Morning Show, Servant, and Dickenson. Possibly due to production delays associated with the COVID-19 (coronavirus) pandemic, Apple invested in content deals in 2020 to fill its empty back catalog, thus expanding its product offering.
C4.3 APPLE’S MARKETING STRATEGIES In addition to its revolutionary products, Apple’s success in pricing, promotion, and distribution has also contributed to its popularity. Marketing is such an important part of Apple that former CEO John Sculley once commented that Apple was, first and foremost, a marketing company. Apple has a clear sense of who its customers are and what the brand represents, which helps it to align its pricing, promotion, and distribution with its overall goals.
C4.3a Pricing Apple products are traditionally priced high compared to competitors. For example, the HomePod smartspeaker retails for $299 while the Amazon Echo retails for $99.99. Apple’s Mac computers often cost more than $1,000. Most of Apple’s profit comes from the high margins on its hardware devices. Yet rather than dissuading consumers from adopting the products, the high price point provides Apple with an image of prestige. Though the iPhone introduced a more affordable iPhone model in 2020, it may not be an indicator of an overall trend for the company. Apple also stresses the convenience of its products as well as the revolutionary new capabilities they have to offer. Thus, it attempts to create value for customers, prompting them to pay more for Apple brands than for its competitors’.
C4.3b Promotion Apple encourages demand for its products through several types of promotion, including wordof-mouth marketing. The company relies on hit products and high-impact rollouts (often after months of rumors) to stimulate emotional buying. The company positions itself as the technology provider for creative people. Like Apple’s products, its advertisements are often simple, artistic, and instantly recognizable. For example, several brightly colored iPod commercials in the early 2000s featured the silhouettes of dancers wearing the company’s iconic white earbuds. This simplicity continues today. Apple’s AirPods Pro commercial featured dancers along with up-close shots of its earbud product. Apple also supports “evangelism” of its products, even employing a chief evangelist to spread awareness about Apple and spur demand. Corporate evangelists refer to people who extensively promote a corporation’s products, acting as both employees and loyal customers. Successful evangelists spread enthusiasm about a company among consumers. These consumers in turn convince other people about the value of the product. Through product evangelism, Apple created a “Mac cult” of loyal customers eager to share their enthusiasm about the company with others. Apple’s promotion strategy has led to a perception that Apple products are part of a consumer’s identity.
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C4.3c Distribution Apple distributes its products to consumers via retailers, the company’s online store, and Apple stores. Apple stores have enhanced the brand and changed Apple’s distribution strategies. Originally created to give Apple more control over product displays and customer experiences, the Apple store model was a huge success and grew faster than any other retailer in history. It currently has more than 500 locations. Apple stores differentiate themselves significantly from other retailers; in fact, Apple took the concept of retail in an entirely new direction. Apple stores are a place where customers can both shop and play. Everything in the store is carefully planned to align with the company’s image, from the glass-and-steel design reminiscent of the company’s technology to the stations where customers can try out Apple products. Customer service is also important to the Apple store image. For example, employees are expected to speak with customers within two minutes of them entering the store. Each employee has received extensive training and often receives greater compensation than those at other retail stores to encourage better customer service. Apple executives constantly look for ways to improve stores, enhance customer service, and increase the time that customers spend in-store. Apple initiated a store redesign project in 2016 for the first time in 15 years. The design is intended to be more community-inspired rather than retail-focused and encourages even more hands-on interaction than before. This new look deemphasizes signs, logos, and other store fixtures, optimizing the balance of aesthetics and function.
C4.4 APPLE’S CORPORATE CULTURE In addition to its products, pricing, promotion, and distribution, Apple’s corporate culture is an important part of its marketing success. Many people attribute Apple’s success to Steve Jobs’s remarkable leadership abilities, Apple’s highly skilled employees, and its strong corporate culture. Apple markets itself as a fast-paced, innovative, and collaborative environment committed to doing things “the right way.” The organization has a flat structure, lacking the layers of bureaucracy of other corporations. Apple also emphasizes that it does not adhere to normal work environments in which employees are at their stations from 9:00 a.m. to 5:00 p.m. By offering both challenges and benefits to applicants, Apple hopes to attract those who fit best with its corporate culture. Successful evangelism can only occur with dedicated, enthusiastic employees who are willing to spread the word about Apple. When Jobs returned to Apple, he instituted two cultural changes: he encouraged debate on ideas, and he created a vision that employees could believe in. By implementing these two changes, employees felt that their input was important and that they were a part of something bigger than themselves. Additionally, in order to maintain its competitive advantage, Apple also fosters a culture of secrecy. Secrecy is necessary to prevent damage to sales of existing products because if consumers learn about a future upgrade, they may delay their purchases. Certain places at Apple are off-limits to most employees, and employees are not allowed to discuss their work unless everyone in the room knows about the project. This lack of transparency challenges traditional conceptions of what makes a company successful. However, employees say that they remain passionate about their work and are part of a unique experience. Another benefit Apple offers combines employee concerns with environmental action. In an effort to reduce their overall environmental impact, Apple offers incentives for corporate employees such as free shuttle service and transit subsidies for employees who opt to use public transportation. In addition, as part of its long-term commitment to sustainability, Apple spent $850 million for 25 years of solar power. Apple’s global facilities run on 100 percent renewable energy, including retail stores, offices, and data centers.
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C4.5 APPLE’S MARKETING CHALLENGES Although Apple has consistently won a spot on Fortune’s World’s Most Admired Companies list, it has experienced several ethical issues in recent years. These issues could have a profound effect on the company’s future success. Apple’s sterling reputation could easily be damaged by serious misconduct or a failure to address risks appropriately.
C4.5a Competition Apple faces competition on a variety of fronts. Although a diverse product mix mitigates the risk of any one product failing, it also increases Apple’s number of competitors. Rivals include Dell, Lenovo, and ASUS for computers; Samsung and Google for smartphones; Amazon, Samsung, and Lenovo for tablets; Google and Amazon for cloud storage services; Amazon and Google for digital assistants; and Samsung and Fossil for smartwatches. Though Apple holds the top spot in many categories, rivals are striving to catch up. Chinese company Huawei has slowly gained market share internationally, becoming a formidable competitor for both Apple and Samsung. Becoming the “dominant player” in the global smartphone industry is now a toss-up between Samsung, Apple, and Huawei.
C4.5b Customer Privacy Privacy is another major concern for Apple. In 2011 Apple and Google disclosed that certain features of their cell phones collect data on the phones’ locations. Consumers and government officials saw this as an infringement on user privacy. The companies announced that users have the option to disable these features on their phones. However, this was not entirely true for Apple as some of its phones continued to collect location information even after users had disabled the feature. Apple attributed this to a glitch that it remedied with new software. Both Google and Apple defend its data-collection mechanisms, but many government officials disagree. The government is considering passing legislation on mobile privacy, actions which could have profound effects on Apple and other electronics companies. Apple Pay represents another risk area for Apple as it expands into the mobile payments industry. The potential for hackers to steal information from mobile payment systems is a major area of concern for both companies and regulators. Another privacy controversy was related to Apple Pay, software that allows consumers to purchase items both online and in-person through their iPhones. The mobile payment system became a target for hackers, who exploited vulnerabilities in the verification process of adding a credit card to an Apple Pay account. The issue with hackers gaining access to payment information is at least partially the responsibility of the banking institutions since they approve the addition of credit cards to Apple Pay accounts. Banks did not ask enough security verification questions, making it easier for consumers to add credit cards to their accounts and also leaving the door open for increased fraud. Many experts say that this issue reflected weakness with credit card security rather than Apple’s platform. To improve the security of their devices, Apple launched a bug bounty program designed to reward security researchers who discover and disclose to Apple vulnerabilities in Macs, MacBooks, Apple TV, and Apple Watch. Apple then resolves the security issues and rewards the finder with $1 million. Before the bug bounty existed, security researchers could discover system flaws and abuse them or sell the knowledge to exploit brokers. Additionally, under the new iOS Security Research Device Program, Apple gives development phones to trusted security researchers to discover vulnerabilities in the underlying software and operating system. In 2016, after a couple opened fire in an office in San Bernardino, California, killing 14 people, Apple faced a privacy issue that pitted them against the FBI. The FBI believed that the husband’s encrypted iPhone could reveal important information about the attack. Interestingly, only a few years earlier, Apple had developed encryption systems making it more difficult for forensic investigators to get into the system. The FBI asked for Apple’s help, but Apple claimed that providing the government with a way to bypass their own security measures would set a dangerous precedent
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that could place the privacy of millions of customers who use Apple products at risk. The FBI issued a court order mandating Apple to help the government in this matter. Apple refused, and the FBI dropped the case after they were able to hack into the iPhone without Apple’s help. The conflict elicited mixed feelings from the general populace. Some felt that this was a special case that could be used to fight terrorism while others believed it would allow the U.S. government, and possibly other governments, to hack into the phones of private citizens whenever they felt a need. This is just one of several cases where the government has asked for access to secured tech devices in their investigation. Privacy advocates believe the conflict between the government and tech giants like Apple is far from over. To this day, Apple refuses to unlock iPhones for the FBI. Another large complaint from consumers and developers occurred when Apple removed several screen-time and parental control apps from the App Store. In some cases, Apple asked companies to remove parental control features from their apps, and in other cases the apps were simply removed from the store entirely. One app, Freedom, which allowed users to temporarily block certain sites and apps on their devices, had more than 770,000 downloads before it was removed. Apple stated that the apps they removed violated their rules because they allowed one iPhone to control another. However, these practices had been allowed for years and the apps had approved hundreds of versions of their apps over this time period. Apple responded that they made these changes because of the risk that these apps could gain too much information from the users’ devices, particularly a concern because the devices often belonged to children. The threat against privacy and data security is something that Apple does not tolerate, but the timing of the ban on these particular apps brought suspicion. Shortly after the incident, Apple launched its own Screen Time tool, allowing users to limit and monitor their use of apps and overall phone usage. Such timing focused antitrust concern and scrutiny on the issue of Apple’s dominance and control over apps in their marketplace. Apple denies that the timing of these changes had to do with the launch of its Screen Time tool. Users have voiced discontent with Apple’s Screen Time tool, stating it provides fewer restrictions and is more complicated than the apps they were previously using. Another issue raised is that the new tool included in Apple’s software requires all users within a family to have iPhones, whereas the apps used previously allowed parents with iPhones to control their child’s Android devices. Thus, Apple’s customers, though loyal, do have product problems and service concerns that require the company to make tough choices.
C4.5c Price Fixing In 2013 a judge found that Apple had conspired to fix prices on electronic books (e-books) with five major book publishers. The judge determined that Apple was part of a deal requiring publishers to provide Apple’s iTunes store with the best deals in the marketplace for e-books. More specifically, Apple allegedly allowed publishers to set the e-book prices for the iPad and received 30 percent of the proceeds (known as the “agency model”). The agency model is less competitive than the wholesale model, in which retailers and publishers negotiate on pricing. Under the agreement, if a competitor was found selling the e-book for less, Apple was to be offered the same lower price. This scheme is more commonly referred to as a most-favored-nation clause. Many believe that it is anticompetitive because companies can use it to keep competitors out of the market. After striking the deal with Apple, publishers approached Amazon about participating in the contract. Apple denied wrongdoing and acknowledged only passive association with the deal to set e-book prices. In 2016, the Supreme Court refused to hear Apple’s appeal. Apple was found guilty of violating the Sherman Act and was fined $450 million, $400 million of which was refunded to impacted buyers.
C4.5d Intellectual Property With the many products Apple releases each year, it makes sense for it to protect its technology from theft. Apple is serious about keeping its proprietary information a secret to prevent other companies from stealing its ideas. This has led to many patent and copyright lawsuits between Apple and other technology firms, including Franklin Computer Corporation, Microsoft, Cisco Systems, Samsung, and HTC.
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However, Apple is also the target of lawsuits. Kodak filed a lawsuit against Apple and Research in Motion (now BlackBerry Limited), alleging that the companies infringed on its patent on digital-imaging technology. In response, Apple countersued Kodak by claiming it violated Apple’s patents. Kodak later sold 1,100 digital imaging and processing patents to Apple, Google, Facebook, and other technology firms, which resolved the lawsuits. Additionally, Proview Electronics filed a lawsuit alleging that Apple fraudulently acquired the iPad trademark by creating a fake company to purchase the trademark and not disclosing its intent. Apple paid Proview $60 million to settle the dispute. Apple’s aggressiveness regarding patent protection has led it to file lawsuits against some powerful companies. As mentioned earlier, the company filed a lawsuit against Samsung. Apple claimed Samsung infringed on multiple intellectual property rights, including patents, trademarks, user interface, style, false designation of origin, unfair competition, and trademark infringement. Specifically, Apple claimed Samsung used key features of its iPhone and iPad, including glass screens and rounded corners, along with many performance features and physical similarities. A jury found Samsung guilty of willfully infringing on Apple’s design and utility patents. Apple was initially awarded more than $1 billion in damages, and Samsung’s allegations of infringement against Apple were dismissed within the United States. After years of litigation, Apple was ultimately awarded $539 million, only a fraction of the initial damages the company sought against Samsung. Although the outcomes of some of these lawsuits have provided technology companies with more extensive intellectual property protections, they also bring attention to the legitimacy of Apple’s claims. Is it pursuing companies that it honestly believes infringed on its patents, or is it simply trying to cast its competitors in a bad light so it can become the major player in the market? Although it might seem that Apple is being too aggressive, companies that do not set boundaries and protect their property can easily have it copied by their competitors, who can then use it to gain market share.
C4.5e Supply Chain Management Many of Apple’s product components are manufactured in countries with low labor costs. This means that the potential for misconduct is high due to varying labor standards and less direct oversight. As a result, Apple makes each of its suppliers sign its supplier code of conduct and perform factory audits to ensure compliance. To emphasize its commitment toward responsible supplier conduct, Apple releases an annual Supplier Responsibility Progress Report that explains expectations for suppliers, the results of its audits, and corrective actions the company will take against factories where violations have occurred. In addition, Apple claims it has empowered over six million workers by teaching them about their rights and increased the number of suppliers it audits each year. Apple discovered a correlation between improved compliance and the number of audits. For example, facilities audited twice, instead of once, showed a 25 percent gain in compliance ratings, while three audits resulted in a 31 percent compliance score improvement. Most of Apple’s products are manufactured throughout Asia, with a majority produced within Foxconn and Pegatron factories in China. In the past, multiple accusations pertaining to improper working conditions, underage labor disputes, and worker abuse have come into question. Apple has been labeled as an unfair sweatshop, and critics have launched multiple campaigns against the company. This has resulted in negative publicity from protestors, who asked current Apple consumers not to support Apple’s unlawful practices by purchasing their products. A report by China Labor Watch, a New York–based nonprofit, in September 2019 said that more than 50 percent of Apple’s workforce at Foxconn in August were temporary workers, violating China’s labor laws which set a limit at 10 percent. Even as student workers returned to school, the number of temporary workers still exceeded China’s labor laws. Other issues included violations related to overtime work, failed bonuses, internship laws, and safety. Some workers had more than 100 overtime hours in one month, though Chinese law sets a limit at 36 overtime hours. Some dispatch workers were not paid their bonuses. Additionally, student employees worked overtime, which violates internship laws. Lastly, the safety of the workers was put at risk due to the lack of
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protective equipment and occupational health and safety training. The report also revealed that the factory in question does not report work injuries. Though Apple denied most of the allegations and said workers are all receiving the appropriate compensation, Apple would not disclose which allegations were true. Apple should work to be as transparent as possible in the face of negative publicity. Despite these measures, Apple has faced scrutiny for its manufacturing processes. Suppliers claim that Apple’s manufacturing standards are hard to achieve because suppliers are only allowed slim profit margins. In contrast, competitors like Hewlett-Packard allow suppliers to keep more profits if they improve worker conditions. Apple’s focus on the bottom line can cause suppliers to find other ways to cut costs, usually by requiring employees to work longer hours and using less expensive but more dangerous chemicals. In such an environment, mistakes and safety issues become more common. According to the company’s own audits, 96 percent of Apple’s suppliers are in compliance with working-hour limits (60 hours per week). Apple won the “Stop Slavery Award” from The Thomas Reuters Foundation for its efforts to create a more transparent supply chain. In addition, audits in 2018 discovered only one underage worker. Apple acknowledges that the problem of underage workers needs to be totally eliminated from the supply chain, and each year the audits uncover fewer facilities out of compliance. Apple’s policy requires suppliers to continue to pay wages to underage workers, even after they are sent home, and provide educational opportunities. After the worker reaches legal age, the supplier is required to offer the individual employment once again. Apple claims suppliers who violate company policies are resaudited every 30, 60, and 90 days or until the problem has been rectified. If a core violation is discovered, such as employing underage labor, employee retaliation, and falsified documents, the supplier is put on immediate probation while senior officials from both companies address the problem. Apple will drop suppliers who do not improve. Several high-profile events at Apple factories generated criticism of its supply chain and prompted Apple to take action to improve monitoring and compliance. In January 2010, more than 135 workers fell ill after using a poisonous chemical to clean iPhone screens. In 2011, aluminum dust and improper ventilation caused two explosions that killed four people and injured 77. Additionally, over a dozen workers have committed suicide at Apple supplier factories. Much of the media attention focused on the conditions at Foxconn, Apple’s largest supplier, with a sordid background of labor violations and the site of one of the explosions and several of the suicides. Foxconn continues to assert that it is in compliance with all regulations, despite the reports. The death of an employee at a Chinese iPhone factory in 2018 renewed concerns over working conditions. Apple claims it is significantly improving supplier conditions and becoming more transparent about its labor processes. CEO Tim Cook visited Foxconn personally to oversee conditions. However, some blamed Apple’s culture of innovation and the need to release new or improved products each year, which requires suppliers to work quickly at the expense of safety standards. Additionally, inconsistent international labor standards and high competition mean that virtually every major electronic producer faces similar manufacturing issues. As media and consumer scrutiny increase, Apple must continue to address its supply chain management issues. However, as one Apple executive told The New York Times, “Customers care more about a new iPhone than working conditions in China.” In spite of the pressures to develop new products at low costs, Apple has been recognized by the Fair Labor Association (FLA) for dramatically improving the conditions at Foxconn and completing 280 of the FLA’s recommendations. Continual monitoring of their suppliers and enforcement of ethical standards are necessary to assure stakeholders that Apple takes the well-being of workers seriously.
C4.5f Sustainability Apple has taken steps to become a greener company, such as reducing its environmental impact at its facilities. They also have restrictions addressing the manufacturing, use, and recycling of their products. However, the company admits that most of its emissions come from its products. Apple’s success hinges on constantly developing and launching new
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products, which leads to planned obsolescence—pushing people to replace or upgrade their technology whenever Apple comes out with an updated version. Since Apple constantly releases upgraded products, this could result in older technology being tossed aside. Apple has undertaken different approaches to combat this problem. For one, the company strives to build quality, long-lasting products with materials suitable for recycling. In addition, in the past 10 years the average energy consumption of their latest products has decreased by 70 percent. To encourage recycling, Apple implemented a program at its stores, Apple Trade, so old devices such as iPods, iPhones, and Mac computers can be recycled. More than two-thirds of the iPhones Apple receives through Apple Trade are used by new owners. If the phone is not in good enough shape to refurbish, Apple invented a disassembly robot, Daisy, that can take apart iPhones to recover the materials.
C4.5g Apple’s Impact on Marketing Apple’s corporate culture of innovation and loyalty has created a company that massively impacts the marketing strategies of consumer electronics firms and other industries. Apple’s iPhone increased competition in the smartphone and tablet computer industries. It also popularized the concept of mobile marketing. The iPhone’s easy-to-use features and applications allowed consumers to shop from home or in-store. This provided new opportunities for retailers to introduce their own iPhone apps and create customized marketing messages delivered over mobile devices. Brands are utilizing Apple’s platform to create product awareness and/or generate repeat business. Apple’s advances in mobile marketing have not only changed the way that customers interact with mobile devices but also have enhanced customer relationships between business and consumer. No company has mastered the concept of product differentiation better than Apple. While products such as the iPhone provided functions and benefits similar to competing products, Apple’s technology and user-friendly interface provided a consumer perception of a completely new product. Apple retail stores and services help create a total product that was unlike any available in the marketplace. The Apple brand name became a cultural icon with loyal followers devoted to Apple’s products. Cultural branding results in consumers exhibiting almost cult-like loyalty to products. Companies such as Coca-Cola, Harley Davidson, and Nike are examples of companies with strong cultural branding. The product becomes a part of their self-concept and image when interacting with others. Once a product becomes so important to individuals, they are less sensitive to price and quickly adopt new Apple products that are brought to the market. Few companies have been able to develop cultural branding and a cult-like following like Apple. Additionally, many companies are seizing on the opportunity to learn from Apple. Due to the immense success of Apple stores, other companies are attempting to imitate its retail model. Microsoft and Sony opened some of their own stores. Other companies now use Apple products to enhance their businesses as well. For instance, some pharmaceutical and car salespeople have adopted the iPad to aid in business transactions, and some restaurants even use the iPad to show menu items.
C4.6 THE FUTURE OF APPLE Apple appears optimistic about its future. The company has created a cult following of consumers who are intensely loyal to Apple products. Notable acquisitions include Shazam, Emagic, Siri, Beats Electronics, NeXT, Inc., Anobit Technologies, and PrimeSense. Apple has made strategic acquisitions to improve their products and stay ahead of the pack. For example, Apple acquired a British artist-services startup called Platoon in 2018. The service allows music artists to distribute music without a record label. Many theorize Platoon could be a key component in Apple becoming a music-rights owner, giving Apple Music exclusive recordings.
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Over the last decade, Apple has excelled at keeping pace with the quickly evolving industry of computers and consumer electronics. Its diversification, collaborative corporate culture, and product evangelism propelled it to heights that could not have been envisioned when Jobs and Wozniak sold their first computer kit in 1976. The company shows no signs of stopping its momentum, while consumers have shown few signs of reducing their admiration for Apple. On the other hand, Apple will face many challenges in the future. Not only has it been criticized for violations in its supply chain, but it has also been questioned about why it offshores most of its production. Since Apple makes such high profits and reportedly received tax breaks earlier in its history, some politicians have suggested that Apple bring production jobs back to the United States. As concerns over outsourcing continue, Apple may experience increasing pressure from stakeholders to create more manufacturing opportunities in the United States.
QUESTIONS 1. How has Apple developed extreme loyalty among consumers that has resulted in an almost cult-like following? 2. Describe the role of Apple stores as an important part of its marketing strategy. 3. What will Apple need to do to maintain product innovation and customer loyalty?
SOURCES Adam Lashinsky, “The Secrets Apple Keeps,” Fortune, February 6, 2012, 85–94; Amanda Cantrell, “Apple’s Remarkable Comeback Story,” CNN Money, March 29, 2006, http://money .cnn.com/2006/03/29/technology/apple_anniversary/ (accessed May 19, 2020); Andrew Griffin, “Apple Given Stop Slavery Award as It Opens Up About Trying to Stop Abuses in Its Supply Chain,” Independent, November 15, 2018, https:// www.independent.co.uk/life-style/gadgets-and-tech/news /apple-slavery-modern-stop-award-supply-chain-thomson -reuters-foundation-latest-a8634376.html (accessed August 13, 2019); Anne Steele and Tripp Mickle, “Apple Music Overtakes Spotify in Paid U.S. Subscribers,” The Wall Street Journal, April 5, 2019, https://www.wsj.com/articles/apple -music-overtakes-spotify-in-u-s-subscribers-11554475924 (accessed May 19, 2020); Annie Gaus, “Apple Is Dominating the Watch Game—Here’s Why That’s Good News for Investors,” TheStreet, August 12, 2019, https://www.thestreet.com /investing/apple-is-dominating-the-watch-game-here-s -why-that-s-great-news-for-investors-15053914 (accessed August 13, 2019); Annie Gaus, “Apple Is Dominating the Watch Game—Here’s Why That’s Good News for Investors,” TheStreet, August 12, 2019, https://www.thestreet.com /investing/apple-is-dominating-the-watch-game-here-s -why-that-s-great-news-for-investors-15053914 (accessed August 13, 2019); Apple History, http://www.apple-history .com/ (accessed May 4, 2015); Apple, “Apple Now Globally Powered by 100 Percent Renewable Energy,” April 9, 2018, https://www.apple.com/newsroom/2018/04/apple-now
-globally-powered-by-100-percent-renewable-energy/ (accessed May 19, 2020); Apple, “Environment,” https://www.apple .com/environment/ (accessed August 13, 2019); Apple, “Environment,” https://www.apple.com/environment/ (accessed August 13, 2019); Apple, “Supplier Responsibility: 2019 Progress Report,” 2019, https://www.apple.com/supplier -responsibility/pdf/Apple_SR_2019_Progress_Report.pdf (accessed August 13, 2019); Ben Lovejoy, “Apple Hits a Dozen Years as the World’s Most Admired Company,” 9to5Mac, January 22, 2019, https://9to5mac.com/2019/01/22/the-worlds -most-admired-company/ (accessed August 12, 2019); Ben Winck, “The 5 Most Valuable US Tech Companies Are Now Worth More Than $5 Trillion After Alphabet’s Record Close,” Markets Insider, January 17, 2020, https://markets.business insider.com/news/stocks/most-valuable-tech-companies -total-worth-trillions-alphabet-stock-record-2020-1 -1028826533#5-facebook1 (accessed May 19, 2020); Benjamin Mayo, “Bloomberg: Apple TV+ Tops 10 Million Subscribers, Company Buying TV Show and Movie Back Catalog to Expand Service,” 9to5Mac, May 19, 2020, https://9to5mac .com/2020/05/19/apple-tv-plus-back-catalog-subscribers/ (accessed May 19, 2020); Bryan Gardiner, “Learning From Failure: Apple’s Most Notorious Flops,” Wired, January 24, 2008, https://www.wired.com/2008/02/gallery-apple-flops/ (accessed April 22, 2017); Cable News Network, “Apple Chronology,” CNN Money, January 6, 1998, http://money .cnn.com/1998/01/06/technology/apple_chrono/ (accessed April 22, 2017); Daisuke Wakabayahsi and Robin Sidel, “Fraud Starts to Take a Bite Out of Apple Pay,” The Wall Street Journal, March 3, 2015, http://www.wsj.com/articles/fraud -starts-to-take-a-bite-out-of-apple-pay-1425430639 (accessed April 22, 2017); Daphne Leprince-Ringuet, “Tablet Sales Are Still in Decline, But Apple’s Latest iPad Is Showing the Way Forward,” ZDNet, February 3, 2020, https://www.zdnet.com /article/tablet-sales-are-still-in-decline-but-apples-latest -ipad-is-showing-the-way-forward/ (accessed May 19, 2020); “Former Apple Evangelist on Company’s History,” ZDNet, March 29, 2006, http://www.zdnet.com/article/former-apple -evangelist-on-companys-history/ (accessed April 22, 2017); Greg Sandoval, “This Is Why DOJ Accused Apple of Fixing
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Case 4: Apple Bites Back 331
e-Book Prices,” CNET, April 11, 2013, http://news.cnet .com/8301-13579_3-57412369-37/this-is-why-doj-accused -apple-of-fixing-e-book-prices/ (accessed April 22, 2017); “Inside the Minds of Most Hard-Charging CEOs,” Inc., September 2012, 142–146; Jack Nicas, “Apple Cracks Down on Apps That Fight iPhone Addiction,” The New York Times, April 27, 2019, https://www.nytimes.com/2019/04/27/technology /apple-screen-time-trackers.html?module=inline (accessed August 3, 2019); Jamie Fullerton, “Suicide at Chinese iPhone Factory Reignites Concern Over Working Conditions,” Telegraph, January 7, 2018, https://www.telegraph.co.uk/news /2018/01/07/suicide-chinese-iphone-factory-reignites-concern -working-conditions/ (accessed August 13, 2019); Joanna Stern, “Apple and Foxconn Make Progress on Working Conditions at Factories,” ABC News, August 21, 2012, http:// abcnews.go.com/blogs/technology/2012/08/apple-andfoxconn-make-progress-on-working-conditions-at-factories/ (accessed April 22, 2017); Kevin Johnson, Jon Swartz, and Marco della Cava, “FBI Hacks Into Terrorist’s iPhone Without Apple,” USA Today, March 28, 2016, https://www.usatoday .com/story/news/nation/2016/03/28/apple-justice-department -farook/82354040/ (accessed April 22, 2017); Lisa Eadicicco, “The Battle for Dominance of the Smartphone Industry Is Getting Fiercer Than Ever as Apple Makes a Roaring Comeback Thanks to the iPhone 11,” Business Insider, January 30, 2020, https://www.businessinsider.com/apple-beats-samsung -huawei-smartphone-shipments-iphone-11-2020-1 (accessed May 19, 2020); Malcolm Owen, “Apple Watch Continues to Dominate the Smartwatch Market,” Apple Insider, November 7, 2019, https://appleinsider.com/articles/19/11/07/apple -watch-continues-to-dominate-the-smartwatch-market (accessed May 19, 2020); Michael Steeber, “New Apple Store Design Changes Prioritize a Straightforward Shopping Experience,” 9to5Mac, June 18, 2019, https://9to5mac.com/2019/06/18 /apple-store-pricing-sign-watch-display-design-changes/ (accessed May 19, 2020); Nathan Reiff, “Top 7 Companies Owned by Apple,” Investopedia, May 16, 2019, https://www
.investopedia.com/investing/top-companies-owned-apple/ (accessed August 12, 2019); Nick Statt, “Apple Wins $539 Million From Samsung in Latest Chapter of Ongoing Patent Trial,” The Verge, May 24, 2018, https://www.theverge .com/2018/5/24/17392216/apple-vs-samsung-patent-trial -539-million-damages-jury-verdict (accessed August 13, 2019); Nick Wingfield, “As Apple’s Battle With HTC Ends, Smartphone Patent Fights Continue,” The New York Times, November 11, 2012, http://www.nytimes.com/2012/11/12 /technology/as-apple-and-htc-end-lawsuits-smartphone -patent-battles-continue.html?_r=o (accessed April 22, 2017); Paul Elias, “Samsung Ordered to Pay Apple $1,05B in Patent Case,” Yahoo! Finance, August 25, 2012, http://finance .yahoo.com/news/samsung-ordered-pay-apple-1-004505800 .html (accessed April 22, 2017); Romain Dillet, “App Store Developers Have Earned $120 Billion Since 2008,” TechCrunch, January 28, 2019, https://techcrunch.com /2019/01/28/app-store-developers-have-earned-120-billion -since-2008/ (accessed May 19, 2020); Saheli Roy Choudhury, “Apple Denies Claims It Broke Chinese Labor Laws in iPhone Factory,” CNBC, September 9, 2019, https://www .cnbc.com/2019/09/09/apple-appl-claims-it-broke-china -labor-laws-at-iphone-factory-mostly-false.html (accessed October 24, 2019); “The Evangelist’s Evangelist,” Academia, http://www.academia.edu/4182207/The_Evangelist_s_Evange list_Developing_a_Customer_Evangelism_Scale_using_ Faith-Based_Volunteer_Tourism_Data (accessed May 4, 2015); Yukari Iwatani Kane and Ian Sherr, “Apple: Samsung Copied Design,” The Wall Street Journal, April 19, 2011, https://www .wsj.com/articles/SB1000142405274870391600457627121010938 9154 (accessed April 22, 2017); Zack Whittaker, “Apple Card Will Make Credit Card Fraud a Lot More Difficult,” TechCrunch, March 25, 2019, https://techcrunch.com/2019/03/25/apple-credit -card-fraud/ (accessed August 12, 2019); Zack Whittaker, “Apple Expands Its Bug Bounty, Increases Maximum Payout to $1M,” TechCrunch, August 8, 2019, https://techcrunch.com/2019/08/08 /apple-hackers-macos-security/ (accessed August 12, 2019).
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CASE 5 Uber: The Opportunities and Challenges of Market Disruption* SYNOPSIS: By seamlessly connecting consumers and drivers through its smartphone app, Uber has changed the ride-sharing landscape for consumers and the traditional taxi and limousine industries. The company has experienced incredible success but not without a fair amount of criticism and backlash. Uber faces a number of challenges including internal struggles, legal and regulatory challenges, and global issues. Many countries and some states in the United States are making legal changes to push Uber to reclassify its drivers from independent contractors to employees. Additionally, major cities have moved to regulate Uber, while some foreign countries have banned Uber’s services. Uber will have to adapt its marketing strategy to address both domestic and international challenges. THEMES: Marketing strategy, mobile marketing, branding, legal/regulatory environment, risk assessment, pricing issues, customer safety, market expansion, global marketing
U
ber Technologies, Inc. (Uber) is a multinational tech company that provides ride-sharing services by facilitating a connection between independent contractors (drivers) and riders with the use of an app. Uber has expanded its operations to 900 cities in more than 70 countries around the world and is valued at around $82 billion. Because its services cost less than taking a traditional taxi, Uber is responsible for upending the taxi industry. The company has experienced resounding success and is looking toward continued expansion.
*Noushin Laila Ansari, Lecia Weber, Sederick Hood, Christian Otto, Jennifer Sawayda, Jordan Burkes, and Kelsey Reddick developed this case under the direction of O. C. Ferrell and Linda Ferrell, © 2022. This case was prepared for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.
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However, Uber has faced many challenges in the form of legal/regulatory, social, and technical obstacles. Some argue that Uber has too much control over its drivers, and therefore, they should be classified as employees rather than independent contractors, which would create a huge tax expense for Uber. Others accuse Uber of not vetting their drivers, creating potentially unsafe situations. Some major cities are banning ride-sharing services such as Uber because of these concerns. Additionally, Uber has faced various lawsuits. Its presence in the market has influenced lawmakers to draft new regulations to govern ride-sharing systems. Legislation can often hinder a company’s expansion opportunities because of the resources it must expend to comply with regulatory requirements. To be successful Uber must address these issues in its marketing strategy so it can reduce resistance as it expands into other cities.
C5.1 BACKGROUND In 2009, Travis Kalanick and Garrett Camp developed a smartphone application to connect drivers-for-hire with people needing rides to a destination in their city. This innovative service was originally founded as UberCab, Inc., a privately held company. It was renamed Uber Technologies, Inc. in 2010. Cofounders Kalanick and Camp designed the mobile app for iPhone and Android smartphones, enabling customers to get an estimated time of arrival from the driver on their smartphone with the use of an integrated GPS system. Consumers liked the Uber app because of its convenience and ease of use. Riders use the app to find nearby drivers, and the app provides the estimated fare before the ride is even booked. Uber does not maintain automobile inventory for drivers, such as a fleet of taxicabs or limousines. Instead, each driver-for-hire supplies their own automobile, gas, and insurance. A surge pricing model is used during times of peak demand. Drivers collect earnings from the base fare, a trip supplement, and any promotions (i.e., boosts and surge pricing) as well as tips from riders. As Uber looks to the future, it is investing in advanced transportation technology to stay ahead of the curve. Uber and Volvo partnered to create a driverless car through a $300 million alliance. Uber and Volvo revealed their first production vehicle, the XC90 SUV, in 2019. Even in the face of safety concerns, Uber believes self-driving vehicles to be safer and more sustainable than traditional vehicles. Additionally, Uber has a team called Uber Elevate that is working to develop aerial ridesharing by 2023 in Dallas, Los Angeles, and Melbourne. Uber will face many regulation challenges and ethical concerns with this uncharted territory. They will need to work closely with local and national governments to establish safety standards for urban aviation. Uber filed for an initial public offering in 2019 soon after competitor Lyft was listed on NASDAQ in March 2019. The Uber IPO was one of the biggest of all time with a value of $82.2 billion, just behind Facebook at a valuation of $115 billion and Alibaba at $179 billion at the date of their IPOs. All 180 million shares of Uber stock were sold out within three days of the IPO. Uber’s initial stock price was $45 a share, raising a total of $8.1 billion at a valuation of $82.2 billion in total. Less than a year after its IPO, the COVID-19 (coronavirus) pandemic struck the United States, drastically altering day-to-day life. People around the world were ordered to stay home and travel was limited which hurt the ride-sharing industry as a whole. Even as businesses reopened and people returned to work and school, the demand for ride-sharing remained low. Though Uber faced substantial losses due to the pandemic, the company kept its eyes on the future. Uber acquired Postmates for $2.65 billion in the midst of the pandemic, preparing its Uber Eats division for significant growth. Shortly after, the company introduced grocery delivery in select cities to meet the needs of the rapidly changing marketing environment. The ability to quickly adapt its strategies is a key strength for Uber.
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Case 5: Uber: The Opportunities and Challenges of Market Disruption 335
C5.2 UBER’S MARKETING PROGRAM Like all companies, Uber must understand its target market and maintain a strong marketing mix to be successful. Due to its technology, Uber does not have as many constraints as taxicabs, although it has encountered regulatory obstacles and some public resistance. The Uber business model takes advantage of the smartphone technology of consumers and links them with independent drivers as their cabs. This provides a more potentially efficient and less expensive way to purchase transportation.
C5.2a Products Uber is a service product that is digitally mediated via a smartphone app that consumers download. When they want to request a ride, they can use the app to connect with a driver in the near vicinity. The app allows consumers to track the location of the car and alerts them to when the car arrives. Uber offers a few different services to customers based upon their preferences: UberX (affordable, everyday rides), UberXL (affordable rides for groups up to 6), Uber Black (luxury rides with professional drivers), Uber Black SUV (premium rides for up to 6), Uber Select (comfortable rides with top-rated drivers), UberWAV (wheelchair-accessible rides), and UberPool (carpool rides). In 2014, Uber launched Uber Eats. The app gives users the ability to order food from participating local restaurants. Now, Uber has partnered with more than 100,000 restaurants around the globe. Uber Eats provides Uber with a large revenue source and holds 30 percent of the market for on-demand food delivery services. Uber has also invested at least $2 billion to research autonomous vehicles and test different fleets of these vehicles. With people stuck at home during the COVID-19 pandemic, Uber Eats saw 52 percent growth in bookings, attracting many new firsttime customers. However, despite experiencing record growth, the service recorded $313 million in losses due to the cost of promotions and the expense of additional safety equipment. At the same time, pressure increased for the companies to reduce commissions in light of the crisis. In response, Uber Eats waived its delivery fees in the United States and Canada. Despite the struggle, Uber has remained committed to making Uber Eats a successful platform. Case in point, Uber introduced grocery delivery in 2020 to expand the Uber Eats platform and meet consumer demand. Uber expects the demand for grocery delivery will be sustained over the long term. In 2017, Uber launched Uber Freight, a service that connects shipping companies with drivers. The service, which operates similarly to Uber’s core ride-sharing app, has seen triple-digit revenue growth, expanding both nationally and internationally. Freight transportation represents a huge opportunity for Uber, especially as the United States faces a shortage of truck drivers. Now that Uber has established themselves as a pillar of the sharing economy, Uber stands to be a big player in this segment. However, during the COVID-19 pandemic, Uber faced steep losses with some experts suggesting the company had been winning new business by selling its service below cost. Though revenue was growing, Uber Freight struggled to turn a profit. Uber Freight will have to find its way to profitability to truly be considered a success. Uber has smaller business segments that even combined make up less than one percent of Uber’s business. This segment of their business is a catch-all category for Uber’s early development-stage projects. One example is Uber Health. Uber Health is a service where health-care professionals can schedule rides for patients and caregivers going to and from the care they need. This service is a perfect complement to its core business.
C5.2b Distribution One major reason Uber is so popular is because its app allows users to contact any drivers in the near vicinity. Drivers use the Uber app to provide them with directions. It is estimated that Uber has more than 5 million drivers, making its network extensive. Most Uber drivers offer their ride-sharing services on a part-time basis. Uber is the top ride-sharing service in every major region in which they operate (i.e., the United States, Canada, Latin America, Europe, Australia, New Zealand, the Middle East, Africa, and India).
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To be successful, Uber engages in strategic partnerships with other companies. Strategic partnerships with local firms have been especially important as Uber expands internationally because it allows the company to utilize the resources and knowledge of domestic firms familiar with the country’s culture. Uber has partnered with Yandex Taxi in Russia, Grab in Southeast Asia, and Didi in China.
C5.2c Pricing Uber uses its app to determine pricing. In the United States, riders can see a price estimate before confirming their ride. This upfront price is based on the estimated length and duration of the trip. Estimates vary based on demand and traffic among other real-world factors. Once the passenger completes a ride with an Uber partner–driver, the person’s credit card is charged automatically. The rider’s fee includes the base fare, toll fees, tips, surge pricing, and a booking fee with discounts for UberPool rides, promotions, subscriptions, and route-based adjustments. Uber uses an algorithm to estimate fees charged when demand is high. Called surge pricing, Uber has even applied for a patent for this type of system. This “peak pricing” strategy is not too different than when utilities or flights charge higher prices when demand is high. Passengers are alerted during times where the price is higher. In some situations, Uber’s surge pricing has led to criticism. Uber Eats food delivery includes the cost of the menu items ordered plus tip, a service fee (15 percent), and a delivery fee. The delivery fee is based on the distance between the customer and the restaurant and the average cost of orders for the selected restaurant. The pricing structure has attracted critics who say users are paying too high of a premium for the service. In some cases, markups have topped 90 percent over dine-in menu prices.
C5.2d Promotion Uber has engaged in a number of promotional activities to make its brand known. Often it adopts buzz-marketing strategies to draw attention to its services. For instance, to celebrate National Ice Cream Month, Uber launched on-demand ice cream trucks in seven major cities. Uber also offers promotions to its drivers. For example, Uber offered Uber Pro platinum and diamond status drivers a chance to win a free vacation to Mexico. Uber also uses promotion to portray its benefits compared to its rivals. For instance, Uber has assumed a combative advertising approach to its major rival Lyft with Facebook ads. Uber advertising often stresses the convenience and low cost of its ride-sharing services. However, like all companies, Uber must take care to ensure that its advertising could not be construed as misleading. A lawsuit was filed in the U.S. District Court in San Francisco stating that Uber violated the 1946 Lanham Act that prohibits false advertising. Taxi companies claimed, for instance, that Uber’s drivers do not have to undergo fingerprinting in California as part of background checks, and yet it uses advertising such as “the safest ride on the road” and sets “the strictest safety standards possible,” as well as Uber’s $1 “Safe Rides Fee.” According to the taxi drivers, these deceptive advertising practices take customers away from their services and are therefore leading to economic harm.
C5.3 UBER FACES CHALLENGES Uber faces a number of challenges including internal struggles, legal and regulatory challenges, and global issues. In the United States, major cities are considering regulating Uber. However, it faces even more challenges as it expands internationally as some countries are opting to ban Uber or services that it offers. Uber will have to adapt its marketing strategy to address both domestic challenges within the United States as well as to the various laws enforced in different countries.
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Case 5: Uber: The Opportunities and Challenges of Market Disruption 337
C5.3a Controversy While the company is widely successful, Uber has faced a variety of controversies. Multiple issues in 2017 in particular cast a negative light on the organization. To start off the year, Uber had to pay more than $20 million in a settlement for misleading drivers on how much they would earn. In February, a former Uber female engineer published a blog post alleging that there was widespread sexual harassment and gender discrimination at the company, which prompted an investigation into Uber’s corporate culture. This investigation later resulted in 20 employees being fired for various sexual harassment and discrimination violations. In March, five executives left the company, including the senior vice president of engineering. In April, Uber faced controversy with Apple, Inc. Uber had been secretly identifying and tagging iPhones even after the app and its data had been deleted from the iPhones. Uber tagged these phones to see if users were using the same phone to download the app and then repeatedly wiping it so they could use promo codes multiple times. Although Uber was trying to detect fraud and prevent customer abuse, this action violated Apple’s privacy policy. Tim Cook confronted the chief executive of Uber, threatening to remove the app from Apple’s app store if Uber did not stop breaking the policy. The impact would have caused millions of iPhone consumers to lose access to the Uber app. The CEO at the time, Travis Kalanick, had developed a reputation for bending or sometimes breaking the rules in order to drive the company toward desired goals. Since its founding in 2009, Uber has gained a negative reputation for challenging the rules and causing disruption. In May, the U.S. Department of Justice launched a criminal investigation for the company’s use of “Greyball,” a secret software that identified users who were violating the terms of services and denied ride requests to them. The users simply never got paired with a driver on the app. This software even targeted government officials who were using the app to investigate Uber and their drivers. There was controversy over the use of this software as to whether it was in violation of the Foreign Corrupt Practices Act, which bans the use of bribes to foreign officials to get or keep business. In June, Uber fired top executive Eric Alexander for obtaining medical records of an Uber passenger, who was raped by her driver, for the purpose of casting doubt on her case. Uber held an all-staff meeting to discuss reforming company culture, which was immediately followed by CEO Travis Kalanick taking a leave of absence. This ultimately led to Dara Khosrowshahi becoming his successor as CEO in August. In September, the FBI investigated Uber’s software for allegedly illegally interfering with competitors. The internal program, known by Uber as “Hell,” could track drivers working for the competitor Lyft. The investigation revealed that Uber created fake Lyft customer accounts to “request” rides around different cities in order to see how many Lyft drivers were nearby and what prices they were being offered for various routes around the cities. The program was also able to identify drivers who worked for both Lyft and Uber in order to give these drivers incentives to leave Lyft. The program was presumably used from 2014 to 2016. The ability to recruit and maintain drivers is a critical component of how these ride-share companies operate. Every major city has users who engage with both apps to determine the most cost-effective option for their trips. Having inside knowledge of the competition and being able to dominate the market in this way was invaluable toward gaining more customers on a more consistent basis. On the other hand, these activities can also violate laws on fair competition. In September, Uber lost its license to operate in London due to a lack of corporate responsibility as discussed earlier. In November, it was revealed that Uber faced a data breach in 2016. During the breach, e-mail addresses, names, and phone numbers of 50 million global Uber riders were stolen. The personal information of drivers was also compromised, including driver’s license numbers. Uber had an obligation to report hacking incidents to regulators and drivers whose information was taken. However, at the time Uber kept the data breach quiet by paying the hackers to delete the data. They were in the process of negotiating with the Federal Trade Commission about the proper handling of consumer data. Uber reported that they believed none of the data were used by the hackers and offered free identity theft protection and monitoring to victims of the hacking. The data breach was not made public until almost a year after it occurred. As a result of this incident, the chief security officer and the legal director of security and law enforcement were fired.
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338 Part 5: Cases
Uber’s troubles did not stop there. Uber also faced difficulties with accidents and tragedies outside the inner-company operations. In 2018, a self-driving Uber car struck and killed a pedestrian in one of the first video-recorded accidents involving the death of a pedestrian. It was found that the vehicle feature that carries out emergency brakes for dangerous situations was disabled by Uber to prevent erratic vehicle behavior. Uber settled a civil case with the pedestrian’s family, and Arizona prosecutors decided not to criminally charge Uber. It seemed unclear whether the car or the victim was at fault. Uber responded by suspending their self-driving program for a few months and resuming the program after changing their approach to self-driving vehicles. Another tragedy brought Uber attention in 2019 when University of South Carolina student Samantha Josephson was murdered after getting into a car she mistook for an Uber. Following her death Uber promoted awareness, reminding riders to verify their drivers through notifications and ads. The university encouraged students and riders everywhere to ask their driver “What is my name?” to confirm they were in the correct vehicle. Uber stated they had been working with college campuses since 2017 to educate students on detecting fake ride-share drivers and will continue to do so to help prevent future incidents. Additionally, the South Carolina House of Representatives passed a bill requiring ride-sharing drivers to display illuminated company signs in their vehicle to further prove their validity to riders. Controversy struck again after Uber sold its electric bike and scooter rental business, Uber Jump, to Lime in 2020. Shortly after the sale, photos circulated showing thousands of Uber bikes and scooters on trucks waiting to be scrapped. Of the 20,000–30,000 Jump vehicles on the market, Lime only acquired the newest bikes, and Uber confirmed tens of thousands of units would be recycled. Many believed Uber’s Jump business had a positive impact, reducing the number of people riding in cars, so both consumers and Uber employees were disappointed to see Uber dumping its bikes rather than donating them. According to an Uber statement, donation was not an option because of “maintenance, liability, safety concerns, and a lack of consumer-grade charging equipment.” The company assured the public it was recycling the units responsibly. However, other bikeshare companies, such as Spin and Ofo, have successfully donated e-bikes in the past.
C5.3b Driver Satisfaction Uber operates in an industry where trust between strangers is vital. This trust ensures a safe and comfortable ride for both passenger and driver. This is why Uber drivers undergo a background check before they’re approved. Additionally, Uber added an emergency contact button on the trip screen for both drivers and riders for quick access to 911. The app also has a RideCheck feature that uses GPS data and sensors to detect if a ride goes off-course, giving drivers resources to get help. Uber heavily relies on a rating system to help assure this trust and reliability between passengers and drivers, called a ride-share ratings system. Ride-share rating systems pose a unique challenge for Uber because of the way they are set up and the level of rider objectivity. Uber’s insistent policy of maintaining a five-star fleet can put drivers at a disadvantage. Uber rivals have similar policies; for instance, Lyft tells customers that anything less than five stars indicates unhappiness with the ride. Low driver scores can mean drivers are forced to take remedial classes where they learn about safe driving techniques and driver etiquette. Those who fail to increase their scores risk suspension or permanent deactivation. However, the rating function is a two-way system, meaning drivers also have the opportunity to rate their riders. In some cases, riders are permanently banned to protect the driver community. Drivers have also expressed unhappiness with Uber’s pay. Uber will often lower fare rates in order to gain a competitive advantage in different markets, which cuts into driver earnings. Additionally, drivers are driving their own cars and spending their personal funds on upkeep and insurance. Though unions have formed in the past, the National Labor Relations Board says that since Uber drivers are independent contractors rather than employees, they do not have a right to form a union or bargain collectively.
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Case 5: Uber: The Opportunities and Challenges of Market Disruption 339
C5.3c Worker Classification There is an ongoing threat to the sharing economy in which Uber operates: worker classification. Under current U.S. law, a worker either depends on an organization as an employee or is self-employed as an independent contractor. The rise of Uber and other digital matching apps has called worker classification into question. This has been a widespread concern because employees receive workplace protections such as minimum wage and overtime pay that independent contractors do not. Some consider the independent relationships between Uber and their drivers to be beneficial because of the flexibility and personal control for the drivers. However, lawmakers fear companies are evading U.S. labor laws to the detriment of the contractors. California legislators passed Assembly Bill 5 in 2019, which classifies contract workers for companies such as Uber as employees. The bill expands the 2018 California Supreme Court decision known as Dynamex. Together, they established a three-point test, often referred to as the ABC test, to determine if a worker is an employee: (1) the company controls the employee’s work; (2) the employee’s work is a core part of the company’s business; and (3) the workers don’t typically engage in providing their service to other companies. This poses a major threat to Uber who relies on low-cost, flexible labor. Not only will labor costs increase, but long-term Uber is concerned they may have to limit the number of drivers or schedule drivers in advance, eliminating the ability for drivers to work as often or as little as they desire. When Uber failed to comply, California issued an order to suspend all ride-sharing operations, but the California Supreme Court delayed the orders while Uber appealed the decision. However, the appeals court upheld the ruling that Uber must reclassify drivers as employees. This landmark California bill has the potential to influence legislation in other states. Labor groups in states such as New York support similar legislation. Uber lobbied to be exempt from the bill in exchange for establishing minimum pay rates for drivers, paid time off, and an association to protect the interests of drivers. Uber, Lyft, and DoorDash fought the bill by pledging $90 million to support lobbying efforts but were not granted exemption. It is estimated by officials in the industry that switching to an employee model could increase costs 20 to 30 percent, which would have a significant impact on Uber’s bottom line.
C5.3d Global Expansion International expansion is a major part of Uber’s marketing strategy. Adopting the motto “think local to expand global,” Uber believes that consumers from other countries will appreciate their low cost, convenience, and freedom. As it expands into different countries, Uber is engaging in strategic partnerships with local companies. These alliances with local firms are especially important because they allow Uber to utilize the resources and knowledge of domestic firms familiar with the country’s culture. Despite Uber’s international success, many countries have regulatory hurdles that have caused trouble for the company. Perhaps the biggest hurdle is Uber’s failure to mandate that their drivers obtain the same license types as professional taxi drivers even though Uber drivers offer many of the same services as professionally licensed taxi drivers. Governments have responded by banning Uber—and the services provided via Uber—due to the company’s nonenforcement of professional licenses for their drivers.
Spain In Spain, Uber was forced to shut down ride-sharing services after a judge ruled that Uber drivers were not legally authorized to transport passengers, claiming that Uber created unfair competition for professionally licensed taxi drivers. Because the taxi industry is important in many cities, governments like Spain’s are not looking favorably at what they view as an unfair competitive advantage that could potentially bankrupt the industry. Uber returned to Spain in March 2018 with UberX, a tier of Uber service that uses professionally licensed drivers, placing it more on par with licensed taxi drivers. However, in 2019, Uber and its Spanish competitor Cabify announced that they were suspending services in Barcelona after a new law was passed requiring all vehicles to be booked with at least 15 minutes advance notice.
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340 Part 5: Cases
France Uber faced similar problems in France. In 2011, Paris became the first city outside of the United States where Uber set up operations. However, local authorities attempted to ban one of Uber’s services because drivers did not need to be professionally licensed. French police even raided Uber’s Paris office. French law mandates that operating a service that connects passengers to nonprofessional drivers is punishable with fines of more than $300,000 and up to two years in prison. Hundreds of Uber drivers in France were issued fines for operating illegally, which Uber paid. Uber challenged that law, claiming that it was unconstitutional because it hindered free enterprise. A French court decided against banning Uber’s service and sent the case to a higher court. This generated strong criticism from taxicab officials in France as they maintained that they had to have professionally licensed drivers while Uber was free from this restriction. French courts later ruled against Uber, and the company is no longer allowed to use nonprofessional drivers in the country. The past use of nonprofessional drivers continues to haunt Uber. The European Union determined that France could file criminal charges against Uber for their UberPOP service as it had used nonprofessional drivers to operate an illegal taxi service. In another landmark ruling, French courts sided with an Uber driver who claimed he should be recognized as an employee, not an independent contractor. Though Uber challenged the ruling, France’s top civil court sided with the driver. The ruling does not automatically reclassify all Uber drivers in the country as employees, however. Individual drivers will have to go to court to seek reclassification. Regardless, this puts Uber’s business model at risk. India India is Uber’s second largest market after the United States. In New Delhi, a woman’s
rape allegation led to a ban against app-based services without radio-taxi permits in the capital. In response to the alleged rape, Uber began updating their app to include panic button and tracking features. Uber also began offering their service in New Delhi without charging booking or service fees. The company came under fire for how they compensate Indian drivers. As Uber came closer to releasing its initial public offering (IPO), which was filed in May 2019, they began to reduce driver incentives to build up financial performance. As a result, reduced incentives and higher diesel prices negatively impacted Indian drivers’ financial earnings, causing growing discontent. Uber must tread carefully to seize upon opportunities in India without violating regulatory requirements or damaging relationships with their drivers. Uber now controls more than 50 percent of the ridesharing market in India.
Germany In 2015, a German court banned Uber services if they used nonprofessional drivers. Uber argued that the company itself is only an agent to connect driver and rider. Rules that apply to taxi services do not apply, and all services are deemed to be legal, according to Uber. The court ruled that Uber’s business model clearly infringes the Personal Transportation Law, because drivers transport riders without a personal transportation license. The injunction includes a fine of more than $260,000 per ride for noncompliance. After the ruling Uber switched to working exclusively with professional and licensed private-hire vehicle companies. However, in 2019, a German court banned Uber from sending ride requests to rental car companies, effectively outlawing Uber’s revised business model. Uber will have to adapt once again to remain viable in Germany. London In 2017, London transportation authorities revoked Uber’s license for a variety of
reasons, including poor oversight of drivers. After appealing, Uber was granted a 15-month license but had to agree to additional government oversight and policy changes. After this period, authorities chose not to renew Uber’s operating license in 2019 due to consistent safety problems. Uber was able to operate throughout the appeals process. The company took steps to address the concerns of regulators, including the implementation of new safety measures, and in 2020, the company’s transportation license was restored. Uber faces many regulatory and legal issues outside of the United States. The company attempted to take a global approach to expansion by applying the same practices in other countries as they do in the United States. However, they are quickly realizing that they must take a more customized approach. Laws differ from country to country. Although Uber defines themselves
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Case 5: Uber: The Opportunities and Challenges of Market Disruption 341
as an “agent” of their “individual contractors,” many courts do not view their services in the same way. They are forcing Uber to comply with licensing laws or stop business in certain areas.
C5.4 CONCLUSION The long-term viability of Uber depends on managing future risks in five key areas: ●●
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Drivers: The number of disgruntled drivers could get out of control if Uber increases its profit share deductions. With recent laws mandating employee classification, Uber may need to adapt its business model. Products: Rather than diversify its portfolio further, Uber may need to focus on its core product offerings—Uber and Uber Eats—to reach profitability rather than investing in new ventures (e.g., Uber Jump). Customer base: Increasing the demand for rides-for-services and food delivery is a continuous or future challenge that requires attention primarily to safety improvements and rates that have a cost/benefit to both passengers and drivers. Unpredictable demand is a future risk that could be met with product diversification. Currently, Uber offers technologyoriented products, and it must continue to be competitive in an industry where there is intense competition for rates. Technology: At the heart of its business, Uber is a technology company. Therefore, Uber needs to be at the forefront of innovation to stay ahead of competitors and add value for customers and drivers. Customer satisfaction: Some customers experience long waits, inexperienced drivers, and even sexual harassment. Uber needs to quickly address issues as they arise, particularly where safety is concerned.
Uber faces a number of marketing challenges including regulatory and legal issues both inside and outside of the United States. Laws that protect consumers specifically target taxi services, whereas Uber defines its services as “ride-sharing” and Uber as an agent of individual contractors. However, many courts do not view its services in the same way and are forcing Uber to comply with licensing laws or stop business in certain areas. Despite Uber’s challenges, the company has become widely popular. Supporters claim that Uber is revolutionizing the transportation service industry. Investors clearly believe Uber is going to be strong in the market in the long run. Uber has a bright future and expansion opportunities are great. It is therefore important for Uber to ensure the safety of their riders and the drivers. They should also adopt controls to ensure that independent contractors using their app obey relevant country laws. Uber has to address these issues to uphold the trust of their customers and achieve long-term market success.
QUESTIONS 1. What are the strengths and weaknesses of the apps and firms that offer ride-sharing services? 2. Describe the threats that Uber has to overcome to be successful. 3. What are Uber’s weaknesses?
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342 Part 5: Cases
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Case 5: Uber: The Opportunities and Challenges of Market Disruption 343
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CASE 6 Social Responsibility Is the Key Ingredient at New Belgium Brewing* SYNOPSIS: From its roots in a Fort Collins, Colorado, basement, New Belgium Brewing has always aimed for business goals loftier than profitability. The company’s tremendous growth to become the nation’s fourth-largest craft brewer and 11th-largest overall has been guided by a steadfast branding strategy based on customer intimacy, social responsibility, and whimsy. The company’s products, especially Fat Tire Amber Ale, appeal to beer connoisseurs who appreciate New Belgium’s focus on sustainability as much as the company’s world-class brews. Despite its growth and success, New Belgium has managed to stay true to its core values and brand authenticity—the keys to its marketing advantage in the highly competitive craft brewing industry. THEMES: Customer intimacy, competitive advantage, social responsibility, sustainability, branding strategy, product strategy, distribution strategy, marketing implementation, customer relationships
A
lthough large companies are frequently cited as examples of ethical and socially responsible firms, it is often businesses that start small that stand to have the greatest impact. These businesses create jobs and provide goods and services for customers in smaller markets that larger corporations often are not interested in serving. Moreover, they also contribute money, resources, and volunteer time to local causes. By serving these markets, small businesses are not only being socially responsible but are also seizing on a lucrative opportunity to sell goods and services to underserved consumers. *O. C. Ferrell, Jennifer Sawayda, and Kelsey Reddick prepared this case for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management, © 2022. We appreciate the input and assistance of Greg Owsley, formerly of New Belgium Brewing, in developing this case. All sources used for this case were obtained through publicly available material and the New Belgium Brewing website.
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One such small business is the New Belgium Brewing Company, based in Fort Collins, Colorado. The New Belgium brand has become known for two things: its high-quality, Belgian-style beers and its commitment toward sustainability. Its socially responsible initiatives have contributed greatly to New Belgium Brewing’s success. In fact, New Belgium’s business model has been so successful that it is increasingly easy to find its beers around the country as more consumers embrace what the company stands for. They have created jobs and contributed money, resources, and volunteer time to local causes for 30 years, serving as community leaders. New Belgium Brewing Company, acquired by Lion Little World Beverages in 2019, continues to be a role model in both the world of brewing and the local communities in which they operate.
C6.1 HISTORY OF THE NEW BELGIUM BREWING COMPANY The idea for the New Belgium Brewing Company began with a bicycling trip through Belgium. Belgium is the home of some of the world’s finest ales, some of which have been brewed for centuries in monasteries. As Jeff Lebesch, an American electrical engineer, cruised around the country on his fat-tired mountain bike, he wondered whether he could produce such high-quality beers back home in Colorado. After acquiring the special strain of yeast used to brew Belgian-style ales, Lebesch returned home and began to experiment in his Colorado basement. When his beers earned thumbs up from friends, Lebesch decided to market them. The New Belgium Brewing Company (NBB) opened for business in 1991 as a tiny basement operation in Lebesch’s home in Fort Collins. Lebesch’s wife at the time, Kim Jordan, became the firm’s marketing director. The company named its first brew “Fat Tire Amber Ale” in honor of Lebesch’s bike ride through Belgium. Initially, getting New Belgium beer onto store shelves was not easy. Jordan often delivered the beer to stores in the back of her Toyota station wagon. However, New Belgium beers quickly developed a small but devoted customer base, first in Fort Collins and then throughout Colorado. The brewery soon outgrew the couple’s basement and moved into an old railroad depot before settling into its present custom-built facility in 1995. The brewery includes two brew houses, four quality assurance labs, a wastewater treatment facility, a canning and bottling line, and numerous technological innovations for which New Belgium has become nationally recognized as a “paradigm of environmental efficiencies.” NBB currently offers a variety of permanent and seasonal ales and pilsners. The company has the Year-Round series, the Voodoo Ranger series of India pale ales (IPAs), the Vintage Sour series, the Belgian Collection, the Wood Cellar Reserve, the Up Next Series, and the Fat Tire Collection, which is still the firm’s bestseller. Some customers even refer to the company as the Fat Tire Brewery. The firm also has a line of “Glütiny,” or reduced gluten, beers. Additionally, New Belgium is working in collaboration with other craft brewers to come up with new products. Through this, they hope to create improved efficiency and experimentation and take collaborative strides toward the future of American craft beer making. NBB partnered with Ben & Jerry’s to develop new flavors of beer such as Chocolate Chip Cookie Dough Ale. Fifty thousand dollars of the proceeds from the beer were used to raise awareness about climate change. NBB’s most effective form of advertising has always been word of mouth, especially in the early days. Indeed, before New Belgium beers were widely distributed throughout Colorado, one liquor-store owner in Telluride is purported to have offered people gas money if they would stop by and pick up New Belgium beer on their way through Fort Collins. Today, New Belgium is sold in all 50 states, the District of Columbia, Canada, South Korea, Norway, Japan, Australia, and Sweden. NBB experienced strong growth, which led the firm to build a 76,000 square-foot addition to its 100,000 square-foot plant in 2005, as well as a second brewery in Asheville, North Carolina, in 2016. In 2018, NBB began brewing small batch beers at The Source Hotel in Denver. In 2019, NBB opened a 125-seat restaurant at Denver International Airport (DIA), a strategic move that stands to increase brand awareness as DIA is the fifth busiest airport in the United States. Although still
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a small brewery when compared to many beer companies like fellow Coloradan Coors, NBB’s place in U.S. brewing history was recognized by the Smithsonian’s National Museum of American History in its “FOOD: Transforming the American Table” exhibition in 2019. The travel notebook Lebesch kept that helped inspire the brewery was included in a showcase about the craft brewing revolution. Beer connoisseurs who appreciate the high quality of NBB’s products, as well as the company’s environmental and ethical business practices, have driven growth. For example, when the company began distribution in Minnesota, the beers were so popular that a liquor store had to open early and make other accommodations for the large number of customers. The store sold 400 cases of Fat Tire in the first hour it was open. With expanding distribution, however, the brewery recognized a need to increase its opportunities for reaching its far-flung customers. It consulted with Dr. Douglas Holt, an Oxford professor and cultural branding expert. After studying the company, Holt, together with former Marketing Director Greg Owsley, drafted a 70-page “manifesto” describing the brand’s attributes, character, cultural relevancy, and promise. In particular, Holt identified in New Belgium an ethos of pursuing creative activities simply for the joy of doing them well and in harmony with the natural environment. With the brand thus defined, NBB worked with New York advertising agency Amalgamated to create a $10 million advertising campaign. The campaign would target high-end beer drinkers, men aged 25 to 44, and highlight the brewery’s down-to-earth image. The grainy ads focused on a man, Charles the Tinkerer, rebuilding a cruiser bike out of used parts and then riding it along pastoral country roads. The product appeared in just 5 seconds of each ad between the tag lines, “Follow Your Folly … Ours Is Beer.” With nostalgic music playing in the background, the ads helped position the growing brand as whimsical, thoughtful, and reflective. NBB later re released its Tinkerer commercial during the U.S. Pro Challenge. The re released commercial had an additional scene with the Tinkerer riding partway next to a professional cyclist contestant, with music from songwriter and Tour de Fat enthusiast Sean Hayes. It would be eight more years before NBB would develop its next television advertising campaign. In 2013, NBB developed a campaign called “Pairs Well with People” that included a 30-second television advertisement. The television ad described the unique qualities of NBB as an organization, including its environmental consciousness. The advertisement was launched on four major networks in large cities across the United States. Because the primary purpose of the campaign was to create awareness in areas not as familiar with the brand (such as RaleighDurham and Minneapolis), NBB did not air the commercial in Colorado and states where the brand was already well-known. The campaign also featured four 15-second online videos of how the company’s beer “pairs well with people.” In addition to the ad campaign, the company maintains its strategy of promotion through event sponsorships and digital media. To launch its Ranger IPA beer, New Belgium created a microsite and an online video of the NBB salesforce dressed as rangers performing a dance number to promote the beer. The only difference was that instead of horses, the NBB rangers rode bicycles. The purpose of the video was to create a hip, fun brand image for the new beer, with the campaign theme “To Protect. To Pour. To Partake.” The company’s Beer Mode mobile app gives users who download it access to exclusive content, preselects messages to post on the users’ social media sites when they are spending time enjoying their beers, and provides users with the locations of retailers that sell NBB products. NBB started a free digital loyalty program called Grand Cru that rewards members with exclusive experiences and merchandise for engaging with the company and offering insights for new products. In so doing, NBB not only increases customer loyalty but can obtain valuable customer feedback on the firm and its products. NBB is highly active on Facebook, Instagram, and Twitter, seeing social media as an effective way for reaching customers. In 2019, CEO Steve Fechheimer and cofounder Kim Jordan announced the sale of NBB to Australia-based Lion Little World Beverage. NBB, which was previously 100 percent employee-owned, announced its 300 employee-owners would receive $100,000 or more in retirement money from the deal. Current and former employees received nearly $190 million through NBB’s
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employee stock ownership plan (ESOP) over the life of the plan. Jordan maintains an active role at NBB, and Fechheimer remains as CEO. Fechheimer said the sale would not impact its beer product offerings or Fort Collins distribution.
C6.2 NEW BELGIUM EMBRACES SOCIAL RESPONSIBILITY According to New Belgium, the company maintains a fundamental focus on the ethical culture of the brand. Although consumer suspicion of business is at an all-time high, those in good standing—as opposed to those trading on hype—are eyed with icon-like adoration. Today, businesses that fully embrace citizenship in the communities they serve can forge enduring bonds with customers. At New Belgium, the synergy between branding and corporate citizenship occurred naturally as the firm’s ethical culture (in the form of core values and beliefs) and was in place long before NBB had a marketing department. Back in early 1991, when New Belgium was just a fledgling home-brewed business, Jeff and Kim took a hike into Rocky Mountain National Park. Armed with a pen and a notebook, they took their first stab at what the company’s core purpose would be. If they were going forward with this venture, what were their aspirations beyond profitability? What was at the heart of their dream? What they wrote down that spring day, give or take a little editing, was the core values and beliefs you can read on the NBB website today. More importantly, ask just about any New Belgium employees and they can list for you many, if not all, of these shared values and can inform you which are the most personally poignant. For NBB, branding strategies are as rooted in its company values as in its other business practices. For instance, as a way to live out its values, the company adopted a triple bottom line (TBL) approach to business. TBL incorporates economic, social, and environmental factors into its business strategies. In other words, the company looks at its impact on profits, people, and the planet rather than simply on the bottom line. New Belgium’s dedication to quality, the environment, and its employees and customers is expressed in its purpose statement and core values: Purpose Statement:
To manifest our love and talent by crafting our customers’ favorite brands and proving business can be a force for good. Company Core Values and Beliefs:
1. Remembering that we are incredibly lucky to create something fine that enhances people’s lives while surpassing our consumers’ expectations. 2. Producing world-class beers. 3. Promoting beer culture and the responsible enjoyment of beer. 4. Kindling social, environmental, and cultural change as a business role model. 5. Environmental stewardship: minimizing resource consumption, maximizing energy efficiency, and recycling. 6. Cultivating potential through learning, participative management, and the pursuit of opportunities. 7. Balancing the myriad needs of the company, staff, and their families. 8. Trusting each other and committing ourselves to authentic relationships, communications, and promises. 9. Continuous, innovative quality and efficiency improvements. 10. Having fun. Employees believe that these statements help communicate to customers and other stakeholders what New Belgium, as a company, is about. These simple values developed roughly 25 years ago are just as meaningful to the company and its customers today, even though there has been much growth.
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C6.2a Responsibilities to the Environment New Belgium’s marketing strategy involves linking the quality of its products, as well as its brand, with the company’s philosophy of environmental friendliness. As chair of the sustainability subcommittee for its trade group the Brewers Association, NBB is at the forefront in advancing eco-friendly business processes among companies in its industry. Coworkers and managers from all areas of the organization meet monthly to discuss sustainability ideas as part of NBB’s natural resource management team. From leading-edge environmental gadgets and high-tech industry advancements to employee-ownership programs and a strong belief in giving back to the community, New Belgium demonstrates its desire to create a living, learning community. NBB strives for cost-efficient energy-saving alternatives for conducting its business and reducing its impact on the environment. In staying true to the company’s core values and beliefs, the brewery invested in a wind turbine, making New Belgium the first fully wind-powered brewery in the United States. NBB also charges itself a per-kilowatt-hour internal tax on purchased energy consumption that it uses for energy efficiency projects. NBB has also invested in the following energy-saving technologies: ●●
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A smart grid installation that allows NBB to communicate with its electricity provider to conserve energy. For example, the smart grid alerts NBB to nonessential operational functions, allowing the company to turn them off and save power. The installation of 1,235 solar photovoltaic panels on top of the packaging hall. The array produces 4.5 percent of the company’s electricity. A brew kettle, the second of its kind installed in the nation, which heats sheets of wort instead of the whole kettle at once. This kettle heating method conserves energy more than standard kettles do. Sun tubes that provide natural daytime lighting throughout the brew house all year long. A system to capture its wastewater and extract methane from it. This can contribute up to 15 percent of the brewery’s power needs while reducing the strain on the local municipal water treatment facility. A steam condenser that captures and reuses the hot water that boils the barley and hops in the production process to start the next brew. The steam is redirected to heat the floor tiles and de-ice the loading docks in cold weather.
In April 2014, New Belgium was featured in a half-page advertisement supporting the EPA clean water rule that was introduced on March 26, 2014. Andrew Lemley, New Belgium’s Government Relations Director, was quoted in an EPA news release championing continued support for the Clean Water Act while also associating quality water with quality beer. In addition to voicing political support for environmental protections, New Belgium also takes pride in reducing waste through recycling and creative reuse strategies. The company strives to recycle as many supplies as possible, including cardboard boxes, keg caps, office materials, and the amber glass used in bottling. In fact, the company diverts 99.9 percent of its waste. For example, NBB partnered with Original Grain in 2019, a sustainable wood and steel watch company, to supply wood foeder (beer) barrels for the creation of a collection of limited-edition watches. The brewery also stores spent barley and hop grains in an on-premise silo and invites local farmers to pick up the grains, free of charge, to feed their pigs. Going further down the road to producing products for the food chain, NBB works with partners to take the same bacteria that create methane from NBB wastewater and convert them into a harvestable, high-protein fish food. NBB also buys recycled products when it can, and even encourages its employees to reduce air pollution by using alternative transportation. Reduce, Reuse, Recycle—the three Rs of environmental stewardship—are taken seriously at NBB. The company has been a proud member of the environmental group Business for Innovative Climate & Energy Policy (BICEP), and it signed BICEP’s Climate Declaration in 2013, which calls for American businesses, stakeholders, and regulators to address climate change. Additionally, New Belgium has been a long-time participant in green building techniques. With each expansion of the facility, it has incorporated new technologies and learned a few lessons along the way. In 2002, NBB agreed to participate in the U.S. Green Building Council’s Leadership in Energy and Environment Design for Existing Buildings (LEED-EB) pilot program. From sun
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tubes and day lighting throughout the facility to reusing heat in the brew house, NBB continues to search for new ways to close loops and conserve resources. NBB has made significant achievements in sustainability, particularly compared to other companies in the industry. For one, NBB’s goal is to use only 4 gallons of water to make 1 gallon of beer, which is more than 20 percent less than most other companies. The company is attempting to create a closed-loop wastewater system with its own Process Water Treatment Plant, in which microbes are used to clean the wastewater. Additionally, 100 percent of its electricity comes from renewable energy sources. NBB’s Fat Tire was certified as America’s first nationally distributed carbon neutral beer in 2020 by SCS Global Services. To encourage sustainability throughout the supply chain, NBB adopted Sustainable Purchasing Guidelines. The Guidelines allow them to pinpoint and work closely with eco-friendly suppliers to create sustainability throughout the entire value chain. For its part, NBB conducts life-cycle analysis on its packaging components while continually seeking more efficient refrigeration and transportation technology that can be incorporated into its supply chain. NBB aims to be fully carbon neutral by 2030. In 2013, NBB achieved B Corporation certification as a way to further solidify their belief that business can be a “force for good.” The B stands for benefit. B Corporation certification, awarded by the nonprofit B Lab, is a type of certification for for-profit firms that certifies they meet stringent environmental and social performance goals, as well as practice transparency and accountability. Companies that have received B Corporation certification are scored based on their performance in ethical, social, and environmental areas, including governance, worker relations, community relations, and the environment. NBB scored 143 out of 200, whereas the median B corporation score is 80. NBB demonstrates through certification that they go above and beyond what is expected to try and make the world a better place.
C6.2b Responsibilities to Society Beyond its use of environmentally friendly technologies and innovations, New Belgium also strives to improve communities and enhance people’s lives through corporate giving, event sponsorship, and philanthropic involvement. Since its inception, NBB has donated more than $11.3 million through its grants program to philanthropic causes. For every barrel of beer sold the prior year, NBB donates $1 to philanthropic causes within their distribution territories. The donations are divided between states in proportion to their percentage of overall sales. This is the company’s way of staying local and giving back to the communities that support and purchase NBB products. NBB participates in One Percent for the Planet, a philanthropic network to which the company donates one percent of Fat Tire sales. Funding decisions are made by NBB’s Philanthropy Committee, which comprises employees throughout the brewery, including area leaders and production workers. NBB looks for nonprofit organizations that demonstrate creativity, diversity, and an innovative approach to their mission and objectives. The Philanthropy Committee also looks for groups that involve the community to reach their goals. In recent years, the focus areas for its large grant program include climate action, land and water conservation, and social equity. Additionally, NBB maintains a community bulletin board in its facility, where it posts an array of community involvement activities and proposals. This community board allows tourists and employees to see the different ways they can help out the community, and it gives nonprofit organizations a chance to make their needs known. Organizations can even apply for grants through the NBB website, which has a link designated for this purpose. The company donates to causes with a particular emphasis on water conservation, sensible transportation and bike advocacy, sustainable agriculture, and youth environmental education, among other areas. NBB also sponsors a number of events, with a special focus on those that involve “humanpowered” sports that cause minimal damage to the natural environment. Through event sponsorships, such as the Tour de Fat, NBB supports various environmental, social, and cycling nonprofit organizations. In the Tour de Fat, one participant hands over their car keys and vehicle title in exchange for an NBB commuter bike and trailer. The participant is then filmed for the world to see as they promote sustainable transportation over driving. In the course of a year, New Belgium can be found at anywhere from 150 to 200 festivals and events across the nation.
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C6.2c Responsibilities to Employees Recognizing employees’ role in the company’s success, New Belgium provides many generous benefits for its employees. In addition to the usual paid health and dental insurance and retirement plans, employees who stay with the company for five years earn an all-expenses-paid trip to Belgium to “study beer culture.” Employees are also reimbursed for one hour of paid time off for every two hours of volunteer work that they perform. Open book management allows employees to see the financial costs and performance of the company. Employees are provided with financial training so they can understand the books and ask questions about the numbers. When NBB opened its second brewery, the company demonstrated how seriously it takes employees’ contributions. NBB selected 13 possible locations on the East Coast for its new brewery. The company wanted to select an area that met 33 criteria NBB developed as to what they were looking for in a town. NBB owners visited all 13 locations. They returned on a second visit accompanied by employees and other stakeholders. Employees were an integral part of the decision-making process. Although this process took longer because it involved more stakeholders, NBB’s actions assured employees that the firm values their feedback and views them more like family than employees. New Belgium also wishes to get its employees involved not only in the company but in its sustainability efforts as well. To help their own sustainability efforts, employees are given a fattired cruiser bike after one year’s employment so they can ride to work instead of drive. An onsite recycling center is also provided for employees. Additionally, each summer New Belgium hosts the Tour de Fat, where employees can dress in costumes and lead locals on a bike tour. Other company perks include wellness programs such as tobacco cessation, yoga, weight lifting, circuit training, and mindful parenting classes. To ensure that workers’ voices are heard, NBB has a democratically elected group of coworkers called POSSE. POSSE acts as a liaison between the board, managers, and employees.
C6.3 RESPONSIBILITY BREEDS SUCCESS New Belgium Brewing’s efforts to live up to its own high standards have paid off with a very loyal following—in fact, the company recently expanded the number of tours it offers of its facilities due to such high demand. The company has also been the recipient of numerous awards. Past awards for NBB include the Business Ethics Magazine’s Business Ethics Award for its “dedication to environmental excellence in every part of its innovative brewing process,” its inclusion in the The Wall Street Journal’s 15 best small workplaces, and the award for best midsized brewing company of the year and best midsized brewmaster at the Great American Beer Festival. New Belgium has taken home medals for three different brews: Abbey Belgian Style Ale, Blue Paddle Pilsner, and La Folie specialty ale. Many applaud New Belgium Brewing Company’s sustainability and philanthropic initiatives. According to David Edgar, former director of the Institute for Brewing Studies, “They’ve created a very positive image for their company in the beer-consuming public with smart decision-making.” Although some members of society do not believe that a company whose major product is alcohol can be socially responsible, NBB has set out to prove that for those who make a choice to drink responsibly, the company can do everything possible to contribute to society. NBB also promotes the responsible appreciation of beer through its participation in and support of the culinary arts. For instance, it frequently hosts New Belgium Beer Dinners, in which every course of the meal is served with a complementary culinary treat. Although NBB has made great strides in creating a socially responsible brand image, its work is never done. It must continually reexamine its ethical, social, and environmental responsibilities, especially as they move forward from being acquired by Little Lion World Beverage. For example, continued expansion requires longer travel distances to distribute products, which increases the use of fossil fuels. In addition to addressing logistical challenges, NBB is part of an industry where there is always a need for more public dialogue on avoiding alcohol abuse. Practically speaking, the company has a never-ending to-do list.
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NBB executives acknowledge that as its annual sales increase, so do the challenges to remain on a human scale and to continue to be culturally authentic. How to boldly grow the brand while maintaining its humble feel has always been a challenge. Additionally, reducing waste to an even greater extent will take lots of work on behalf of both managers and employees, creating the need for a collaborative process that will require the dedication of both parties toward sustainability. Perhaps as a way to deal with the long transportation distances necessary for national distribution as well as to expand production capacity, NBB opened its second brewery in Asheville, North Carolina, in 2016. NBB uses its $175 million facility as a hub for product distribution to eastern states. However, opening their second brewery was about more than just increasing production capacity; NBB was attracted to Asheville for the local culture that values sustainability and locally produced products. Asheville is surrounded by mountains, is near protected water sources, and is inhabited by many outdoor enthusiasts. Indeed, NBB is not the only craft brewery to recognize the potential of positive tourist exposure and local support by operating in the Asheville area. Sierra Nevada added tours of their brewery to emphasize their history and sustainable brewing practices. Additionally, other Asheville breweries spent millions expanding their current operations in anticipation of NBB’s entrance to the area. NBB also faces increased competition from other craft breweries. It still remains behind D. G. Yuengling & Son Inc., Boston Beer Co. (maker of Sam Adams beer), and Sierra Nevada in market share. NBB must also compete against craft beer alternatives released by traditional breweries, such as MillerCoor’s New Moon Belgian White. It must constantly engage in environmental scanning and competitive analysis to compete in this increasingly competitive environment. Finally, New Belgium is facing a potential slowdown in craft beer consumption. Smaller local competitors, called microbreweries, are increasing and have begun to draw away some of NBB’s customers. There is concern that NBB might be getting too big, thereby losing their “niche” feel. With sales slowing, NBB was forced to lay off 28 workers in 2018. Every six-pack of New Belgium Beer displays the phrase, “In this box is our labor of love. We feel incredibly lucky to be creating something fine that enhances people’s lives.” Although Jeff Lebesch and Kim Jordan are divorced and Lebesch has left the company to focus on other interests, the founders of NBB hope this statement captures the spirit of the company. Despite the challenges the brewery has faced, NBB leaders are optimistic about the future. Jordan indicated the purchase by Little Lion Beverage World provides the opportunity to expand capacity and continue to grow the company. Not to mention, resources for research and development will be much greater. NBB is the 11th-largest overall brewer in the United States and continues to be a role model for ethics and social responsibility for the entire brewing industry.
QUESTIONS
SOURCES
1. What are the challenges associated with combining the need for growth with the need to maintain customer intimacy and social responsibility? 2. Do you agree that New Belgium’s focus on social responsibility provides a key competitive advantage for the company? Why or why not? 3. Some segments of society contend that companies that sell alcoholic beverages and tobacco products cannot be socially responsible organizations because of the nature of their primary products. Do you believe that New Belgium’s actions and initiatives are indicative of a socially responsible corporation? Why or why not?
“A Tour of the New Belgium Brewery—Act One,” LiveGreen Blog, April 9, 2007, http://www.livegreensd.com/2007/04 /tour-of-new-belgium-brewery-act-one.html (accessed April 13, 2012); “How New Belgium Brewing Is Positioning Itself to Remain Independent,” Denver Post, January 15, 2013, http://blogs.denverpost.com/beer/2013/01/15/newbelgium-positio/7872/ (accessed August 5, 2019); “Industry Profile: Breweries,” First Research, October 17, 2011, http:// www.firstresearch.com (accessed February 17, 2012); “New Belgium Brewing Announces Asheville as Site for Second Brewery,” The Denver Post, April 5, 2012, http://marketwire .denverpost.com/client/denver_post/release.jsp?actionFor
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CASE 7 Bayer Grows With Monsanto Acquisition* SYNOPSIS: This case focuses on Monsanto’s acquisition by Bayer, a German pharmaceutical, agricultural, and chemical giant, and Bayer’s desire to balance the many significant benefits that its products bring to society (and the company’s resulting profits) with the interests of a variety of stakeholders. The case examines Monsanto’s history as it shifted from a chemical company to one focused on biotechnology. It then examines Monsanto’s focus on developing genetically modified seeds, including stakeholder concerns regarding the safety and environmental effects of these seeds. Next, we discuss key ethical concerns, including patent issues and legal issues. The case concludes by examining the challenges and opportunities that Bayer may face in the future. THEMES:
thics and social responsibility, sustainability, product strategy, product E liability, corporate affairs, stakeholder relationships, product labeling, government regulation, legal environment, global marketing
M
onsanto Company was the world’s largest seed company, with sales of $14.6 billion in 2017 before it was acquired by Bayer, a German multinational pharmaceutical and life sciences company. It specialized in biotechnology, or the genetic manipulation of organisms. Monsanto scientists spent decades modifying crops, often by inserting new genes or adapting existing genes within plant seeds, to meet certain objectives such as higher yield or insect resistance. Monsanto developed genetically engineered seeds of plants that can survive
*Kelsey Reddick, Jennifer Sawayda, Danielle Jolley, Jordan Burkes, Caleb Yarbrough, and Annalisa LaRue prepared this case under the direction of O. C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management.
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weeks of drought, ward off weeds, and kill invasive insects. Monsanto’s genetically modified (GM) seeds increased the quantity and availability of crops, helping farmers worldwide increase food production and revenues. Before being acquired by Bayer, 90 percent of the world’s GM seeds were sold by Monsanto or companies that use Monsanto genes. Monsanto met its share of criticism from sources as diverse as governments, farmers, activists, and advocacy groups. Monsanto supporters said the company created solutions to world hunger by generating higher crop yields and hardier plants. Critics accused the multinational giant of attempting to take over the world’s food supply and destroying biodiversity. The announcement that Bayer AG acquired Monsanto for $63 billion intensified these concerns because the acquisition meant one company would command over one-fourth of the world’s seeds and pesticides market. Since biotechnology is relatively new, critics also express concerns about the possibility of negative health and environmental effects from biotech food. The acquisition was not easy for Bayer, which inherited a string of lawsuits related to Monsanto’s Roundup herbicide, resulting in millions of dollars spent on litigation and damage payments.
C7.1 HISTORY: FROM CHEMICALS TO FOOD Monsanto was founded by John F. Queeny in 1901 in St. Louis and was named after his wife, Olga Monsanto Queeny. The company’s first product was the artificial sweetener saccharine, sold to Coca-Cola. Monsanto followed by selling Coca-Cola caffeine extract and vanillin, an artificial vanilla flavoring. At the start of World War I, company leaders realized the growth opportunities in the industrial chemicals industry and renamed the company The Monsanto Chemical Company. The company began specializing in plastics, its own agricultural chemicals, and synthetic rubber. Due to its expanding product lines, Monsanto’s name was changed to the “Monsanto Company” in 1964. By this time, Monsanto was producing such diverse products as petroleum, fibers, and packaging. A few years later, Monsanto created its first Roundup herbicide, a successful product that would propel the company even more into the limelight. During the 1970s, however, Monsanto hit a major legal snare. The company had produced a chemical known as Agent Orange that was used during the Vietnam War to quickly deforest the thick Vietnamese jungle. Agent Orange contained dioxin, a chemical that caused a legal nightmare for Monsanto. Dioxin was found to be extremely carcinogenic, and in 1979, a lawsuit was filed against Monsanto on behalf of hundreds of veterans who claimed they were harmed by the chemical. Monsanto and several other manufacturers agreed to settle for $180 million. The repercussions of dioxin would continue to plague the company for decades. In 1981, Monsanto’s leaders determined that biotechnology would be the company’s new strategic focus. Monsanto’s quest for biotechnology continued for more than a decade, and in 1994, Monsanto introduced the first biotech product to win regulatory approval. Soon the company was selling soybean, cotton, and canola seeds that were engineered to be tolerant to Monsanto’s Roundup herbicide. Many other herbicides killed the good plants as well as the bad ones. Roundup Ready seeds allowed farmers to use the herbicide to eliminate weeds while sparing the crop. In 1997, Monsanto spun off its chemical business as Solutia, and in 2000, the company entered into a merger and changed its name to the Pharmacia Corporation. Two years later, a new Monsanto, focused entirely on agriculture, broke off from Pharmacia, and the companies became two separate legal entities. The emergence of new Monsanto was tainted by some disturbing news that the company had been covering up decades of environmental pollution. For nearly 40 years, the Monsanto Company had released toxic waste into a creek in Anniston, Alabama. It had also disposed of polychlorinated biphenyls (PCBs), a highly toxic chemical, in open-pit landfills in the area. The results were catastrophic. Fish in the creek were deformed, and the population had elevated PCB levels that shocked environmental health experts. A paper trail showed that Monsanto leaders had known about the pollution since the 1960s but had not
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Case 7: Bayer Grows With Monsanto Acquisition 357
stopped production. Once the cover-up was discovered, thousands of plaintiffs from the area filed a lawsuit against the company. In 2003, Monsanto and Solutia agreed to pay $700 million to more than 20,000 Anniston-area residents. When CEO Hugh Grant took over in 2003, scandals and stakeholder uncertainty had tarnished the company’s reputation. The price of Monsanto’s stock had fallen almost 50 percent, down to $8 a share. The company had lost $1.7 billion the previous year. Grant knew the company was fragile and decided to shift its strategic focus. Through a strong strategic focus on GM foods, the company recovered. In spite of their controversial nature, GM foods have become popular in developed and developing countries. Monsanto became so successful with its GM seeds that it acquired Seminis Inc., a leader in the fruit and vegetable seed industry. The acquisition transformed Monsanto into a global leader in the seed industry. Between 2005 and 2008, Monsanto made a series of acquisitions, including Emergent Genetics, Seminis, Delta and Pine Land Company, and De Ruiter. In 2018, Monsanto was acquired by Bayer, a German pharmaceutical company, for $63 billion. The Department of Justice (DOJ) granted the two companies permission to merge under the stipulation that the two firms sell off $9 billion worth of assets. This was the largest sale of corporate assets ever required by the DOJ. Without the stipulations, Bayer would have acquired a monopoly over herbicide-resistant cotton and canola in the United States. The company would have also acquired a near monopoly on other herbicide-resistant crops such as cucumbers and carrots. The required sales were meant to prevent Bayer and Monsanto from forming these monopolies and using their combined power and influence to raise the prices of agricultural products. In fear of Bayer and Monsanto losing motivation to develop new crops, treatments, and pesticides, the DOJ also required Bayer to transfer several of its R&D projects and facilities to another German firm. Once the acquisition was complete, Bayer dropped the Monsanto name. The merger leaves only four big competitors in the agrochemical research and sales industry: Bayer, Syngenta, Corteva, and BASF.
C7.2 MONSANTO’S EMPHASIS ON BIOTECHNOLOGY Although the original Monsanto made a name for itself by manufacturing chemicals, the company took quite a different turn, shifting its focus to chemical food. Monsanto owed its $14.6 billion in sales to biotechnology, specifically to its sales of GM plant seeds. These seeds revolutionized the agriculture industry. Not content with resting on its laurels, Monsanto continued to use its $1.5 billion research budget for investigating new methods of farming at its 1.5-million-squarefoot complex in Missouri. Throughout history, weeds, insects, and drought have been the banes of the farmer’s existence. In the past century, herbicides and pesticides were invented to ward off pests. Yet, applying these chemicals to an entire crop was both costly and time-consuming. Monsanto scientists, through their work in biotechnology, were able to implant seeds with genes to make the plants themselves kill bugs. They also created seeds containing the Roundup herbicide, an herbicide that kills weeds but spares the crop. Since then Monsanto has used technology to create many innovative products, such as drought-tolerant seeds for dry areas like Africa. The company utilized its technological prowess to gain the support of stakeholders. For example, Monsanto gave laboratory tours to farmers. One of the technologies the company showed farmers was a corn chipper, which picks up seeds and removes genetic material from them. That material is analyzed to see how well the seed will grow if planted. The “best” seeds are the ones Monsanto sold for planting. Monsanto extended its reach into the computing industry as well. The company offered software and hardware that used big data to yield important information to help farmers in the field. It even provided recommendations on when and where to plant. Monsanto also arranged tours for its critics to help them understand the process of GM crops and their implications. Bayer has continued these efforts.
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However, GM crops are not without critics. Opponents believe influencing the gene pools of the plants we eat could result in negative health consequences. Others worry about the health effects on beneficial insects and plants, fearing that pollinating GM plants could affect nearby insects and non-GM plants. Monsanto decided to curtail the tide of criticism by focusing biotechnology on products that would not be directly placed on the dinner plate, but instead on products such as animal feed and corn syrup. In this way, Monsanto was able to reduce some of the opposition. The company invested largely in four crops—corn, cotton, soybeans, and canola—which Bayer continues to invest in along with other crops such as cereal grains, fruits, and potatoes. Farmers who purchase GM seeds can grow more crops on less land and with less left to chance. GM crops have saved farmers billions by preventing loss and increasing crop yields. For example, in 1970 the average corn harvest yielded approximately 70 bushels an acre. With the introduction of biotech crops, the average corn harvest increased to roughly 150 bushels an acre. Many predict even higher yields in the future, which would increase crop yields without taking up more land, helping to meet the world’s growing agricultural needs. Monsanto and Bayer GM seeds have not been accepted everywhere. Attempts to introduce them into Europe met with consumer backlash. The European Union banned most Monsanto crops except for one variety of corn. Consumers have gone so far as to destroy fields of GM crops and arrange sit-ins. In 2019, French and German farmers dug up thousands of acres of fields after banned GM organisms were discovered in seeds sold by Bayer. Even China placed bans on certain GM corn imports, although it has since relaxed the ban and has encouraged more acceptance of GM crops among its citizens. Winning over China would be a major victory as the United States is the world’s largest producer of GM crops and China is the largest importer of GM crops. Animosity toward Bayer’s products is generated by two main concerns: the safety of GM food and the environmental effects of genetic modification.
C7.2a Safety Concerns Of great concern for many stakeholders are the moral and safety implications of GM food. Many skeptics see biotech crops as unnatural, with Monsanto and Bayer scientists essentially “playing God” by controlling what goes into the seed. Also, because GM crops are relatively new, critics maintain that the health implications of biotech food may not be known for years to come. They also contend that effective standards have not been created to determine the safety of biotech crops. Some geneticists believe the splicing of these genes into seeds could create small changes that might negatively impact the health of humans and animals that eat them. Although the FDA has declared biotech crops safe, critics say they have not been around long enough to gauge their long-term effects. In March 2013, more than 250,000 people signed a petition in response to President Barack Obama’s signing of H.R. 933 into law. The law, called the Agricultural Appropriations Bill of 2013, contains a provision that protects GM organisms and genetically engineered seeds from litigation concerning their health risks. In other words, courts cannot bar the sale of GM food even if future health risks are revealed. Critics of the provision claim that the provision was slipped in at the last moment and that many members of Congress were not aware of it. For consumers, questions pertaining to the health risks associated with GM crops have gone unanswered and are the primary reason the petition was started. Many people called this bill the “Monsanto Protection Act” and believe it will help protect the survival of biotech corporations. Critics also say that the continuing resolution spending bill will no longer allow the court system to protect consumers, which could create a further disconnect between consumers and producers. More controversy ensued in 2015 when the House of Representatives added an addition to a chemical safety bill intended to replace the outdated Toxic Substances Control Act. The additional paragraph was interpreted as protecting chemical firms from legal liability for chemical spills if they were the only company that manufactured the chemical. Because Monsanto was largely the only manufacturer of the now-banned PCBs, state attorneys general and environmental regulators believe the law might protect companies such as Monsanto and Bayer against lawsuits
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Case 7: Bayer Grows With Monsanto Acquisition 359
involving chemical spills or dumping of PCBs. This controversy occurred in the midst of a number of lawsuits from individuals, cities, and school systems accusing Monsanto of selling a dangerous chemical. Although Congress claimed the bill did not favor Monsanto, the addition immediately sparked protest and demands for Congress to change the bill. Despite consumer concerns, the FDA and the American Association for the Advancement of Science have proclaimed that GM food is safe to consume. The European Commission examined more than 130 studies and concluded that GM food does not appear to be riskier than crops grown by conventional methods. Sixty-four countries, notably those in the European Union, require GM food products to state this fact in their labeling. Labeling laws have also changed in the United States. After years of debate over labeling laws, the USDA announced a labeling standard for GM foods in 2018. The labeling laws require there to be either text on certain food packages, a symbol, or a link to a website explaining more about the product. In addition to concerns over GM seeds, Bayer is facing tens of thousands of claims that Roundup causes cancer. Interestingly enough, the product remains on the shelf. Most companies discontinue, alter, or add warning labels to their products that have them facing mass litigation. The U.S. Environmental Protection Agency has stated that glyphosate doesn’t cause cancer, therefore, states can’t require and Bayer can’t put cancer warnings on Roundup and other glyphosate-based herbicides. Bayer also can’t remove the chemical because it is the main weed-killing ingredient. Bayer has chosen not to take the product out of the market because it’s the main source of revenue from the Monsanto acquisition. Bayer instead has invested tens of millions of dollars in additional consumer marketing and uses the EPA’s points to justify keeping the product on shelfs. Bayer faced billions of dollars in lawsuits across more than 95,000 individual cases. Bayer agreed to pay upwards of $10 billion to settle the claims, with some of the money being reserved for future cases. Despite the settlement, Roundup continues to be sold to consumers who could potentially turn around and sue, claiming it caused their cancer. Additionally, there are more than 30,000 outstanding claims from individuals who did not join the settlement. The $1.25 billion on reserve for future settlements will also be used to create an independent panel of experts to determine if glyphosate is a carcinogen and, if so, how much exposure is dangerous.
C7.2b Environmental Concerns Some studies have supported the premise that Roundup herbicide, which is used in conjunction with the Roundup Ready seeds, can be harmful to birds, insects, and particularly amphibians. Such studies have revealed that small concentrations of Roundup may be deadly to tadpoles, which is a major concern, as frog and toad species are rapidly disappearing around the globe. Other studies suggest that Roundup might have a detrimental effect on human cells, especially embryonic, umbilical, and placental cells. Monsanto countered these claims by questioning the methodology used in the studies, and the EPA maintains that glyphosate is not dangerous at recommended doses. On the other hand, the World Health Organization (WHO) ruled that glyphosate probably does have the potential to cause cancer in humans. The finding caused Monsanto shares to drop 2 percent. Monsanto challenged this assertion and wants to meet with WHO officials to discuss the findings. It’s estimated that up to 90 percent of soybeans sold in the United States contain Bayer’s Roundup-tolerant genes. As rivals, such as Corteva, lure farmers away from Bayer’s Roundup with new, potentially more environmentally friendly pesticides, Bayer will have to adapt both its seed and pesticide strategies. As honeybees have begun to die off, critics are blaming companies like Bayer. They believe the companies’ pesticides are killing off the good insects as well as the bad ones. Opposition against Bayer is rising as the honeybee population continues to decline. In 2020, the EU Commission banned Bayer’s insecticide thiacloprid which has been linked to killing bees by the European Food Safety Agency. Another concern with GM seeds in general is the threat of environmental contamination. Bees, other insects, and wind can carry a crop’s seeds to other areas, sometimes to fields containing non-GM crops. These seeds and pollens might then mix with the farmer’s crops. Organic farmers have complained that GM seeds from nearby farms have “contaminated” their
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crops. This environmental contamination could pose a serious threat. Some scientists fear that GM seeds’ spread to native plants may cause those plants to adopt the GM trait, thus creating new genetic variations of those plants that could negatively influence (through genetic advantages) the surrounding ecosystem. Another controversy involved the discovery of a field in Oregon filled with an experimental form of Monsanto’s GM wheat. The wheat was not approved by the U.S. Department of Agriculture. The discovery of this wheat raised concern over whether it could have contaminated U.S. wheat supplies. As a result, Japan temporarily instituted a ban on U.S. wheat. Initial investigations revealed that the wheat had been stored in a Colorado facility but were unable to provide an explanation for how it showed up in an Oregon field. Monsanto denied involvement and stated that it suspected someone had covertly obtained the GM wheat and planted it. The company also claims that this incident was an isolated occurrence. The altered wheat is not believed to have caused any damage, and Japan lifted the ban. However, some farmers filed lawsuits against Monsanto seeking class-action status. Another environmental problem that has emerged is the possibility of weed and insect resistance to the herbicides and pesticides on Monsanto crops. Critics fear that continual use of the chemicals could result in “super weeds” and “super bugs,” much like the overuse of antibiotics in humans has resulted in drug-resistant bacteria. The company’s Roundup line, in particular, has come under attack. GM seeds labeled “Roundup Ready” are genetically engineered to withstand large doses of the herbicide. Because Roundup has been used more frequently and exclusively, significant numbers of Roundup-resistant weeds have been found in the United States and Australia. In addition to “superweeds,” companies such as Bayer have attracted concern about “superbugs.” To prevent resistance to the Roundup herbicide, farmers are supposed to vary herbicide use and practice crop rotation. However, because Roundup is so easy to use, particularly in conjunction with Roundup Ready seeds, many farmers do not take the time to take these preventative measures. When they do rotate their crops, some will rotate one Roundup Ready crop with another. As a result, agricultural pests such as rootworm are becoming resistant to genes in GM crops intended to kill them. This resistance is causing some farmers to turn toward more traditional herbicides and pesticides. For the first time, regulators in the United States are encouraging limits on certain kinds of GM corn to prevent the spread of resistant bugs. The EPA acknowledges that farmers and seed companies have not done enough to curb resistance. It is recommending that 35 percent of fields should be planted with another crop other than biotech corn. This is of particular concern in Latin America, Africa, and Asia, where farmers may not be as informed of the risks of herbicide and pesticide overuse.
C7.3 ADDRESSING ETHICAL AND LEGAL ISSUES In addition to concerns over the safety of GM seeds and environmental issues, Monsanto and Bayer have dealt with patent issues and legal issues in addition to concerns about organizational conduct. Organizations face significant risks from strategies and employees striving for high performance standards. Such pressure sometimes encourages employees to engage in illegal or unethical conduct. All firms have these concerns. In the case of Monsanto and Bayer, patents and other legal issues have resulted in legal, ethical, and reputational consequences.
C7.3a Patent Issues Bayer’s seeds are protected under patent law. Under the terms of the patent, farmers using Bayer seeds are not allowed to harvest seeds from the plants for use in upcoming seasons. Instead, they must purchase new Bayer seeds each season. By issuing new seeds each year, Bayer ensures it secures a profit as well as maintains control over its property. This patent protection has become a controversial subject among farmers and led to numerous litigation battles for Monsanto. Throughout agricultural history, farmers have collected and saved seeds from previous harvests to plant the following year’s crops. Critics argue that requiring farmers to suddenly purchase
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new seeds each year puts an undue financial burden on them and gives Bayer too much power. However, the law protects Bayer’s right to have exclusive control over its creations, and farmers must abide by these laws. When they are found guilty of using Bayer seeds from previous seasons, either deliberately or out of ignorance, they are often fined. In 2007, Monsanto sued Vernon Bowman, an Indiana farmer who Monsanto claims used second-generation Monsanto seeds to plant soybeans. Monsanto claimed their patent protection reaches past first-generation seeds and Mr. Bowman infringed upon their patent. In 2009, the court ruled in favor of Monsanto and ordered Bowman to pay $84,000 in damages. Mr. Bowman did not accept defeat, and in 2013 brought his case before the Supreme Court. The Supreme Court ruled in favor of Monsanto, representing a great victory for biotechnology companies. Monsanto filed a lawsuit against DuPont, which was one of the world’s largest seed makers at the time, for combining DuPont technology with Roundup Ready. Monsanto won that lawsuit but was countersued by DuPont for anticompetitive practices. These accusations of anticompetitive practices garnered the attention of federal antitrust lawyers. With increased pressure coming from different areas, Monsanto agreed to allow patents to expire on its seeds starting in 2014. However, Monsanto announced it would continue to strictly enforce patents for new versions of its products, such as Roundup Ready 2 soybeans. In 2002 India approved Monsanto’s GM cotton seed trait, turning the country into the world’s top producer of the plant. However, in 2016 Monsanto withdrew its application for the latest updated trait due to a dispute with the government and concerns over patent claims. Nonetheless, the seed snuck its way into Indian farms and many farmers openly planted them illegally. In January of 2019, India’s Supreme Court ruled that Bayer could claim patents on its GM cotton seeds. This Supreme Court ruling liberated the biotechnology industry in India in a way. Many biotechnology companies are now working on corn and other GM crops to get governmental approval in India. This would be a big step for India since they spend billions of dollars every year importing food. Opponents of GM crops say that they threaten country’s biodiversity and are too expensive for Indian farmers. Sales of GM cotton seeds in India are estimated to be around $500 million a year. Bayer also controls 90 percent of India’s cotton acreage.
C7.3b Legal Issues Many major companies have government and legal forces to deal with, and Monsanto and Bayer are no exception. The government closely examined Monsanto’s practices and will likely do the same with Bayer. In early 2013, Monsanto settled with local residents in Nitro, West Virginia, after claims of health problems became persistent in a now-closed Agent Orange plant. The company agreed to spend up to $93 million on medical testing and local cleanup of as many as 4,500 homes. It also agreed to establish a medical monitoring program and will make additional money available to continue the program’s operation for 30 years. In 1980 the Supreme Court allowed living organisms to be patented for the first time, giving Monsanto the ability to patent its seeds. Despite this victory, Monsanto came to the attention of the American Antitrust Institute for alleged anticompetitive activities. The institute suggested that Monsanto hindered competition, exerting too much power over the transgenic seed industry and limiting seed innovation. When Monsanto acquired DeKalb and Delta Land and Pine, it had to obtain the approval of antitrust authorities and gained that approval after agreeing to certain concessions. As a result of complaints, the DOJ began a civil investigation into Monsanto’s practices. Although the DOJ eventually dropped the antitrust probe, concerns over Monsanto’s acquisitions continued. The announcement that chemical, pharmaceutical, and life sciences firm Bayer AG would acquire Monsanto for $63 billion drew scrutiny from both U.S. and European authorities. Many feared such a merger would create a “one-stop shop” for seeds, pesticides and herbicides, and farmer services. Regulators were concerned that the merger might give the combined firm too much power over the seed and pesticide industry. Bayer and Monsanto denied that their merger would reduce competition. In a meeting with President Donald Trump, Bayer said it would spend
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362 Part 5: Cases
$8 billion for research and development in the United States and keep Monsanto’s workforce intact. The Bayer-Monsanto merger faced many challenges, largely due to ongoing legal issues. Bayer is currently facing billions in liability from civil suits with its herbicides Roundup and Ranger Pro. After absorbing Monsanto, Bayer took on all of its liabilities, including the 13,400 glyphosaterelated legal claims, which have now skyrocketed to more than 50,000 cases. In past legal cases, the United States has awarded plaintiffs very heavy damages, the largest being $289 million. Bayer’s failure to see and predict the liability behind Roundup reflects poorly on their due diligence. Due diligence is the comprehensive appraisal of a business by a prospective buyer to assess liabilities and evaluate its commercial potential. Bayer should have paid closer attention to Monsanto’s biotechnology innovation. GM crops are more accepted in the United States than in Europe, and Bayer failed to see the risk.
C7.4 CORPORATE RESPONSIBILITY AT BAYER Monsanto was acquired by a company with extensive corporate responsibility initiatives. Bayer’s mission is “science for a better life” with a goal to achieve “health for all, hunger for none.” The company is also committed to philanthropic giving, strategic partnerships, and employee engagement. Bayer has been recognized for its diversity efforts. For example, through its Making Science Make Sense initiative, Bayer supports women and minorities in STEM (science, technology, engineering, and math) fields through scholarships and fellowships, investments in STEM education, public awareness and education campaigns, employee volunteerism, and more. Bayer also supports supplier diversity and employee diversity and inclusion. As an agricultural company, Bayer must address the grim reality that the world’s population is increasing quickly and the amount of land and water available for agriculture is decreasing. Some experts believe our planet must produce more food in the next 50 years to feed the world’s population than what has grown in the past 10,000 years, requiring us to double our food output. As a multinational corporation dedicated to agriculture, Bayer is expected to address these problems. Bayer’s corporate culture is based on the firm’s LIFE values:
1. Leadership 2. Integrity 3. Flexibility 4. Efficiency
C7.4a Sustainable Agriculture Bayer believes that sustainability and business go hand in hand, which also applies to global agriculture. Farming accounts for 25 percent of greenhouse gas emissions and almost 70 percent of water use globally. To address this, Bayer has mobilized its resources to work with its customers. For example, the company, along with farms and science experts, is searching for ways to preserve biodiversity under its ForwardFarming initiative. With ForwardFarming, Bayer shows how integrated crop protection and resistance management can be put into place. Additionally, with training courses, Bayer teaches farmers how to use the company’s products effectively and efficiently to increase crop yields in ways that are safe for both human health and the environment.
C7.4b Philanthropy Bayer’s funding areas include research and education, social innovation in health and nutrition, and projects in local communities. In 2019, Bayer Fund, based in the United States, gave more than $14 million to 3,200 charities and nonprofit organizations, including $1.3 million to help health food programs, $5.6 million to support education, and matched $2.8 million in gifts. Bayer
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Case 7: Bayer Grows With Monsanto Acquisition 363
Fund builds off of Monsanto’s Monsanto Fund, which had similar priorities: community projects, education, nutrition, and disaster aid. Additionally, Bayer gave $2 million to support COVID-19 (coronavirus) initiatives such as food security.
C7.5 THE FUTURE OF BAYER Bayer faces challenges inherited from Monsanto that it must address, including lingering concerns over the safety and the environmental impact of its products. Bayer’s failure to recognize the liability behind Roundup as a red flag has put Bayer in an uphill battle as lawsuits continue. Yet despite the onslaught of criticism from Monsanto detractors, Bayer has numerous opportunities to thrive in the future. The company is currently working on new innovations that could increase its competitive edge as well as benefit farmers worldwide. For instance, Bayer has identified a new compound that could be effective against Roundup-resistant “superweeds.” Bayer is in a race with competitors to develop new weed killers, a race it needs to win to protect its $5 billion herbicide business. Bayer is trying to portray itself as a socially responsible company dedicated to improving agriculture. However, Bayer will have to fight to shed Monsanto’s reputation and continue working with stakeholders to promote its technological innovations and eliminate fears concerning its industry.
QUESTIONS 1. Did Monsanto maintain an ethical culture that effectively responded to various stakeholders? Does Bayer? 2. Compare the benefits of growing GM seeds for crops with the potential negative consequences of using them. 3. How should Bayer manage the potential harm to plant and animal life from using products such as Roundup?
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Case 7: Bayer Grows With Monsanto Acquisition 365
Monsanto as Regulators Seek Details,” Bloomberg, February 22, 2017, https://www.bloomberg.com/news/articles/2017 -02-22/bayer-fourth-quarter-profit-beats-estimates-helped -by-drugs (accessed April 1, 2017); John W. Miller, “Monsanto Loses Case in Europe Over Seeds,” The Wall Street Journal, July 7, 2010, B1; “Justice Department Approved BayerMonsanto Merger in Landmark Settlement,” The Washington Post, May 29, 2018, https://www.washingtonpost.com/business /economy/justice-department-approves-bayer-monsanto -merger-in-landmark-settlement/2018/05/29/25d56ec8 -6358-11e8-a69c-b944de66d9e7_story.html (accessed June 4, 2020); Jutia Group, “Monsanto Mania: The Seed of Profits,” http://jutiagroup.com/20080117-monsanto-mania-the-seed -of-profits/ (accessed April 1, 2017); Katy Moncivai, “Roundup Lawsuit” ConsumerSafety, https://www.consumersafety .org/product-lawsuits/roundup/ (accessed June 3, 2020); Laura Kusisto, Ruth Bender, and Jacob Bunge, “Bayer Strives to End Lawsuits Over Roundup—While Still Selling It,” The Wall Street Journal, February 12, 2020, https://www.wsj.com /articles/bayer-strives-to-end-lawsuits-over-roundupwhile -still-selling-it-11581535816 (accessed June 3, 2020); Lindsey Boerma, “Critics Slam Obama for Protecting Monsanto,” CBS NEWS, March 28, 2013, http://www.cbsnews.com/8301 -250_162-57576835/critics-slam-obama-for-protecting -monsanto/ (accessed April 1, 2017); Margie Kelly, “Top 7 Genetically Modified Crops,” The Huffington Post, October 30, 2012, http://www.huffingtonpost.com/margie-kelly/genetically -modified-food_b_2039455.html (accessed April 1, 2017); Mark Memmot, “Supreme Court Rules for Monsanto in Case Against Farmer,” NPR, May 13, 2013, http://www.npr.org /blogs/thetwo-way/2013/05/13/183603368/supreme-courtrules-for-monsanto-in-case-against-farmer (accessed April 1, 2017); Mark Peters and Kris Maher, “Monsanto Settles Lawsuits,” Wall Street Journal, February 25–26, 2012, B3; Matt Ridley, “The Perils of Always Ignoring the Bright Side,” The Wall Street Journal, https://www.wsj.com/articles/SB100 00872396390444004704578030340322277954 (accessed April 1, 2017); Michael Addady, “President Obama Signed This GMO Labeling Bill,” Fortune, July 31, 2016, http://fortune .com/2016/07/31/gmo-labeling-bill/ (accessed April 1, 2017); Michael Grunwald, “Monsanto Hid Decades of Pollution,” The Washington Post, January 1, 2002, A1; Michael Pollan, “Playing God in the Garden,” The New York Times Magazine, October 25, 1998, http://michaelpollan.com/articles-archive /playing-god-in-the-garden/ (accessed April 1, 2017); Monsanto Company, “Backgrounder: Glyphosate and Environmental Fate Studies,” http://www.monsanto.com/glyphosate /documents/glyphosate-and-environmental-fate-studies.pdf (accessed April 1, 2017); Monsanto Company, “Code of Ethics for Chief Executives and Senior Financial Officers,” February 19, 2003, http://www.monsanto.com/whoweare/Pages /code-of-ethics.aspx (accessed April 1, 2017); Monsanto Company, “Corporate Profile,” http://www.monsanto.com /investors/pages/corporate-profile.aspx (accessed April 1,
2017); Monsanto Company, “Do GM Crops Increase Yields?” http://www.monsanto.com/newsviews/Pages/do-gm-crops -increase-yield.aspx (accessed April 1, 2017); Monsanto Company, “Financial Highlights,” http://www.monsanto.com /investors/pages/financial-highlights.aspx (accessed April 1, 2017); Monsanto Company, “India Cotton Success,” http:// www.monsanto.com/improvingagriculture/pages/celebrating -bollgard-cotton-india.aspx (accessed April 1, 2017); Monsanto Company, “Monsanto Code of Business Conduct,” http://www.monsanto.com/sitecollectiondocuments/code -of-business-conduct-pdfs/code_of_conduct_english.pdf (accessed April 1, 2017); Monsanto Company, “Virus Resistant Cassava for Africa (VIRCA),” http://www.monsanto .com/improvingagriculture/pages/virus-resistant-cassava -for-africa.aspx (accessed April 1, 2017); Monsanto Company, “What Is Monsanto Doing to Help?” http://www.monsanto .com/improvingagriculture/pages/what-is-monsanto-doing -to-help.aspx (accessed April 1, 2017); Monsanto Company, “Youth and Education,” http://test.monsanto.com/whoweare /pages/youth-and-education.aspx (accessed April 1, 2017); Monsanto Fund, “America’s Farmers: Grow Ag Leaders,” http://www.monsantofund.org/grants/grow-ag-leaders/ (accessed April 1, 2017); Monsanto Fund, “Math and Science K-12,” http://www.monsantofund.org/grants/math-science-education/ (accessed April 1, 2017); Monsanto, “Investor FAQs,” http:// www.monsanto.com/investors/pages/faqs.aspx (accessed April 1, 2017); Monsanto, “Monsanto Again Named by Fortune Magazine as One of the World’s Most Admired Companies,” February 16, 2017, http://news.monsanto.com/press-release /corporate/monsanto-again-named-fortune-magazine-one -worlds-most-admired-companies (accessed April 1, 2017); “Monsanto Company—Company Profile, Information, Business Description, History, Background Information on Monsanto Company,” http://www.referenceforbusiness.com/history2 /92/Monsanto-Company.html (accessed April 1, 2017); Nina Easton, “Why the March on Genetically Modified Food Hurts the Hungry,” Fortune, June 10, 2013, 64; Patricia Cohen, “Roundup Maker to Pay $10 Billion to Settle Cancer Suits,” The New York Times, June 24, 2020, https://www .nytimes.com/2020/06/24/business/roundup-settlement -lawsuits.html (accessed July 2, 2020); Rajendra Jadhav and Mayank Bhardwaj, “After Monsanto Patent Ruling, Indian Farmers Hope for Next-Gen GM Seeds,” Reuters, January 10, 2019, https://www.reuters.com/article/us-india-monsanto /after-monsanto-patent-ruling-indian-farmers-hope-for -next-gen-gm-seeds-idUSKCN1P505M (accessed June 3, 2020); Reuters, “Monsanto Shareholders Approve a $66 Billion Acquisition by Bayer,” Fortune, December 13, 2016, http://fortune.com/2016/12/13/monsanto-shareholders-bayer -aquisition/ (accessed April 1, 2017); Seralini Gilles-Eric, Emilie Clair, Robin Mesnage, Steeve Gress, Nicolas Defarage, Manuela Malatesta, Didier Hennequin, and Joel Spiroux de Vendomois, “Long Term Toxicity of a Roundup Herbicide and a Roundup-Tolerant Genetically Modified Maize,” Food
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and Chemical Toxicology 57 (March 2013): 476–483; Sybille de La Hamaide, “French, German Farmers Destroy Crops after GMOs Found in Bayer Seeds,” Reuters, February 6, 2019, https://www.reuters.com/article/us-france-gmo-bayer /french-german-farmers-destroy-crops-after-gmos-found -in-bayer-seeds-idUSKCN1PV1RG (accessed June 3, 2020); The Monsanto Fund website, http://www.monsantofund.org/ (accessed April 1, 2017); “The Parable of the Sower,” The
Economist, November 21, 2009, 71–73; World Health Organization, “Food Security,” http://www.who.int/trade/glossary /storyo28/en/ (accessed April 20, 2015); Zoë Schlanger, “Monsanto Is About to Disappear. Everything Will Stay Exactly the Same,” Quartz, June 5, 2018, https://qz.com/1297749 /the-end-of-the-monsanto-brand-bayer-pharmaceuticals-is -dropping-the-name-monsanto/ (accessed June 3, 2020).
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CASE 8 Netflix Fights to Stay Ahead of a Rapidly Changing Market* SYNOPSIS: Netflix, the world’s largest subscription streaming platform, faces more competition than ever. As the streaming war heats up, Netflix’s survival depends on its ability to adapt and identify new opportunities in digital entertainment in a rapidly changing market. Netflix has long benefited from its first-mover advantage; however, the success of newer streaming services such as Disney+ pose a threat to Netflix’s long-term success. The problem is that the future changes rapidly in this industry. THEMES:
C hanging technology, changing consumer preferences, competition, competitive advantage, product strategy, product life cycle, services marketing, pricing strategy, distribution strategy, nonstore retailing, customer relationships, value, implementation, customer churn
T
echnology has played a leading role in the evolution of the entertainment industry. Several of the major movie production companies have now opted to bypass the theater experience and instead promote a selection of their movies directly to the home viewing audience via streaming platforms such as Netflix and Hulu. Through increasing disintermediation (bypassing theaters), movie studios stand to increase profit margins dramatically. Today there are more streaming competitors than ever, including Netflix, Amazon Prime Video, Hulu, Disney+, and Apple TV+, among others.
*Kelsey Reddick, Jacqueline Trent, and Jennifer Sawayda prepared this case under the direction of Michael Hartline and O. C. Ferrell, © 2022. This case was developed for classroom discussion, rather than to illustrate either effective or ineffective handling of an administrative situation.
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C8.1 NETFLIX’S HISTORY CEO Reed Hastings told Fortune he got the idea for a DVD-by-mail service after paying a $40 late fee for Apollo 13 in 1997. Although VHS was the popular format at the time, Hastings heard that DVDs were on the way, and he knew there was a big market waiting to be tapped. At first he and fellow software executive Marc Randolph attempted a rent-by-mail service that didn’t require a subscription, but it was very unpopular. The company launched the subscription service on September 23, 1999, with a free trial for the first month and found that 80 percent of customers renewed after the trial ended. Netflix turned its first profit in 2003 in the same quarter that it reached one million subscribers. Hastings said the company was named Netflix because they saw the industry’s future moving from the DVD format to Internet streaming in the long run. Netflix introduced streaming services in 2007 after reaching more than 6.3 million members. Intense competition from Netflix was the main reason that Blockbuster—the former leader in home movie and video game rentals—dropped its late-fee program in 2005 (a shift that led to a $400 million loss in revenue for Blockbuster). In 2006, Hastings set a goal of reaching 20 million subscribers by 2012—a goal they would exceed, partially due to its successful launch in Canada in 2010. This same year, Blockbuster declared bankruptcy. Ultimately, Blockbuster failed to adapt to the changing market and faced $1 billion in debt. Blockbuster was eventually purchased by Dish Network, but this failed to save the firm. Blockbuster shuttered its final 300 stores in 2013. Today, with more than 190 million paid subscribers, Netflix is the world’s largest online entertainment subscription service, with operations in more than 190 countries.
C8.1a Early Strategy Netflix built its success around online movie rentals with expedited delivery of DVDs. DVDs were first introduced to the United States in March 1996. In 1997, few American households owned DVD players as they cost more than $1,000 at the time. In addition, few movie titles were available on DVD. However, Hastings and Randolph successfully predicted that the format would quickly replace the comparatively low quality, bulky, and cumbersome VHS format among American consumers. A key factor in Netflix’s strategy was that the DVD’s compact size made the U.S. Postal Service a viable delivery method. It experimented with 200 different mailing packages to perfect the packages for disc safety, shipping cost, and reliability. On April 14, 1998, Netflix officially opened for business with 30 employees and 925 titles—the majority of DVDs in print at the time. Initially, Netflix offered a seven-day rental for $4 plus $2 in shipping, with per item prices decreasing with each additional title. They offered no-hassle “time-extensions” rather than punitive and costly “late fees,” which had been the industry standard and a big revenue generator. During the initial period, when demand was low, Netflix formed strategic relationships that were important in expanding the DVD market and ensuring its early success. The company forged cross-promotional agreements with DVD hardware manufacturers and studios, offering free Netflix rentals with purchases of DVD players from manufacturers such as Toshiba, HewlettPackard, Pioneer, Sony, and Apple to help get DVD players in American homes. It also teamed with studios to promote high-profile films and with online movie information/review providers to funnel movie-interested Internet traffic directly to Netflix. The company also enjoyed significant positive publicity in 1998 when it offered videos of President Bill Clinton’s grand jury testimony for 2 cents, plus $2 shipping and handling. In September 1999, Hastings announced that Netflix had achieved economies of scale and could now offer subscription services. A few months later in early 2000, it dropped the pay-per-title model entirely and began to market itself as an unlimited subscription service, completely free of due dates, late fees, shipping charges, and per-title fees. At that time, Netflix charged $19.99 per month for three DVDs at a time and added less expensive one- and two-DVD options a short time later. Bob Pisano, a former MGM executive and sitting president of the Screen Actors Guild, joined the Board of Directors of Netflix in 2000. Pisano cultivated relationships with the studios, and in December, Netflix signed revenue-sharing agreements with Warner Home Video and Columbia
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Case 8: Netflix Fights to Stay Ahead of a Rapidly Changing Market 369
Tri-Star. This enabled Netflix to consistently and more profitably fill the short-lived new release demand peak. Agreements with other studios would soon follow.
C8.1b Optimizing Distribution In 2002, Netflix reached the milestone of 500,000 subscribers. It made its initial public offering in March, raising $82.5 million on 5.5 million shares. On June 20, 2002, Netflix announced the opening of 10 additional warehouses throughout the country. The company situated its warehouses to supply as many customers as possible with overnight first-class DVD delivery because its per-capita subscription rates were much higher in markets with overnight delivery. As competitors entered the market over the next couple of years, Netflix was already refining its processes and opening more distribution centers to better serve its expanding subscriber base more profitably and quickly. For many years, the location of these distribution centers was a mystery. Netflix employees signed confidentiality agreements when hired, and the exterior of the warehouses themselves was nondescript and designed expressly to camouflage the building’s function. Although Netflix was concerned with trade secrets early on, former vice president of communications Steve Swasey explained in 2009 that Netflix was already so ahead of the competition that it was not worried about industrial espionage. Rather, it was more worried about the possible disruption of processes if customers were to show up and expect to be able to drop off the DVDs directly at the warehouse, rather than through the U.S. Postal Service. Though DVDs are no longer the bread and butter of Netflix’s business model, it still operates 17 distribution centers, down from 50 at its peak. In 2003, Netflix hit one million subscribers. Customers appreciated the low-cost subscription fees, the ease of returning DVDs, and the elimination of late fees. That same year, Netflix was awarded a patent for its preference tracking software and by mid-summer possessed a library of 15,000 titles.
C8.1c Evolving the Business Model Netflix CEO Reed Hastings correctly anticipated the new technology entering the home entertainment industry. A study from IHS Screen Digest suggested that by 2012, online movie streaming in the United States would exceed both DVD and Blu-ray use. Hastings expected that Netflix’s DVD subscriptions would decline steadily over each quarter as new technology diffused into consumers’ homes. At that point, Hastings made a strategic decision that he would later regret. In 2011, Netflix attempted to move its DVD-by-mail business into a new subsidiary called Qwikster that would focus solely on DVD-by-mail services. This move would free Netflix to focus on the streaming side of the operation. While this supported Hastings’s vision of an all-streaming future, it led to a price increase of 60 percent and took away the convenient and valued one-stop shopping experience for subscribers who used both DVD-by-mail and streaming. The customer backlash was swift and dramatic. Netflix reversed its decision and kept both services under one brand. Netflix made another big move in 2013 with the introduction of original programming to its streaming business. Its first original series included House of Cards and Orange Is the New Black. House of Cards was the first online-only web series to receive a major Emmy nomination. The show’s success wasn’t just a fluke. In 2014, Netflix shows were nominated for 31 Emmys, firmly establishing Netflix as a contender in the realm of original content. That same year, Netflix reached 50 million subscribers. In 2019, Netflix released its first international originals from the Middle East and Thailand.
C8.1d Growing Global Global expansion has been a key element to Netflix’s success. By 2016, Netflix was accessible worldwide, touting more than 190 countries and 21 languages. When it first began expanding into new countries, the company carefully and intentionally selected locations that were both
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geographically close and culturally similar to the United States. This strategy allowed Netflix to refine its internationalization capabilities before entering culturally foreign markets. After this success, Netflix expanded more rapidly to countries with shared cultural similarities, affluent consumers, and access to broadband internet. As with any company entering a new country, Netflix localized its platform. However, Netflix went beyond offering quality subtitles to tailoring its user interface for local audiences and sourcing local-language content. The company has also grappled with varying regulations and technological limitations. Netflix has become skilled at the art of international expansion, benefiting from extensive knowledge about international marketing. The company continues to add additional languages (for both subtitles and dubbing), improve personalization algorithms for global content, adopt global partnerships, and expand its device support. Looking to the future, Netflix is adapting to support emerging economies by investing in mobile. Mobile is the main avenue for internet access in many countries, and Netflix has prepared for this by developing its mobile user interface and improving streaming on cellular networks. Netflix has successfully applied the same customer-centric approach it used in the United States to other countries.
C8.2 INTENSE COMPETITION IN THE STREAMING INDUSTRY Streaming and digital downloads have replaced DVDs as the de facto standard for home entertainment. While Netflix clearly recognizes this trend and is making changes to establish a competitive advantage, so are many of its competitors. The market has become crowded with competition from Amazon Prime, Apple TV+, Disney+, Hulu, and more. While Netflix might have had first-mover advantages, other companies are catching up in terms of their digital product offerings. Netflix will need to constantly innovate in order to remain one step ahead of the competition. Amazon Prime Video was an early competitor for Netflix. It was first released in 2006 as a video purchase or rental service, similar to on-demand video offered by cable providers. In 2011, the platform was reintroduced as Amazon Instant Video with a selection of movies and TV shows for Amazon Prime members. The company founded Amazon Studios in 2010, setting its sights on video produced for theatrical release. However, the studio would later shift its focus to producing content for the Prime Video streaming platform. The same year Netflix introduced original content, Amazon did the same, premiering Alpha House and Betas. However, the quality of Amazon’s original programming lagged behind Netflix for several years. It wasn’t until 2015 that Amazon attracted its first major award for its series Transparent. One feature that Amazon offers that Netflix does not is third-party subscriptions such as Starz and Showtime. Though the subscription services are separate from Amazon, many users view Amazon Prime Video as a one-stop-shop for entertainment. Amazon Prime Video now has more than 150 million subscribers. Though Hulu has been around since 2007, it has always lagged behind Netflix. The company began as a joint venture between News Corporation and NBC Universal. The following year Hulu.com launched, giving the consumer access to free, ad-supported content. It wasn’t until 2010 that the company launched a subscription service, Hulu Plus. In 2011, however, Hulu hit one million subscribers and became the first streaming service to introduce original content with the series A Day in the Life. Similar to Amazon, Hulu introduced third-party add-ons such as Showtime and Cinemax in 2015. In 2017, Hulu differentiated itself from Netflix and Amazon by introducing live television streaming, becoming the first and only streaming platform to do so. This positioned Hulu to compete with TV streaming services such as Sling TV and YouTube TV. In 2019, The Walt Disney Company bought a controlling interest in Hulu as part of its direct-to-consumer strategy, rounding out its streaming offering. Now, Hulu has more than 32 million subscribers.
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Apple TV+ launched in 2019 with a different tactic than its competitors, featuring exclusively original content with 30 titles and plans to add more each month. However, due to the timing of its launch—just months before the COVID-19 (coronavirus) pandemic hit the United States—the platform was forced to quickly change its strategy. Due to shutdowns across the country, production was halted on new projects, forcing the company to strike content deals to fill its back catalog. Though the platform has only attracted 10 million subscribers to date, some predict Apple TV+ will reach 100 million by 2025. Disney+, which also launched in 2019, experienced success immediately upon launching, passing 10 million subscribers on its first day. While Apple TV+ was negatively impacted by the global pandemic, Disney’s hefty back catalog helped propel Disney+ to instant success. While the pandemic caused movie theaters to shut down, Disney used this as an opportunity to leverage titles such as Artemis Fowl and Onward to go straight-to-streaming and draw in new subscribers to the Disney+ platform. Unlike Netflix, which took years to expand internationally, Disney had the advantage of already having extensive knowledge of international marketing and an established reputation in the entertainment industry worldwide. The company rolled out almost immediately in countries such as India, Germany, Spain, Austria, and Switzerland. Disney+ now has more than 60 million subscribers and is growing rapidly. These are just a few of Netflix’s competitors. New streaming platforms, such as Quibi, continue to make an appearance, while Netflix also competes against traditional cable services as well as live television streaming platforms. For now, Netflix dominates the streaming competition, but only time will tell if Netflix can hold its lead over Amazon Prime Video and Disney+.
C8.3 ANALYZING NETFLIX’S MARKETING STRATEGY Netflix moved away from its DVD-by-mail service, emphasizing its streaming services and investing in original content. Netflix currently has more than 190 million subscribers for streaming in the United States, Canada, the United Kingdom, Ireland, Latin America, and many more. While the competition for Netflix has been increasing, Netflix is showing that it will not give up market share without a fight. Netflix offers subscription-based pricing, attracting new users with a freemium model by offering a 30-day free trial. While free trials can be effective at luring in new customers, many companies operate at a loss to gain the customer. This makes customer churn—when subscriptions are not renewed—even more painful. However, Netflix has one of the highest renewal rates in the streaming industry, with 93 percent of subscribers staying onboard and 7 percent abandoning ship. Netflix has achieved this due to its extensive content library and quality original content, which drive both new sign-ups and encourage retention. Personalization is also at the core of Netflix’s success. The company has invested heavily in page personalization, search algorithms, and personalized messaging and marketing. Netflix even goes as far as to personalize the artwork each user sees when selecting a title to watch. Through marketing analytics, Netflix is able to predict what the customer wants and improve the user experience. The homepage recommends videos the subscriber is likely to enjoy and organizes them into personalized categories from Suspenseful TV Shows to Critically Acclaimed Films. The company also uses machine learning along with text analytics and collaborative filtering to power its search function. Beyond its streaming platform, Netflix also takes a personalized approach to other communication channels such as e-mail. Using an algorithm, the streaming giant is able to determine what message to send, when to send it, and who to send it to, delivering billions of messages per year across e-mail, notifications, and programmatic advertising. Netflix is a household name, making an appearance even in the homes of nonsubscribers. For instance, since 2011 Netflix has secured a prominent spot on the remotes of smart TVs. According to Bloomberg, Netflix pays a pretty penny for this advertising. This form of advertising has proven to be a win-win for both Netflix and TV manufacturers. Roku, a streaming player device, charges $1 per customer for a sponsored button. While Netflix has invested in advertising for
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its platform, Netflix has never sold advertising on its platform as Hulu does. Even in the face of a slowdown in U.S. subscribers, Netflix remains firm in its decision not to pursue ad-supported content. Though some analysts believe Netflix will need to introduce lower-priced tiers with ad-supported content, Netflix has made it clear that it does not want to go this route. The COVID-19 (coronavirus) global pandemic pushed Netflix to record growth, adding 16 million new subscribers in the first quarter of 2020, double the company’s projected growth for that time. Most of the growth occurred outside of North America. The pandemic struck countries at different times, and each country had varying shutdown policies. At-home entertainment surged as movie theaters closed and concerts and events were canceled. Most of the subscriber growth came from Asia, Europe, the Middle East, and Africa. While the virus negatively impacted production schedules, Netflix had plenty of content in the pipeline to keep viewers entertained. Additionally, animation production and postproduction of more than 200 projects continued remotely while writers on existing series continued their work on new scripts. The company hired 2,000 new agents to handle the surge in customer support. The company’s array of acquired and original content and its ability to quickly adapt and support new customers proved to be a strength for Netflix.
C8.4 NETFLIX’S FUTURE As Netflix looks toward the future, the streaming wars will continue to present a challenge. Netflix must contend with streaming competitors (e.g., Amazon Prime Video and Disney+) in addition to live TV streaming services (e.g., Sling TV and YouTube TV) and traditional cable providers (e.g., Xfinity and Frontier). However, Netflix continues to maintain its competitive edge with a significant market share in streaming not to mention its extensive back catalog and collection of high-quality original content. Netflix has demonstrated time and time again its willingness to embrace market opportunities. Netflix will also have to foster various content provider relationships and proactively search for newer, better opportunities. The heart of this challenge is simple in concept but difficult to execute in practice: Will Netflix remain innovative enough to maintain its top spot in such a highly saturated market?
QUESTIONS 1. What role will Disney+ play in the development of Netflix’s strategic plans? How threatening is Disney+ to Netflix’s future? 2. What new opportunities do you see in the streaming business or the entertainment industry as a whole? 3. Do you think Netflix will remain the dominant force in both streaming and movie rentals? Why or why not?
SOURCES Alex Hern, “Who Are the 6 Million People Still Getting Netflix by Mail? I’m One of Them,” Guardian, July 22, 2014, http://www.theguardian.com/media/2014/jul/22/netflix -dvds-mail-subscription (accessed May 27, 2015); Alyssa Abkowitz, “Secrets of My Success: CEO Reed Hastings,” CNNMoney, January 28, 2009, http://archive.fortune.com /2009/01/27/news/newsmakers/hastings_netflix.fortune
/index.htm (accessed May 27, 2015); Andrea Cheng, “Roll Credits: Dish Shuttering Its Remaining 300 Blockbuster Stores,” MarketWatch, November 6, 2013, http://blogs .marketwatch.com/behindthestorefront/2013/11/06/roll -credits-dish-shuttering-its-remaining-300-blockbuster -stores/ (accessed May 27, 2015); Annika Olson and Eddie Yoon, “Netflix Will Rebound Faster Than You Think,” Harvard Business Review, January 26, 2012, http://blogs .hbr.org/cs/2012/01/netflix_will_rebound_faster_th.html (accessed May 27, 2015); Audrey Schomer, “Netflix’s Q2 Sub Drop Highlights the Difficulty of Direct-to-Consumer Content,” Business Insider, July 19, 2019, https://www.business insider.com/netflix-q2-us-subscription-members-drop -first-time-ever-2019-7 (accessed June 10, 2020); Benjamin Mayo, “Bloomberg: Apple TV+ Tops 10 Million Subscribers, Company Buying TV Show and Movie Back Catalog to Expand Service,” 9to5 Mac, May 19, 2020, https://9to5mac .com/2020/05/19/apple-tv-plus-back-catalog-subscribers/ (accessed June 10, 2020); Brent Lang, “Netflix CEO Reed Hastings: ‘We Expect DVD Subscribers to Decline Forever,’”
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Reuters, January 25, 2012, http://www.reuters.com/article /2012/01/26/ idUS257021289720120126 (accessed May 27, 2015); Chaim Gartenberg, “The Netflix Button Is an Advertisement Masquerading as a Product,” The Verge, April 24, 2020, https://www.theverge.com/circuitbreaker/2020 /4/24/21232655/netflix-button-tv-remotes-advertisement -marketing-streaming (accessed June 10, 2020); Christopher Borrelli, “How Netflix Gets Your Movies to Your Mailbox So Fast,” Chicago Tribune, August 4, 2009, http://articles .chicagotribune.com/2009-08-04/entertainment/0908030313 _1_dvd-by-mail-warehouse-trade-secrets (accessed May 27, 2015); Claire Atkinson, “Disney-Hulu Puts Focus on CBS,” Broadcasting and Cable, May 4, 2009, p. 3; Cliff Edward and Ronald Grover, “Can Netflix Regain Lost Ground?” BusinessWeek, October 19, 2011, http://www.businessweek.com /magazine/can-netflix-regain-lost-ground-10192011.html (accessed May 27, 2015); Dan Cryan, “Online Movies: The Future, Today,” IHS Technology, March 22, 2012, https:// technology.ihs.com/345118/ online-movies-the-future-today (accessed May 27, 2015); Dan Graziano, “Online Movie Streaming in U.S. to Top DVDs for the First Time in 2012,” Boy Genius Report, March 26, 2012, http://www.bgr .com/2012/03/26/online-movie-streaming-in-u-s-to-top-dvds -for-the-first-time-in-2012 (accessed May 27, 2015); Dan Moskowitz, “Who Are Netflix’s Main Competitors?” Investopedia, May 16, 2020, https://www.investopedia.com/articles /markets/051215/who-are-netflixs-main-competitors-nflx. asp (accessed June 10, 2020); Elizabeth Barber, “Netflix to Release First Original Movie,” Time, September 30, 2014, http:// time.com/3447312/netflix-to-release-first-original-movie/ (accessed May 27, 2015); Greg Sandoval, “Redbox Pays $100 Million for NCR’s Blockbuster Express,” CNET News, February 6, 2012, http://news.cnet.com/8301-31001_3-57372197-261/ redbox-pays-$100-million-for-ncrs-blockbuster-express (accessed May 27, 2015); Hulu, “About Hulu,” https://press .hulu.com/corporate/ (accessed June 10, 2020); Jeffrey O’Brien, “The Netflix Effect,” Wired, December 2002, http://www.wired.com/wired/archive/10.12/netflix.html?pg =1&topic=&topic_set= (accessed May 27, 2015); Joe Flint and Micah Maidenberg, “Netflix Adds 16 Million New Subscribers as Homebound Consumers Stream Away,” The Wall Street Journal, April 21, 2020, https://www.wsj.com/articles /netflix-adds-16-million-new-subscribers-as-home-bound -consumers-stream-away-11587501078?mod=djemwhatsnews (accessed June 10, 2020); Julia Alexander, “Disney Plus Surpasses 50 Million Subscribers,” The Verge, April 8, 2020, https://www.theverge.com/2020/4/8/21214236/disney -plus-50-million-subscribers-international-europe-india -netflix (accessed June 10, 2020); Katie Marsal, “Viacom
Deal Brings MTV, Comedy Central, Nickelodeon Shows to Amazon Prime,” AppleInsider, February 8, 2012, http://www .appleinsider.com/articles/12/02/08/viacom_deal_brings _mtv_comedy_central_nickelodeon_shows_to_amazon _prime.html (accessed May 27, 2015); Kelsey Sutton, “Media Buyers to Netflix: Take Our Money,” Adweek, February 4, 2020, https://www.adweek.com/tv-video/media-buyers-to-netflix -take-our-money/ (accessed June 10, 2020); Louis Brennan, “How Netflix Expanded to 190 Countries in 7 Years,” Harvard Business Review, October 12, 2018, https://hbr.org/2018/10 /how-netflix-expanded-to-190-countries-in-7-years (accessed June 10, 2020); Maggie McGrath, “Amazon and Hulu Could Slow Netflix Growth in 2014, Morgan Stanley Says,” Forbes, January 7, 2014, http://www.forbes.com/sites/maggiemcgrath /2014/01/07/amazon-and-hulu-could-slow-netflix-growth -in-2014-morgan-stanley-says/ (accessed May 27, 2015); Michael Liedtke, “Netflix Class Action Settlement: Service Pays $9 Million After Allegations of Privacy Violations,” Huffington Post, February 10, 2012, http://www .huffingtonpost.com/2012/02/11/netflix-class-action-settlement _n_1270230.html (accessed May 27, 2015); Michael Liedtke, “Netflix Users Watched a Billion Hours Last Month,” USA Today, July 4, 2012, http://www.usatoday.com/tech/news/story /2012-07-03/netflix-online-video/56009322/1 (accessed May 27, 2015); Mike Snider, “Netflix Axes Qwikster; Kills Plan to Split in Two,” USA Today, October 10, 2011, http://www .usatoday.com/tech/news/story/2011-10-10/netflix-axes -qwikster/50723084/1; Netflix, “About Netflix,” https://media .netflix.com/en/about-netflix (accessed June 10, 2020); Netflix, “Personalization & Search,” https://research.netflix.com /business-area/personalization-and-search (accessed June 10, 2020); “Netflix to rise on 61% online streaming share,” Seeking Alpha, May 14, 2012, http://seekingalpha.com/article /585631-netflix-to-rise-on-61-online-streaming-share (accessed May 27, 2015); Peter Grant, “Telecommunications; Outside the Box: As Broadband Connections Proliferate, So Do the Opportunities for Niche Video-Content Providers,” The Wall Street Journal, December 19, 2005, p. R11; Richard Hull, “Content Goes Hollywood: How the Film Industry Is Struggling With Digital Content,” EContent, October 2004, p. 22; Todd Haselton, “Upset Investors File Class Action Lawsuit Against Netflix,” Boy Genius Report, January 17, 2012, http:// www.bgr.com/2012/01/17/upset-investors-file-class-action -lawsuit-against-netflix (accessed May 27, 2015); Todd Spangler, “Amazon Streams More Video Than Hulu or Apple, But It’s Still Miles Behind Netflix,” Variety, April 8, 2014, http://variety.com/2014/digital/news/amazon-streams-more -video-than-hulu-or-apple-but-its-still-miles-behind-netflix -1201154130/ (accessed May 27, 2015).
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CASE 9 From the Outside In: Corporate Social Responsibility at Patagonia* SYNOPSIS: Patagonia, an outdoor apparel company, has integrated its core beliefs and values into its products and corporate social responsibility initiatives. The company has long-embraced a progressive corporate culture, prioritizing work-life balance for its employees and supporting ethical conduct throughout its supply chain. This case explores Patagonia’s core values, leadership and management style, environmental initiatives, and corporate social responsibility. THEMES:
L eadership, corporate social responsibility, sustainability, product strategy, advertising
H
ow can businesses make a difference in a world of decreasing resources? Patagonia, a privately held outdoor clothing company based in Ventura, California, is working toward finding an answer to that question. Patagonia’s clothing has been developed and marketed toward a variety of outdoor sports, travel, and everyday wear. The company has integrated core beliefs and values into every product and is known for its innovative designs, exceptional quality, and environmental ingenuity. High integrity and commitment to the environment have regularly placed Patagonia on the Ethisphere Institute’s “World’s Most Ethical Companies” list.
*This case was prepared by Mark Zekoff, Sarah Sawayda, Callie Kyzar, and Kelsey Reddick for and under the direction of O.C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.
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c9.1 HISTORY OF PATAGONIA Like many successful companies, Patagonia stems from one entrepreneur’s passion. In 1953, Yvon Chouinard, founder of Patagonia, developed a passion for rock climbing. His passion brought him west to the San Fernando Valley in California, where he became an expert at climbing and rappelling. Unfortunately, his passion was limited by a lack of appropriate climbing gear. The only available climbing gear were pitons, metal spikes that were driven into cracks or seams in rocks. These pitons were left in the rock, meaning that a long climb could require hundreds of these tools. Recognizing a need for better, more environmentally friendly equipment, Chouinard began to make his own reusable pitons that were stronger than what was currently on the market. Word of Chouinard’s invention spread and he began selling his pitons out of the back of his car for $1.50 each. By 1965, Chouinard decided to partner with Tom Frost to create Chouinard Equipment. For nearly a decade, Chouinard and Frost made improvements on nearly every climbing tool. Soon Chouinard and his wife Malinda were selling clothing as a way to support the hardware business. By 1972, the clothing line had expanded to become a business venture. The name of the line was Patagonia and was intended to reflect the mysticism of far-off lands and adventurous places located beyond the map. The clothing line was successful for many years. However, financial hardships, coupled with Chouinard’s strong focus on the environment, resulted in a change in the product material. The company switched to more expensive and durable organic cotton in 1996, a risky business move considering it increased the firm’s supply costs. The more durable the product, the fewer customers need to purchase from the company. Overall, the change had a net positive effect; consumers were more willing to do business with Patagonia due to their environmental consciousness and the fact that they could trust Patagonia’s products to have a long lifespan. As the change to organic cotton shows, Patagonia puts the values of integrity, accountability, and trust into practice in their business by backing their mission with action. Recycled materials now account for 69 percent of their clothing. The company plans to hit 100 percent by 2025. Patagonia’s environmentally friendly fibers include hemp, organic cotton, recycled nylon, 100 percent recycled down, recycled polyester, recycled wool, Yulex, reclaimed cotton, denim made from organic cotton, sustainably sourced wool, and cellulose-based fibers REFIBRA lyocell and TENCEL lyocell. In addition to clothing, Patagonia has also spoken out about sustainability practices in other areas. For example, the company has produced films about the environmental impacts of common business practices. One of these films, Artifishal, discusses the need for more natural salmon fishing rather than reliance on the controversial practices of fish hatcheries. Today Patagonia is debt-free and is still willing to bend the rules. For instance, the firm—which constantly remarks that they place the environment over profits—has embarked on a “Buy Less” campaign, among other initiatives that seem like they might discourage revenue growth. On the contrary, annual revenue has hit $1 billion in recent years.
c9.2 PATAGONIA’S CORE VALUES When Patagonia was first developed, Yvon and Malinda agreed that the company would produce only products of the highest quality and manufactured in the most responsible way. Patagonia’s core values are to build the best product, cause no unnecessary harm, use business to protect nature, and remain unbound by convention. Patagonia strives to live out these values every day. For Patagonia, this means working with friends; hiring self-motivated, intelligent employees; and giving employees flexible time to enjoy surfing, climbing, and spending time with their families. Another important value involves finding ways to be responsible by restoring or reusing, which has prompted the company to open retail locations in old buildings that have been restored. After the company nearly went out of business during the 1990s, Yvon Chouinard vowed to never again stray from the core values that he had adopted to develop Patagonia. These values are strongly embedded into all company operations and activities.
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Case 9: From the Outside In: Corporate Social Responsibility at Patagonia 377
c9.3 PATAGONIA’S LEADERSHIP AND MANAGEMENT STYLE Yvon Chouinard set out to create a company that was proactive in their approach to how business is conducted by embracing a progressive corporate culture. As stated, Patagonia believes that employees should be out enjoying nature and have the option to care for their children when they are sick. Such a culture has made the company widely popular with employees and has steered the company toward innovation and success on a global platform. Patagonia’s commitment to putting employees first remained a priority during the COVID-19 (coronavirus) pandemic in 2020. The CEO published a note on the company website about Patagonia’s safety measures during the pandemic, establishing that the safety of employees and surrounding communities was a top priority. This concern resulted in the decision to temporarily close all stores, offices, and other operations in the United States and other impacted countries. When faced with the ethical conflict of prioritizing sales versus employee health, Patagonia even suspended online ordering for more than a month, despite the fact that many other companies chose to promote online orders and offer special discounts to shop from home. Patagonia worked on ways to ensure the safety of warehouse team members before reopening online ordering. After resuming e-commerce operations, Patagonia supplied employees with face masks and gloves and implemented staggered employee shifts, frequent sanitization, and temperature scans. All employees received regular pay during the shutdown, and any employees who could work from home were able to do so. Patagonia’s swift and proactive action made it one of the earliest retailers to respond to the pandemic. Although Yvon Chouinard owns Patagonia, he surrounds himself with talented leaders to help advance the company’s goals. Patagonia’s leadership is well-known for ethical conduct and for guiding the company according to its corporate mission and values. In addition to guiding Patagonia employees, the company also supports ethical conduct throughout its supply chain— including sub-suppliers and subcontractors—with a supplier code of conduct. Beyond the code, Patagonia collaborates with suppliers through training, root-cause analysis, and managementsystem development, effectively elevating its business partners. Patagonia’s former CEO, Rose Marcario, was committed to Patagonia’s vision of environmentalism and was the recipient of a number of environmental and ethics awards. Originally the company’s CFO in 2008, she earned the CEO position in 2014. She was influential in driving the company to continue pursuing its environmental and social responsibility goals. In 2020, Marcario was succeeded by Ryan Gellert. Gellert, who was previously responsible for overseeing the company’s business across Europe, the Middle East, and Africa, was selected by the board of directors due to his deep commitment to Patagonia’s mission and values.
c9.4 ENVIRONMENTAL INITIATIVES Over the years, Patagonia has teamed up with other corporations to develop and create initiatives aimed at reducing the environmental footprint businesses leave behind. They have pioneered revolutions in clothing technology development and manufacturing. Patagonia has also been an innovative force in creating programs that deal with the environmental crisis head-on.
C9.4a 1% for the Planet The organization 1% for the Planet is an alliance of businesses that donate part of their proceeds to environmental organizations to support sustainability and the preservation of the environment. Since 1985, Patagonia has committed to donating 1 percent of their sales to environmental organizations around the world that work to conserve and restore the natural environment. Since they started to support 1% for the Planet, Patagonia has contributed $74 million in donations. Even during the COVID-19 pandemic, Patagonia continued to contribute 1 percent of sales, even
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as the company faced a sharp decline in sales. In addition to 1% for the Planet, Patagonia regularly contributes additional dollars to environmental groups. For example, in 2018 following corporate tax cuts, Patagonia took the money it saved and donated $10 million to nonprofit environmental organizations.
C9.4b Worn Wear Initiative After years of hosting Worn Wear pop-up events where customers could bring used clothing for either repair or exchange, Patagonia launched a permanent Worn Wear store on its site in 2017. Now, customers can buy, sell, and trade Patagonia gear second-hand. Patagonia also educates its customers on how to repair their purchases. This initiative embraces the concept of extending the life of each product, allowing customers to reuse, repair, resell, or recycle to keep products out of the landfill.
C9.4c Conservation Alliance The Conservation Alliance was cofounded by Patagonia in 1989. The purpose of the Conservation Alliance is to encourage businesses in the outdoor industry to contribute to environmental organizations that protect and restore nature and wildlife. Throughout the years, the alliance has grown beyond its four founders to include 250 businesses. The Conservation Alliance has donated more than $10 million and Patagonia remains actively involved with the alliance, maintaining a seat on the board.
C9.4d The bluesign® System Patagonia has worked with BLUESIGN technologies in their quest to reduce resource consumption since 2000 and became the first official bluesign® system partner in 2007. BLUESIGN provides solutions for sustainable processing and manufacturing with strict criteria. For those resources that cannot be reduced, BLUESIGN helps Patagonia use more sustainable resources that will have less of a negative impact on the environment. Patagonia’s goal is to have “bluesign APPROVED” fabrics on 100 percent of their products in the future. There are now more than 400 partners of the bluesign system including brands, manufacturers, and suppliers.
c9.5 CORPORATE SOCIAL RESPONSIBILITY In addition to their many environmental initiatives satisfying stakeholder groups throughout the community, Patagonia also focuses on satisfying their employees. As described earlier, Patagonia believes in a work/life balance philosophy. On Election Day, Patagonia gives every employee the day off to vote in the presidential elections and has invited other companies to join in through the Time to Vote campaign, which now has more than 400 members. Because of this strong relationship with its workforce, the company has a 4 percent turnover rate compared to the industry average of 13 percent. Patagonia averages 900 applications per job opening, providing them with the opportunity to hire the best talent. Patagonia also works with factories to ensure that their products are being produced in alignment with Patagonia’s corporate values and environmental integrity. In 1990, Patagonia developed the Contractor Relationship Assessment, a scorecard used to rate a factory’s performance. In 1996, Patagonia became a founding member of the FLA (Fair Labor Association), which conducts audits and training on factory conditions. In 2007, the firm joined the Fair Factory Clearinghouse (FFC), which is a database that helps Patagonia collect and manage supplier data that deals with social and environmental issues. This information is shared with other firms in Patagonia’s industry and can help establish benchmarks for best practices. Patagonia keeps a close eye on its supply chain with regular factory audits. The company also assesses factories based on how they measure up to social responsibility and environmental goals.
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Case 9: From the Outside In: Corporate Social Responsibility at Patagonia 379
For their materials suppliers such as mills, Patagonia has Environmental Health and Safety requirements as well as a Raw Materials Social Responsibility program. Under this program, Patagonia’s materials suppliers must audit their factories to measure whether they are compliant with safety, social responsibility, and environmental criteria as well as areas of improvement. By raising the bar for social and environmental responsibility among their suppliers and factories, Patagonia is attempting to incorporate corporate social responsibility among all of its stakeholders. Patagonia has also set standards for its corporate clients in the name of environmental responsibility. The company made the controversial decision to limit the sales of its custom vests, only selling them to companies that “prioritize the planet,” according to the company’s announcement. The vests, which have become trendy among businesspeople, often feature company logos on the chest opposite the Patagonia logo. The move, which only impacts new partners, protects the Patagonia brand from being associated with environmentally unfriendly companies and holds other companies to a higher standard. In addition to protecting the planet, Patagonia fights to protect the outdoor industry as a whole. As the nation began to reopen during the COVID-19 pandemic, Patagonia joined more than 60 outdoor industry companies, including L.L. Bean and North Face, to urge Congress to invest in recreation infrastructure. The companies championed the Great American Outdoors Act, which would support parks and public lands by providing funding to the Land and Water Conservation Fund.
c9.6 WHAT THE FUTURE HOLDS FOR PATAGONIA Patagonia shows no signs of slowing down and neither does Yvon Chouinard. The company remains dedicated to advancing environmental awareness among businesses—even if it entails partnering with some unlikely companies. For instance, Patagonia partnered with Walmart and Adidas to form the Sustainable Apparel Coalition. Patagonia realizes that to create lasting change, they must not only improve their sustainability operations but also assist in helping other businesses learn how to reduce their impact on the environment. By 2025, Patagonia hopes to be carbon neutral and would like to be carbon positive in the future. Patagonia is even moving beyond apparel to address sustainability in the food industry. Under its subsidiary Patagonia Provisions, the company aims to improve the food chain with the same principles that it applies to its clothing business. Chouinard continues to see himself as an innovator rather than just an inventor. Under his influence and the influence of company leaders, Patagonia seeks to make a difference and create a revolution in how businesses view sustainability. Rather than taking from the environment, the goal for Patagonia is to educate consumers and businesses about how they can help to preserve it. Patagonia demonstrates how strong corporate values and ethical leadership can create a company that is both successful and a role model for those who desire to make a positive difference.
QUESTIONS
SOURCES
1. How has Patagonia been able to promote corporate social responsibility among other businesses? 2. Do you think it is beneficial for Patagonia to branch out into ventures other than apparel? 3. Does Patagonia—a privately held, debt-free company— have an advantage over public companies with shareholders by being socially responsible?
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to Pandemic,” Forbes, April 23, 2020, https://www.forbes.com /sites/angelauyeung/2020/04/23/outdoor-clothing-chain -patagonia-yvon-chouinard-starts-selling-online-again -after-unusual-decision-to-pause-its-e-commerce-due-to -coronavirus-pandemic/#702088381c48 (accessed May 12, 2020); Ariella Simke, “Patagonia Provisions Challenges Ocean Fish Farms By Selling Seafood,” Forbes, June 17, 2020, https://www.forbes.com/sites/ariellasimke/2020/06/17 /patagonia-provisions-challenges-ocean-fish-farms-by -selling-seafood/#1683b6c64281 (accessed July 16, 2020); Ashley Lutz, “A Clothing Company Discourages Customers From Buying Its Stuff—And Business Is Booming,” Business Insider Australia, September 9, 2014, https://www.businessinsider.com.au/patagonia-business -strategy-2014-9 (accessed May 12, 2020); Associated Press, “Patagonia Gives $10 Million GOP Tax Windfall to Environmental Groups,” CNBC, November 29, 2018, https://www .nbcnews.com/business/business-news/update-patagonia -gives-gop-tax-windfall-environmental-groups-n941551 (accessed May 12, 2020); Bradford Wieners, “Solving Climate Change With Beer From Patagonia’s Food Startup,” Bloomberg Businessweek, October 3, 2016, https://www .bloomberg.com/news/features/2016-10-03/solving-climate -change-with-beer-from-patagonia-s-food-startup (accessed May 12, 2020); Daniel Bentley, “Doing Good and Making a Profit: These Apparel Companies Are Proving They Aren’t Mutually Exclusive,” Fortune, January 23, 2019, http:// fortune.com/2019/01/23/patagonia-art-eden-sustainability/ (accessed May 12, 2020); Daniela Sirtori-Cortina, “From Climber to Billionaire: How Yvon Chouinard Built Patagonia Into a Powerhouse in Own Way,” Forbes, March 20, 2017, 1, https://www.forbes.com/sites/danielasirtori/2017/03 /20/from-climber-to-billionaire-how-yvon-chouinard - bu i ltp at agon i a - i nto - a - p owe rhou s e - h i s - ow n - w ay /#387feacf275c (accessed May 12, 2020); J. B. MacKinnon, “Patagonia’s Anti-Growth Strategy,” The New Yorker, May 21, 2017, https://www.newyorker.com/business/currency/patagonias -anti-growth-strategy (accessed May 12, 2020); Jeff Beer, “How Patagonia Grows Every Time It Amplifies Its Social Mission,” Fast Company, February 21, 2018, https://www .fastcompany.com/40525452/how-patagonia-grows -every-time-it-amplifies-its-social-mission (accessed May 12, 2020); Katherine Martinko, “Patagonia Launches Worn Wear, an Online Store for Used Gear,” TreeHugger, September 21, 2017, https://www.treehugger.com/sustainable -fashion/patagonia-launches-worn-wear-online-store-used -gear.html (accessed May 12, 2020); Lauren Thomas, “Patagonia Is Closing All of Its Stores and Shutting Down Its Website Because of the Coronavirus,” CNBC, March 13, 2020, https://www.cnbc.com/2020/03/13/patagonia-is -closing-all-of-its-stores-because-of-the-coronavirus
.html (accessed May 12, 2020); Lila MacLellan, “At Patagonia, Exit Interviews Are Rare—but They Go Deep,” Quartz, https://qz.com/work/1574375/patagonias-hr-leader-has -been-moved-to-tears-in-exit-interviews/ (accessed May 12, 2020); Nick Paumgarten, “Patagonia’s Philosopher-King,” The New Yorker, September 19, 2017, https://www.newyorker .com/magazine/2016/09/19/patagonias-philosopher-king (accessed May 12, 2020); Patagonia, “1% for the Planet,” https://www.patagonia.com/one-percent-for-the-planet .html (accessed May 12, 2020); Patagonia, “bluesign® System,» https://www.patagonia.com/our-footprint/bluesign.html (accessed May 12, 2020); Patagonia, “Materials & Technologies,” https://www.patagonia.com/materials/ (accessed May 12, 2020); Patagonia, “Core Values,” https://www.patagonia .com/core-values/ (accessed May 12, 2020); Patagonia, “Supplier Workplace Code of Conduct,” https://www.patagonia .com/on/demandware.static/Sites-patagonia-us-Site /Library-Sites-PatagoniaShared/en_US/PDF-US/Patagonia _COC_English_02_13.pdf (accessed May 12, 2020); Patagonia, “The Conservation Alliance,” https://www.patagonia .com/conservation-alliance.html (accessed May 12, 2020); Patagonia, “What We’re Doing About Our Plastic Problem,” June 13, 2019, https://www.patagonia.com/stories/what -were-doing-about-our-plastic-problem/story-72799 .html (accessed May 12, 2020); Richard Feloni, “Patagonia’s CEO Says ‘Capitalism Needs to Evolve’ If We Want to Save the Planet,” Business Insider, April 16, 2019, https://www .businessinsider.com/patagonia-ceo-rose-marcario -says-capitalism-must-evolve-to-save-earth-2019-4 (accessed May 12, 2020); Scott Mautz, “Patagonia Has Only 4 Percent Employee Turnover Because They Value This 1 Thing So Much,” Inc., https://www.inc.com/scott-mautz /how-can-patagonia-have-only-4-percent-worker-turnover -hint-they-pay-activist-employees-bail.html (accessed May 12, 2020); Stephanie Spear, “10 Most Profound Passages From ‘Let My People Go Surfing,’” EcoWatch, September 19, 2016, 1. https://www.ecowatch.com/let-my-people-go -surfing-2008599492.html (accessed May 12, 2020); Tessa Byars, “A Letter From Our Founder, Yvon Chouinard,” Patagonia Works, April 22, 2020, www.patagoniaworks.com/ press/2020/4/22/a-letter-from-our-founder-yvon-chouinard (accessed May 12, 2020); Tessa Byars, “Patagonia Releases a Documentary About the High Cost of Fish Hatcheries, Fish Farms and Human Ignorance,” Patagonia Works, April 12, 2019, http://www.patagoniaworks.com/press/2019/4/18/ patagonia-releases-a-documentary-about-the-high-costof-fish-hatcheries-fish-farms-and-human-ignorance (accessed May 12, 2020); Wes Siler, “Patagonia Just Got 2 Million People Time Off to Vote,” Outside Online, February 28, 2020, https://www.outsideonline.com/2409741/patagonia -time-to-vote-initiative (accessed May 12, 2020).
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CASE 10 Google Searches for Solution to Privacy Issues* SYNOPSIS: Google processes billions of searches each day. In addition to its search engine, Google has a broad product mix from advertising and e-mail to web browsing and web analytics. Being one of the largest tech companies in the world, however, means that Google’s business practices are constantly monitored. This case highlights Google’s top products, the company’s social responsibility initiatives, and issues relating to privacy, censorship, and regulation. THEMES:
ompetition, market segmentation, product mix, global marketing, C corporate governance, sustainability, regulation, social responsibility
G
oogle’s ease of use and superior search results have propelled the search engine to its number-one status, ousting former competitors such as AltaVista and WebCrawler. Even later offerings by other large tech companies using comparable algorithms, such as Bing by Microsoft, have failed to make significant inroads with Internet users, with Google retaining an impressive 90 percent of the global market share of mobile, web, and in-app searches. Each day, more than 5.5 billion searches are processed by Google. As the search engine gained popularity, it began expanding into several different ventures, including web analytics, advertising, and digital book publishing. It has spent billions to acquire hundreds of companies in a variety of industries, from robotics to smart home devices to intangibles such as voice recognition technologies. As may happen with any large company, Google has experienced its share of ethical issues. Its mantra “Don’t Be Evil” was called into question after it worked with the Chinese government on a secret project called Dragonfly to censor aspects of some of its sites to enter the market. Though
*This material was developed by Kelsey Reddick, Tri Nix, and Jennifer Sawayda under the direction of O.C. Ferrell and Linda Ferrell, © 2022. This case is intended for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management. All sources for this case were obtained through publicly available material.
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Dragonfly was ultimately terminated, Google’s vice president of public policy would not commit to the U.S. Senate to not engage in censorship in China in the future. Google has also been investigated and sued by multiple governments based on concerns that its widespread reach and market power violate antitrust laws. The hot ethical topic for many Internet users, however, is the company’s approach to Internet privacy and the collection of user information. To improve its services—including customized search results, targeted ads, and more precise integration of its various offerings—Google tracks and leverages user information. Such tracking is common practice for Internet companies, but Google’s deep access to so many different types of user information has led people to question whether Google violates user privacy. Considering the increasing amount of cyberattacks and the U.S. government’s determination to crack down on these illegal attacks, consumers also worry that their private information, tracked and stored by Google’s algorithms, might be compromised. This case analyzes Google’s efforts to be a good corporate citizen and the privacy issues the company has faced. The analysis starts by providing background on Google, its technology, and its initiatives. Google’s efforts to be a socially responsible company are discussed. We then discuss the criticisms levied against Google, including its initial attempts to break into the censored Chinese market, its tracking of users, and changes to its privacy policies. We examine how Google has sometimes clashed with government authorities. Finally, we review some of the legal methods that have been proposed to regulate Internet data collection practices and Google’s response to the proposals.
C10.1 COMPANY CULTURE Google takes a decentralized approach to empower its employees. Its corporate headquarters in Mountain View, California, is known as the “Googleplex” and consists of a campus containing such amenities as on-site gymnasiums, swimming pools, a bowling alley, an outdoor volleyball court, and even high-tech “nap pods” for optimized downtime. When Sergey Brin and Larry Page founded the company, they recognized employees had to put in long hours to make the company not only successful but also flexible enough to adapt to the changing environment. Thus, Google employees are provided with fringe benefits to make the campus seem like their second home. They built a sense of community with break-out zones and micro-kitchens around the campus in addition to its peer-to-peer coaching program, Googler to Googler. The company strives to make its corporate culture fun and innovative. At the same time, Google works to ensure it has top talent. While it reinvents the office experience, it also takes different tactics in recruiting to ensure the company hires the most creative, talented individuals. For instance, Google recruiters take a bottom-up approach when reading résumés. Recognizing that top items such as education and work experience do not always guarantee the applicant is innovative, some Google recruiters start at the bottom of the résumé where applicants put more creative information. Google’s innovative approach to company culture is one of the reasons why it has become successful in so many different market niches.
C10.2 PRODUCTS Although Google started as a search engine, it has since branched out into a variety of fields, including consumer electronics and productivity tools. While it would take too long to list all of Google’s products, some of the more popular offerings are described below.
C10.2a Search Engine According to Larry Page, a good search engine “understands exactly what you mean and gives you back exactly what you want.” This philosophy was the founding principle behind the creation of
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Google and is a fundamental reason why the Google search engine surpassed competitors. Google could not have gained such prominence without an in-depth search index of the web’s content. The company creates this index using programs called “Googlebots”—automated web crawlers that visit webpages, add their content to the index, and then follow the links on those pages to other parts of the Internet. This process is ongoing, with every indexed page periodically revisited to ensure the index contains the most updated material. Google’s index is one of the most extensive in the world, with more than 100 million gigabytes worth of information. A good search engine’s index must not only be comprehensive but also easily accessible. To achieve easy access, Google uses algorithms to organize search results according to their perceived relevancy. Google constantly searches for new pages in a process called crawling. When a new page is crawled, Google analyzes its content and catalogs it, a process called indexing. When a user types a search term into Google’s search box, Google’s index matches the term with what is deemed the most relevant materials and creates a list of these materials for the user, a process called serving. The order in which the results are served to users is called ranking. Factors considered in ranking include the user’s location, language, device, site load speed, and more. Each search result is followed by a few sentences describing the webpage (called a “snippet”). To maintain a competitive edge, Google responds quickly to its users’ queries, with a typical response time of approximately one-fourth of a second.
C10.2b Advertising Google’s main source of revenue is advertising. The company earns approximately $134 billion in advertising revenue. Google AdWords, now called Google Ads, was first introduced in 2000. Google Ads differs from traditional advertising in that advertisers do not pay Google anything upfront, but only pay when customers take action—either by viewing the ad (pay-perimpression), clicking on the ad (pay-per-click), or performing a certain predefined action such as making an online purchase (pay-per-conversion). This model is attractive to advertisers because they only pay when their ad is effective, as determined by the metric of their choice. The twist, however, is that Google does not set ad prices, but rather puts its limited advertising space up for auction; companies submit “bids” for how much they will pay per customer action, and higher bids generally get more ad time (other factors are also considered, such as how popular an ad has been so far). Since Google makes no money from even a very high bid if customers do not engage with the ad, advertisers are incentivized to bid high, which benefits Google’s bottom line. Google promotes the model as a win-win; the company makes a profit and customers get more bang for their advertising buck. Google leverages its various product offerings to provide a variety of attractive advertising options. Companies can choose to have their ads displayed as “sponsored links” alongside search results for certain keywords, or as banners on any of the more than two million websites that display Google ads in return for a cut of the profits (known as the Google Display Network). Google continuously expands placement options to improve ad performance. YouTube is another option, offering video ads before, during, or after videos, as well as traditional banner space on the site. Mobile is also a critical advertising space, through searches on both mobile devices and apps that allow advertising. Improving the effectiveness of its Ads service is a key driver of Google’s collection of user information—the more it knows about its users, the more targeting options it can provide to advertisers and the more precisely it can serve targeted ads to desired consumer segments.
C10.2c Web Browser Google Chrome is the most popular web browser in the world with about two-thirds market share. When Google Chrome was released, it was praised for its unparalleled speed, support, and security. The Chrome browser is known for loading within seconds and maintaining a simplistic design to make it easier for users to navigate. Chrome is also updated more frequently than most of the other browsers, allowing Google to quickly push out new features and security improvements. With more than 2 billion active installs, the web browser has a vast audience. The Chrome
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Web Store contains a wide selection of apps and extensions, providing additional flexibility and functionality for users.
C10.2d E-mail Google’s e-mail service, called Gmail, has more than 1.5 billion monthly active users and is the world’s largest e-mail service provider. Gmail was initially revolutionary for the huge amount of space it offered—1 gigabyte per user when rivals were only offering 100 megabytes or less—and the integration of Google search, which gave users a robust way to search within their stored e-mails. Since then, Gmail has continued to offer popular features such as snoozing, e-mail “nudge” reminders, e-mail scheduling, clickable attachments, two-factor authentication, predictive Smart Compose, a variety of add-ons, and deep integration with other Google products such as Hangouts, YouTube, Maps, Drive, and Calendar.
C10.2e YouTube In 2006, Google acquired video sharing site YouTube for $1.65 billion. YouTube allows users to upload and share original videos and has become the second most visited of all websites (Google. com is the most visited site in the world). Everyone from global corporations to consumers uses YouTube to share videos ranging from video blogs to parodies, to corporate messages to news events. By selling video advertising slots before, during, and after videos, as well as placing banner ads in free space on the site, Google has made billions in advertising revenue. Additionally, YouTube content creators can share in advertising profits from their videos through YouTube’s Partner Program, allowing popular “YouTubers” to make careers out of their channels. Although YouTube opened up new opportunities in marketing and entertainment, it has had its share of controversy. YouTube has been sued by organizations such as Viacom for copyright infringement after finding copyrighted content on YouTube’s site. YouTube’s Community Guidelines specifically direct users to respect copyright. However, not all users heed the warning. To detect and eliminate copyrighted material, YouTube enables users to “flag” videos for copyright infringement. If upon review the flag is found to be valid, the offending video is removed. YouTube has invested $100 million in an automated system called Content ID, which automatically compares newly uploaded videos to a database of copyrighted material and notifies the copyright holder if a match is found. To date, Content ID has paid more than $3 billion to rights holders. Google believes providing tools to enable self-interested copyright owners to protect their property is the best way to police YouTube, arguing it is simply not feasible for the company to screen the more than 500 hours of video uploaded to the site every minute. Additionally, the Federal Trade Commission sued YouTube for violating the Children’s Online Privacy Protection Act (COPPA) by collecting data on children, resulting in a $170 million settlement and new privacy rules for the popular video platform.
C10.2f Android In 2005, Google acquired the startup firm Android Inc., which worked on mobile phone software technology. In 2008, the Android operating system was released by the Open Handset Alliance, a team of organizations led by Google whose mission is to promote the development of open standards for mobile devices. The Android operating system is an open source platform, meaning the source code is available for outside users to view and use. However, Google has copyrighted the Android name and logo, as well as some proprietary features of Google’s version of the software. Companies that wish to claim they make “Android” devices must enter into a licensing agreement with Google. The Android operating system is most often used in mobile devices and tablets but can also be found on other devices, including full computers, game consoles, and digital cameras. Android has become the most popular mobile operating system in the world, making up over 86 percent of the market. In many countries, Android has more than 90 percent market share.
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Apple’s iOS, while undeniably a strong competitor with a loyal customer base, trails far behind with 15 percent of the smartphone market. One reason for Android’s larger market share is that, unlike Apple and its iPhone and iPad, Google is not the only company that makes Android phones and tablets; Samsung, HTC, Motorola, T-Mobile, Sony, and many other manufacturers develop Android devices. However, there are disadvantages to this approach. For example, Amazon built its mobile offerings—the Fire Phone and Kindle Fire tablets—off the Android open source code and now competes directly with Google in the mobile sphere. In Europe, Google’s partners can now offer Android-powered phones without Google apps preinstalled on the devices. Google is also a direct player in the mobile device market with its Nexus line of phones and tablets, placing it in the uncomfortable position of competing with its business partners. Still, Android has been a great success for Google, vastly increasing the company’s reach into electronics. One top Google executive called the initial Android Inc. acquisition the company’s “best deal ever.”
C10.2g Web Analytics In November 2015, shortly after acquiring Urchin Software Corporation, Google released the free web analytics service Google Analytics, which has grown to become the most popular web analytics service with approximately 30 million active sites. Google Analytics tracks and freely reports website traffic statistics, giving businesses a market research tool to understand how customers are interacting with their websites. The dashboard is broken out into five reports: Realtime, Audience, Acquisition, Behavior, and Conversions. Google Analytics 360, a premium version, is designed to help companies target potential customers with even more in-depth analytics, tying in data from other Google products such as Tag Manager and Data Studio. The tool identifies the habits of individuals from web and television to mobile, competing with companies like Salesforce and Oracle. Services like Google Analytics help website owners measure and interpret the effectiveness of business activities. Google tracks visits via a user’s IP address, raising some privacy concerns.
C10.2h Expanding the Product Mix Google offers several other popular products to businesses and consumers. Google Translate and Google Maps offer automated translation and mapping/directional services. Google Flights provides flight information including price data from many airlines. Google Drive allows users to store files in the cloud and share them with others. The service offers 15 gigabytes of free storage per user, and more can be purchased if desired. The company is also investing in artificial intelligence (AI) processing and has developed a new chip called the Tensor Processing Unit. This is a breakthrough in the more sophisticated systems needed to run artificial intelligence applications. Google aims to push AI processing into devices like phones and virtual assistants. Google is also known for its forays into exciting and cutting-edge technologies, especially through its semi-secretive Google X department, whose mission is to develop “moonshots”— science-fiction-like technologies that have a slim chance of succeeding but could change the world if they do. Research projects underway at Google X include using machine learning to teach robots new skills and using space optics to transmit high-speed data. One of its retired initiatives involved developing a real-time heads-up display for the average consumer. The result was Google Glass, a wearable computer in the form of glasses worn on the face that can display information in front of the wearer’s eyes, respond to verbal and movement commands, and more. Google Glass was publicly released in 2014 and has been applied to a wide variety of commercial applications, from providing doctors with hands-free information during surgery to helping autistic children interact with their environment. However, the device never achieved mainstream popularity. The style of the glasses was unappealing and the technology created privacy concerns since wearers could use them to record others without permission or cheat on exams. Though Glass was retired, the product lives on in its enterprise edition for businesses. The technology highlighted the need for rules to protect people from being recorded.
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C10.3 GOOGLE’S INITIATIVES Like all successful major corporations, Google is expected to act with integrity and give back to the communities where it does business. Google has invested in several initiatives that support economic development, environmental awareness, and charitable endeavors.
C10.3a GV In 2009, Google formed Google Ventures, later shortened to GV, as a separate entity to provide funding for startup firms. The venture capital fund began with $100 million in seed money and now manages more than $4.5 billion in assets of its own. It invests this money in startup companies at the forefront of technological innovation. The money goes not only to firms that market Internet-based technologies or consumer electronics, but also to green technology firms, biotechnology and life-sciences companies, and more. Its best-known investments include Uber, Nest, and Slack. GV’s goal is to invest in entrepreneurs that can change the world through technology by having “a healthy disregard for the impossible,” mirroring what the Google X department is trying to do within Google itself.
C10.3b Google Sustainability Google has recognized the business opportunities that come from adopting sustainable operations and technologies. Greener technology not only saves Google money in the long run with decreased energy costs, but it also enables the company to create greener products for consumers. Google, which reached its goal of 100 percent renewable energy for its global operations in 2017, claims its data centers use 50 percent less energy than typical data centers. Now, 100 percent of shipments to and from Google are carbon neutral. Google has committed to including recycled materials in every single product it makes. For employees, Google offers a shuttle system run on biodiesel, an on-campus car-sharing program, company bicycles to commute between buildings and departments, and the largest electric vehicle charging station in the country. Other sustainability successes for Google include a large solar installation on its campus and LEED-certified buildings.
C10.3c Google.org Google.org is the charitable arm of the organization. According to its website, the organization assists “nonprofits using technology and innovation to tackle complex global challenges” by giving more than $100 million in grants and 200,000 volunteer hours each year. Google.org also develops tools for nonprofits and provides disaster relief. Google for Nonprofits provides resources such as discounts on Google products and free advertising to nonprofit organizations. Google.org has also partnered with nonprofits to offer them the use of Google’s considerable resources. For example, Google provides tools to the National Center for Missing and Exploited Children to help the nonprofit in their fight against global child exploitation. Google extended its community service outreach efforts with the introduction of the Google.org Fellowship that allows its employees to work full-time for its nonprofit partners for up to six months. Collectively, Google aims for 50,000 hours of pro bono work annually through the program. In 2020 as a result of the global COVID-19 (coronavirus) pandemic, Google.org committed $100 million toward immediate relief, long-term recovery, and future preparedness measures in the areas of health and science, economic recovery, and distance learning. For example, to aid in economic relief and recovery, Google distributed $15 million in cash grants to various organizations benefitting medium-sized small businesses. That same year, the company provided $12 million in funding to support the fight for racial equity. In addition to the company’s work through Google.org, Google contributes hundreds of millions of dollars directly to various charities and socially responsible organizations. Just before the company’s initial public offering in 2004, Google’s cofounder Larry Page promised Google would
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continually contribute 1 percent of its profits, 1 percent of its equity, and a significant amount of employee time to philanthropic endeavors. In terms of giving employee time, Google encourages employees to get involved in giving back to their communities. For instance, Google matches up to $6,000 of each employee’s contributions to nonprofits annually. The company has donated millions of dollars to thousands of nonprofits. Google also encourages employees to take time to volunteer in their communities, especially during its annual GoogleServe event, which sets aside one to two weeks each June for Google staff worldwide to get involved in their communities and donate time to good causes.
C10.4 PRIVACY Being a large company, Google has many risks and ethical issues it must constantly address. In many ways, Google has helped advance ethical conduct in the web and technology industries. Google has been named multiple times among Ethisphere Institute’s “World’s Most Ethical Companies” due to its contributions to the community and the environment. The company also consistently ranks among Fortune magazine’s “100 Best Companies to Work for” because of its fun and innovative work environment. One of the greatest risks faced by digital companies involves hacking attacks and online scams. Google is attempting to address these risks head-on. For example, Google was hit with a massive phishing attack. Gmail users were sent an e-mail that supposedly came from someone they knew inviting them to open up a document in Google Docs. Those who clicked on the link were directed to a real Google page, where they were asked to input their passwords to download a fraudulent app. Once the fraudsters had the users’ credentials, they used them to access the users’ contact lists to send out more phishing e-mails. Google immediately reacted to disable the accounts and notify its Gmail users. Though phishers are becoming more sophisticated, Google successfully blocks approximately 100 million phishing e-mails per day. In addition to its preventative efforts, when Google can’t positively identify a phishing attempt, it displays a safety warning above questionable e-mails in a user’s inbox. Despite its contributions to ethics, Google’s actions have been called into question. For instance, when Google created an ethics board to guide “responsible development of AI” at the organization, thousands petitioned for the removal of a board member who made concerning comments about transgender people and whose company was skeptical of climate change. Many questioned whether the eight members who would meet only four times per year could possibly understand the full scope of Google’s AI development. When the debate about its board members continued, it became clear that the board was a liability for Google. Google dissolved the ethics board after just one week and resolved to find better ways to add outside perspective on AI topics. Google also faces intense antitrust scrutiny from the European community. Competitors in Europe claim Google uses its dominant market position to promote its own offerings and demote rival results in search listings. In 2010, the European Union (EU) investigated Google’s practices. Google proposed concessions and business changes it was willing to make to satisfy competitors and investigators, but none were accepted, and the EU announced formal charges against Google in 2015. The initial charge was that Google favors its comparison-shopping service over competitors. The EU later filed another antitrust charge against Google targeting the AdSense advertising platform. These accusations were similar to the EU’s investigation into Microsoft, which eventually led to $2.3 billion in fines and significant changes in how Microsoft conducted business worldwide. Google was fined a third time in 2019 for hindering competition. The $1.7 billion fine was in response to Google allegedly blocking rivals from placing ads on third-party websites. In total, Google has been fined more than $9 billion by the EU in the past few years alone. Additional changes need to be made by Google to avoid further investigations. For the sake of brevity, this case will focus on one major ethical issue Google has continually wrestled with as it seeks to expand its reach: privacy. The advent of the Internet and mobile
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technology provides so many opportunities for stakeholders that many do not realize the cost for this information might be significant portions of their privacy. Many consumers are shocked to find that web companies such as Google and Facebook track their online activity and use this information to tailor advertisements or sell to marketers. Other consumers feel that Google’s use of their personal information is a small price to pay in exchange for access to the company’s superior services. For Google—which offers so much free content and gets most of its revenue from advertising—this information is extremely valuable to its continued business success. Google’s privacy policy details what information it collects and how it uses that information. For instance, Google claims it may share nonpersonal information with its partners. Despite Google’s attempts to be transparent, there are ethical gray areas regarding the collection and use of data. Because there is still little legislation regulating how Internet companies gather and employ user information, it is tempting for firms to push the limits on privacy. Going too far, however, creates reputational and legal problems. Google was fined $57 million under the EU’s General Data Protection Regulation (GDPR) in France. The French data protection authority claimed Google did not disclose how data is collected across its services properly. Such concerns are not exclusive to GDPR. Although Google is the most popular search engine, one poll found that 52 percent of Google users have concerns about their privacy when using it. This could be a potential obstacle for Google since consumer trust plays a big role in how they interact with a company. The following sections discuss some of the major privacy issues Google has experienced.
C10.4a Search Queries One of the major privacy criticisms levied against Google is that the company keeps track of users’ search terms. Keeping a longer history allows Google to create a custom user experience. Consider all the things you have ever searched for using Google’s search engine. Now consider how comfortable you feel knowing the company has recorded and stored all those search terms... forever. This tracking cannot be turned off—users can disable their Google web history to remove any external record of searches and prevent the information from being used in certain ways, but Google will continue to record and store search terms for internal purposes. To address privacy concerns, users can automatically set their Google history to be deleted on a 3-month or 18-month schedule, so it’s no longer a manual process. To be fair, the practice of retaining search data is not limited to Google—many other Internet firms do the same. Because Google is the most popular search engine in the world, it is more heavily scrutinized. The big question users ask is whether their search terms can be traced back to them personally. Google claims that although it stores users’ search terms, after 18 months the data becomes “anonymized” and theoretically untraceable. However, critics debate this claim because supposedly anonymized data from other search engines were later matched to specific users. Google claims it treats this information with respect, using it to refine its search engine. Yet under the Third Party Doctrine and the Patriot Act, the U.S. government could subpoena the data if deemed necessary for national security. Needless to say, Google’s storage of users’ search terms is a controversial topic. In fact, several smaller search engines such as DuckDuckGo use the fact that they do not track user activity as a competitive differentiator from Google.
C10.4b Tracking Users Tracking users has become a major issue for Google. A storm of criticism was unleashed when government regulators and consumers learned the company’s phones tracked users’ locations. It was revealed that Android phones contained location-logging features enabling the firm to collect GPS coordinates of its users as well as the coordinates of nearby Wi-Fi networks. Similar tracking features were found on the Apple iPhone. The revelations spurred legislators to write letters to Google asking for clarification on how it tracks users and uses this information. It was later discovered by an AP investigation that even when users have turned off location history, Google still saves their location.
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Google also tracks users on the Internet. For Google, offering advertisers the ability to specifically target their ads to desired users based on their interests is invaluable to remaining competitive in the advertising market. Additionally, Google uses this information to customize its services to individual users. For example, users will see different results for the same Google search terms based on what Google believes they most likely want, based on what the company knows about them. Many privacy advocates do not like this pervasive use of tracking, and there is ongoing concern by regulators and others over how Google uses the information it collects. Google’s privacy policy does allow users to opt out of many tracking functions, but users must actively do so—the default is to be tracked. This is especially problematic for the many users who do not realize they are being tracked and/or do not know how to use Google’s settings to opt-out. All of the popular web browsers, including Google Chrome, now include a “Do Not Track” option, which indicates to websites that the user does not wish to be tracked. However, the designation has no legal or regulatory authority and has so far remained mostly symbolic, with many websites simply ignoring it. On the other hand, supporters of Google maintain that tracking is necessary to provide the best services to users. These services are often free because Google is able to generate revenue through advertising. Tracking also allows Google to customize its services to individual user needs. Consumers must, therefore, be proactive in deciding whether they place greater value on their privacy or Google’s free services. Although some people do not appear to mind having their web activity tracked in exchange for Google’s free services, Google has repeatedly violated public trust. In 2012, security analysts revealed that Google was using loopholes in Apple’s Safari browser to ignore their default privacy settings while simultaneously telling Safari users that they were protected. Google eventually paid $22.5 million to settle the FTC charges and an additional $17 million to settle similar charges brought by 37 states and the District of Columbia. Google has also been accused of failing to respect user privacy in the real world. In 2010, Google announced it had accidentally scanned data from some users’ personal wireless networks in the United Kingdom with its vans that collect data and photos for its location-based services. The vans scanned wireless networks of nearby residences and collected activity data from unsecured, open networks, including e-mails, text messages, video and audio files, and more. Though Google promised it would destroy the data collected, a later investigation revealed Google still retained some of this user data. The violation exacerbated its image of being a firm that disregards privacy. Soon after the incident, it was discovered that Google had been collecting the same type of information from unsecured residential wireless networks in other countries as well. In the United States, Google was fined $25,000 by the Federal Communications Commission (FCC) for deliberately delaying and impeding its investigation. The investigation led to a $7 million settlement among Google, the FCC, and 38 states and the District of Columbia. At least seven other countries also found Google guilty of similar activity in their jurisdictions. Yet another privacy-related incident for Google involved the Google Play App Store. A developer who started selling a mobile application through Google’s app store was shocked by the amount of information he was given about his customers, including their names, locations, and e-mail addresses, even though nowhere in the app buying process were customers asked to give consent to release that information. The developer argued that this practice violated Google’s privacy policy, which at the time stated that identifiable information would never be given to third parties without user consent. Some privacy experts agreed with the developer; others did not, stating that the information shared was minimal and of the type commonly expected to be given out in making any purchase. Still, Google’s approach to privacy continues to be a subject of controversy and debate. As technology evolves, the definition of personally identifiable data changes. In 2019, Google and the University of Chicago were sued in a lawsuit that accused the company and the university of failing to strip identifiable data from medical records in a collaboration designed to use AI to improve diagnosing medical problems. The artificial intelligence that Google is developing reads health records to assist doctors. To learn and produce accurate results, the machines must analyze large quantities of old health records. Though patient data was largely “de-identified,” dates of
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services were left intact, raising concerns. The lawsuit claims the retention of dates violates the Health Insurance Portability and Accountability Act (HIPAA), the legislation that provides data privacy for medical information, because dates could potentially be cross-referenced against other data Google collects, such as location history from Google Maps, to identify individuals. With the COVID-19 pandemic, many companies stepped up to help. One asset Google could provide was data. The company utilized the records of its users’ locations to help public health officials spot trends and help combat the virus. It did not give away the actual location of individuals but rather the aggregated statistics. Originally, the data was meant to help businesses better understand how to set their hours of operation and make decisions about delivery options. While it is important that corporations with large databases of information should use it for good, it also presents a dilemma concerning individual privacy.
C10.4c Privacy Audits Although Google has faced lawsuits from consumers claiming the company violated their privacy rights, a lack of Internet legislation enables Google to continue many of its practices. However, Google found itself in trouble with governmental authorities after allegedly violating its own privacy policies. In 2010, Google launched the failed social networking platform Google Buzz. Most of those who chose to join were unaware that the identities of their frequent contacts on Gmail would be made publicly available on the Internet through Google Buzz. Although users could opt out of having this information released, they claimed the opt-out features were difficult to locate. Other accusations claimed that even those users who opted out of joining Google Buzz were still enrolled in certain features of the social network and that those who requested to leave the network were not fully removed. Although Google worked to fix these problems, the FTC’s investigation found Google had acted deceptively and violated its own privacy policies. Google agreed to settle with the FTC by agreeing to never again misrepresent its privacy practices and allowing approved third-party firms to conduct privacy audits every other year regarding how the company uses information. These audits will take place for 20 years from the date of the settlement. That same year, Facebook agreed to a similar deal after allegedly violating its users’ rights to privacy, and other companies have since become subject to privacy audits as well. If Google’s audits reveal problems, the FTC may impose fines of $16,000 for each violation per day. These audits are a blow to Google’s operations. As one of the first Internet companies to have this kind of audit imposed on it, the company will have to tread carefully regarding how it collects and uses information. On the other hand, Google might choose to see this as an opportunity to improve its internal controls and privacy practices to ensure user information is respected. Doing so could gain more trust from users and prevent future legislative action against the company. So far, Google’s record in honoring the settlement is mixed. Its 2012 privacy audit found no issues, but that same year the FTC found Google’s bypassing of the Safari browser’s default privacy controls to be a violation of the agreement and fined the company for it. As one of the world’s largest Internet companies, the actions Google takes in this area will significantly impact the future activities of other companies.
C10.4d From Many Privacy Policies to One For most of its history, Google has had separate privacy policies for most of its products, each detailing how Google collects and uses information for that product. Google’s rapid growth and expansion from just search into an Internet behemoth had resulted in more than 70 separate Google privacy policies across its offerings. This was beneficial in one sense, as consumers who took the time to read the policies could understand in great detail how Google was operating each product. On the other hand, the overwhelming amount of policies was confusing, tedious, and time-consuming to sift through, and the average consumer would have been hard-pressed to decipher them. Google announced it was unifying its myriad privacy policies into just one, which would govern Google’s practices across its entire organization. At first glance, this seemed like an efficient
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change. However, it had many subtler implications that sparked widespread concern. Could consumers still opt out of specific information-sharing in individual products? Did the new policy adequately explain all the different ways Google gathered and shared information so consumers could be properly informed? Did the new policy expand Google’s information-gathering power under the guise of making things simpler? One especially concerning aspect of Google’s new policy was that it allowed the company to take all the information gathered on its users across all its products and combine them. Coupled with the new unified login system, the new privacy policy allowed Google to use information on a much larger and more encompassing scale. Users’ Google searches might affect the ads they see on their Android phones, and YouTube browsing histories could be combined with Gmail activity to better understand user interests and more. Was this “all-seeing eye” approach acceptable, especially for such a large company with so many widely used services? Understandably, the announcement of a unified privacy policy led to considerable backlash. Google received letters from Congress members and U.S. attorneys general expressing concern about the new policy. Competitors such as Microsoft took advantage of the situation to run ads drawing consumer attention to Google’s potentially unsettling approach to user privacy. The EU asked Google to delay the implementation of the policy until it could study and better understand its implications. In defending itself, Google emphasized that it was not gathering any more information than before, nor was it making any changes to existing user ability to opt out of informationsharing or use product-specific privacy settings. It was merely making existing practices simpler and clearer for customers to understand, as well as improving its own ability to serve users by unifying the information it gathered across offerings. Google argued the new policy was in legal compliance and refused to delay the transition. On March 1, 2012, the unified policy took effect. The new privacy policy was poorly received in Europe. The EU Justice Commissioner questioned the legality of Google’s new policy according to EU law. French data regulators launched an investigation concerning the new policy, believing the policy might not adhere to EU Internet transparency and privacy laws. Google maintained its new policy met EU regulations. However, in 2013 six European countries banded together to take legal action against Google for not complying with the requests of the government. Google has since been fined by several European countries for breaking their privacy or data protection laws, including nearly $1 million by Spain and $204,000 by France. The Netherlands threatened a fine of up to $15 million if Google does not comply with its desired changes. The company narrowly avoided yet another fine in the U.K. by agreeing to change its privacy policy for U.K. users, and there are signs it may make such a change Europe-wide in an attempt to allay the concerns of the EU and its member nations. Google has learned that activities that are legal in one country might not be legal in another. The public’s reaction to Google’s unified privacy policy once again brings to light the more general debate over the company’s gathering and use of user information. Supporters argue that Google uses this information to create improved services for users. It helps the firm remain competitive with strong rivals such as Apple and Facebook. Critics are concerned that Google is constantly overreaching and seems to have little actual concern for user privacy, only slowing or backtracking when it is forced to by consumer backlash or governmental regulators. Critics are also worried by the ease with which Google appears to change its policies, which could spell trouble for users and their privacy rights. Google keeps a log of changes made to its policies to improve transparency with a comparison tool that allows users to see what changes were made between versions.
C10.4e “Right to Be Forgotten” In 2014, the European Union’s highest court ruled that EU citizens have a “right to be forgotten.” In other words, consumers have the right to prevent certain types of content from showing up in online search results. Such content includes results that are inadequate, irrelevant, no longer relevant, or excessive. The court decision allows individuals to petition search engines to remove such content from search results, and if refused, to take the matter to a local data protection authority for adjudication.
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The court decision sent shockwaves through the Internet search community. Was this censorship, or the beginning of an acknowledgment that search engines have a duty to at least somewhat curate their results? Was this a victory for privacy, or a defeat for freedom of speech? How will search companies be able to properly decide whether removal requests are legitimate or stretch beyond the boundaries of the court decision? In response to the ruling, Google set up a process by which it processes “right to be forgotten” requests. The claimant fills out an online form, which is reviewed and processed by a team of Google lawyers, paralegals, and engineers. “Easy” cases, where the correct decision is relatively clear, are made by that team. Difficult cases are forwarded to a senior panel of Google experts and executives to decide. For instance, a published U.S. record of the name of a 16-year-old German individual convicted in the United States of a sex crime could be controversial because in Germany the record would not be published due to his minor status. Google also releases periodic “Transparency Reports” providing information on right to be forgotten requests. So far, Google has received more than 650,000 requests to remove 2.43 million URLs, mostly from individuals who want to protect their private information. Google removes approximately 43 percent of these URLs. Google and other Internet search companies continue to express their opposition to the “right to be forgotten” concept, and many others agree. Some are opposed to it outright, citing freedom of speech concerns; others believe it may be a good idea but that private companies such as Google should not be the ones deciding which links to keep and which to take down. Simultaneously, EU regulators are dissatisfied with how Google has chosen to interpret the court decision. For example, Google only removed links from its Europe-specific search engines such as Google. fr or Google.co.uk, meaning anyone can simply move to Google.com to find the hidden content. Google has since won this small battle. Europe’s highest court sided with Google and declared Google does not have to apply “right to be forgotten” globally. France’s top administration canceled a fine of $111,000. Simultaneously, other areas of the world are considering the right to be forgotten idea, with varying success. In Mexico, courts have ruled for some individuals petitioning Google to remove content, but critics worry the right is being used largely by politically powerful individuals to remove unsightly aspects of their past. California passed a law requiring websites to provide a mechanism by which minors can have content they post removed, believing children should not be punished for online missteps. Hong Kong’s top privacy regulator has embraced the concept wholeheartedly, suggesting Google should apply the EU ruling to its operations globally. “Right to be forgotten” adds another wrinkle to Google’s privacy concerns. Now, at least in some parts of the world, Google must not only worry about the information it collects itself, but also about what information posted by third parties might be showing in its search results.
C10.4f Google in China Google has had a tough time in China. When Google decided to enter the world’s most populous country, it faced an ethical dilemma. On the one hand, Google did not want to miss the opportunity to tap into a market consisting of more than one billion potential consumers. On the other hand, Google could not enter China without censorship. If it created a Chinese version of Google and hosted it outside of China, it would be subject to China’s “Great Firewall,” which the government uses to censor foreign sites. Google tried this method first, but its Chinese search engine was intermittently blocked and was otherwise slow and inconsistent for users, causing Google to steadily lose market share to domestic Chinese competitors such as Baidu. Google’s other option, to host a search engine from within China, would require agreeing to self-censor search results in accordance with Chinese law. Such an agreement went against the essence of what Google stood for—providing free and open access to information. Could Google agree to censor itself and still hold true to its “Don’t Be Evil” mantra? Despite criticism, Google applied the principles of utilitarianism to the situation and concluded that the benefits of setting up a search engine inside China outweighed the costs. Google refused to offer localized e-mail or blogging, finding the Chinese censorship and reporting requirements for these services to be too egregious. However, for search Google decided the greater good would be to provide Chinese citizens with “the greatest amount of information” possible, even if some of
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that information was censored. In 2006, Google opened its localized, self-censored Chinese search engine. Whenever a search term led to censored results, Google added a message to the results page notifying the user that some entries were missing. Google also left up its original, uncensored Chinese search engine hosted outside of China, so users could try to use it if they wanted. Despite these precautions, Google’s plan ran into problems almost from the onset. Google gained significant market share and became a serious competitor to Baidu, but the company’s relationship with the Chinese government was continually tense, with Google accusing the government of interfering with the search engine beyond expectations. Google also faced intense backlash in the United States, including its leadership being called to testify at Congressional hearings about how they could justify self-censoring in China considering the principles they claimed to stand for everywhere else in the world. In 2010, Google announced it had been targeted by a sophisticated cyberattack that appeared to originate from China and, among other things, had attempted to access the Gmail accounts of known Chinese human rights activists. Google stated that the implications of the cyberattack required the company to reevaluate its approach toward the Chinese market, and it could no longer justify self-censorship. It shut down its China-hosted site and forwarded visitors to their external, uncensored but often-blocked Chinese search engine. As a result, Google saw its market share in China plunge and Baidu retaking its dominant position. The Chinese government was also not happy with Google’s handling of the situation and immediately began blocking and/or censoring large portions of Google’s services. Google did not give up on the largest market in the world. Google began a secret project in 2017 with the Chinese government called Dragonfly. The plan was to again launch a censored search engine in China. The project was kept under wraps until it was exposed by The Intercept, an online news publication. A previous Google employee called the project disturbing. In 2019, Google officially terminated Dragonfly, and the company stated it had no active plans to launch in China. The company will have to remember the lessons it learned from both of its failed attempts and the sensitive ethical issues involved with censorship if it makes any future moves into the Chinese market.
C10.5 GOVERNMENT RESPONSE TO PRIVACY ISSUES Consumer concerns over privacy issues prompted Congress to consider new legislation regulating what information Internet companies such as Google can collect and how it can use it. Internet companies, in turn, are attempting to make such legislation unnecessary by developing their own industry standards, such as the “Do Not Track” feature now found on all major web browsers. Such self-regulation is an attempt to ward off federal legislation that could seriously limit the tracking activities of companies like Google. Some of the ideas that federal regulators have been discussing include a User’s Bill of Rights and a mandatory Do Not Track feature. The Bill of Rights would, among other things, require companies to adhere to certain privacy practices. Its intent in this area would be to make Internet privacy policies easier for users to understand. A mandatory Do Not Track mechanism would be comparable to Do Not Call legislation, which makes it illegal for companies to sell to consumers over the telephone if those consumers are on the national Do Not Call registry. A similar law regulating Internet tracking could seriously impact how Internet companies collect information. Many states are dissatisfied with the lack of federal action on this topic and have passed their own privacy laws. California law, for example, provides special privacy protections to minors online and requires websites to disclose whether they are respecting the “Do Not Track” requests they receive from user browsers. Illinois has a law called the Biometric Information Privacy Act (BIPA) to prevent the unlawful collection, storage, and use of biometric identifiers. A lawsuit alleges Google, Amazon, and Microsoft violated this law after images of two Illinois residents appeared in an IBM “Diversity in Faces” database without their consent. Their faces were used to train the facial recognition systems at the three companies named in the lawsuit. Many believe the U.S. government is failing to address the privacy gap, giving online companies like Google free rein to collect, store, and use user information.
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Because legislation could be a serious threat to Google, the company spends millions on lobbying and employs lobbyists on its staff. Google hopes to stave off regulation it feels restricts its ability to coordinate targeted advertising or offer customized services to users. However, with privacy issues and Internet breaches becoming a growing concern, the chance of increased regulation in the future is high. Although Google might not be able to prevent legislation restricting some of the activities of Internet firms, it can work with regulators to push for legislation with less of a negative effect on its operations. Google’s lobbyists are having a profound impact on laws safeguarding Internet security.
C10.6 CONCLUSION Google’s success story is unparalleled among search engine providers. The company started off as a small search engine and ranking system and has become one of the most profitable Internet companies in the world. Today the company is the owner and provider of products that go above and beyond simply a search engine. While there might be a risk of Google overextending itself, the company has a talent for making highly profitable acquisitions that increase its global reach. As a way to manage its various businesses, in 2015 Google created a new publicly traded holding company called Alphabet. The founders, Larry Page and Sergey Brin, believed that developing a holding company and “slimming down” Google to focus more on its Internet businesses would be beneficial for the firm in the long run. Google has made itself into the epitome of a “best company to work for.” The benefits Google offers employees are extensive, and Google empowers them to make decisions to improve the company’s operations. The company has taken a strong stand on green initiatives and supports technologies to address global challenges. Google’s “Don’t Be Evil” mantra became a popular yardstick to guide Google’s actions. After Google became part of the holding company Alphabet, it took the motto “Do the Right Thing.” On the other hand, Google has faced challenges in privacy, many of which continue to this day. Google is forced to draw a fine line between using user information to generate revenue and violating user privacy. Because Google can offer targeted advertising to advertisers through its collection of information, the company can provide quality Internet services to its users for free. At the same time, Google has committed questionable actions that seem to infringe on user rights and has encountered resistance from governmental authorities on many privacy-related initiatives. With the threat of new regulation, Google lobbies to prevent legislation from being passed that proves unfavorable to the company. Because Google depends on tracking and similar activities to maintain profitability, it has a large stake in the privacy issue. However, rather than seeing this solely as a liability, Google might instead choose to improve its privacy practices and increase transparency in its operations. Google has the responsibility to ensure stakeholder rights are respected. Although Google has made great strides in social responsibility, both the company and society know there is room for improvement. Google’s size, reputation, and history give it a unique opportunity to positively impact how companies interact on the Internet.
QUESTIONS
SOURCES
1. Has Google implemented a strategy that serves all stakeholders? 2. How can Google respect privacy and still maintain its profitability? 3. How will increasing global regulation of privacy affect Google’s operations?
Adi Robertson, “Google France Forced to Notify Visitors of €150,000 Privacy Policy Fine,” The Verge, February 8, 2014, http://www.theverge.com/2014/2/8/5393418/google-france -forced-to-notify-visitors-of-150ooo-privacy-policy-fine /in/2527939 (accessed July 16, 2020); Alex Johnson, “Massive Phishing Attack Targets Millions of Gmail Users,”
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396 Part 5: Cases
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Case 10: Google Searches for Solution to Privacy Issues 397
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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
398 Part 5: Cases
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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CASE 11 IndyCar: Seeking a Return to Motorsports’ Fast Lane* SYNOPSIS: Auto racing has experienced a steady decline for more than a decade. After years of damaging competition, the Indy Racing League and Champ Car (CART) reunified, leading to new sponsors, new business opportunities, and a new television contract. Despite the resurgence, the league remains a distant competitor to NASCAR in terms of popularity in the motorsports market. IndyCar must address this issue and several other concerns in order to strengthen its standing in the American motorsports market and build connections with new fans and sponsors. THEMES:
ompetition, market segmentation, product and branding strategy, C sports and event marketing, sponsorship, global marketing, corporate governance, marketing implementation
T
he origins of IndyCar can be traced back to the formation of Championship Auto Racing Teams (CART) in 1978. Several automobile racing team owners created CART as a sanctioning body for open-wheel racing in the United States. Open-wheel racing refers to cars whose wheels are located outside the body of the car rather than underneath the body or fenders as found on streetcars. They have an open cockpit, also called a pod, with the engine housed at the rear of the vehicle. The United States Auto Club (USAC) had sanctioned the sport since the mid1950s, but many racing teams were dissatisfied with USAC’s administration and promotion of open-wheel racing. Consequently, CART was founded when 18 of the 21 team owners left USAC to form the new league.
*Don Roy, Crawford Rummel, Jennifer Sawayda, and Kelsey Reddick prepared this case under the direction of O.C. Ferrell for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2022.
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400 Part 5: Cases
C11.1 THE EARLY HISTORY OF U.S. OPEN-WHEEL RACING During the first 17 years of its existence, CART dominated auto racing in the United States, and open-wheel racing enjoyed greater notoriety than other forms of racing, including stock car racing. However, Anton H. “Tony” George, the president of the Indianapolis Motor Speedway, was concerned that CART was beginning to lose sight of the interests of American open-wheel racing by holding events in foreign countries, putting too much emphasis on racing at road courses instead of oval tracks, and focusing too much on promoting top foreign drivers as CART stars. In the early to mid 90s, George announced that he was creating a new open-wheel league that would compete with CART called the Indy Racing League (IRL), the forerunner to today’s IndyCar. The new league was divisive to open-wheel racing in the United States, as team owners were forced to decide whether to remain with CART or move to the new IRL. Only IRL members would be allowed to race in the Indianapolis 500. The IRL–CART feud, which also involved lawsuits in court, distracted both leagues and stock car racing (i.e., NASCAR) solidified its standing as the favorite motor sport in the United States. The diminished appeal of open-wheel racing contributed to additional problems with sponsor relationships. Major partners left CART, including Honda, Toyota, and FedEx. During the same time, the IRL struggled to find corporate partners. Interest in IRL as measured by television ratings took a noticeable dip in the early 2000s. The declining television audience was a factor in the IRL’s inability to sell naming rights for its series from 2002 through 2009. In contrast, NASCAR (National Association of Stock Car Auto Racing) signed a blockbuster deal with Nextel that called for more than $700 million over a 10 year period. Industry experts believed that the most the IRL could command for its title sponsorship as long as it competed with CART was about $50 million over 10 years. However, CART went bankrupt in 2003 and was renamed the Champ Car World Series after a buyout. In response to declining interest in the IRL, marketing initiatives were taken to reverse the trend. The league didn’t establish a dedicated marketing staff until 2001. In 2005 the IRL launched a new ad campaign that targeted 18- to 34-year-old males. Instead of focusing on the cutting-edge technology found in IRL cars, as had been done in previous ad campaigns, the focus shifted to drivers and the drama created on the track. In support of this effort, two developments can be noted. First, the IRL followed a trend observed in NASCAR and got several celebrities involved in the sport through team ownership. Also, rock star Gene Simmons, a partner in Simmons Abramson Marketing, was hired to help the IRL devise new marketing strategies. The firm’s entertainment marketing savvy was tapped to help the IRL connect with fans on an emotional level through its drivers, whom Simmons referred to as “rock stars in rocket ships.” Second, driver personalities began to give the IRL some visibility. In 2005, Danica Patrick was a 23-year-old IRL rookie who finished fourth in the Indianapolis 500. Soon after, Patrick placed first in the Indy Japan 300 to become the only woman with a win in an IndyCar Series race. The combination of the novelty of a female driver and her captivating personality made her the darling of American sports. The IRL reported gains in event attendance, merchandise sales, website traffic, and television ratings during Patrick’s rookie season. Patrick attracted the interest of many companies that hired her as a product endorser, including Motorola, GoDaddy, Boost Mobile, and XM Radio.
C11.2 MOTORSPORTS COMPETITION Although many forms of motorsports exist, competition for IndyCar can be narrowed to two properties: Formula 1 and NASCAR.
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C11.2a Formula 1 Formula 1 is an open-wheel series that has the greatest global reach in terms of race venues and races exclusively on road courses. A Formula 1 race is known as a Grand Prix, with each race taking on the name of the country hosting a particular race (e.g., Grand Prix of Spain). Grand Prix races have been held in countries including Austria, Bahrain, Belgium, Brazil, Canada, China, Hungary, Italy, Mexico, Russia, Spain, the United Arab Emirates, the United Kingdom, the United States, and Vietnam. Formula 1 was the first racing league in the Western hemisphere to stage an event in the lucrative Chinese market. Most Formula 1 drivers hail from European countries, although there are also drivers from Australia, Canada, Thailand, Russia, Mexico, and Brazil. The winner of the Formula 1 season series is referred to as the “Formula 1 World Driver Champion,” further reinforcing Formula 1 as a global racing league.
C11.2b NASCAR The clear leader in the U.S. motorsports market is NASCAR. It was founded in the early 1950s, approximately the same time period when USAC was founded. NASCAR has four major national racing series, including the Cup Series, Xfinity Series, Gander RV & Outdoor Truck Series, and the ARCA Menards Series. The Cup Series is NASCAR’s premier circuit. Its 36 races are held primarily on oval tracks and exclusively in U.S. markets. Like IndyCar, NASCAR has a strong regional following, with the southeast United States being a long-time hotbed for the league. NASCAR was predominantly a southern U.S. sport until the 1990s as exposure provided by cable television and the emergence of strong driver personalities such as Dale Earnhardt and Jeff Gordon led to an explosion in NASCAR’s popularity. The league became even more popular as it focused on marketing drivers, especially young drivers often referred to as NASCAR’s “Young Guns.” As a result of NASCAR’s popularity growth, it was able to negotiate a lucrative, multibillion-dollar contract with Fox and ESPN. Today, NASCAR towers over IndyCar in the United States in terms of sponsor support and audiences. NASCAR has sought to expand to become a truly national sport, adding races in Chicago, southern California, and Texas while eliminating races in smaller markets such as Rockingham, North Carolina. Potential expansion plans include tracks in Texas, the Pacific Northwest, Iowa, Wisconsin, and Tennessee.
C11.3 REUNIFICATION Many racing observers believe that open-wheel racing could have been as popular as NASCAR is today. In the 1980s and early 1990s, it was CART that enjoyed greater popularity and television ratings. The split in open-wheel racing that led to the formation of the IRL was a setback to openwheel racing in general. The split resulted in a dilution of competition quality, sponsor dollars, and fan support. Many experts believed a reunification of open-wheel racing was the only way to compete against NASCAR. The long-awaited reunification of U.S. open-wheel racing occurred before the beginning of the 2008 season. The same year Patrick placed first in the Indy Japan 300, Champ Car World Series—CART’s successor—filed for bankruptcy. Tony George’s IRL bought the assets of Champ Car for a mere $10 million and provided a $30 million capital investment for equipment and incentives to bring Champ Car teams into the IRL fold. After reunification, the IRL rebranded as IndyCar, and its reunified open-wheel racing circuit was branded the IndyCar Series. Decisions had to be made about the markets and racing courses that the IndyCar Series would target following the merger of Champ Car and IRL. Fast forward to 2020, and the IndyCar schedule included 17 races, which is less than half the number (41) of NASCAR Sprint Cup Series races. One change has been an increase in the number of street and road course races. The IndyCar Series added street races in markets that had been very successful for CART/Champ Car and now make up the majority of the races. In contrast, only two of the 36 races in the NASCAR Sprint Cup Series are held on road courses. This characteristic of IndyCar’s
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schedule is drastically different than the product of the old IRL, which ran on oval tracks exclusively between 1996 and 2008. The 2020 schedule initially included 22 races, an increase from the previous year; however, the global pandemic resulting from COVID-19 severely shortened the season. In addition to the influence of Champ Car’s strategy of more street courses, another feature of Champ Car that IndyCar sought to leverage was the positioning of races as entertainment events. The race itself is only one piece of the product. Champ Car used the term “Festival of Speed” to position its events. In addition to the race, fans can often partake in such activities as kids’ zones, beach volleyball, wine tasting, or live concerts. The festival concept has been a success. Street races in Long Beach and Toronto annually draw more than 150,000 people over the course of a three-day race schedule. Another positive development for the IndyCar Series was the announcement of NBC as a television broadcast partner beginning in 2018. ABC televised the Indianapolis 500 for around half a century, but now NBC is the exclusive home for IndyCar. This change was huge for IndyCar’s exposure as it is now recognized in NBC’s “Championship Season” along with the Triple Crown, the Tour de France, and many other popular world sports events. This promotional support along with elevated TV ratings helped IndyCar keep its momentum in the effort to become the premier auto racing league. This partnership has already proven fruitful as the 2020 season-opening race was the most watched IndyCar race since 2016. Though the COVID-19 pandemic condensed the 2020 season and reduced in-person spectators, more viewers tuned in as they were eager to view live sports. NBC and IndyCar could see a continuation of this increased viewership over the long term.
C11.4 STEPS FORWARD, BACKWARD Both optimism and uncertainty existed as IndyCar moved beyond reunification. A primary concern for IndyCar following reunification was top leadership. Tony George resigned his top positions with both IndyCar and the Indianapolis Motor Speedway in July 2009. His role in causing the split in open-wheel racing was never forgotten, and many people within the industry believed a reunified league would benefit from a new leader. In 2010 Randy Bernard joined IndyCar as CEO following a highly successful tenure leading Professional Bull Riders (PBR). Bernard created excitement around PBR events and marketed riders’ personalities. He had similar priorities for IndyCar. Bernard wanted to raise the profile of IndyCar drivers, to make them “bigger than life.” More elaborate driver introductions were produced at races to spotlight drivers, and the league invested in an office responsible for placing IndyCar and drivers in television and movies. Bernard’s commitment to marketing was apparent in the successes IndyCar had signing new sponsors and moving into new markets in the United States (Baltimore) as well as Brazil and China. Despite his successes, after 3 years at the helm Bernard stepped down as CEO amid rumors of conflicts with team owners. During his tenure, Bernard had to deal with the fallback that came when two-time Indianapolis 500 winner Dan Wheldon died in a crash in 2011. However, his resignation was heavily criticized by fans and racing owner Roger Penske, who supported Bernard’s efforts at revitalizing the sport. The next few years introduced marketing challenges for IndyCar. The marketing strategy appeared to be inconsistent, and IndyCar’s deal with VERSUS (now called NBCSN) was criticized because it was viewed as being less visible than ESPN. In 2013 Mark Miles, former president of the ATP tennis tour, assumed the role of CEO. One of Miles’s plans was to expand IndyCar globally, increasing its presence in major international events starting in 2015. Miles was able to secure $100 million in tax revenue to restore the Indianapolis Motor Speedway over a 20-year period. He added more races to the schedule and secured a new title sponsor, Japanese telecom company NTT, to replace Verizon. In 2018, Miles was vital in beginning its three-year deal with NBC, which boosted race viewership. Miles brought stability and promise to the sport when at times it seemed as if it would fail. With some of the big hurdles such
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Case 11: IndyCar: Seeking a Return to Motorsports’ Fast Lane 403
as title sponsorship out of the way, Miles has announced the organization will commit more time to marketing driver development. Miles also gained the confidence and support from the league’s team owners such as Michael Andretti, who claims this is the best spot the league has been in since he has been involved with the sport. The global COVID-19 pandemic in 2020 challenged IndyCar in many ways. Revenue is earned through ticket sales, sponsorships, and TV revenue, and drivers bring in funds through sponsorships. Drivers with good reputations spend much time selling their car, suit, and helmet for advertising space. Drivers earn their salaries thanks to these sponsorships. With restricted inperson attendance in 2020 and a shortened season, there was significantly less revenue. There were limited ticket sales, but TV viewership increased because there were significantly fewer sports events to watch on TV. On the bright side, Roger Penske purchased the Indy racing league and Indy 500 racetrack. Penske was in a strong financial position to support IndyCar. The Indy 500 remains the most famous race in the world and a crown jewel for the sport going forward. Penske’s renovations at the track set the stage for a 2021 recovery.
C11.5 NEW BUSINESS OPPORTUNITIES Optimism also exists in new business opportunities. For instance, IndyCar has made important gains in sponsorships. A partnership with Mattel brought Hot Wheels branded IndyCars to retail stores and IndyCar Series events, promoting drivers and the Series schedule by including it on product packaging. Sponsors were happy to see that their money is going to good use. The IndyCar races featured on NBC saw an average rating increase of 34 percent in viewership from the year before. Current sponsors include NTT, Chevrolet, Honda, Firestone, Pennzoil, Sirius XM, Tag Heuer, Netjets, Verizon, and several others. In 2019, IndyCar announced that it had found a new title sponsor in global information and communications company NTT, as the deal with Verizon came to an end in December of that year. Aligning with the goals of Miles, NTT is attempting to grow the sport by modern marketing tactics such as the new mobile app and a Smart Platform to enhance the fan experience. This multiyear deal looks extremely hopeful as it should attract more younger and digitally inclined people to the sport. NTT also happens to be the current primary sponsor of the Ganassi #10 car. Another factor coming into play with IndyCar’s global reach is talks between the company and Ferrari to become a possible third manufacturer for the sport. Due to budget cuts coming from Formula 1, Ferrari is looking for ways to spend the money resulting from the savings. Adding IndyCar to their racing portfolio could save the company from massive layoffs, so there have been discussions regarding their entrance to the sport with Ferrari showing public interest. If they joined as a manufacturer, they would become one of three manufacturers for the sport, the other two being Honda and Chevrolet. Another step forward for IndyCar is increasing its presence beyond tracks and race broadcasts. IndyCar was prominently featured in the DreamWorks movie Turbo, a story of a snail that dreams of being fast enough to win the Indianapolis 500. The movie featured the Indianapolis Motor Speedway as well as several IndyCar teams, drivers, and sponsors. Also, a weekly television series INDYCAR 36 follows a driver at the track and away from it over a 36-hour period that gives fans a more intimate view of some of the personalities of IndyCar. After a lengthy tenure as owners for 74 years, the Hulman family finally sold both the IndyCar Series and the Indianapolis Motor Speedway to Roger Penske, as discussed earlier in this case. Penske, the most successful team owner in the history of the Indy 500, intends to build the IndyCar sport in the same way as Miles would like to. However, with his company now owning the series his team competes in, a conflict of interest may be called into question. Penske has assured other owners and fans that he understands the integrity and hopes his long-standing credibility outweighs the concern. Miles stepped into the position as CEO of Penske Entertainment Corp., so he remains in the same position as before the purchase.
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C11.6 FAN ENGAGEMENT Along with looking for new marketing initiatives, IndyCar is heavily invested in trying to engage more closely with the fans the sport already has. The new partnership with NTT Corporation has given IndyCar many different avenues with which to increase the fan experience. The most obvious is with technology. IndyCar has taken advantage of smart technologies to enhance the experience, safety, and convenience for each fan’s trip to the racetrack. NTT brought together an Accelerate Smart platform that grants fans with a wide array of technological uses such as being able to track where cars are on the racetrack, see stats for each driver, and use a 100-foot media wall to have real-time insights to the race. With the Indy 500 being the world’s largest single-day sporting event, NTT is also focusing on different security measures it can provide to create a safe and worry-free experience for every attendee. Improving the fan experience has not been limited to efforts at the tracks. A redesign of the IndyCar.com website connected fans with content on the league’s social media sites as well as the digital app that is available on all mobile devices for users. Users on the app can see live in-car cameras during races, track weather forecasts, watch highlights after races, and utilize many other features. IndyCar uses social networking to engage fans beyond providing news and information. An example is IndyCar partnering with Cie Games, a gaming company that created the Facebook game “Car Town.” IndyCar’s presence in “Car Town” included cars that players could buy and a pit-stop challenge with an Indianapolis 500 theme. IndyCar and Cie Games shared revenue from IndyCar-related purchases made by “Car Town” players. “Car Town” lasted for 4 years on Facebook and generated more than 7 million “likes.” Like NASCAR, IndyCar is challenged to get young people interested in the sport. Among the steps taken to target youth have been lowering the age to enter the garage area to as young as nine years old. Also, the Indianapolis Motor Speedway offered children 15 and under a free general admission ticket to the race with a paid adult ticket. Creating value by offering interactive, entertaining experiences at races at customer-friendly prices has potential strategic benefits for IndyCar. Michael Andretti, a former IRL driver and now IndyCar team owner, believes the cost advantage of attending IndyCar races compared to NASCAR gives the league an upper hand in a difficult economic environment.
C11.7 IRL’S CURRENT MARKETING STRATEGY Despite the positive developments for IndyCar, the long-term future is unclear. One concern is the mix of racetracks and target markets. IndyCar’s recent focus on street racing, for example, could be a big win for the organization as a way to differentiate it from Formula 1 and NASCAR. IndyCar touts the mix of races as challenging to drivers, forcing them to master a variety of tracks in order to win the IndyCar season championship. Critics fear fewer oval tracks will take the IndyCar series away from its roots. With that fear, the 2020 pandemic cancellations could have a bad effect long-term on fans’ views of the season. Further, oval track racing is more popular with fans in the United States as evidenced by NASCAR’s popularity. Recently, IndyCar added two veteran executives who the league is hoping will boost the commercial side of IndyCar. SJ Luedtke, a former sports marketing executive at Nike, is the vice president of marketing. Mike Zizzo, a long-time executive in the motorsports industry, was retained by IndyCar as a communications consultant. With IndyCar’s deal with NTT, it has brought about many possibilities to grow the global reach of the sport. The 2019 season was shown in approximately 100 different countries as IndyCar Media secured deals to broadcast content abroad. IndyCar also gained airtime on premium channels in both Canada and the United Kingdom. With foreign drivers and a growing foreign fan base, vice president of promoter and media partner relations Stephen Starks is hopeful these partnerships will allow the sport to flourish throughout the world.
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Case 11: IndyCar: Seeking a Return to Motorsports’ Fast Lane 405
Like all forms of auto racing, safety is a continuous issue for IndyCar. Racecar driving is a dangerous profession, and crashes are not uncommon. In 2011 at the season-ending race in Las Vegas, racecar driver Dan Wheldon was killed in a horrific crash just 11 laps into the race. His death called into question the safety of racing on oval tracks, which were built for stock car racing such as NASCAR. IndyCars reach speeds of more than 220 miles per hour, significantly faster than stock cars. Many people in the racing industry said that IndyCar should discontinue racing on ovals. Additionally, in 2015, Justin Wilson was tragically killed after being struck by a piece of debris from another racecar. This incident is another case highlighting the riskiness of having an open cockpit for the drivers. IndyCar worked on implementing safety measures to reduce the risk of fatal crashes. In 2019, IndyCar released a new phase of safety called the Advanced Frontal Protection, which is a piece of titanium in front of the cockpit that is designed to deflect debris away from the driver. This invention could have possibly saved Wilson’s life, and IndyCar hopes it will save dozens going forward.
C11.8 CONCLUSION Auto racing has been the fastest growing spectator sport in the United States in recent years. While open-wheel racing experienced a period of decline for quite some time, it seems the sport has found new growth with new sponsors, restructuring, and a new owner. However, Formula 1 racing still appears to be very popular around the world, and IndyCar is a distant second to NASCAR in terms of popularity in the United States. While NASCAR focuses on the North American market, especially concentrated in the southeast, IndyCar is trying to become more global, which is supported by its international drivers. There is no doubt that these international drivers, if properly promoted, will develop a great deal of interest and support from race fans in their countries. An important challenge is to determine how global IndyCar should be and how to overcome some of the obstacles for international races that are sometimes canceled due to financial resource issues. Another marketing decision is how to deploy resources to promote this sport. For example, should more promotion create a following for specific drivers so fans will want to follow specific drivers in the races? IndyCar cannot succeed without finding the best marketing strategy for fan engagement that will trigger attendance and television viewership. IndyCar is optimistic about its future, especially as ratings and viewership have risen in recent years. The league must continue to strengthen its standing in the American motorsports market. With the two major open-wheel leagues reunified, IndyCar must reconnect with more fans and sponsors as well as build new relationships. And, it must ensure the safety of its greatest marketing asset—the IndyCar drivers.
QUESTIONS
SOURCES
1. Identify the external factors that have impacted and continue to impact IndyCar and its marketing efforts. Which factors appear to be IndyCar’s greatest opportunities and threats? 2. What advantages does IndyCar possess over NASCAR? How should these advantages be used by IndyCar to compete with NASCAR? 3. What can IndyCar learn from NASCAR’s success? Are there elements of NASCAR’s marketing strategy that IndyCar could adopt?
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Ryan, “Dan Wheldon’s Death Raises Questions for IndyCar Circuit,” USA Today, October 18, 2011, http://www.usatoday .com/sports/motor/indycar/story/2011-10-17/indycar-faces -questions-about-future-after-death-of-dan-wheldon /50807480/1?csp=ip (accessed May 28, 2015); Nate Ryan, “IndyCar’s New Leader: ‘We Have a Lot of Work to Do’,” USA Today, March 21, 2013, http://www.usatoday.com/story /sp or ts/motor/2013/03/20/izo d-indycar-series -mark-miles-ryan-reynolds-jeffrey-katzenberg-dreamworks /2004517/ (accessed May 28, 2015); “NBC Sports Delivers Most-Watched IndyCar Race Since 2016,” IndyCar, June 8, 2020, https://www.indycar.com/News/2020/06/06-08-NBC -Viewership (accessed June 12, 2020); “NTT Enhancing IndyCar Fan Experience and Safety at Indianapolis Motor Speedway,” NTT, May 21, 2020, https://www.businesswire .com/news/home/20200521005270/en/NTT-Enhancing -INDYCAR-Fan-Experience-Safety-Indianapolis (accessed June 15, 2020); “NTT IndyCar Series Sponsors,” IndyCar, https://www.indycar.com/Sponsors (accessed June 13, 2020); Reggie Hayes, “What’s Next for IndyCar?” Fort Wayne News-Sentinel, July 1, 2009, http://www.news-sentinel.com /apps/pbcs.dll/article?AID=/20090701/SPORTS/907010339 (accessed May 28, 2015); Scott Warfield, “Danica Patrick Provides Sizzle to IRL,” Street & Smith’s Sports Business Journal, May 23, 2005, p. 1; Scott Warfield, “IRL in Line to Court Young Males,” Street & Smith’s Sports Business Journal, November 29, 2004, p. 4; Shawn Fenner, “IRL Sees Significance of Selling Product to U.S. Market,” Richmond Times-Dispatch,
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CASE 12 Mattel Gives Its Marketing Strategy a Makeover* SYNOPSIS: As a global leader in toy manufacturing and marketing, Mattel faces a number of potential threats to its ongoing operations. Like most firms that market products for children, Mattel is ever mindful of its social and ethical obligations and the target on its corporate back. This case summarizes many of the challenges that Mattel has faced over the past decade, including tough competition, changing consumer preferences and lifestyles, lawsuits, product liability issues, global sourcing, and declining sales. Mattel’s social responsibility imperative is discussed along with the company’s reactions to its challenges and its prospects for the future. THEMES:
Environmental threats, competition, social responsibility, marketing
ethics, product/branding strategy, intellectual property, global marketing, product liability, global manufacturing/sourcing, marketing control
I
t all started in a California garage workshop when Ruth and Elliot Handler and Matt Matson founded Mattel in 1945. The company started out making picture frames, but the founders soon recognized the profitability of the toy industry and switched their emphasis to toys. Mattel became a publicly owned company in 1960, with sales exceeding $100 million by 1965. Over the next 50 years, Mattel went on to become one of the world’s largest toy companies in terms of revenue. Today, Mattel, Inc. is a global leader in designing and manufacturing toys and family products. Well known for brands such as Barbie, American Girl, Fisher-Price, and Hot Wheels, the company boasts nearly $4.5 billion in annual revenue. Headquartered in El Segundo, California, Mattel is the second-largest toymaker in the world behind Lego Group.
*This case was prepared by Debbie Thorne, O.C. Ferrell, Jennifer Sawayda, and Kelsey Reddick. Copyright © 2022. This case is meant for classroom discussion and is not meant to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available materials.
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C12.1 LEADERSHIP AT MATTEL Despite its overall success, Mattel has had its share of losses over its history. During the mid-tolate 1990s, Mattel lost millions to declining sales and bad business acquisitions. In January 1997 Jill Barad took over as Mattel’s CEO. Barad’s management style was characterized as strict and her tenure at the helm proved challenging for many employees. While Barad had been successful in building the Barbie brand to $2 billion by the end of the twentieth century, growth slowed in the early twenty-first. Declining sales at outlets such as Toys “R” Us marked the start of some difficulties for the retailer, responsibilities for which Barad accepted and resigned in 2000. Robert Eckert replaced Barad as CEO. Aiming to turn things around, Eckert sold unprofitable units and cut hundreds of jobs. In 2000, under Eckert, Mattel was granted the highly soughtafter licensing agreement for products related to the Harry Potter series of books and movies. The company continued to flourish and build its reputation, even earning the Corporate Responsibility Award from UNICEF in 2003. Mattel released its first Annual Corporate Responsibility Report the following year. Eckert retired as CEO in 2011 and was replaced by former COO Bryan Stockton. However, from 2009 and onward, Barbie sales saw a sharp downward trajectory, and its other premier products failed to make up for the lost sales. During this time, Mattel experienced layoffs to cut costs. Mattel announced the departure of Stockton after a weak holiday season and just a few months after losing its spot as the top toymaker in the world in 2014. The following year, Christopher Sinclair took over the role. Though the company made several strategic acquisitions during his tenure—such as licensing to produce Jurassic Park toys—the company still failed to reinvigorate sales, and Sinclair was replaced just two years later. Yvon Kreiz became CEO in 2018, the same year that Toys “R” Us liquidated following its bankruptcy. Kreiz planned an aggressive turnaround, putting his entertainment and media-distribution background to good use. Kreiz led the charge behind a live-action Barbie film as well as movies, television series, and video games for its other brands, creating Mattel Films, an in-house studio. He also reorganized business operations, laying off employees, selling select manufacturing plants, and cutting $650 million in costs.
C12.2 MATTEL’S CORE PRODUCTS Mattel has a number of well-known brands under the Mattel and Fisher-Price names. Fisher-Price focuses more on toys for infants and has been a subsidiary of Mattel since 1993. Some of Mattel’s more popular brands through the years have included Barbie, American Girl, Hot Wheels, and Fisher-Price. This section will briefly describe these brands and their major influence on the success of Mattel.
C12.2a Barbie Among its many lines of popular toy products, Mattel is famous for owning top girls’ brands. In 1959, Mattel introduced a product that would change its future forever: the Barbie doll. After seeing her daughter’s fascination with cutout paper dolls, Ruth suggested that a threedimensional doll should be produced so that young girls could live out their dreams and fantasies. This doll was named “Barbie,” the nickname of Ruth and Elliot Handler’s daughter. The first Barbie doll sported open-toed shoes, a ponytail, sunglasses, earrings, and a zebra-striped bathing suit. Fashions and accessories were also available for the doll. Although buyers at the annual Toy Fair in New York took no interest in the Barbie doll, little girls of the time certainly did. The intense demand seen at the retail stores was insufficiently met for several years. Mattel just could not produce the Barbie dolls fast enough. Although Barbie is still a top brand among girls, sales experienced a significant dip. First, the changing lifestyles of today’s young girls are a concern for Mattel. Many young girls prefer to
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Case 12: Mattel Gives Its Marketing Strategy a Makeover 411
spend time with music, movies, or the Internet than play with traditional toys like dolls. Second, Barbie has suffered at the hands of new and innovative competition, including the Bratz doll line that gained significant market share during the early 2000s. The dolls, which featured contemporary, diverse designs, were a stark contrast to Barbie and an immediate hit with young girls. By 2005, four years after the brand’s debut, Bratz sales were at $2 billion. In an attempt to recover, Mattel introduced the new line of My Scene dolls aimed at “tweens.” These dolls were trendier, younger-looking, and were considered to be more hip. Despite Mattel’s efforts, the doll industry remained highly competitive. In 2014, Disney’s FrozenTM dolls were cited as a major reason for why Barbie sales had declined that year. To reinvigorate Barbie sales, Mattel adopted a strategy of taking advantage of trends in the real world. For instance, Barbie has embraced diversity with increasing representation of race, body type, hair types, and abilities to address potential concerns about negative self-image. The Barbie Fashionistas line includes 176 dolls, 9 body types, 35 skin tones, and 94 hairstyles. The range also includes a doll with a wheelchair, a doll with a prosthetic leg, a doll with no hair, and a doll with vitiligo (a common skin-pigment condition). The Fashionista line has been a success with Mattel facing repeated stockouts of its vitiligo doll. Beyond Barbie and Ken, Mattel has pursued growth with the introduction of Creatable World, its first line of gender-neutral dolls with mix-and-match outfits and features, in response to shifting gender norms. Instead of being aspirational like Barbie, Mattel says Creatable World dolls are intended to be relatable. Though Mattel acknowledges the generational divide on the subject of gendered toys, Mattel is clearly investing in parents of the future. Overall, Mattel is adapting its product offerings to reflect new digital, social, and environmental impact preferences of consumers that have, in some ways, moved consumers away from purchasing physical toys.
C12.2b American Girl To supplement the Barbie line, in 1998 Mattel acquired a popular younger type of doll. Mattel announced it would pay $700 million to Pleasant Co. for its high-end American Girl collection. American Girl’s historical characters, such as Samantha, Melody, and Josefina, are sold with books about their lives, which take place during important periods of U.S. history. In addition to historical characters, the American Girl lineup of dolls includes Truly Me dolls with a variety of skin tones and hair colors, Bitty Baby for girls ages 3–6, WellieWishers for girls ages 5–7, and create-your-own dolls. The American Girl brand includes several book series, accessories, furniture, and clothing for dolls and girls. The American Girl collection is popular with girls in the 7- to 12-year-old demographic. This move by Mattel represented a long-term strategy to reduce reliance on traditional products and to take away the stigma surrounding the “perfect image” of Barbie. Each American Girl doll lives during a specific time in American history, and all have stories that describe the hardships they face while maturing into young adults. For example, Josefina lives in New Mexico in 1824 during the rapid growth of the American West. However, American Girl is facing its own decline in sales over the last several years. Critics suggest its Bitty Baby dolls are too far of a departure from the company’s core historical characters lineup because they’re poorly differentiated from other dolls on the market. Additionally, in an attempt to keep their core dolls relevant, Mattel introduced dolls with more modern storylines, which could also be a misstep. The company has attempted to generate enthusiasm for the brand with digital content, such as videos for the American Girl YouTube channel, to no avail. The company may need to return to its historical roots to set itself apart once again.
C12.2c Hot Wheels Hot Wheels roared into the toy world in 1968. Cofounder Elliot Handler recognized the potential demand for die-cast cars among boys and decided to create a toy that would compete with British company Lesney’s Matchbox toys (Lesney was later acquired by Mattel). The original hot wheels were 1:64 scale, but in 1970 they were expanded to include cars that were 1:43 scale. More than
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50 years later, the brand is hotter than ever and includes licensing agreements with Mario Kart, Marvel, Star Wars, DC Comics, and more. Much like Barbie, there are many adult collectors of Hot Wheels. Many of these collectors were avid fans of Hot Wheels as children and continue to hold a favorable view of the toys as adults. Adult collectors are estimated to have about 1,550 cars on average. As a result, Mattel created a Hot Wheels website for collectors. The website discusses upcoming Hot Wheels releases, special events, and other Hot Wheels news.
C12.2d Fisher-Price Acquired in 1993 as a wholly-owned subsidiary, Fisher-Price is the umbrella brand for Mattel’s infant and preschool lines. The brand is trusted by parents around the world and appears on everything from children’s software and eyewear to books and bicycles. Some of the more classic products include the Rock-a-Stack, Power Wheels vehicles, and Little People playsets. Through licensing agreements, the brand also develops character-based toys such as Disney’s Elsa and Woody. Fisher-Price has built trust with parents by creating products that are educational, safe, and useful. For example, the brand has earned high regard for innovative car seats and nursery monitors. Fisher-Price keeps pace with the interests of today’s families through innovative learning toys and award-winning products. For example, its Laugh & Learn Smart Learning Home and Think & Learn Rocktopus have both won Toy of the Year from the Toy Industry Association.
C12.3 MATTEL’S COMMITMENT TO ETHICS AND SOCIAL RESPONSIBILITY Mattel’s core products and business environment create many ethical issues. Because the company’s products are designed primarily for children, it must be sensitive to social concerns about children’s rights. It must also be aware that the international environment often complicates business transactions. Different legal systems and cultural expectations about business can create ethical conflicts. Finally, the use of technology may present ethical dilemmas, especially regarding consumer privacy. Mattel has recognized these potential issues and taken steps to strengthen its commitment to business ethics. The company also claims to take a stand on social responsibility, encouraging its employees and consumers to do the same.
C12.3a Privacy and Marketing Technology One issue Mattel has tried to address repeatedly is that of privacy and online technology. Advances in technology have created special marketing issues for Mattel. The company recognizes that, because it markets to children, it must communicate with parents regarding its corporate marketing strategy. Mattel has taken steps to inform both children and adults about its philosophy regarding Internet-based marketing tools and products. Mattel canceled plans for a digital assistant called Aristotle after facing too many privacy concerns. The device, similar to Amazon’s Echo, was an artificial intelligence-based Wi-Fi speaker. It was designed to offer tools for parents, such as reordering products, as well as features for children such as interactive educational games. After hearing concerns from child advocacy groups, new leadership at Mattel reevaluated the product and agreed it posed too many privacy risks.
C12.3b Expectations of Mattel’s Business Partners Mattel, Inc. also makes a serious commitment to business ethics in its dealings with other industries. In late 1997 the company completed its first full ethics audit of each of its manufacturing sites as well as the facilities of its primary contractors. The audit revealed that the
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company was not using any child labor or forced labor, a problem plaguing other overseas manufacturers. However, several contractors were found to be in violation of Mattel’s safety and human rights standards and were asked to change their operations or risk losing Mattel’s business. That year, Mattel became one of the first companies to create ethical and environmental standards for manufacturing, which are now known as its Responsible Supply Chain Commitment. One of these principles requires all Mattel-owned and contracted manufacturing facilities to favor business partners committed to ethical standards comparable with those of Mattel. Other principles relate to safety, wages, and adherence to local laws. Mattel’s audits and subsequent code of conduct were designed as preventative, not punitive measures. The company is dedicated to creating and encouraging responsible business practices throughout the world. Mattel is also committed to its workforce. Mattel cares deeply about increasing its employees’ skill sets and providing opportunities to excel. This reflects Mattel’s concern for relationships between and with employees and business partners. Mattel also offers employee resource groups to support diversity and inclusion. The company’s code is a signal to potential partners, customers, and other stakeholders that Mattel has made a commitment to fostering and upholding ethical values.
C12.3c Legal and Ethical Business Practices Mattel partners with businesses similarly committed to high ethical standards. At a minimum, partners must comply with the local and national laws of the countries in which they operate. In addition, all partners must respect the intellectual property of the company, and support Mattel in the protection of assets such as patents, trademarks, or copyrights. They are also responsible for product safety and quality, protecting the environment, customs, evaluation and monitoring, and compliance. Mattel’s business partners must have high standards for product safety and quality, adhering to practices that meet Mattel’s safety and quality standards. Also, because of the global nature of Mattel’s business and its history of leadership in this area, the company insists that business partners strictly adhere to local and international customs laws. Partners must also comply with all import and export regulations. To assist in compliance with standards, Mattel insists that all manufacturing facilities provide the following: ●● ●●
●●
Full access for on-site inspections by Mattel or parties designated by Mattel. Full access to those records that will enable Mattel to determine compliance with its principles. An annual statement of compliance with Mattel’s “Global Manufacturing Principles,” signed by an officer of the manufacturer or manufacturing facility.
With the creation of the Mattel Independent Monitoring Council (MIMCO), Mattel became the first global consumer products company to apply such a system to facilities and core contractors worldwide. The company seeks to maintain an independent monitoring system that provides checks and balances to help ensure that standards are met. If certain aspects of Mattel’s manufacturing principles are not being met, Mattel will try to work with the factories to help them fix their problems. New partners will not be hired unless they meet Mattel’s standards. If corrective action is advised but not taken, Mattel will terminate its relationship with the partner in question. Overall, Mattel is committed to both business success and ethical standards, and it recognizes that it is part of a continuous improvement process.
C12.3d Mattel Children’s Foundation Mattel takes its social responsibilities very seriously. Through the Mattel Children’s Foundation, established in 1978, the company promotes philanthropy and community involvement among its employees and makes charitable investments to better the lives of children in need. The company donates more than $10 million per year in international grants, matching gifts, global disaster
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relief, and more. Also, through the Barbie Dream Gap Project and the Ruth Handler Mentorship program, Mattel is helping girls and young professionals by providing educational resources, mentorship, coaching, and professional development. The company also supports science, technology, engineering, arts, and mathematics (STEAM) education through its Speedometry program at UCLA Mattel Children’s Hospital. Mattel employees are also encouraged to participate in a wide range of volunteer activities. Employees serving on boards of local nonprofit organizations or helping with ongoing nonprofit programs are eligible to apply for volunteer grants supporting their organizations. Mattel employees contributing to higher education or to nonprofit organizations serving children in need are eligible to have their personal donations matched dollar for dollar up to $5,000 annually.
C12.3e Global Manufacturing Principles As a U.S.-based multinational company owning and operating facilities and contracting worldwide, Mattel’s Responsible Supply Chain Commitment reflects not only its need to conduct manufacturing responsibly but also to respect the cultural, ethical, and philosophical differences of the countries in which it operates. These principles set uniform standards across Mattel manufacturers and attempt to benefit both employees and consumers. Mattel’s principles cover issues such as wages, work hours, child labor, forced labor, discrimination, freedom of association, and working conditions. Workers must be paid at least minimum wage or a wage that meets local industry standards (whichever is greater). No one under the age of 16 or the local age limit (whichever is higher) may be allowed to work for Mattel facilities. Mattel refuses to work with facilities that use forced or prison labor or to use these types of labor itself. Additionally, Mattel does not tolerate discrimination. The company states that an individual should be hired and employed based on their ability—not on individual characteristics or beliefs. Mattel recognizes all employees’ rights to choose to associate with organizations without interference. Regarding working conditions, all Mattel facilities and its business partners must provide safe working environments for their employees.
C12.4 MATTEL FACES PRODUCT RECALLS Despite Mattel’s best efforts, the company has faced a handful of recalls over the years. In September 2007, Mattel announced recalls of toys containing lead paint. An estimated 10 million individual toys produced in China were affected. The situation began when Early Light Industrial Co., a subcontractor for Mattel owned by Hong Kong toy tycoon Choi Chee Ming, subcontracted the painting of parts of Cars toys to another China-based vendor. The vendor, named Hong Li Da, decided to source paint from a nonauthorized third-party supplier—a violation of Mattel’s requirement to use paint supplied directly by Early Light. The products were found to contain “impermissible levels of lead.” Another Early Lights subcontractor, Lee Der Industrial Co., used the same lead paint found on Cars products. China immediately suspended the company’s export license. Mattel blamed the fiasco on the manufacturer’s desire to save money in the face of increasing prices. How did this crisis occur under the watch of a company praised for its ethics and high safety standards? Although Mattel had investigated its contractors, it did not audit the entire supply chain, including subcontractors. Such oversights left room for these violations. Mattel moved to enforce a rule that subcontractors cannot hire suppliers two or three tiers down. In a statement, Mattel says it spent more than 50,000 hours investigating its vendors and testing its toys. Mattel also announced a three-point plan aimed to tighten Mattel’s control of production, discover and prevent the unauthorized use of subcontractors, and test the products itself rather than depending on contractors. However, soon after, Mattel was forced to recall several more toys because of powerful magnets in the toys that could come loose and pose a choking hazard for young children. If more than
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Case 12: Mattel Gives Its Marketing Strategy a Makeover 415
one magnet is swallowed, the magnets can attract each other inside the child’s stomach, causing potentially fatal complications. More than 21 million Mattel toys were recalled in all, and parents filed several lawsuits claiming that these Mattel products harmed their children. In 2019, Mattel faced a recall of Fisher-Price Rock ’N Play toys, which were connected to more than 30 infant deaths. Though the company said child safety is its highest priority, the product was recalled after being on the market for 10 years. Mattel was quick to point out that the deaths were tied to misuse of the product contrary to safety warnings and instructions but decided a voluntary recall was the best move. The recall cost the company $40–60 million in cash refunds and lost sales.
C12.5 MATTEL VERSUS MGA In 2004, Mattel became embroiled in a bitter intellectual property rights battle with former employee Carter Bryant and MGA Entertainment, Inc. over rights to MGA’s popular Bratz dolls. Carter Bryant, an on-again/off-again Mattel employee, designed the Bratz dolls and pitched them to MGA. A few months after the pitch, Bryant left Mattel to work at MGA, which began producing Bratz in 2001. In 2002, Mattel launched an investigation into whether Bryant had designed the Bratz dolls while employed with Mattel. After two years of investigation, Mattel sued Bryant. A year later MGA fired off a suit of its own, claiming that Mattel was creating Barbies with looks similar to those of Bratz in an effort to eliminate the competition. Mattel answered by expanding its own suit to include MGA and its CEO, Isaac Larian. For decades, Barbie has reigned supreme on the doll market. However, Bratz dolls gave Barbie a run for her money. In 2005, four years after the brand’s debut, Bratz sales were at $2 billion. At the same time, Barbie was suffering from declining sales. Although still widely popular, many analysts believe that Barbie has reached the maturity stage of its product life cycle. Concerns have increased in recent years as Barbie sales continue to drop significantly. This is requiring Mattel to try and popularize Barbie in other markets, such as China. Four years after the initial suit was filed, Bryant settled with Mattel under an undisclosed set of terms. In July 2008 a jury deemed MGA and its CEO liable for what it termed “intentional interference” regarding Bryant’s contract with Mattel. In August 2008 Mattel received damages in the range of $100 million. Although Mattel first requested damages of $1.8 billion, the company seemed pleased with the principle behind the victory. In December 2008, Mattel appeared to win another victory when a California judge banned MGA from issuing or selling any more Bratz dolls. However, the tide soon turned on Mattel’s victory. In July 2010 the Ninth U.S. Circuit Court of Appeals threw out the ruling. Eventually, the case came down to whether Mattel owned Bryant’s ideas under the contract he had with the company. In April 2011 a California federal jury rejected Mattel’s claims to ownership. In another blow to Mattel, the jury also ruled that the company had stolen trade secrets from MGA. According to the allegations, Mattel employees used fake business cards to get into MGA showrooms during toy fairs. Mattel was ordered to pay $85 million in liabilities, plus an additional $225 million in damages and legal fees. MGA CEO Isaac Larian also announced that he was filing an antitrust case against Mattel. Mattel continues to claim that Bryant violated his contract when he was working for the company. Although the conflict appeared to be settled, the fight between MGA and Mattel continued. The antitrust suit against Mattel was dismissed, and in January 2013 the U.S Court of Appeals overturned MGA’s victory over Mattel concerning the theft of trade secrets. However, the court maintained that Mattel was responsible for paying MGA’s legal fines totaling $137.2 million. MGA CEO Isaac Larian was determined to contest this issue in court again and referred to the people at Mattel as “crooks.” He filed another lawsuit seeking $1 billion in damages. According to Larian, Mattel had used bullying tactics and lied both in and outside of the court. In 2018 a California district court dismissed the lawsuit, and in 2019, a California appeals court refused to reopen the case after MGA asked that it be reinstated.
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416 Part 5: Cases
C12.6 MATTEL LOOKS TOWARD THE FUTURE Like all major companies, Mattel has weathered its share of storms. The company has faced a series of difficult and potentially crippling challenges, including the lawsuits with MGA regarding ownership of the Bratz dolls. Due to toy recalls, some analysts suggested that the company’s reputation was battered beyond repair. Mattel, however, has refused to go quietly. Although the company admits to poor handling of certain affairs, it is attempting to rectify its mistakes and to prevent future mistakes as well. The company appears to be dedicated to shoring up its ethical defenses to protect both itself and its customers. Mattel’s experiences should teach all companies that threats could materialize within the marketing environment despite the best-laid plans to prevent such issues from occurring. Today, Mattel faces many market opportunities and threats, including the rate at which children are growing up and leaving toys, the role of technology in consumer products, and purchasing power and consumer needs in global markets. The continuing lifestyle shift of American youth is of particular concern for Mattel. The phenomenal success of gaming systems, portable media devices, smartphones, and social networking sites among today’s youth is a testament to this shift. Children and teens are also more active in extracurricular activities (i.e., sports, music, and volunteerism) than ever before. Consequently, these young consumers have less time to spend with traditional toys. There has also been an upsurge in demand for Lego products, the world’s largest toymaker. Despite these concerns, Mattel has a lot to offer to both children and investors. Barbie remains the number one doll in the United States and worldwide. Furthermore, all of Mattel’s core brands are instantly recognizable around the world. Hence, the ability to leverage one or all of these brands is high. A few remaining issues include Mattel’s reliance on major retailers, such as Walmart, Target, and Amazon (which lessens Mattel’s pricing power), volatile oil prices (oil is used to make plastics), and increasing competition on a global scale. However, analysts believe Mattel has great growth potential with technology-based toys, especially in international markets, despite changing demographic and socioeconomic trends. For a company that began with two friends making picture frames, Mattel has demonstrated marketing dexterity and longevity. The next few years, however, will test the firm’s resolve.
QUESTIONS 1. Do manufacturers of products for children have special obligations to consumers and society? If so, what are these responsibilities? 2. How effective has Mattel been at encouraging ethical and legal conduct by its manufacturers? What changes and additions would you make to the company’s global manufacturing principles? 3. How can Mattel adjust its product mix to accommodate the continuing lifestyle shift of American youth?
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David Barboza, “Scandal and Suicide in China: A Dark Side of Toys,” New York Times, August 23, 2007, http://www .nytimes.com/2007/08/23/business/worldbusiness/23suicide.html?pagewanted=all (accessed August 15, 2014); Edvard Petterssen and Karen Gullo, “MGA Bratz Win Over Mattel Partly Erased by Appeals Court,” Bloomberg, January 24, 2013, http://www.bloomberg.com/news/2013-01-24 /mga-bratz-win-over-mattel-partly-erased-by-appealscourt.html (accessed February 13, 2013); Edvard Pettersson, “Mattel Wins Dismissal of MGA Entertainment’s $1 Billion Antitrust Lawsuit,” Bloomberg, February 22, 2012, http:// www.bloomberg.com/news/2012-02-22/mattel-wins-dismissal-of-mga-entertainment-s-1-billion-antitrust-lawsuit .html (accessed August 15, 2014); Elizabeth Segran, “American Girl Sales Are Plummeting. Can the Iconic ‘90s Brand Be Saved?” Fast Company, December 17, 2019, https://www .fastcompany.com/90439667/american-girl-is-in-free-fall (accessed June 24, 2020); Frank Shyong and Andrea Chang, “Award Is Tossed in Bratz Lawsuit,” Los Angeles Times, January 25, 2013, http://articles.latimes.com/2013/jan/25/business/la-fi-bratz-mattel-20130125 (accessed August 15, 2014); Gina Keating, “MGA ‘Still Accessing’ Impact of Bratz Ruling: CEO,” Yahoo! News, December 4, 2008, http://www.reuters. com/article/2008/12/05/us-mattel-larian-idUSTRE4B405820081205 (accessed August 15, 2014); “Here Comes Tattoo Barbie,” CBS News, October 29, 2011, http:// www.cbsnews.com/8301-207_162-20127453/here-comes -tattoo-barbie/ (accessed August 15, 2014); Jack A. Raisner (1997), “Using the ‘Ethical Environment’ Paradigm to Teach Business Ethics: The Case of the Maquiladoras,” Journal of Business Ethics, 16, 1331–1346; Jacob Davidson, “Lego Is Now the Largest Toy Company in the World,” Time, September 4, 2014, http://time.com/money/3268065/lego-largest -toy-company-mattel/ (accessed May 14, 2015); Judith Levy, “Third Toy Recall by Mattel in Five Weeks,” Business Standard, September 5, 2007, http://seekingalpha.com/article /46374-mattel-announces-third-toy-recall (accessed August 15, 2014); Julie Creswell, “Mattel’s Revival Plan: Bet on Barbie, the Movie,” The New York Times, December 13, 2018, https://www.nytimes.com/2018/12/13/business/mattel -barbie-movie-ynon-kreiz.html (accessed June 24, 2020); Karen Weise, “Briefs: Mattel—Must Pay for Stealing Bratz Secrets,” Bloomberg Businessweek, August 15–28, 2011, p. 22; Laura S. Spark, “Chinese Product Scares Prompt US Fears,” BBC News, July 10, 2007, http://news.bbc.co.uk/2/hi /americas/6275758.stm (accessed August 15, 2014); Laurie Burkitt, “Mattel Plants Face Scrutiny in China,” Wall Street Journal, October 17, 2013, p. B3; “Learning From Mattel,” Tuck School of Business at Dartmouth, http://mba.tuck.dartmouth.edu/pdf/2002-1-0072.pdf (accessed August 15, 2014); Lisa Bannon and Carlta Vitzhum, “One-Toy-Fits-All: How Industry Learned to Love the Global Kid,” Wall Street Journal, April 29, 2003, http://online.wsj.com/article /SB105156578439799000.html (accessed August 15, 2014);
Lisa Beilfuss, “Mattel Says Ex-CEO Stockton Was Fired,” The Wall Street Journal, April 9, 2015, https://www.wsj.com/articles/mattel-says-ex-ceo-stockton-was-fired-1428608806 (accessed June 24, 2020); “Mattel Awarded $100M in Doll Lawsuit,” USA Today, August 27, 2008, p. B1; Mattel Customer Service, “Product Recall,” April 1, 2008, http://service.mattel .com/us/recall.asp (accessed April 1, 2008); Mattel Inc., 2014 Annual Report, 2015, http://files.shareholder.com/downloads/MAT/3400947343x0x820303/68C602DD-88F3-47F8 -ABB5-46635E8495D8/Mattel_-_Bookmarked_2014_Annual_Report_Final_.PDF (accessed May 14, 2015); Mattel Inc., Mattel Annual Report 2008, 2009, http://files.shareholde r. c o m / d o w n l o a d s / M AT / 2 3 2 8 8 4 3 1 1 5 x 0 x 2 8 3 6 7 7 /D4E18CB7-C8B4-4A28-BCE9-C114B248A26D/Mattel AnnualReport2008.pdf (accessed August 15, 2014); Mattel, Inc., “About Us,” Mattel, http://corporate.mattel.com/aboutus/ (accessed July 16, 2020); Mattel, Inc., “Independent Monitoring Council Completes Audits of Mattel Plants in China and Mexico,” May 7, 2001, http://investor.shareholder.com /mattel/releasedetail.cfm?releaseid=43066 (accessed August 15, 2014); Mattel, Inc., “Mattel Children’s Foundation,” http:// corporate.mattel.com/about-us/philanthropy/childrenfoundation.aspx (accessed August 15, 2014); Mattel, Inc., “Mattel, Inc. online privacy statement,” 2013, http://corporate.mattel .com/privacy-statement.aspx (accessed February 19, 2013); Mattel, Inc., 2013 Annual Report, http://corporate.mattel .com/PDFs/2013_AR_Report_Mattel%20Inc.pdf (accessed October 15, 2014); Mattel, Inc., Annual Report 2011, http:// files.shareholder.com/downloads/MAT/2319434112x0x555821/3C654248-30D8-4A8D-A8FC -53A89560A3C3/2011_Mattel_Annual_Report.pdf (accessed August 15, 2014); Maya Salam, “Mattel, Maker of Barbie, Debuts Gender-Neutral Dolls,” The New York Times, September 25, 2019, https://www.nytimes.com/2019/09/25/arts/mattel -gender-neutral-dolls.html (accessed April 17, 2020); Michael White, “Barbie Will Lose Some Curves When Mattel Modernizes Icon,” Detroit News, November 18, 1997; Miranda Hitti, “9 Million Mattel Toys Recalled,” WebMD, August 14, 2007, http://children.webmd.com /news/20070814/9_million_mattel_toys_recalled (accessed August 15, 2014); Natalie Sherman, “Is Barbie’s Makeover Working?” BBC, December 21, 2019, https://www.bbc.com /news/business-50829046 (accessed April 17, 2020); Nicholas Casey, “Mattel Prevails Over MGA in Bratz-Doll Trial,” The Wall Street Journal, July 18, 2008, p. B18, B19; Nicholas Casey, “Mattel to Get up to $100 Million in Bratz Case,” Wall Street Journal, August 27, 2008, http://online.wsj.com /news/articles/SB121978263398273857 (accessed August 15, 2014); Pan Kwan Yuk, “Mattel Replaces CEO After Less Than Two Years,” Financial Times, January 17, 2017, https://www .ft.com/content/5e5bf7ab-6b53-319e-9a8d-168704fc7c41 (accessed June 24, 2020); Parker Waichman LLP, “Magnetic Toy Sets Defective Project Injury Lawsuits,” http://www .yourlawyer.com/topics/overview/magnetic_toy_sets (accessed
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August 15, 2014); Patricia Sellers, “The 50 Most Powerful Women in American Business,” Fortune, October 12, 1998; Paul Ziobro, “Mattel Puts a Target on Lego,” Wall Street Journal, March 1–2, 2014, p. B3; PR Newswire, “Mattel Wins Coveted Toy of the Year Awards for the Fisher-Price® Laugh & Learn® Smart Learning Home™ and Fisher-Price Think & Learn Rocktopus™,” February 16, 2019, https://www.prnewswire .com/news-releases/mattel-wins-coveted-toy-of-the-year -awards-for-the-fisher-price-laugh--learn-smart-learning -home-and-fisher-price-think--learn-rocktopus-300797043 .html (accessed June 24, 2020); PR Newswire, “Independent Monitoring Council Completes Audits of Mattel Manufacturing Facilities in Indonesia, Malaysia and Thailand,” November 15, 2002, http://www.prnewswire.com/news-releases/independent-monitoring-council-completes-audits-of-mattel -manufacturing-facilities-in-indonesia-malaysia-and-thailand -76850522.html (accessed August 15, 2014); PR Newswire, “Mattel, Inc., Launches Global Code of Conduct Intended to Improve Workplace, Workers’ Standard of Living,” November 20, 1997, http://www.prnewswire.com/news-releases /mattel-inc-launches-global-code-of-conduct-intended-to -improve-workplace-workers-standard-of-living-77630507 .html (accessed August 15, 2014); Rachel Rabkin Peachman, “Mattel Pulls Aristotle Children’s Device After Privacy Concerns,” The New York Times, October 5, 2017, https://www .nytimes.com/2017/10/05/well/family/mattel-aristotle -privacy.html (accessed June 24, 2020); S. Prakash Sethi, Emre A. Veral, H. Jack Shapiro, and Olga Emelianova (2011), “Mattel, Inc.: Global Manufacturing Principles (GMP)—A
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CASE 13 Starbucks Perfects Its Blend* SYNOPSIS: Starbucks, the largest coffeehouse company in the world, has experienced immense success since its first store opened in 1971. Looking to the future, Starbucks is refining its distribution and product strategies to deliver convenience in addition to tasty food and beverages. The company has doubled down on innovation and become more agile in developing, testing, and releasing new products and systems. THEMES: Product strategy, distribution strategy, environmental threats, competition, social responsibility, marketing ethics, branding strategy, global marketing, innovation, analysis of the customer environment, brand loyalty
T
he first Starbucks store opened in Seattle’s Pike Place Market in 1971 serving fresh-roasted whole bean coffees. When Howard Schultz joined Starbucks in 1982 as director of retail operations and marketing, the company began selling coffee to restaurants and espresso bars. After a trip to Italy, Schultz recognized an opportunity to emulate Milan’s coffee bar culture in Seattle. In 1984, the company tested its first downtown Seattle coffeehouse and served the first Starbucks Caffè Latte. Since then, Starbucks has expanded across the United States and around the world, now operating more than 30,000 stores in 80 markets. The company serves more than 100 million customers per week and is the largest coffeehouse company in the world.
*This case was prepared by Jennifer Sawayda, Michelle Urban, Sarah Sawayda, Tri Nix, and Kelsey Reddick for and under the direction of O.C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.
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420 Part 5: Cases
C13.1 DISTRIBUTION STRATEGY Starbucks locates its retail stores in high-traffic, high-visibility locations. The stores are designed to provide an inviting coffee bar environment that is an important part of the Starbucks product and experience. Howard Schultz intended to make Starbucks into “the third place” for consumers to frequent, after home and work. Because the company is flexible regarding store size and format, many of its locations are in or near a variety of settings, including office buildings, bookstores, and university campuses. Retail stores are also situated in select rural and off-highway locations to serve a broader array of customers outside major metropolitan markets and to further expand brand awareness. Starbucks opened a 15,000-square-foot Starbucks Reserve Roastery and Tasting Room in Seattle in 2014, a place where coffee is roasted, bagged, sold, and shipped internationally. Equipped with a Coffee Library and Coffee Experience Bar, the roastery is intended to redefine the coffee retail experience for customers and sells 28 to 30 different coffees. Starbucks added local Mora ice cream to the product line at the roastery so consumers can create Affogato-style beverages (espresso poured over ice cream). Taking the roastery concept international, the company opened The Starbucks Reserve Roastery in Shanghai in 2017. It has been called the “biggest Starbucks in the world.” Starbucks also has Reserve stores in Milan, Tokyo, Manhattan, and Chicago. While the roasteries have been extremely successful, CEO Kevin Johnson is slow to continue further expansion due to a desire to perfect the existing roasteries first. In addition to selling products through retail outlets, Starbucks sells coffee and tea products and licenses its trademark through other channels and partners. For instance, its Frappuccino coffee drinks, Starbucks Doubleshot espresso drinks, iced espresso drinks, almond milk Frappuccino coffee drinks, and VIA coffees can be purchased in grocery stores and through retailers such as Walmart and Target. A common criticism of Starbucks is its strategy for location and expansion. The company’s “clustering” strategy—placing a Starbucks on nearly every corner in some areas of operation— forced many smaller coffee shops out of business. This strategy dominated for most of the 1990s and 2000s, and Starbucks became the source of parodies and pop culture jokes. Many people began to wonder whether two Starbucks directly across the street from each other were necessary. The Great Recession in 2008 brought a change in policy, however. Starbucks pulled back on expansion, closed hundreds of stores around the United States, and focused more on international markets. In the years following the recession, Starbucks began increasing U.S. expansion once more. However, in response to criticism from consumers about the clustering strategy, the company closed stores deemed redundant in 2018. The affected stores were in densely populated urban areas that already had multiple Starbucks locations. In 2018, Starbucks and Alibaba, one of the world’s largest online retailers, formed a partnership to provide an online Starbucks store for customers in China. China is Starbucks’ largest growth market. Utilizing Alibaba’s technology, Starbucks products are ordered online and delivered to customers directly. While the delivery system benefits Starbucks, Alibaba will also benefit by carrying Starbucks drinks in its popular supermarkets, called Hema, via “Starbucks Delivery Kitchens.” Since partnering with Alibaba in China, Starbucks has formed two additional partnerships in the United States with Brightloom and Uber Eats in 2019, with a focus again on virtual deliveries and expansion of the company through technology. The idea behind the partnership with Uber Eats came from the success of the Alibaba delivery program in China, which caters to 2,000 stores in more than 30 cities. Capitalizing on the fact that digital and mobile orders, especially through delivery services, often result in higher checks, Starbucks hopes to lure customers into spending more money via the delivery system.
C13.2 PRODUCT STRATEGY Starbucks has introduced many new products over the years to remain competitive. In 2008, Starbucks introduced its Pike Place Blend. The company hoped that the blend would return Starbucks to its roots of distinctive, expertly blended coffee. To perfect the flavor, Starbucks enlisted
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Case 13: Starbucks Perfects Its Blend 421
the inputs of 1,000 customers over 1,500 hours. To kick off the new offering, Starbucks held the largest nationwide coffee tasting in history. To make the brew even more appealing, Starbucks joined forces with Conservation International to ensure the beans were sustainably harvested. After feedback revealed many of its customers desired a lighter blend, Starbucks introduced the Blonde Roast blend in 2011. Although Starbucks has achieved massive success, the company realized it had to modify its brand to appeal to changing consumer tastes. All established companies, no matter how successful, must learn to adapt their products and image to appeal to the shifting demands of their target markets. Starbucks is no exception. The company is associated with premium coffee beverages, an association that has served them well over the years. However, as competition in specialty coffee drinks increased, Starbucks recognized the need to expand its brand in the eyes of consumers. To symbolize a shift toward the consumer packaged goods business, Starbucks gave its logo a new look. Previously, the company’s circular logo featured a mermaid with the words “Starbucks Coffee” encircling it. In 2011, Starbucks removed the words and enlarged the mermaid to signal to consumers that Starbucks is more than just the average coffee retailer. With brand expansion in mind, the company began to adopt more products. In addition to coffee, Starbucks stores sell coffee accessories, teas, muffins, water, grab-and-go products, upscale food items, and wine and beer in select locations. Food sales make up 20 percent of Starbucks’ revenue. CEO Kevin Johnson stated that the company plans to double that. The rise in coffee prices has created an opportunity for expansion into consumer packaged goods that will protect Starbucks against the risks of relying solely on coffee. In 2018, Starbucks and Nestlé partnered under a global coffee alliance. This alliance produced Starbucks Creamer as a new product with a variety of flavors. In 2018, Starbucks noticed a 3 percent decline in Frappuccino sales, one of its signature drinks. Starbucks attributed the decrease to customers becoming more health-conscious and moving away from sugary drinks. As a result, Starbucks has worked to develop more healthconscious drinks to cater to customers’ changing preferences. Additionally, Starbucks has seen steady growth in cold brew beverages, which resonates with younger audiences. The cold brew coffee market is expected to reach $1.63 billion by 2025. Starbucks has been long known for its limited release holiday beverages such as the Eggnog Latte and Peppermint Mocha Frappuccino. This strategy keeps regular customers interested, draws in infrequent guests, and attracts new customers. Many customers look forward to seasonal beverages, such as the Pumpkin Spice Latte, and increase their visit frequency while certain beverages are available. In recent years, Starbucks has built on this concept to keep its menu fresh year-round with a variety of seasonal drink offerings. Not only does Starbucks have a variety of coffees, bakery items, and breakfast and lunch options, they also have six different sizes of drinks for patrons to choose from: short (8 fl. oz.), tall (12 fl. oz.), grande (16 fl. oz.), venti hot (20 fl. oz.), venti cold (24 fl. oz.), and trenta (31 fl. oz.). Trenta was first introduced in 2011 and is Starbucks’ largest drink size. Starbucks has developed multiple ways to stay competitive, and in a society that values choice, having six different size options is yet another way the company appeals to consumers. To ramp up innovation, Starbucks created the Tryer Center in 2018 at its headquarters in Seattle, a 20,000-square-foot facility where employees test new beverages using rapid prototyping. Product development can traditionally take companies months and sometimes years to perfect an idea, and this is a way that Starbucks is attempting to accelerate the process. At the center, employees can quickly test new concepts for the stores. For example, a new single-cup brewing prototype was able to go through 10 versions in a month’s time using the lab’s 3D printer. Another month later, the final product made it into Starbucks locations. From the more than 130 projects that have been tested to date, approximately 30 percent of projects are currently in Starbucks cafes. Starbucks partners from every level of the business are invited to submit ideas, helping foster a sense of community among its team members. The creation of this innovation lab will make Starbucks more agile in developing, testing, and releasing new products and systems.
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C13.3 TECHNOLOGY Starbucks fosters brand loyalty by increasing repeat business. One of the ways they accomplish this is through the Starbucks Reward program, accessible online and via mobile. Customers can order or preorder their coffee and scan their phone for payment. Users collect up to three stars for every dollar spent, and stars can be used to redeem rewards such as bakery items, handcrafted drinks, hot breakfast items, lunch sandwiches, or select merchandise. Today, the Starbucks Rewards program has 17 million active users. Howard Schultz believed that the future is digital, and, thus, Starbucks is placing more emphasis on digital marketing strategies. Starbucks is investing in innovation with technology. The company teamed up with Microsoft to enhance the Starbucks app, using reinforcement learning technology to provide users with a personalized ordering experience. This technology uses artificial intelligence (AI) to give users custom food and drink suggestions based on factors such as previous order history, weather, daypart, and inventory at the user’s local Starbucks. Starbucks believes this use of machine learning builds on the Starbucks experience of customer connection. Additionally, with the rise of connected Internet of Things (IoT) devices, Starbucks, with the help of Microsoft, has put the right technology in place to accommodate cloud-connected store equipment. This type of connectivity provides Starbucks with data points on equipment performance such as coffee temperature and water quality, so baristas can focus less on machine maintenance. The company can send new coffee recipes directly to the machines instead of having store partners manually loading them from flash drives, saving time and money. The data-driven system allows Starbucks to have a predictive rather than reactive approach.
C13.4 STARBUCKS CULTURE In 1990, the Starbucks’ senior executive team created a mission statement that specified the guiding principles for the company. They hoped the principles included in the mission statement would assist partners in determining the appropriateness of later decisions and actions. After drafting the mission statement, the executive team asked all Starbucks partners to review and comment on the document. Based on their feedback, the final statement put forth the mantra of “people first and profits last.” In fact, the first value guiding the Starbucks’ mission statement is to create a warm and welcoming culture. Starbucks has done three things to keep the mission and guiding principles alive over the decades. First, they distribute the mission statement and comment cards for feedback during orientation to all new partners. Second, Starbucks continually relates company decisions back to the guiding principle or principles they support. These principles focus on coffee, partners, customers, stores, neighborhoods, and shareholders. And finally, the company formed a “Mission Review” system so partners can comment on a decision or action relative to its consistency with one of the six principles. These guiding principles and values have become the cornerstone of a strong ethical culture of predominately young and educated workers. Former Starbucks CEO Howard Schultz has long been a public advocate for increased awareness of ethics in business. In a 2007 speech at Notre Dame, he spoke to students about the importance of balancing “profitability and social consciousness.” Schultz is a true believer that ethical companies do better in the long run, something that has been backed by research. According to the Ethisphere Institute, ethical companies perform better and have higher shareholder returns. Schultz maintains that, while it can be difficult to do the right thing at all times, in the long term, it is better for a company to take short-term losses than to lose sight of their core values. The care a company shows its employees is a large part of what sets them apart from other firms. Starbucks offers all employees who work more than 240 hours each quarter a comprehensive benefits package that includes stock options as well as medical, dental, and vision benefits. In another effort to benefit employees, Starbucks partners with Arizona State University (ASU) to offer tuition assistance to those who want to earn a degree from the university’s online program.
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The company also offers an employee assistance program, adoption assistance, a college achievement plan, and commuter benefits. Another key part of the Starbucks image involves its commitment to ethics and sustainability. Social responsibility, transparency, and sustainability are all important values to Starbucks. To become more transparent about ethical harvesting, as well as to build trust in the company among consumers, Starbucks partnered with Microsoft in 2019 to use blockchain technology to allow customers to trace where and how their coffee came to be. Starbucks actively partners with nonprofits around the globe and is one of the largest buyers of Fair Trade Certified as well as certified organic coffee. Conservation International joined with Starbucks in 1998 to promote sustainable agricultural practices, namely shade-grown coffee, and to help prevent deforestation in endangered regions around the globe. The results of the partnership proved to be positive for both the environment and the farmers. For example, in Chiapas, Mexico, shade-grown coffee acreage (that reduces the need to cut down trees for coffee plantations) increased over 220 percent, while farmers receive a price premium above the market price. The company’s coffee and tea are 99 percent ethically sourced as verified by Coffee and Farmer Equity (C.A.F.E.) Practices. Conservation International joined forces with Starbucks to create C.A.F.E. Practices, one of the industry’s first ethical sourcing standards. Intending to reduce the company’s negative impact on climate change and waste, Starbucks has also invested in new cup technologies to identify more opportunities for recycling and composting for its hot beverage cups. These cups, which are made with 10 percent postconsumer fiber to reduce the environmental impacts of sourcing wood paper fiber, have a degradable liner. Additionally, the company has invested in strawless lids for cold beverages and sustainable straw materials. While the lids are still made of a type of plastic, they are recyclable and, thus, safer for the environment. Considering that about half of Starbucks drink orders are cold drinks, this change could make a significant impact on the company’s sustainability practices. Straws are still available, particularly for Frappuccino drinks; however, these are made out of an alternative, recyclable material. In addition to helping the environment, Starbucks is hoping that the move from plastic straws to sustainable materials will drive more business from younger generations. According to a Nielsen poll, 73 percent of millennials are willing to spend more money on sustainable goods. Starbucks, a company already popular with many generations, may be able to increase its sales even more among young people with a simple change to the straws. Despite these efforts to be more environmentally conscious, there is some controversy among environmental groups about the positive results of the switch. Questions remain about other ecological issues, such as the company’s cup waste. To stay ahead, Starbucks will have to continue to innovate and meet the demands of sustainability-minded consumers.
C13.5 CORPORATE SOCIAL MISSION Although Starbucks supported responsible business practices virtually since its inception, as the company has grown, so has the importance of defending its image. In 1999, Starbucks created a Corporate Social Responsibility department, now known as the Global Responsibility Department. Global Responsibility releases an annual Global Social Impact report for shareholders to keep track of the company’s performance with regard to the environment and its employees, suppliers, customers, and communities.
C13.5a Environment In 1992, long before it became trendy to be “green,” Starbucks developed an environmental mission statement to articulate the company’s environmental priorities and goals. This initiative created the Environmental Starbucks Coffee Company Affairs team, the purpose of which was to develop environmentally responsible policies and minimize the company’s “footprint.” As part of this effort, Starbucks began using environmental purchasing guidelines to reduce waste through
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recycling, conserving energy, and educating partners through the company’s “Green Team” initiatives. Concerned stakeholders can track the company’s progress through its website where there is a clear outline of Starbucks’ environmental goals and how the company fares in living up to those goals. For example, the company has set a goal to reach 10,000 “greener stores” by 2025, which is tracked on its website.
C13.5b Employees Growing up poor with a father whose life was nearly ruined by an unsympathetic employer who did not offer health benefits, Howard Schultz always considered the creation of a good work environment a top priority. He believed companies should value their workers. When forming Starbucks, he decided to build a company that provided opportunities his father did not have. The result is one of the best health-care programs in the coffee shop industry. Schultz’s key to maintaining a strong business was developing a shared vision among employees as well as an environment to which they can actively contribute. Understanding how vital employees are, Schultz is the first to admit his company centers on personal interactions: “We are not in the coffee business serving people, but in the people business serving coffee.” Starbucks is known for its diversity, and 46 percent of its baristas are ethnic minorities. As a way to improve employee health, Starbucks established a program for employees called Thrive Wellness that offers various resources aimed at assisting employees in incorporating wellness into their lives. The program offers resources to assist with smoking cessation, weight loss, and exercise. To further support employees, Starbucks helps employees complete their education through ASU online. More than 14,000 employees have participated in the program, earning a total of 3,200 diplomas. By 2025, Starbucks hopes to have 25,000 graduates among its employees. Along with educational opportunities, employees have an opportunity to join Starbucks’ stock-sharing program called Bean Stock. Starbucks has generated more than $1 billion in financial gains through stock options. After receiving a tax cut in 2018, Starbucks used the money it saved to raise employee pay and provide $500 grants to workers. Starbucks has also reached 100 percent racial and gender pay equity in the United States as well as gender pay equity in Canada and China. The company’s goal is to reach global pay equity in all company-owned markets. To support its employees during the COVID-19 pandemic, Starbucks introduced a $10 million emergency relief fund to issue one-time grants to those facing hardship.
C13.5c Suppliers Even though they are one of the largest coffee brands in the world, Starbucks maintains a good reputation for social responsibility and business ethics throughout the international community of coffee growers. They build positive relationships with small coffee suppliers while also working with governments and nonprofits wherever they operate. Starbucks practices conservation as well as C.A.F.E. practices. Starbucks pays coffee farmers premium prices to help them make profits and support their families. The company also champions supplier diversity with the Starbucks Supplier Diversity and Inclusion Program, supporting women-, minority-, people with disabilities-, veteran-, LGBTQ- and small (8[a] and HUBZone)-owned suppliers. In the last 20 years, Starbucks has spent more than $7.5 billion with diverse suppliers. The company is also involved in social development programs, investing in programs to build schools and health clinics, as well as other projects that benefit coffee-growing communities. Starbucks collaborates directly with some of its growers through Farmer Support Centers, located in Costa Rica, Rwanda, Tanzania, South America, Ethiopia, Indonesia, Mexico, and China. Farmer Support Centers provide technical support and training to ensure high-quality coffee into the future. The company is a major purchaser of Fair Trade Certified, shade-grown, and certified organic beans that further support environmental and economic efforts. In 2018, Starbucks welcomed the public into the coffee process and experience through its new Visitor Center in Costa
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Rica. Again, the goal is transparency and educating the public on how coffee beans go from the fields to the stores.
C13.5d Customers Starbucks is focused more on quality coffee, the atmosphere of its stores, and the overall Starbucks experience rather than the rapid expansion that previously characterized the company. Strengthening its brand and customer satisfaction is more important than ever after the Great Recession forced the company to rethink its strategy. Starbucks refocused the brand by upgrading its coffee-brewing machines, introducing new food and drink items for health and budget-conscious consumers, and refocusing on its core product. Recognizing the concern over the obesity epidemic, Starbucks ensures that its grab-and-go lunch items are under 500 calories and is involved in two sodium reduction programs: the National Salt and Sugar Reduction Initiative in New York and the UK Food Standards Agency’s salt campaign. Conscious of dairy allergies, Starbucks also offers milk alternatives such as almond, soy, and coconut milk for the majority of drinks. Additionally, since the COVID-19 pandemic in 2020, Starbucks has focused on new ways to offer customers convenience, such as delivery.
C13.5e Communities Starbucks coffee shops have long sought to become an “instant gathering spot” and a “place that draws people together.” The company established “community stores,” which not only serve as a meeting place for community programs and training but also as a source of funding to solve issues specific to the local community. These stores are found in diverse, low- to medium-income urban communities. There are currently 16 such locations, including one in Thailand and one in South Korea. Schultz used the advance and ongoing royalties from his book, Pour Your Heart Into It, to create the Starbucks Foundation, which provides opportunity grants to nonprofit literacy groups, sponsors young writers’ programs, and partners with Jumpstart, an organization helping children prepare developmentally for school. The company, which has hired more than 28,000 veterans and military spouses, announced it plans to hire 25,000 more veterans and military spouses by 2025. Additionally, Starbucks takes a proactive approach to address employment opportunities and job training. The company has joined other firms to support the “100,000 Opportunities Initiative,” intending to create 100,000 employment and internship opportunities for lower-income youth between 16 and 24 years of age. Former CEO Howard Schultz helped spearhead the initiative and announced plans to hire 10,000 young workers over three years. Achieving this goal early, Starbucks now has 75,000 young workers.
C13.6 SUCCESS AND CHALLENGES Starbucks is the most prominent brand of high-end coffee in the world but also one of the defining brands of our time. In most large cities, it is impossible to walk more than a few blocks without seeing the familiar mermaid logo. In the past few decades, Starbucks achieved amazing levels of growth, creating financial success for shareholders. Starbucks’ reputation is built on product quality, stakeholder concern, and a balanced approach to all of its business activities. Starbucks does receive criticism for putting other coffee shops out of business and for creating a uniform retail culture in many cities. Yet, the company excels in relationship-building with employees and is a role model for the fast-food industry in employee benefits. In addition, in an age of shifts in supply chain power, Starbucks is as concerned about suppliers and meeting their needs as they are about any other primary stakeholder.
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Starting in late 2008, Starbucks had something new to worry about. A global recession caused the market to bottom out for expensive coffee drinks. The company responded by slowing its global growth plans after years of expanding at a nonstop pace and instead refocused on strengthening its brand, satisfying customers, and building consumer loyalty. After Starbucks stock started to plummet, Howard Schultz returned as CEO to bring the company back to its former glory. Schultz was successful, and Starbucks rebounded from the effects of the recession. In 2017, Kevin Johnson became the president and CEO of Starbucks. Johnson first joined Starbucks in 2009 as a member of the board of directors and later became the president and chief operating officer in 2015. He previously worked as a tech executive, giving him the experience needed to propel Starbucks into the future with technology and innovation. Under Johnson, Starbucks announced plans for an organizational “shake-up” in 2018. This shake-up included corporate layoffs at top levels. Starbucks explained the reasoning was to innovate the company as well as to combat stagnant sales and spark investor and customer interest. In the years leading up to 2018, Starbucks faced lagging U.S. sales for several quarters, and sales growth was not up to investors’ expectations. Kevin Johnson sent an e-mail to employees stating his plan was “to make significant changes to how we work as leaders in all areas of the company.” According to the CEO, approximately 5 percent of the company’s global corporate workforce would be cut, including about 350 employees in marketing, creative, product, technology, and store development areas of the company. Johnson said that while the decision was very difficult, the positions affected were related to work that has been eliminated or deprioritized as the company streamlined its business over time. Starbucks has also expanded rapidly in China under Johnson’s leadership. When Starbucks first entered the country in 1999, coffee was not nearly as popular as tea. Starbucks positioned itself in highly trafficked areas to gain awareness and crafted beverages using widely used local ingredients such as green tea to create appealing drinks. Additionally, Starbucks strategically partnered with various coffee companies around China that provided local expertise to help Starbucks expand quickly. Starbucks effectively overcame obstacles in tapping into the Chinese market and adapted their strategy to attract Chinese consumers. In 2019, Starbucks opened a store in China every 15 hours on average. Starbucks faced a major setback in customer trust in 2018 after two black men were refused access to the bathroom at a Philadelphia location. A video that was recorded of the incident was shared to Twitter and viewed more than 11.5 million times. After the incident, Starbucks closed all of its stores for a one-day anti-bias training for employees. Starbucks publicly apologized and acknowledged the need to make changes to prevent racial bias. The one-time training was costly due to millions in lost profits but showed the company was willing to right its wrongs. Additionally, the two men received an apology along with a financial settlement. Since the incident, more than 175,000 partners have participated in anti-bias training, and in 2019, the company introduced a 15-course online anti-bias curriculum for both employees and customers. Another challenge Starbucks must address is sustainability. Despite the company’s emphasis on becoming more environmentally conscious, billions of Starbucks cups continue to be thrown into landfills each year. Although Starbucks has taken initiatives to make the cups more eco-friendly, its cups continue to represent a serious waste problem for Starbucks. Starbucks encourages consumers to bring in reusable cups (such as the Starbucks tumblers they sell) for a 10-cent rebate, yet these account for less than 2 percent of drinks served. The company hopes to achieve less cup waste with its $1 reusable cup. It remains to be seen whether Starbucks will achieve its goal of total recyclability in the short term. In 2020, in the midst of the COVID-19 (coronavirus) pandemic, Starbucks announced it would permanently close more than 400 company-owned locations while focusing its strategy on pickup, drive-thru, and mobile-only stores. Prior to the pandemic, more than 80 percent of the company’s orders were on-the-go (e.g., order ahead or drive-thru). While the global health crisis disrupted consumer behavior, Starbucks’ emphasis on technology and convenience, specifically through its mobile app, proved to be a strength. The company committed to expanding its pickup-only stores in dense metropolitan areas as well as curbside pickup services at its traditional locations.
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C13.7 THE FUTURE FOR STARBUCKS The future looks bright for Starbucks. The company continues to expand globally into markets such as Bangalore, India; San Jose, Costa Rica; Oslo, Norway; and Ho Chi Minh City, Vietnam. With new roasteries, the innovation lab, and implementing IoT, the company hopes that its innovation will continue to spread the brand name and the distribution of its coffee globally. Starbucks CEO, Johnson, a former tech executive, is pushing to address scale and complexity using technology to move into the future. With the rise of connected IoT devices, Starbucks, has invested heavily in technology, particularly AI. AI is a key part of the strategy to manage areas such as supply chain management, inventory management, and even workforce decisions. Starbucks uses AI for everything from determining how many bananas are needed each day in a store to making custom food and drink suggestions in its app. The challenges the company experienced and will continue to experience in the future have convinced the firm to focus on its strengths and emphasize community involvement, outreach work, and its overall image and offerings.
QUESTIONS 1. How has Starbucks gained a competitive advantage with a core product that is a commodity? 2. What are the strategic opportunities and threats facing Starbucks in the future? 3. Do you think Starbucks has grown because of its mission to put people ahead of profits or because of innovative ideas like online ordering and global roasteries?
SOURCES Aamer Madhani, “Starbucks to Open Stores in Low-Income Areas,” USA Today, July 16, 2015, http://www.usatoday.com /story/news/2015/07/16/starbucks-to-open-15-locations -in-low-income-minority-communities/30206071/ (accessed August 4, 2019); Adam Campbell-Schmitt, “Roastery, Reserve Bar, Regular Starbucks: What’s the Difference?” Food & Wine, December 20, 2018, https://www.foodandwine.com /news/starbucks-roastery-reserve-bar-store-difference (accessed August 4, 2019); Adam Minter, “Why Starbucks Won’t Recycle Your Cup,” Bloomberg View, April 7, 2014, http://www.bloombergview.com/articles/2014-04-07/why -starbucks-won-t-recycle-your-cup (accessed August 4, 2019); Adi Ignatius, “Starbucks CEO Kevin Johnson on Work, Joy, and, Yes, Coffee,” Harvard Business Review, September 23, 2019, https://hbr.org/2019/09/starbucks-ceo-kevin-johnson-on -work-joy-and-yes-coffee (accessed July 13, 2020); Alicia Kelso, “Starbucks’ Focus on Cold Beverages Heats Up Sales,” Forbes, December 4, 2019, https://www.forbes.com/sites /aliciakelso/2019/12/04/starbucks-focus-on-cold-beverages-heats -up-sales/ (accessed July 13, 2020); Alicia Kelso, “Starbucks’ Plan to Double Food Offerings Could Further Disrupt Traditional QSRs,” Forbes, March 27, 2018, https://www.forbes .com/sites/aliciakelso/2018/03/27/starbucks-plans-to
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428 Part 5: Cases
Fad,” USA Today, December 5, 2014, 1B–2B; Business Wire, “Starbucks Opens New Community Store in Dallas Oak Cliff Area to Help Support Economic Revitalization and Youth Hiring,” Business Wire, November 29, 2018, https://www .businesswire.com/news/home/20181129005231/en /Starbucks-Opens-New-Community-Store-Dallas-Oak (accessed August 4, 2019); CC, “Starbucks Brings Imported Coffee to a Land of Exported Coffee,” Fast Company, May 2012, 30; Charlie Rose, “Charlie Rose Talks to Howard Schultz,” Bloomberg Businessweek, April 7–13, 2014, 32; Christine Birkner, “Taking Care of Their Own,” Marketing News, February 2015, 45–49; “Coffee Deal Has Stocks Soaring,” USA Today, March 11, 2011, 5B; Conservation International, “Follow Starbucks’ 15 Year Journey to 100% Ethically Sourced Coffee,” https://www.conservation.org/partners/starbucks (accessed August 4, 2019); Craig Smith, “30 Interesting Starbucks Facts and Statistics (2019) By the Numbers,” DMR, July 27, 2019 (last updated), https://expandedramblings.com /index.php/starbucks-statistics/ (accessed August 1, 2019); Dan Welch, “Fairtrade Beans Do Not Mean a Cup of Coffee Is Entirely Ethical,” guardian.co.uk, February 28, 2011, http: //www.guardian.co.uk/environment/green-living-blog/2011 /feb/28/coffee-chains-ethical (accessed August 4, 2019); Danielle Wiener-Bronner, “Starbucks Says It Will Close 150 Stores Next Year,” CNN Business, June 19, 2018, https://money .cnn.com/2018/06/19/news/companies/starbucks-store -closures/index.html (accessed August 4, 2019); David Kesmodel and Ilan Brat, “Why Starbucks Takes on Social Issues,” The Wall Street Journal, March 24, 2015, B3; David Schorn, “Howard Schultz: The Star of Starbucks,” 60 Minutes, https: //www.cbsnews.com/news/howard-schultz-the-star-of -starbucks/ (accessed August 4, 2019); David Teather, “Starbucks Legend Delivers Recovery by Thinking Smaller,” The Guardian, January 21, 2010, https://www.theguardian.com/business/2010/jan/21/starbucks-howard-schultz (accessed August 4, 2019); Eartheasy.com, “Shade Grown Coffee,” http:// www.earth-easy.com/eat_shadegrown_coffee.htm (accessed August 4, 2019); Emily Canal, “Starbucks Is Putting $250 Million Into Boosting Employee Pay and Benefits After the Tax Cut,” Inc., n.d., https://www.inc.com/emily-canal/starbucks -boosts-workers-pay-corporate-tax-savings.html (accessed August 4, 2019); Eric Corbett, “These 8 Companies Are Ditching Plastic Straws. Here’s How They Are Replacing Them,” Fortune, July 11, 2018, https://fortune .com/2018/07/11/ditching-plastic-straws-replacements/ (accessed August 4, 2019); Erica Salmon Byrne, “A Clear Correlation: Ethical Companies Outperform,” Ethisphere Institute, June 9, 2017, https://insights.ethisphere.com/a-clear -correlation-ethical-companies-outperform/ (accessed October 17, 2019); Erika Cruz, “It’s Coffee Time: Find Out How Starbucks Turns to Technology to Brew up a More Personal Connection With Its Customers,” Microsoft, June 14, 2019, https://blogs.microsoft.com/latinx/2019/06/14/its-coffee-time -find-out-how-starbucks-turns-to-technology-to-brew-up
-a-more-personal-connection-with-its-customers/ (accessed October 25, 2019); Fiona Soltes, “Starbucks Innovation Continues —One Cup at a Time,” National Retail Federation, January 12, 2020, https://nrf.com/blog/starbucks-innovation-continues-one -cup-time (accessed July 13, 2020); Gary Stern, “Starbucks’ Reserve Roastery Is Spacious and Trendy, so Why Is It Slowing Down Expansion?” Forbes, January 22, 2019, https:// www.forbes.com/sites/garystern/2019/01/22/starbucks -reserve-roastery-its-spacious-and-trendy-but-why-is -starbucks-slowing-down-expansion/#6aef24681bc6 (accessed August 4, 2019); Geoff Colvin, “Questions for Starbucks’ Chief Bean Counter,” Fortune, December 9, 2013, 78–82; Haley Geffen, “Starbucks: Howard Schultz on the Coffee Chain’s Expansion Under His Leadership,” Bloomberg Businessweek, December 8–14, 2014, 32; Helen H. Wang, “Five Things Starbucks Did to Get China Right,” Forbes, August 10, 2012, https://www.forbes.com/sites/helenwang/2012/08/10 /five-things-starbucks-did-to-get-china-right/#3ae6fec53af2 (accessed October 17, 2019); Ilan Brat, “Starbucks Lines Up Delivery Options,” The Wall Street Journal, March 19, 2015, B2; Jason Groves and Peter Campbell, “Starbucks Set to Cave in and Pay More Tax After Threats of Boycott at Its ‘Immoral’ Financial Dealings,” dailymail.co.uk, December 3, 2012, http://www.dailymail.co.uk/news/article-2242596/Starbucks -pay-tax-public-outcry-financial-dealings.html (accessed August 4, 2019); Jessica Tyler, “Starbucks Just Opened a Reserve Roastery in New York That Has a Full Cocktail Bar and Is Almost 13 Times the Size of the Average Starbucks. Here’s How It Compares to a Typical Starbucks,” Business Insider, December 17, 2018, https://www.businessinsider.com/starbucks -reserve-roastery-compared-regular-starbucks-2018-12 (accessed August 4, 2019); John Jannarone, “Grounds for Concern at Starbucks,” The Wall Street Journal, May 3, 2011, C10; Jonathan Watts, “Starbucks Faces Eviction From the Forbidden City,” www.guardian.co.uk, January 18, 2007, http://www.guardian.co.uk/world/2007/jan/18/china .jonathanwatts (accessed August 4, 2019); Jordan Davidson, “Starbucks Is Testing Fully Compostable Cups in Five Cities,” EcoWatch, March 10, 2020, https://www.ecowatch.com /starbucks-cups-compostable-2645448929.html (accessed July 13, 2020); Julie Jargon and Douglas Belkin, “Starbucks to Subsidize Online Degrees,” The Wall Street Journal, June 16, 2014, B3; Julie Jargon, “At Starbucks, Baristas Told No More Than Two Drinks,” The Wall Street Journal, October 13, 2010, http://online.wsj.com/article/SB100014240527 48704164004575548403514060736.html (accessed August 4, 2019); Julie Jargon, “Coffee Talk: Starbucks Chief on Prices, McDonald’s Rivalry,” The Wall Street Journal, March 7, 2011, B6; Julie Jargon, “Starbucks Brews Plan Catering to Aficionados,” The Wall Street Journal, September 11, 2014, B7; Julie Jargon, “Starbucks CEO to Focus on Digital,” The Wall Street Journal, January 30, 2014, B6; Julie Jargon, “Starbucks Leads Push to Boost Youth Jobs,” The Wall Street Journal, July 14, 2015, B3; Julie Jargon, “Starbucks Logo Loses ‘Coffee,’
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Case 13: Starbucks Perfects Its Blend 429
Expands Mermaid as Firm Moves to Build Packaged-Goods Business,” The Wall Street Journal, January 6, 2011, B4; Kara Sutyak, “Starbucks Giving Free Coffee to First Responders During Coronavirus Pandemic,” FOX 8, March 25, 2020, https://fox8.com/news/coronavirus/starbucks-giving -free-coffee-to-front-line-responders-during-coronavirus -pandemic/ (accessed July 13, 2020); Kate McClelland, “Starbucks Founder Speaks on Ethics,” Notre Dame Observer, March 30, 2007, http://ndsmcobserver.com/2007/03 /starbucks-founder-speakson-ethics/ (accessed August 4, 2019); Kate Rogers, “Starbucks Is Speeding up Innovation at Its Seattle Research Hub,” CNBC, May 2, 2019, https://www .cnbc.com/2019/05/02/starbucks-is-speeding-up-innovation -at-its-seattle-research-hub.html (accessed October 25, 2019); Kate Rogers and Christine Wang, “Starbucks to Cut 5% of Its Corporate Workforce,” CNBC, November 13, 2018, https://www.cnbc.com/2018/11/13/starbucks-to-cut-5percent -of-its-corporate-workforce.html (accessed August 4, 2019); Kate Taylor, “Starbucks Has a New Innovation Lab That Developed More Than 130 Projects in Under a Year, Including Tech Updates, Instagram-Worthy Drinks, and Soup-Making Equipment,” Business Insider, June 13, 2019, https://www .businessinsider.com/starbucks-tryer-center-innovation -lab-tour-2019-6 (accessed October 25, 2019); Katie Lobosco, “Oprah Chai Tea Comes to Starbucks,” CNN Money, March 19, 2014, https://money.cnn.com/2014/03/19/news /companies/oprah-starubucks-tea/index.html (accessed August 4, 2019); Laura Lorenzetti, “Where Innovation Is Always Brewing,” Fortune, November 17, 2014, 24; Laurie Burkitt, “Starbuck Menu Expands in China,” The Wall Street Journal, March 9, 2011, B7; Lucas Mearian, “From Coffee Bean to Cup: Starbucks Brews a Blockchain-Based Supply Chain With Microsoft,” Computerworld, May 7, 2019, https://www .computerworld.com/article/3393211/from-coffee-bean-to-cup -starbucks-brews-a-blockchain-based-supply-chain-with -microsoft.html (accessed August 4, 2019); Mariko Sanchanta, “Starbucks Plans Big Expansion in China,” The Wall Street Journal, April 14, 2010, B10; Matt Naham, “Starbucks Hit With Class Action Lawsuit Alleging That Customers Were Exposed to ‘Toxic Pesticide’,” Law & Crime, May 21, 2019, https://lawandcrime.com/high-profile/starbucks-hit-with -class-action-lawsuit-alleging-that-customers-were -exposed-to-toxic-pesticide/ (accessed August 4, 2019); Micah Solomon, “Starbucks to Open Store, Customer Service Training Center in Ferguson, 14 Other Distressed Locations,” Forbes, July 16, 2015, http://www.forbes.com/sites/micahsolomon /2015/07/16/starbucks-to-open-store-customer-service -training-center-in-ferguson-14-other-distressed-locations/ (accessed August 4, 2019); MSNBC.com, “Health Care Takes Its Toll on Starbucks,” September 14, 2005, http://www.nbcnews .com/id/9344634/ns/business-us_business/t/health -care-takes-its-toll-starbucks/ (accessed August 4, 2019); Nestle, “Nestle and Starbucks Close Deal for the Perpetual Global License of Starbucks Consumer Packaged Goods and
Foodservice Products,” August 28, 2018, https://www.nestle. com/media/pressreleases/allpressreleases/nestle -starbucks-close-deal-consumer-packaged-goods-foodservice -products (accessed August 4, 2019); Nielsen, “Consumer-Goods’ Brands That Demonstrate Commitment to Sustainability Outperform Those That Don’t,” October 12, 2015, https://www.nielsen.com/us/en/press-releases/2015 /consumer-goods-brands-that-demonstrate-commitment -to-sustainability-outperform/ (accessed October 17, 2019); “Number of Starbucks Stores Globally, 1992–2018,” Knoema, March 12, 2019, https://knoema.com/infographics/kchdsge /number-of-starbucks-stores-globally-1992-2018 (accessed August 1, 2019); Peter Campbell, “Starbucks Caves in to Pressure and Promises to Hand the Taxman £20m After Public Outcry,” dailymail.co.uk, December 6, 2012, http://www .dailymail.co.uk/news/article-2244100/Starbucks-caves -pressure-promises-pay-20m-corporation-tax-2-years.html (accessed August 4, 2019); Rachel Abrams, “Starbucks to Close 8,000 U.S. Stores for Racial-Bias Training After Arrests,” The New York Times, April 17, 2018, https://www .nytimes.com/2018/04/17/business/starbucks-arrests -racial-bias.html (accessed August 23, 2019); Rana Foroohar, “Starbucks for America,” Time, February 16, 2015, 18–23; Reuters, “Starbucks to Open First Outlet in Vietnam in Early February,” Economic Times, January 3, 2013, http://www .reuters.com/article/2013/01/03/starbucks-vietnam -idUSL4N0A815420130103 (accessed August 4, 2019); Ron Shevlin, “Walmart Tops Starbucks, Amazon and Uber for Mobile App Adoption Dominance,” Forbes, May 20, 2019, https://www.forbes.com/sites/ronshevlin/2019/05/20 /walmart-tops-starbucks-amazon-and-uber-for-mobile -app-adoption-dominance/#23d540897a1c (accessed August 4, 2019); Roxanne Escobales and Tracy McVeigh, “Starbucks Hit by UK Uncut Protests as Tax Row Boils Over,” guardian. co.uk, December 8, 2012, http://www.guardian.co.uk /business/2012/dec/08/starbucks-uk-stores-protests-tax (accessed August 4, 2019); Sarah Jones, “Starbucks Shows That Healthcare Isn’t a Job Killer by Adding 1,500 Cafes,” PoliticusUSA, December 6, 2012, http://www.politicususa .com/2012/12/06/healthcare-providing-starbucks-expanding 1500-cafes.html (accessed August 4, 2019); Sarah Whitten and Kate Rogers, “Starbucks Cuts Long-Term Earnings per Share Forecast; Shares Fall,” CNBC, December 13, 2018, https://www.cnbc.com/2018/12/13/starbucks-partners -with-uber-eats-to-deliver-to-customers.html (accessed August 4, 2019); Sarah Whitten, “A Look Inside Starbucks’ Newest Reserve Roastery in New York City,” CNBC, December 13, 2018, https://www.cnbc.com/2018/12/12/heres-what -starbucks-new-roastery-in-new-york-city-looks-like.html (accessed August 4, 2019); SCS Global Services, “Starbucks C.A.F.E. Practices,” http://www.scsglobalservices.com /starbucks-cafe-practices (accessed August 4, 2019); Starbucks “Starbucks Opens Community Store in Birmingham to Support Economic Revitalization and Youth Hiring,”
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430 Part 5: Cases
August 29, 2018, https://stories.starbucks.com/press/2018 /starbucks-opens-community-store-in-birmingham/ (accessed August 4, 2019); Starbucks Reserve, https://www .starbucksreserve.com/en-us/coffee (accessed July 13, 2020); Starbucks, “Global Social Impact,” https://www.starbucks .com/responsibility/global-report (accessed July 13, 2020); Starbucks, “Affogato Line-up at Starbucks Roastery in Seattle,” June 27, 2016, https://news.starbucks.com/news/affogato -line-up-at-starbucks-roastery (accessed August 4, 2019); Starbucks, “Diversity at Starbucks,” https://www.starbucks .com/responsibility/community/diversity-and-inclusion /aspirations (accessed August 4, 2019); Starbucks, “Farming Communities,” http://www.star bucks.com/responsibility /community/farmer-support (accessed August 4, 2019); Starbucks, “Investing in Farmers,” http://www.starbucks.com /responsibility/community/farmer-support/farmer -loan-programs (accessed August 4, 2019); Starbucks, “On the Ground Support for Farming Communities,” https:// www.starbucks.com/responsibility/community/farmer -support/farmer-support-centers (accessed August 4, 2019); Starbucks, “Opportunity for Youth,” https://www.starbucks .com/responsibility/community/opportunity-youth (accessed August 4, 2019); Starbucks, “Recycling & Reducing Waste,” http://www.starbucks.com/responsibility/environment /recycling (accessed August 4, 2019); Starbucks, “Small Changes Add Up to a Big Impact,” http://www.starbucks .com/promo/nutrition (accessed August 4, 2019); Starbucks, “Starbucks and Alibaba Group Announce Partnership to Transform the Coffee Experience in China,” August 2, 2018, https://stories.starbucks.com/press/2018/starbucks-and -alibaba-announce-partnership-to-transform-coffee-experience/ (accessed August 4, 2019); Starbucks, “Starbucks CEO Kevin Johnson Discusses Recent Announcements With Brightloom and Uber Eats,” July 23, 2019, https://stories.starbucks.com /stories/2019/starbucks-ceo-kevin-johnson-discusses -recent-announcements-with-brightloom-and-uber-eats/ (accessed August 4, 2019); Starbucks, “Starbucks Company Timeline,” https://www.starbucks.com/about-us/company -information/starbucks-company-timeline (accessed July 13, 2020); Starbucks, “Starbucks Creamers Launching Nationwide,” July 22, 2019, https://stories.starbucks.com/press/2019 /starbucks-creamers-launching-nationwide/ (accessed August 1, 2019); Starbucks, “Starbucks Reserve Roastery Milano Fact Sheet: Overview,” September 6, 2018, https://stories
.starbucks.com/press/2018/starbucks-reserve-roastery -milano-fact-sheet-overview/ (accessed August 4, 2019); Starbucks, “Starbucks to Transform U.S. Store Portfolio by Building on the Strength of Digital Customer Relationships and the Convenience of the Starbucks App,” June 10, 2020, https://stories.starbucks.com/press/2020/starbucks-to-transform -us-store-portfolio-by-building-on-the-strength-of-digital -customer-relationships/ (accessed July 13, 2020); “Starbucks: A Farm of Its Own,” Bloomberg Businessweek, March 25–31, 2013, 23; “Starbucks Corporation (SBUX),” YAHOO! Finance, http://finance.yahoo.com/q/is?s=SBUX+Income+Statement &annual (accessed August 4, 2019); “Starbucks Introduces $1 Reusable Cup to Cut Down on Waste,” Eatocracy, January 3, 2013, https://cnneatocracy.wordpress.com/2013/01/03/starbucks-introduces-1-reusable-cup-to-cut-down-on-waste /comment-page-2/ (accessed August 4, 2019); “Starbucks Plans ‘Significant Changes’ to Company’s Structure,” Los Angeles Times, September 24, 2018, https://www.latimes.com / bu s i n e ss / l a - f i - st ar bu ck s - org an i z at i on a l - ch ange s -20180924-story.html (accessed August 4, 2019); “Starbucks to Enter China’s Tea Drinks Market,” China Retail News, March 11, 2010, www.chinaretailnews.com/2010/03/11/3423starbucks-to-enter-chinas-tea-drinks-market (accessed August 4, 2019); “Starbucks Unveils Minimalist New Logo,” USA Today, January 6, 2011, 11B; “Statistics and Facts on Starbucks,” Statista, October 2013, http://www.statista.com /topics/1246/starbucks/ (accessed August 4, 2019); Susan Berfield, “Starbucks’ Food Fight,” Businessweek, June 12, 2012, http://w w w.businessweek.com/articles/2012-06-12 /starbucks-food-fight (accessed August 4, 2019); Tom Brennan, “Starbucks and Alibaba Group Announce Partnership to Transform the Coffee Experience in China,” Starbucks, August 2, 2018, https://stories.starbucks.com/press/2018 /starbucks-and-alibaba-announce-partnership-to-transform -coffee-experience/ (accessed August 4, 2019); Tonya Garcia, “Starbucks and McDonald’s Plastic Straw Removal Will Go Down Well With Millennials,” MarketWatch, July 11, 2018, https://www.marketwatch.com/story/starbucks-and-mcdonalds -plastic-straw-removal-will-go-down-well-with-millennials -2018-07-09 (accessed August 4, 2019); Trefis Team, “Starbucks’ Profits Surge Despite Sales Slowing Down,” Forbes, January 30, 2014, http://www.forbes.com/sites/greatspeculations /2014/01/30/starbucks-profits-surge-despite-sales-slowing-down/ (accessed August 4, 2019).
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CASE 14 Zappos Finds the Perfect Fit* SYNOPSIS: This case examines Zappos’s unique marketing strategy and corporate culture, both of which focus on delivering happiness to the company’s varied stakeholders. Despite a few stumbles along the way, Zappos has been a role model of success since its founding in 1999. The company’s charismatic CEO, Tony Hsieh, created a corporate culture that put its customers and employees ahead of financial success. The company was purchased by Amazon in 2010 but was allowed to run as an independent company. The case looks at Zappos’s business model and how it influences the company’s relationships with customers, employees, the environment, and its communities. The case also discusses some of the challenges the company faces and how it plans to move into the future. THEMES: Marketing strategy, e-commerce, branding, long-term customer relationships, customer satisfaction, corporate culture, employee relations, social responsibility, customer loyalty, corporate reputation
C
an a company focused on happiness be successful? Zappos, an online retailer, proves that it can. Tony Hsieh, Zappos’s CEO, says, “It’s a brand about happiness, whether to customers or employees or even vendors.” Zappos’s zany corporate culture and focus on customer satisfaction have made it both successful and a model for other companies.
*Harper Baird, Bernadette Gallegos, Beau Shelton, Jennifer Sawayda, Kelsey Reddick, and Jordan Burkes developed this case under the direction of O.C. Ferrell and Linda Ferrell, © 2022. It is intended for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management. All sources used for this case were obtained through publicly available materials.
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432 Part 5: Cases
C14.1 THE HISTORY OF ZAPPOS Nick Swinmurn founded Zappos in 1999 after a fruitless day spent shopping for shoes in San Francisco. After looking online, Swinmurn decided to quit his job and start a shoe website that offered the best selection and best service. Originally called ShoeSite.com, the company started as an intermediary, transferring orders between customers and suppliers but not holding any inventory. The website was soon renamed Zappos, after the Spanish word for shoes (zapatos). In 2000, entrepreneur Tony Hsieh became the company’s CEO. Hsieh, 26 at the time, was an early investor in Zappos, having made $265 million selling his startup company to Microsoft in 1998. Hsieh wasn’t initially sold on the idea of an Internet shoe store. He told Inc. Magazine, “It sounded like the poster child of bad Internet ideas … but I got sucked in.” After becoming CEO, Hsieh made an unconventional decision to keep Zappos going, even selling his San Francisco loft to pay for a new warehouse and once setting his salary at just $24. Zappos struggled its first few years, making sales but not generating a profit. The dot-com crash forced Zappos to lay off half its staff, but the company recovered. By the end of 2002, Zappos had sales of $32 million but was still not profitable. In 2003, the company decided that to offer the best customer service, it had to control the entire value chain—from order to fulfillment to delivery—and began holding its own inventory. Zappos moved to Las Vegas in 2004 to take advantage of a larger pool of experienced call center employees. The company generated its first profit in 2007 after reaching $840 million in annual sales. Zappos also started to be recognized for its unique work environment and approach to customer service. In 2010, Amazon bought the company for $1.2 billion. Although Hsieh rejected an offer from Amazon in 2005, he believed that the buyout would be better for the company than management from the current board of directors or an outside investor. Many Zappos customers were confused by the unexpected move and expressed concerns about the future of the company’s culture and customer service. Most CEOs would not have felt any obligation to address customer concerns over the merger, but Tony Hsieh valued the support of Zappos’s employees and customers. Hsieh said, “With Amazon, it seemed that Zappos could continue to build its culture, brand, and business. We would be free to be ourselves.” Amazon agreed to let Zappos operate independently and to keep Hsieh as CEO (at his current $36,000 annual salary). Hsieh made $214 million from the merger, and Amazon set aside $40 million for distribution to Zappos employees. After the merger, the company restructured into 10 separate companies organized under the Zappos Family. Zappos was able to keep its unique culture and core values.
C14.2 BUSINESS MODEL AND OPERATING PHILOSOPHY Zappos has 10 core values that guide every activity at the company and form the heart of the company’s business model and culture: ●● ●● ●● ●● ●● ●● ●● ●● ●● ●●
Deliver WOW through service. Embrace and drive change. Create fun and a little weirdness. Be adventurous, creative, and open-minded. Pursue growth and learning. Build open and honest relationships with communication. Build a positive team and family spirit. Do more with less. Be passionate and determined. Be humble.
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Case 14: Zappos Finds the Perfect Fit 433
Zappos’s core values differ from those of other companies in a couple of ways. In addition to being untraditional, the core values create a framework for the company’s actions. This is exemplified in the company’s commitment to its customers’ and employees’ well-being and satisfaction. The Zappos business model is built around developing long-term customer relationships. Zappos does not compete on price because it believes that customers will want to buy from the store with the best service and selection. The company strives to create a unique and addicting shopping experience, offering a wide selection of shoes, apparel, accessories, and home products, free shipping to the customer, free shipping and full refunds on returns, and great customer service.
C14.2a Shopping and Shipping Zappos strives to make the shopping experience enjoyable. The website is streamlined for an easy shopping experience. Products are grouped in specialized segments. Customers can view each product from multiple angles thanks to photographs taken at the company’s studio, and Zappos employees make short videos highlighting the product’s features. Zappos uses feedback provided in customer reviews (e.g., if a shoe fits true to size) to improve its listings. Zappos analyzes how customers navigate the site to improve features, adapt search results, and plan inventory. This spirit of simplicity, innovation, and great service extends to Zappos’s inventory and distribution systems as well. Zappos has a live inventory management system. Once the company sells out of an item, the listing is removed from the website. This helps to reduce customer frustration. Its inventory and shipping systems are linked directly to the website via a central database, and all its information systems are developed in-house and customized to the company’s needs. Their warehouses operate around the clock, which allows them to get a product to the customer faster. Fast shipping creates an instant gratification that is similar to shopping in a physical store. During the COVID-19 (coronavirus) pandemic in 2020, Zappos addressed customer concerns via its website. Due to an influx of orders, they alerted customers that deliveries could take longer than usual to arrive. The company also detailed how Zappos gave back to the community during the crisis. For example, customers were urged to nominate a “hero” to receive a $250 gift card. Additionally, the company provided Crocs shoes to health-care professionals. Zappos merchandised its site to address shifting consumer behavior and preferences, highlighting slippers, athleisure, and leggings that fit better with more time spent at home. Most companies have a negative view of returns, but Zappos’s mentality is the opposite. It sees returns as the ability to maintain customer relationships and to increase its profits. Zappos offers a 100% Satisfaction Guaranteed Return Policy. If a customer is not satisfied with a purchase, the customer can return it within 365 days for a full refund. The customer can print a prepaid shipping label that allows all domestic customers to return the product for free. This return policy encourages customers to order several styles or different sizes and return the items that do not work out. While this strategy seems expensive, it actually works to Zappos’s advantage. The average industry merchandise return rate is 35 percent, but Zappos’s most profitable customers tend to return 50 percent of what they purchase. The customers who have higher return percentages are the most profitable because they have experienced Zappos’s customer service and return policy, which create loyalty to the company. These customers are likely to make purchases more often and to spend more on each purchase. This is what makes Zappos so successful.
C14.2b Customer Service What really makes the Zappos business model unique is the company’s focus on customer service. The company has established a method of serving customers and handling their issues that is distinctive from the rest of the industry. Zappos believes great customer service is an opportunity to make the customer happy. Customers are encouraged to call Zappos with any questions. The number is displayed on every page of the website. Hsieh says, “At Zappos, we want people to call us. We believe that forming personal, emotional connections with our customers is the best way to provide great service.” Customer service representatives also actively use social media sites such as Facebook and Twitter to respond to customer issues.
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Another key aspect of Zappos’s customer service model is that nothing is scripted. Employees have free reign in their decision-making and are expected to spend as much time as they need to “wow” customers. They help customers shop, even on their competitors’ websites, encourage them to buy multiple sizes or colors to try (since return shipping is free), and do anything it takes to make the shopping experience memorable. Zappos’s customer service representatives try to develop relationships with their customers and make them happy. Stories about great customer service include customer support calls that last for 11 hours, sending flowers to customers on their birthdays and surprise upgrades to faster shipping. Some extreme cases include Zappos hand-delivering shoes to customers who have lost luggage and to a groom who forgot the shoes for his wedding. Zappos has even sent pizzas to the homes of customers who have tweeted to the company about being hungry. During the COVID-19 pandemic, Zappos created a customer service line to allow customers to call and chat about anything from travel plans to pandemic worries. Employees came up with the idea, and Zappos, which experienced lower than average call volume as consumers spent less on nonessentials, wanted to make use of its customer service team. Zappos believes that great customer experiences encourage customers to use the store again. In addition, Zappos’s long-term strategy is based on the idea that great customer service will help them expand into other categories. While around 80 percent of Zappos’s orders come from shoes, the markets for housewares and apparel are much larger. The company says it will expand into any area that it is passionate about and that meets its customers’ needs. The company also considers word-of-mouth marketing to be the best way to reach new customers. With more than 75 percent of purchases made by repeat customers, it is evident that Zappos’s mission to “provide the best customer service possible” is working well for the company.
C14.3 CORPORATE CULTURE AND WORK ENVIRONMENT The corporate culture at Zappos sets it apart from nearly every other company. As Amazon’s CEO, Jeff Bezos, says, “I’ve seen a lot of companies, and I have never seen a company with a culture like Zappos.” Zappos’s unorthodox culture is the work of CEO Tony Hsieh, an innovative and successful entrepreneur. Hsieh built the culture on the idea that if you can attract talented people and employees enjoy their work, great service and brand power will naturally develop. Zappos is famous for its relaxed and wacky atmosphere. Employee antics include Nerf ball wars, office parades, ugly sweater days, and donut-eating contests. The headquarters features an employee nap room, a wellness center, and an open mic in the cafeteria. Other quirky activities include forcing employees to wear a “reply-all” hat when they accidentally send a companywide e-mail. This environment isn’t just fun; it’s also strategic. According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.”
C14.3a Hiring and Training The key to creating a zany work environment lies in hiring the right people. Zappos looks for people with a sense of humor who can work hard and play hard. Potential employees go through both cultural and technical interviews to make sure they will fit with the company. However, even Hsieh admits that finding great employees is tough. “One of the biggest enemies to culture is hyper-growth. You’re trying to fill seats with warm bodies, and you end up making compromises,” says Hsieh. New employees attend a four-week training program, which includes two weeks on the phones providing customer service and a week fulfilling orders in a warehouse. To make sure that new employees feel committed to a future with the company, Zappos offers $2,000 to leave the company after the training (called “The Offer”). Amazon has since adopted a similar practice. Even
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after the initial training is over, employees take 200 hours of classes—with the company covering everything from the basics of business to advanced Twitter use—and read at least nine business books a year.
C14.3b Benefits Another aspect of Zappos that is unique is the benefits that it provides to its employees. The company has an extensive health plan, where it pays 100 percent of employee’s medical benefits and on average 85 percent of medical expenses for employees’ dependents. The company also provides employees with dental, vision, and life insurance. Other benefits include a flexible spending account, prepaid legal services, a 40 percent employee discount, free breakfasts, lunches, and snacks, paid volunteer time, life coaching, pet insurance, nap rooms, and a carpool program. Zappos determined that the pay structure and the process for employee shift sign-ups were inefficient for the company’s needs. With Hsieh’s encouragement, the company adopted scheduling software called Open Market. Under this new system, call center employees would be given 10 percent time flexibility to pursue their own projects. Employees could decide when to work, but the compensation system was revamped to mimic the surge-time pricing of popular ride-sharing service Uber. With this compensation system, call center employees working during periods of high demand would receive higher pay. In other words, hourly compensation for Zappos call center employees would be based on demand. Zappos hopes to expand this system to all departments eventually. For seniority-based jobs, this system holds risks. For instance, seniority-based incentives also take into account company loyalty, camaraderie with coworkers, and dedication that are also important to work productivity. However, Zappos believes the system works well for its call center employees because many are employed for shorter periods.
C14.3c Work–Life Integration One of Zappos’s core values is “Build a positive team and family spirit,” so the company expects employees to socialize with each other both in and out of the office. In fact, managers spend 10 to 20 percent of their time bonding with team members outside of work. Zappos outings include hiking trips, going to the movies, and hanging out at bars. Hsieh says that this increases efficiency by improving communication, building trust, and creating friendships. Along with creating friendships, employees are encouraged to support each other. Any employee can give another employee a $50 reward for great work. Zappos employees compile an annual “culture book” comprising essays on the Zappos culture and reviews of the company. The culture book helps employees to think about the meaning of their work and is available unedited to the public. This positive work environment comes with the expectation that employees will work hard. Employees are evaluated on how well they embody the core values and inspire others. Zappos will fire people who are doing great work but don’t fit with the culture of the company. Hsieh says, “We definitely don’t want anyone to feel that they’re entitled to employment for life. It’s more about us creating an environment and growth opportunities for our employees such that they want to be employees for life.”
C14.3d Transparency As with its customers, the foundation of Zappos’s relationships with its employees is trust and transparency. The company wants its employees, like its customers, to actively discuss any issues or concerns that may come up. Hsieh does not have an office; he sits in an open cubicle among the rest of the employees. He believes that “the best way to have an open-door policy is not to have a door in the first place.” Zappos’s management is very open with employees by regularly discussing issues on the company blog. Employees receive detailed information about the company’s performance and are encouraged to share information about the company. Zappos believes that employees should develop open and honest relationships with all stakeholders with the hope that this will assist in maintaining the company’s reputation.
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C14.4 CORPORATE SOCIAL RESPONSIBILITY Zappos also takes an unconventional approach to corporate social responsibility and philanthropy. Many companies have CSR programs that are dedicated to a certain area or cause such as education, but Zappos prefers to support a variety of programs based on the needs of communities and the interests of employees. Zappos is involved in a variety of philanthropic efforts. Programs include donating shoes and gifts as well as giving gift cards to elementary school students. Zappos is known for teaming up with celebrities for philanthropic events. The company worked with Michael Ray and Imagine Dragons to create limited-edition sneakers with Puma and Superga. All the proceeds from the shoe sales went to charity. Zappos also worked with Shaquille O’Neal and the Boys & Girls Clubs of America for a Shaq-a-Clause event that helped more than 2,000 underprivileged kids. Zappos for Good, the charitable arm of Zappos.com, launched a Prom Closet program, a prom shop that offered prom dresses, tuxes, shoes, accessories, and hair and makeup services for teens in need. The company has other projects such as Pawlidayz, a pet adoption promotion, and Closets for Good that builds closets full of clothing and food in schools. In 2019, Zappos created a platform called Goods for Goods, which allows customers to shop for purpose-driven products. The platform is separated into five different categories: recycled, vegan, organic, sustainably certified, and Give Back. The website supports more than 150 brands including Native Shoes, which converts used shoes into playground equipment, and Birkenstock, who is committed to environmentally friendly operations and sustainability. Zappos also started a campaign to improve the company’s impact on the environment. A group of employees created the initiative, which is known as Zappos Leading Environmental Awareness for the Future (L.E.A.F.). The campaign focuses on several environmental efforts, including a new recycling program, community gardens, and getting LEED certification for the company. Additionally, the company’s Las Vegas campus was redesigned to be more energy efficient. The company also uses renewable energy sources such as solar panels.
C14.5 ZAPPOS’S STRUCTURE In 2014, Tony Hsieh made a controversial decision to completely change the structure of the organization. The company transitioned toward an organizational structure that abandoned the top-down managerial hierarchy in favor of a redistribution of power. Called a Holacracy, this organizational structure places empowerment at the core of the organization. Every employee becomes their own leader with their own roles. To be effective, a Holacracy requires periodic governance meetings where employees understand their roles and responsibilities. Teams hold tactical meetings to discuss key issues. While governance meetings focus on clarity and role structure, tactical meetings are used to “sync and triage next actions.” It is believed that this distributed authority increases clarity and transparency and decreases cognitive dissonance by recognizing tensions before they become a problem. As Zappos continues to grow, there is a risk its expansion will make it harder to manage employees and control productivity. Hsieh cites statistics that demonstrate how growth often causes innovation and productivity per employee to go down. However, he also claims that when cities double in size, productivity and innovation per resident increase by 15 percent. Hsieh believes that the key to sustainable growth at Zappos is to operate more like a city than a business. He feels the best way to handle growth is to become a Teal organization, starting out by using a Holacracy structure and evolving from there. In his book Reinventing Organizations, Frédéric Laloux uses a color scheme to describe the development of human organizations, with Teal representing an evolved level. The concept of a Teal organization is based on three premises: self-management developed through peer relationships; involving the whole person in the work; and allowing the organization to grow and adapt instead of being driven. A Teal
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organization is structured under the premise that all units will work “together to support the whole.” For Zappos, this involves adopting a new structure promoting self-organization and self-management. The transformation of Zappos’s organizational structure started off slowly. However, Hsieh believed this slow transition was hindering the company’s transformation toward selforganization and self-management. Hsieh sent an e-mail to all 1,500 employees in 2015 to inform them that the organization was going to take immediate action to transform Zappos into a Teal organization. This involved eliminating bosses and the traditional functions of finance, technology, marketing, and merchandising to create task-oriented circles structured around specific businesses. Managers became employees and no longer engaged in traditional management functions. Hsieh praised traditional managers for their past contributions but stated they are no longer required for a Teal organization. He realized there was likely going to be much resistance from managers and other employees who did not agree with the new system. To address these concerns, Hsieh extended “The Offer.” Zappos agreed to provide employees who wanted to leave severance pay for three months. Approximately 14 percent of employees chose to take the package. In 2016, however, Zappos fell off Fortune magazine’s 100 Best Companies to Work For list for the first time in eight years. Employee surveys showed that scores had gone down on 48 out of 58 questions. Hsieh chalked the problem up to growing pains, saying he believed employees must be committed to the changes and that it will pay off in the long term. Since 2017, Zappos has continued to evolve its Holacracy model. While the company has retained a circular hierarchy, it also reintroduced the manager role. Holacracy has received criticism in the past for being too internally focused, which is at odds with Zappos’s customer focus. John Bunch, an executive at Zappos who co-led the movement toward Holacracy, said the company is guiding employees to focus on the customer by implementing a marketplace system where teams operate like small businesses. They manage their own financials rather than stressing on the scope of their Holacratic authority. These small business-like structures are encouraged and incentivized to create new product lines and services for customers. While this is still a decentralized system that comes with a high degree of autonomy and self-sovereignty, it isn’t a pure Holacracy.
C14.6 THE FUTURE OF ZAPPOS Zappos remains committed to serving its customers and employees. So far, the company has retained its unique culture and continues to expand into new product categories. In one interview, Hsieh talked about the growth of Zappos and how he believes that expanding into the clothing and merchandise market will help the company to grow. Hsieh says that “the sky is the limit” for Zappos, and that growing and expanding into many different types of businesses is Zappos’s future. Hsieh continues to look for talented and creative individuals. He has pledged $1 million in partnership with Venture for America to bring at least 100 graduates to the Las Vegas area over a 5-year period. As Zappos expands, it will have to work harder to hire the right people, avoid ethical issues, and maintain its quirky culture. The company’s new organizational structure and compensation system for its call center employees are major steps to expand without compromising Zappos’s unique culture. Although many employees ended up leaving the company, Zappos believes these moves are the right ones to make and will enable the firm to continue growing both in employees and productivity. Leadership is a key factor in the success of any company, and for Zappos, having Tony Hsieh as a leader is a strong indicator of future success. Hsieh has expressed that he will do whatever it takes to make his employees, customers, and vendors happy. The future for any company looks bright when its leadership is committed to such strong values. However, Zappos needs to make sure that it continues to focus on its stakeholders and its long-term vision with or without Hsieh.
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438 Part 5: Cases
Ultimately, Zappos intends to continue to deliver happiness to its stakeholders. Hsieh says,
At Zappos, our higher purpose is delivering happiness. Whether it’s the happiness our customers receive when they get a new pair of shoes or the perfect piece of clothing, or the happiness they get when dealing with a friendly customer rep over the phone, or the happiness our employees feel about being a part of a culture that celebrates their individuality, these are all ways we bring happiness to people’s lives. Zappos’s success and innovative business model have caught the attention of many other companies. The company has appeared on several prestigious lists including Fast Company’s “50 Most Innovative Companies,” BusinessWeek’s “Top 25 Customer Service Champs,” and Ethisphere’s “World’s Most Ethical Companies.” Zappos’s business model is so successful that the company offers tours and workshops. Its three-day culture camp costs $6,000 and teaches participants about the Zappos culture and how to develop their own successful corporate cultures. The company also created Zappos Insights, an online service that allows subscribers to learn more about Zappos’s business practices through blogs and videos. These programs have high profit potential for the company because they are built on what Zappos already does best. As the company continues to gain recognition for its efforts in creating a vibrant and transparent corporate culture and business model, Zappos’s success among its varied stakeholders looks promising.
QUESTIONS 1. How would you define Zappos’s target market, and how would you describe its strategy to serve this market? 2. Has Zappos’s emphasis on customer satisfaction contributed to its profitability? Explain. 3. Has Zappos developed long-term customer relationships that provide a competitive advantage in the purchase of shoes and other products?
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CASE 15 Gillette’s Razor-Sharp Innovation May Not Be Enough* SYNOPSIS: Gillette ruled the razor market for years, but stiffening competition has made a dent in Gillette’s worldwide market share. Though Gillette has long held a reputation for its product innovation, the company struggled to catch up to competitors with disruptive distribution strategies. Additionally, the razor industry is shrinking as the U.S. population ages and consumer preferences shift. Gillette must decide how to put the razor wars behind it and maintain or increase its share of the global razor market. THEMES: Product leadership, product innovation, pricing strategy, distribution strategy, integrated marketing communication, segmentation, competition, sports marketing, global marketing, strategic focus
S
ince its inception in 1901, Gillette has always prided itself on providing the best shaving care products for men and women. In fact, the company was so visionary that it didn’t have any serious competition until 1962 when Wilkinson Sword introduced its stainless-steel blade. The Wilkinson Sword–Schick Company evolved into Gillette’s primary competitor. Through the years, Gillette strived to stay on the cutting edge of shaving technology in a market that thrived on product innovation. This focus led to a game of one-upmanship with Schick as each company introduced three-bladed (Gillette’s Mach3), four-bladed (Schick’s Quattro), and five-bladed (Gillette’s Fusion) razors in rapid succession. Now, under the ownership and guidance of Procter & Gamble, Gillette faces a saturated U.S. market thanks to competition from subscription-based services such as Dollar Shave Club and affordable brands such as Harry’s, which are eating into Gillette’s profits.
*Michael D. Hartline, Florida State University, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation, © 2022. Editorial assistance was provided by Crawford Rummel, Kelsey Reddick, Jennifer Sawayda, Leanne Davis, Brent Scherz, Matthew Cagiolosi, Daniel Breiding, Nicole Dyche, Colin Roddy, and Ryan Wach.
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Over the last decade, Gillette’s market share has steadily dropped. Before Dollar Shave Club and Harry’s disrupted the market, Gillette controlled 70 percent of the U.S. market. Now, Gillette is holding on to only 50 percent. Gillette faces the challenge of expanding share of the global razor market and regaining lost customers. Additionally, the razor industry as a whole must grapple with major changes in population and consumer preferences. For instance, the U.S. population is aging. Not only do older people shave less frequently, but younger consumers are shaving less as facial hair has become trendier.
C15.1 THE HISTORY OF INNOVATION AT GILLETTE Born in Fond du Lac, Wisconsin, in 1855, King Camp Gillette learned from an early age the importance of self-sufficiency, innovation, and invention. His experiences as a traveling salesman led him to William Painter, the inventor of the disposable Crown Cork bottle cap, who assured him that a successful invention was one that was purchased over and over again by a satisfied customer. In 1895, after several years of considering and rejecting possible inventions, Gillette had the idea of an entirely new shaving product—a razor with a safe, inexpensive, and disposable blade. According to reports, Gillette’s idea wasn’t immediately successful, as technical experts said it would be impossible to produce steel that was hard, thin, and inexpensive enough for commercial development of the disposable razor blade. However, in 1901, with the technical partnership of MIT graduate William Nickerson, Gillette produced the original Gillette safety razor and blade, establishing the foundation for the Gillette Safety Razor Company. Since 1901, the Gillette Company has led the personal care and grooming industry through manufacturing efficiency and exceptional marketing. By offering “consumers high-quality shaving products that would satisfy basic grooming needs at a fair price,” Gillette effectively captured more than half of the entire razor and blades market across the globe. In fact, in the 1920s Gillette said the following of his razor product: “There is no other article for individual use so universally known or widely distributed. In my travels, I have found it in the most northern town in Norway and in the heart of the Sahara Desert.” Gillette reigned as a visionary monopoly in the personal shaving market until 1962 when English firm Wilkinson Sword introduced its stainless steel blade. Distracted by other experimental ventures such as the Paper Mate refillable ballpoint pen, Gillette neglected to foresee the impact this small company could have on its core business of razors and blades and began to lose a substantial portion of market share. Although Gillette retained 70 percent of the market at the time, the arrival of Wilkinson Sword’s stainless-steel blade initiated a transition in niche markets. Fortunately for Gillette, Wilkinson Sword lacked the resources necessary to exploit the niche markets it had penetrated and where it competed with Gillette. Eventually, Wilkinson Sword sold much of its blade business to Gillette. Unfortunately, by this time Gillette had already begun to feel the impact of competition as its market share had dipped to an all-time low of 49 percent. To revive the company, Gillette’s new CEO Vincent Ziegler spearheaded an acquisition and product development campaign. Ziegler was often described as aggressive, marketing oriented, and ambitious for the company, believing in diversification through the acquisition of companies in other business segments. Under Ziegler’s leadership, Gillette purchased the following companies: Braun AG (German manufacturer of small appliances), S.T. Dupont (French maker of luxury lighters), Eve of Roma (high-fashion perfume), Buxton Leather goods, Welcome Wagon, Inc., Sterilon hospital razors, and Jafra Cosmetics (home sales). Unfortunately, four of the acquisitions proved to be unprofitable or unsuitable and were divested, and the other three yielded low profits by Gillette’s standards. These ill ventures exposed the company to competitive pressures, especially in the form of Bic’s disposable razors, lighters, and disposable stick pens. Despite these pressures, Gillette experienced moderate successes under the leadership of Ziegler. For instance, the introduction of the Trac II razor was deemed a success and thus continued Gillette’s dominance in this market. Other successful product developments came under the leadership of Colman Mockler, Gillette’s next CEO, whose strategy was to cut costs and invest
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Case 15: Gillette’s Razor-Sharp Innovation May Not Be Enough 443
more money into advertising and product development. Under Mockler, Gillette experienced some of its greatest successes including memorable innovations such as the Atra razor, the Good News! disposable razor, and the Daisy razor for women. After these product additions, Gillette held roughly 75 percent of the global market in razors and blades, including a majority of the U.S. shaving market (razors, blades, and the leading shaving cream). By the end of 1980, Gillette’s sales rose above $2 billion for the first time in the company’s history. The foundation of this success was the introduction of new products for the razor and blade market developed in Gillette’s home laboratories.
C15.2 RAZOR-SHARP COMPETITION By 1990, Gillette found itself in the interesting position of cannibalizing its own successful products with the launch of the Sensor razor. The Sensor soared in sales globally and quickly dominated the market. It represented the first product that was able to effectively shift consumer demand and sales away from the Atra and Trac II—Gillette’s leading products. A similar effect occurred in the women’s razor market with the development of the Sensor for Women. Gillette’s internal competition heated up with the introduction of the Mach3 razor in 1998. Touting three thin blades designed to provide a closer shave with fewer strokes and less irritation, the Mach3 became Gillette’s most successful new product ever. Recognized for its innovative design (blades on tiny springs), the Mach3 was named winner of the American Marketing Association’s Grand Edison Award for the best new product of 1998. Similar to the marketing strategy employed for Sensor products, Gillette sequentially produced the Mach3 Turbo for men and the Venus system for women in an attempt to further expand the reach of Mach3 technology and market share.
C15.2a Schick In 2003, the razor wars got ugly as Gillette faced a new, more threatening competitor: Schick and the Quattro—the world’s first four-bladed razor. Before Schick introduced the Quattro to the market, Gillette sued Energizer holdings and its Schick division, arguing that the Quattro illegally used the same “progressive geometry” technology as the Mach3. However, despite the lawsuit, Schick was allowed to launch the Quattro. To combat the suit, Schick countersued Gillette, claiming that Gillette’s advertisements stating “the world’s best shave” and “the best a man can get” were misleading. While Gillette and Schick engaged in a legal ping-pong match, consumer preferences and purchases were changing. In addition to Schick’s Quattro for men, its Intuition for women began to encroach on Gillette’s hold of the women’s shaving market. Schick’s total share of the U.S. market had risen to 17 percent, while Gillette’s total share of the razor and blades market had fallen to 63 percent. To fight back, Gillette aggressively established a two-fold plan of attack for recapturing market share. This strategy included converting consumers to higher-priced razors and blades, such as the Sensor, Sensor Excel, and Mach3 lines, from the single- and twin-blade razors, and geographically expanding into the areas of Romania and the former Yugoslavia, the Soviet Union, and the Czech Republic. At the forefront of Gillette’s strategy sat its secret weapon: the Fusion—the world’s first 5 blade razor, introduced in 2006. Using a unique five-blade design with a single blade on the back of the cartridge for use in trimming mustaches and sideburns, the Fusion exploded off the shelves. Although the Fusion represented a victory for Gillette and P&G, the hype surrounding its initial success was fleeting. Consumer Reports concluded that there were no additional performance benefits provided by the five-bladed Fusion, especially when compared to the Mach3. However, what was the most concerning for Gillette was the fact that sales reports indicated that the razors were outselling the cartridge refills. This translated to a consumer perception akin to a “novelty” product with a lack of staying power and product loyalty. Despite these concerns, the Fusion line continued to be a successful revenue generator for Gillette and P&G.
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Rather than continue the razor wars with Schick by producing a six- or seven-blade razor, Gillette focused on releasing complementary products, enhancing its existing product lines, and expanding its intensely successful marketing strategy. To complement its already successful razor and blades division, Gillette sought to expand its product portfolio inside the shower to reinforce the brand’s standing as the world’s leading male-grooming authority.
C15.2b Dollar Shave Club During the Great Recession that began in 2008, both Schick and Gillette slowed innovation. As the economy emerged from the economic turmoil, a new competitor hit the razor industry in 2011: Dollar Shave Club. Dollar Shave Club, a razor-by-mail company, struck a chord with consumers who were tired of premium-priced razors. The company—which turned up its nose at Gillette and Schick’s products by introducing simple razor products—signed up 12,000 customers in its first 48 hours of operating online. They also addressed the consumer’s desire for convenience by using a subscription model that delivered refill cartridges directly to the consumer’s door. Now under the ownership of Unilever, Dollar Shave Club has more than 4 million members. This subscription-based company made it easier and cheaper for consumers to purchase razors, and this heavily affected Gillette. However, in 2019, Dollar Shave Club increased its prices, suggesting Dollar Shave Club is also feeling the heat from the competition. When consumers purchase an ongoing subscription, it’s easy to forget to monitor price changes. While Dollar Shave Club announced the price increase to its customer base, the company may experience more churn as they realize Dollar Shave Club is not always the most affordable option.
C15.2c Harry’s Harry’s is another successful competitor. The company, which started as a subscription-based company in 2012, has a similar approach to Dollar Shave Club: offer high-quality razors at an affordable price. Harry’s poses an even greater threat to Gillette as they also sell their razors in large retailers such as Target. Harry’s razors are considerably less expensive than Gillette’s. Harry’s also has a corporate social responsibility component, donating 1 percent of sales to charitable organizations. Gillette powered ahead, focusing on product innovation rather than addressing Dollar Shave Club and Harry’s head-on. In 2014, Gillette fired the next salvo in the razor wars with its introduction of the Fusion5 ProGlide with FlexBall technology. Gillette spent approximately $200 million in marketing materials for the razor. Despite the hype of the new razor, the product did not receive wide-scale positive reviews within the United States. Gillette followed with the Fusion5 ProShield with lubrication strips on both sides of the blades in 2015 followed by the TREO razor designed for caregivers in 2017. Eventually, Gillette expanded to provide online subscription services, however, the company was late to the game, not launching on-demand and subscription razors until 2017. This effort has not been enough to regain the company its lost market share. In 2019, Edgewell Personal Care, the owner of Schick razors, made a deal to acquire Harry’s Inc. for $1.37 billion. Through the acquisition, the two companies had plans of combining Harry’s experience in building brands and its direct-to-consumer model with Edgewell’s intellectual property and global scale. However, the acquisition deal was not successful. In 2020, the Federal Trade Commission (FTC) sued to block the transaction because it would eliminate one of the most important competitive forces in the shaving business. The FTC stated that the loss of Harry’s as an independent competitor would eliminate a critical rival that has driven down prices and sparked innovation in the industry that was previously dominated by Edgewell and P&G. The FTC reported that prior to Harry’s entering the market, Edgewell (Schick) and Procter and Gamble (Gillette) operated as a duopoly and annually increased prices not driven by changes in cost or demand. When Harry’s entered the market, this new competitive threat forced Edgewell and P&G to reduce prices and offer value-priced products, which was a huge win for consumers. This FTC lawsuit deterred Edgewell from pursuing the purchase.
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C15.3 MARKETING STRATEGIES Gillette’s success can largely be attributed to its marketing and product development. The company virtually turned its marketing into a quantitative science, pouring time and resources into marketing plans that were almost military in their precision and implementation. However, the company continues to slip behind. Today, Gillette continues to lean heavily into product innovation. Since 2018, Gillette has introduced SkinGuard, a razor for sensitive skin, and Heated Razor, a razor with an adjustable temperature. In 2020, Gillette unveiled a new brand named after Gillette’s founder, King C. Gillette, that includes different accessories and care products such as shave gel and beard oil to cater to different individual’s grooming needs. This is an attempt by Gillette to not only regain market share but also address changing consumer preferences. Gillette attributes slowing sales to the increase in men growing beards.
C15.3a Sports Marketing Gillette’s marketing strategies have focused heavily on male-dominated sports marketing activities. Gillette Stadium, home to the NFL’s New England Patriots and soccer’s New England Revolution, seats nearly 70,000 fans and has hosted numerous MSL Cup, World Cup, and NFL championships. Gillette’s sponsorship of the stadium allows it to reach a worldwide audience, as both soccer and the NFL are tremendously popular in Latin America and European countries. This is important because most of Gillette’s sales are generated outside the United States. Given the importance of the stadium sponsorship, Gillette extended its naming rights until 2031. Due to its close relationship with the NFL and its former relationship with NASCAR, Gillette offers a Fan Razor product that customers can personalize. For instance, customers can purchase a ProGlide Shield Razor featuring a Tampa Bay Buccaneers logo. Gillette has also ventured into the realm of esports, sponsoring prominent esports players. Esports resonate with a younger male demographic, allowing Gillette to reach teens, young adults, and young professionals that make up the majority of streaming audiences. Gillette partnered with Amazon’s Twitch streaming platform to establish the Gillette Gaming Alliance, a team of streamers from around the world. The professional gaming athletes promote Gillette along with its Bits for Blades program, which allows consumers to earn Twitch Bits (a virtual good used on the Twitch platform) for razor purchases. One of the major reasons that Gillette focuses on sports in its marketing efforts is that sport resonates with consumers all around the globe. In virtually every worldwide market, Gillette is the dominant brand in both men’s and women’s shaving. Given that dominance and the always present need for shaving equipment and supplies, it is vital that Gillette maintains top-of-mind awareness in every market that it enters. The company feels that sports marketing and sponsorship are the best ways to meet this need.
C15.3b Taking a Stand In 2019, Gillette aired a somewhat controversial advertisement addressing the #MeToo movement in an attempt to address “toxic masculinity.” This ad received heavy backlash, leading to some individuals calling for a boycott of P&G products. However, Gillette also received praise from others for engaging in a national conversation. Gillette has experienced poor financial performance, though the company denies it is related to the advertisement. While the drop in sales cannot be solely attributed to a possible marketing misstep, there has been speculation that the controversy behind the advertisement may have accelerated a sales decline and helped their competitors gain more market share. However, some say the advertisement is part of a broader strategy of shifting the brand image and redefining what it means to be a man. Proctor & Gamble wrote down the value of the Gillette brand by $8 billion in 2019, but executives claimed it was due to currency devaluations and changes in grooming habits rather than product success and marketing issues. According to Proctor & Gamble, this impairment charge
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was to adjust the carrying value of Gillette’s intangibles. P&G also recognized the growth of competitors Harry’s and Dollar Shave Club, acknowledging that some market share had been lost to these companies.
C15.3c Global Expansion P&G discovered that the best way to gain an understanding of customer needs around the world is to perform R&D where the end product will be sold. A case in point is the Indian market. In 2005, Gillette set out to market a new razor for Indian men. Many Indian men shave only a couple of times a week, often with a basin. To test its new razor, Gillette conducted product testing with Indian students at the Massachusetts Institute of Technology (MIT), who responded with rave reviews. However, the students shaved with running water, something not readily available in the Indian market. Consequently, the product launch failed. Later, however, after a product redesign and local market testing, Gillette launched the Gillette Guard to unprecedented demand among Indian men. Within three months of the launch, Gillette Guard became the best-selling razor in India. Gillette ran advertisements in India in 2019 to promote its SkinGuard, a razor for sensitive skin. Gillette used the insights that in India 20 million consumers do not shave with the right razor due to skin issues and the fear of shaving to develop the campaign. Today, P&G invests about $2 billion a year in R&D—60 percent more than its closest competitor. Much of that R&D effort occurs in nations other than the United States. For instance, P&G opened the Beijing Innovation Center (BJIC) in China—a $70 million home for P&G’s regional R&D efforts. P&G now has more than 27 R&D centers around the globe aimed at creating product innovations to serve the needs of customers regionally, enabling the company to introduce products globally in untapped markets.
C15.3d Pricing Strategy Since 2007, Gillette has acknowledged that product quality and efficient marketing are the core value propositions that set the pace for the success of Gillette’s product lines. “If you have a significantly and demonstrably superior product or service, it really is quite meaningful,” said Benson P. Shapiro, a marketing consultant in Concord, Massachusetts. However, “If you don’t put it into language that gives a promise of something better, people won’t try it.” Gillette learned this firsthand during the Great Recession. Despite the company’s stellar marketing efforts, U.S. unit sales of Gillette’s blade cartridges fell roughly 10 percent every month from 2008 through 2009. When combined with the fact that Gillette consistently raised prices to offset higher production costs, it became clear that U.S. consumers had slowed their purchases of Gillette’s razor products. This was especially evident when compared to the sales of private-label disposable razors, which increased 19 percent over the same time frame. Still, Gillette’s solid gains in foreign markets offset some of the decline in the U.S. market. Gillette saw a similar sales trend during the COVID-19 (coronavirus) pandemic in 2020. While P&G sales were up due to consumers stocking up on essential goods, its grooming business was the only segment to report a reduction in organic sales, as consumers stayed home and didn’t focus on grooming as much as before the pandemic. Approximately 75 percent of men shave their face daily. On average, men in the United States spend approximately $20 to $25 per month for razors, blades, and shave preparations. These statistics point to a potential vulnerability in Gillette’s pricing strategy. The retail price of a Fusion 5 ProGlide razor for men and a four-pack of replacement cartridges is almost $27. Step up to Fusion ProGlide Power with Flexball technology and the price increases to about $40. Gillette claims that the ProGlide cartridge will last up to 5 weeks with daily use. Although the veracity of this claim is up for debate, evidence shows that most men and women like less expensive three-blade razors just as well. Gillette’s own research shows that men try to reduce the cost of shaving by cleaning their razors with toothbrushes or in the dishwasher to make the blades last longer.
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C15.4 LOOKING TOWARD THE FUTURE To succeed in the future and effectively win the razor wars and beyond, Gillette must find new ways to innovatively out-produce or out-market the competition. In essence, the challenge for Gillette is to push the envelope without creating innovations that are seen as trivial. For instance, Gillette’s Heated Razor, available for $200, has been mocked as being unnecessary despite winning multiple awards. This requires massive expenditures on R&D that lead to products capable of recouping their investments. As Gillette looks to future technological innovations, the company must be concerned about broad consumer acceptance and whether its research investment can be recovered in a reasonable time frame. The King Gillette product line could be one answer to battling the growing competition, but it is still too early to see how successful these products will be. Similarly, when considering possible increased global expansion, Gillette must consider the roles that culture, religion, and Western influences play in shaving behavior. Being aware of behavioral and cultural characteristics will allow Gillette to effectively segment and target those they will be most successful in transforming into customers. Similarly, although some women in European countries choose not to shave for cultural reasons, others now prefer to engage in the activity as they increasingly embrace Western lifestyles. For example, younger generations of European women are being influenced by American movies and television that depict women with sleek underarms and legs. By fostering the adoption of the shaving lifestyle, Gillette can effectively capitalize on this trend. In fact, if European women embraced hair elimination at the same pace as American women, total blade sales would increase by hundreds of millions each year. In many ways, Gillette and Procter & Gamble are in an enviable position. Gillette, though it has lost market share, still dominates the global wet-shaving market. The company continues to grow, although slowly, in many markets. Still, many industry analysts wonder if Gillette has reached the end of its historical innovation in wet-shaving technology. Besides Schick, Gillette is also facing increased competition online from Dollar Shave Club and in retail stores from the cheaper Harry’s razors. Product innovation alone may not be enough to boost the company. Gillette must create an appeal that entices customers to try and purchase its products. By aligning that appeal with what customers value, Gillette has the potential to establish a position of long-term product maturity and market dominance. In that position, it won’t matter how many blades a competitor puts on a razor.
QUESTIONS 1. Evaluate product innovation at Gillette throughout its history. Has Gillette been a victim of its own success? Has product innovation in the wet-shaving market come to an end? Explain. 2. What do you make of the razor wars, first between Gillette and Schick, and now with Dollar Shave Club and Harry’s? Does Gillette face a serious threat from competitive inroads? Explain. 3. What actions would you recommend over the next five years that could help Gillette maintain its worldwide dominance in the shaving market? What specific marketing program decisions would you recommend?
SOURCES “A Competitive Edge in a Cutthroat Market,” BusinessWeek, November 22, 2005, http://www.businessweek.com/stories /2005-11-22/a-competitive-edge-in-a-cutthroat-market
(accessed July 14, 2020); Adam Lashinsky, “The Cutting Edge of Care,” Fortune, March 9, 2015, http://fortune .com/2015/03/09/dollar-shave-club/ (accessed May 29, 2015); Alexander Coolidge, “P&G Revamps Online Razor Sales, Goes On-Demand With Gillette,” The Enquirer, May 9, 2017, http://www.cincinnati.com/story/money/2017/05/09/pg -revamps-online-razor-sales-goes--demand-gillette /101467444/ (accessed June 25, 2020); Alexandra Topping, Kate Lyons, and Matthew Weaver, “Gillette #MeToo Razors Ad on ‘Toxic Masculinity’ Gets Praise – and Abuse,” The Guardian, January 15, 2019, http://www.theguardian.com /world/2019/jan/15/gillette-metoo-ad-on-toxic-masculinity -cuts-deep-with-mens-rights-activists (accessed June 22, 2020); Amelia Lucas, “Procter & Gamble US Sales Surged 10% as Consumers Stock Up Ahead of Coronavirus Outbreak,” CNBC, April 17, 2020, https://www.cnbc .com/2020/04/17/procter-gamble-pg-q3-2020-earnings.html (accessed July 13, 2020); Amelia Lucas, “Procter & Gamble Writes Down Gillette Business but Remains Confident in Its Future,” CNBC Retail, July 30, 2019, http://www.cnbc .com/2019/07/30/procter-gamble-writes-down-gillette
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-business-but-remains-confident-in-its-future.html (accessed June 22, 2020); Ann-Marie Alcántara, “Edgewell Personal Care Backs Out of Harry’s Acquisition,” Adweek, February 10, 2020, https://www.adweek.com/retail/edgewell -personal-care-backs-out-of-harrys-acquisition/ (accessed July 13, 2020); Business Wire, “Gillette Rings in New Era as World’s Leading Male Grooming Brand,” Reuters, July 11, 2008, http://www.reuters.com/article/pressRelease/idUS119120 +11-Jul-2008 +BW20080711 (accessed May 29, 2015); Chris Gayomali, “I Shaved With Gillette’s New Fusion Proglide With Flexball Technology Razor, and Lived to Bloodily Tell About It,” Fast Company, April 30, 2014, http://www.fastcompany .com/3029800/i-shaved-with-gillettes-new-fusionproglide -with-flexball-technology-razor-and-lived-to-bloo (accessed May 29, 2015); Christina Rexrode, “As US Slows, P&G Turns to Developing Markets,” Inquirer Business, February 2, 2012, http://business.inquirer.net/42663/as-us-slows-pg-turns-to -developing-markets (accessed May 29, 2015); “Cutting Edge: Moore’s Law for Razor Blades,” Economist, March 16, 2006, p. 8; Dean Takahashi, “Gillette and Twitch Round Up Esports Influencers in Gaming Alliance,” Venture Beat, February 11, 2020, https://venturebeat.com/2020/02/11/gillette-and-twitch -round-up-esports-influencers-in-gaming-alliance/ (accessed July 14, 2020); Dollar Shave Club, “About Us,” http://www .dollarshaveclub.com/about-us (accessed May 29, 2015); E. B. Solomon, “Schick Cuts Into Gillette’s Market Share,” St. Louis Business Journal, April 20, 2012, http://www.bizjournals.com /st louis/pr int-e dit ion/2012/04/20/s chickc uts-into -gillettes-market-share.html?page=all (accessed May 29, 2015); Ellen Byron, “Gillette Sharpens Its Pitch for Expensive Razor,” The Wall Street Journal, October 6, 2008, http://online .wsj.com/article/SB122325275682206367.html (accessed May 29, 2015); Emily Glazer, “A David and Gillette Story,” The Wall Street Journal, April 12, 2012, http://online.wsj.com/article /SB10001424052702303624004577338103789934144.html (accessed May 29, 2015); Erica Pandey, “Shaving Giants Sweep Up the Disruptors,” Axios, May 11, 2019, https://www .axios.com/shaving-giants-schick-gillette-harrys-dollar -shave-club-acquisition-fba1b15b-ee9e-4e5a-a37b -2e530162f15e.html (accessed July 14, 2020); Executive Shaving Company, “History of Gillette Razors,” https://www .executive-shaving.co.uk/History-of-Gillette-Razors (accessed July 14, 2020); Freya Drohan, “Procter & Gamble Blames Slumping Gillette Razor Sales on the Popularity of Beards Among Millennial Men - After Facing Boycott Threats From Customers Over Controversial Ad Campaigns,” Daily Mail, August 5, 2019, https://www.dailymail.co.uk/femail/article -7315705/Procter-Gamble-blames-slumping-Gillette-razor -sales-popularity-BEARDS-millennials.html (accessed July 14, 2020); Georgi Georgiev, “$350 mln. in 6 Months – The Cost of the 2019 Gillette Advertising Fiasco?,” Medium,
November 20, 2019, http://www.medium.com/@georgi_ georgiev/350-mln-in-6-months-the-cost-of-the-2019 -gillette-advertising-fiasco-86785f29a4bf (accessed June 22, 2020); Gillette, http://www.gillette.com (accessed July 14, 2020); Gillette, “Our Story,” https://gillette.com/en-us/about /our-story (accessed July 14, 2020); “Gillette’s Edge,” BusinessWeek, January 19, 1998, p. 70–77; Glenn Rifkin, “Mach3: Anatomy of Gillette’s latest global launch,” Strategy + Business, April 1, 1999, http://www.strategy-business.com/article /16651?gko=927cc (accessed May 29, 2015); “It Has Never Been Easier to Launch a New Brand,” The Economist, January 23, 2020, http://www.economist.com/business/2020/01/23 /it-has-never-been-easier-to-launch-a-new-brand (accessed June 24, 2020); Jack Neff, “Gillette Shaves Prices as It’s Nicked by Rivals Both New and Old,” Ad Age, April 9, 2012, https:// adage.com/article/news/gillette-shaves-prices-nicked -rivals/234019 (accessed May 29, 2015); Jason Del Rey, “Dollar Shave Club Just Sold for $1 Billion to Unilever,” Vox, July 19, 2016, http://www.vox.com/2016/7/19/12232698/dollar -shave-club-just-sold-for-1-billion-to-unilever (accessed June 25, 2020); Jennifer Reingold, “Can P&G Make Money Where People Earn $2 a Day?” CNNMoney, January 6, 2011, http:// features.blogs.fortune.cnn.com/2011/01/06/can-pg-make -money-in-places-where-people-earn-2-a-day (accessed May 29, 2015); Jeremy Kahn, “Gillette Loses Face,” Fortune, November 8, 1999, pp. 147–152; Kaitlyn Tiffany, “The Absurd Question to Make the ‘Best’ Razor,” Vox, December 11, 2018, https://www.vox.com/the-goods/2018/12/11/18134456/best -razor-gillette-harrys-dollar-shave-club (accessed July 14, 2020); Kim Lyons, “FTC Blocks Sale of Harry’s Razor Company Because the D2C Company Is a Key Part of Competition,” The Verge, February 4, 2020, http://www.theverge .com/2020/2/4/21120241/ftc-blocks-harrys-dollar-shave -unilever-schick-gillette-razors-edgewell (accessed June 25, 2020); Mark Ritson, “5 Reasons Gillette Is the Best a Brand Can Get,” Branding Strategy Insider, June 23, 2009, http:// www.brandingstrategyinsider.com/2009/06/5-reasons -gillette-is-the-best-a-brand-can-get.html (accessed May 29, 2015); Mercedes M. Cardona, “Gillette’s Mach3 Captures Top Prize at Edison Awards,” Ad Age, March 22, 1999, p. 54; Mike Isaac, “Where Profit Margins Are Hefty, Online Upstarts Muscle In,” The New York Times, September 23, 2014, http:// www.nytimes.com/2014/09/24/technology/24shave.html (accessed May 29, 2015); Mike Sandoval, “The Benefits of Traditional Wet Shaving,” Shaving 101, October 14, 2010, http://www.shaving101.com/index.php/education/double -edge-shaving/164-money-magazine-got-it-wrong.html (accessed May 29, 2015); Molly Prior, “Fighting for the Edge in Shaving (Blade Wars: Shaving Report),” March 8, 2004, http://www.accessmylibrary.com/article-1G1-114404714 /fighting-edge-shaving-blade.html; P.J. Bednarski, “Gillette
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CASE 16 TOMS Kicks the One for One Model to the Curb* SYNOPSIS: TOMS, a for-profit known for its shoes, pioneered the one for one business model. For every product purchased, TOMS donated a pair of shoes to a child in need. Over time, TOMS attempted to stay relevant by creating new product lines. However, despite the introduction of eyewear, coffee, and bags, footwear product innovation held the company back instead of moving it forward. Now, the company is evolving its mission. THEMES: Ethics, marketing strategy, social responsibility, product strategy, product innovation, sociocultural trends, supply chain
T
OMS is a for-profit business with a large philanthropic component. The company was started after entrepreneur Blake Mycoskie witnessed the poverty among villagers in Argentina, poverty so extreme that the villagers could not even afford a pair of shoes. Mycoskie returned to the United States with 200 Argentinian shoes and a mission. He went from one retail store to another with a unique business proposal. He would start an organization that would provide a pair of shoes for an Argentinian child in need for every pair of shoes purchased from his business. After many meetings and discussions, a few Los Angeles boutiques agreed to sell the shoes. Mycoskie’s story was eventually picked up by the Los Angeles Times, who ran an article on his extremely unique business. To his surprise, the following weekend garnered $88,000 in orders. The orders didn’t slow down there, and two years after officially establishing TOMS, the business had $9.6 million in revenue.
*This case was prepared by Lexie Olszewski, Jennifer Sawayda, Sarah Sawayda, and Kelsey Reddick for and under the direction of O.C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.
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Most firms do not want other companies to copy their successful business model. However, the shoe retailer TOMS is not your typical retailer, and the firm’s business model is unusual, to say the least. While many organizations try to incorporate social entrepreneurship into their business operations, TOMS took the concept of philanthropy one step further by blending a for-profit business with a philanthropic component in what they termed the One for One model. For every product purchased, TOMS donates products or resources to help those in need. The cost of providing the products to those in need is already built into the products’ sales price, turning the customer into the benefactor. The philanthropic component is just as important as the for-profit business for TOMS. TOMS’s goal is to be able to turn a profit, support itself, make the world a better place, and educate consumers, all at the same time. TOMS expanded its business to include a variety of products. For every product purchased, including TOMS shoes, TOMS eyewear, and coffee bags from TOMS Roasting Co., TOMS will help a person in need. For every pair of glasses sold, for example, TOMS provides a person in need with a full eye exam and treatment including prescription glasses, sight-saving surgery, or medical treatment to restore their sight. For each bag of TOMS Roasting Co. Coffee purchased, TOMS gives an entire week’s supply of safe drinking water to a person in need. When consumers buy a TOMS product, they get the added value of helping others. TOMS’s founder, Mycoskie, developed a revolutionary business model that has evolved in recent years. From its founding to its operational approach, the TOMS organization has been able to carry out its central mission. Its unique corporate culture is a necessity for the successful operation of TOMS, as well as the firm’s marketing strategy. TOMS’s business model has impacted today’s society as well as other business organizations as it has addressed changing attitudes toward social issues. TOMS faces various criticisms and risks and has reinvented its famous One for One model as it charts its course for the future. These topics, from the founding of TOMS to its future as a business, are discussed in the following sections.
C16.1 THE HISTORY OF TOMS Blake Mycoskie is the founder and Chief Shoe Giver of TOMS. Before founding TOMS, Mycoskie had started five companies that ranged from billboard advertising to laundry services. His foray into the shoe industry, however, was almost accidental. After participating in the 2002 Amazing Race reality television show, Mycoskie decided to return to all the countries he had visited during the show. When Mycoskie returned to Argentina in early 2006, he had no idea that the country’s backwoods would be the inspiration for his new company. When interacting with the local villagers, he immediately noticed that many of the families could not afford a pair of shoes for their children. He was shocked and deeply saddened to see the number of children forced to live barefooted every day. This observation stuck with him for the remainder of his trip, and when he discovered the Alpargata (the comfortable and unique farm shoe worn by some of the locals), his initial idea for TOMS was born. He completed his trip in Argentina and left the country determined to take action for all of those children he saw in need. Upon coming back home, Mycoskie sold his online driver education company for $500,000 and used that money to finance the creation of TOMS. TOMS was derived from “tomorrow,” which was taken from the original company concept: “the shoes for tomorrow project.” After a lot of hard work, TOMS opened for business in May of 2006. In addition to its core shoe-selling business, the company also runs the nonprofit subsidiary known as Friends of TOMS. The for-profit and nonprofit organizations work in conjunction to operate the TOMS enterprise. Since its founding, TOMS has been widely successful across the United States, even drawing the attention of well-known celebrities. Scarlett Johansson and Keira Knightley were among the first to publicly endorse TOMS shoes. Internationally, the nonprofit side of the business is also making a huge impact in communities, evidenced by the 88 million shoes that have been distributed to children in need.
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Case 16: TOMS Kicks the One for One Model to the Curb 453
C16.2 THE TOMS MOVEMENT TOMS initially decided to develop its business model and, therefore, its product line around shoes for several key reasons. Mycoskie knew from his travels that many children in impoverished countries live in areas with unsafe terrains. He saw firsthand the lack of paved roads and other common hazards that could cause injury for children walking around barefoot. In fact, children can contract a range of soil-transmitted diseases from not wearing shoes. For example, soil-transmitted Helminthiasis, an infection developed from intestinal worms, is common in South Africa. Simply wearing shoes can prevent many diseases, and Mycoskie wanted to help. Mycoskie also understood the value of education. In many nations, shoes are required to attend school. Owning a pair of shoes provides a child with an opportunity to be educated, leading to higher school attendance. According to TOMS, this combination of education and health provides children the opportunity for a better tomorrow. As mentioned, Mycoskie’s organization consists of two parts: TOMS and Friends of TOMS. TOMS is a for-profit company that manages the overall operations and logistics. Friends of TOMS, the company’s nonprofit subsidiary, is responsible for organizing volunteer activities and all “shoe drops,” when shoes are distributed to communities in need. This was critical to the One for One business model that TOMS popularized. The model was simple: for every pair of shoes that TOMS sold, it donated a pair of shoes to a child in need on behalf of the customer. The One for One model enabled Friends of TOMS to remain in operation because the shoes sold cover the cost of the shoes for countries in need. Mycoskie dubbed this business system “Philanthropic Capitalism” because the company makes a profit but incorporates philanthropy into their business strategy. The company’s ultimate vision is to demonstrate the effect of how working together as a society can “create a better tomorrow by taking compassionate action today.” The philanthropic component of TOMS contributed to its widespread popularity among consumers. One consumer survey revealed that nearly half of respondents had purchased or would purchase items during a certain time period if part of the revenues supported charitable causes. Cause-related marketing is growing and businesses like TOMS—where philanthropy is embedded within the business model—are likely to attract the support of consumers who want to make a difference. TOMS has developed successful collaborations with recognizable brands such as Ralph Lauren and Element Skateboards. In the beginning, TOMS did not have a marketing budget and relied on word of mouth, viral marketing, and social networks to spread its marketing efforts. Word of mouth can be one of the most effective forms of marketing because many consumers believe it to be more trustworthy than corporate advertisements. The challenge for any organization is to convince customers to talk about their products. For TOMS, many customers are excited that their purchase is going toward a good cause and are eager to discuss it with others. TOMS has taken proactive steps to encourage word-of-mouth communication. For example, initially, each pair of TOMS shoes came with a blue-and-white TOMS flag and a small card asking customers to take pictures of themselves wearing their new shoes and holding up the flag. The customers were then asked to upload those photos to a “HOW WE WEAR THEM” section on the company’s website, in addition to social networking websites such as Facebook and Twitter. Photos of customers using TOMS products increase both product awareness and the credibility of the brand.
C16.3 SUPPLY CHAIN Due to their lack of knowledge about the shoe industry, Mycoskie and his team initially faced supply chain management problems. Mycoskie was unaware of how fast the demand for TOMS shoes would escalate. Two weeks after Mycoskie began selling his products to retailers, a fashion reporter wrote an article about Mycoskie’s business and mission in the Los Angeles Times. The TOMS website sold 2,200 pairs of shoes that same day—but Mycoskie had only 40 pairs available.
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The situation required him to hire interns to personally call customers and ask them to wait eight weeks for delivery. Mycoskie then flew back to Argentina where he had 40,000 shoes manufactured. Amazingly, all pairs in the batch were sold within the next few weeks. Since then, TOMS has improved at managing its increasingly complex supply chain. The company has opened up additional manufacturing factories in China, Argentina, and Ethiopia and plans to open another location in Brazil. These factories are audited by third parties to ensure that workers are being treated fairly. TOMS has its factory workers sign a code of conduct stating that they will follow all the stipulations of TOMS. The company’s production staff visits each of the factories regularly to verify that the factories are continuing to adhere to the code of conduct and other working standards. The manufacturing standards at TOMS are modeled after International Labor Organization compliance standards. More than 500 retailers around the world now carry TOMS shoes. In its first couple of years in business, TOMS was able to secure distribution deals of its shoes with Nordstrom, Bloomingdale’s, Neiman Marcus, Whole Foods, and Urban Outfitters. TOMS has also expanded to retailers that are independently owned small businesses. TOMS continuously seeks retailers that are passionate about their firm’s mission. Retailers can purchase the bulk of their shoes at cost from TOMS, and thus they are able to turn a profit as well as support the One for One movement. All shoes that the retailers purchase are directly shipped to the retailers—TOMS does not operate on a consignment basis. TOMS shoes are sold in retail stores in the United States, the United Kingdom, Australia, Canada, Germany, and France. Consumers can also purchase TOMS shoes on their website. Manufacturing the shoes and selling them to customers is only the first step of the process. Next, TOMS must distribute shoes and other resources to the children and communities that need them. TOMS collaborates with more than 200 nonprofits to identify children and communities in need. These Giving Partners are in the areas of giving shoes (e.g., Feed the Children, YouChange), sight (e.g., Seva Foundation, Visualiza), safe water (e.g., WaterAid America, Water for the People), safe birth (e.g., ayzh, BRAC), bully prevention and response (e.g., Crisis Text Line, No Bully), solar light (e.g., SolarAid, Solar Sister), and impact grants (e.g., March for Our Lives, Rock the Vote). TOMS seeks organizations that are deeply rooted in their communities with sustainable programming. To become a Giving Partner, organizations must go through audits to ensure that they meet TOMS’s specific criteria. These five criteria are detailed in Table 1. Table 1 Giving Partner Qualifications Local experts: Our Giving Partners must have deep roots in the communities they serve and the work that they’re doing, drawing expertise from experience. They don’t rely on international volunteers to sustain their programs. They are local experts. Sustainable programming: Our Giving Partners work to address local needs in a way that will allow the community to meet its own needs in the future, empowering the population. Opportunities for integration: We work with organizations that are poised to integrate TOMS resources into their existing programs. We believe this creates a more sustainable relationship between ourselves and our partners, helping to maximize the impact already being created by existing programs. Tracking capabilities: We seek out partners with proven monitoring and assessment capabilities. Every Giving Partner must complete annual reporting so that we can see how TOMS resources are being utilized, and if we’re complementing the programs as intended. Innovative, impactful solutions: From nonprofits serving small to midsize communities to larger, more established organizations launching new programs, we’re always looking for ways that we can help move the needle. Source: TOMS, “[Y]our Impact: TOMS 2019 Global Impact Report,” 2019, https://media01.toms.com/static/www/images/landingpages /TOMS_Impact/TOMS_2019_Global_Impact_Report.pdf (accessed June 3, 2020).
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Case 16: TOMS Kicks the One for One Model to the Curb 455
Friends of TOMS helps coordinate 8 to 12 giving trips per year to various countries, such as Peru, Honduras, and Paraguay. TOMS seeks volunteers and individuals affiliated with TOMS to fly to the area giving shoes on site or learning about the local communities through a week-long immersion. More than 60 percent of TOMS employees have participated in a giving trip. Even after resources have been delivered, TOMS continues to maintain relationships with its Giving Partners and communities. TOMS constantly monitors its partners for accountability. Additionally, the organization recognizes that one pair of shoes is not going to last for the child’s entire lifetime. Therefore, as the children grow out of their shoes—approximately every six months—TOMS provides replacement shoes to these same children regularly. A schedule is set up with the identified community and local Giving Partner to maintain a regular shoe drop for the children. TOMS believes that repeat giving allows it to understand the locale’s needs more thoroughly. TOMS also works to adapt products to account for the region’s terrain, weather, and education requirements.
C16.4 PRODUCT LINE TOMS’s original product lines were derived from the Argentinian Alpargata shoe design worn by farmers in the region. The shoe is made from either canvas or fabric material with rubber soles. Since its inception, TOMS has introduced different styles of shoes, such as the Bota and the Cordones, along with wrap boots and wedges. The Bota resembles an ankle boot with soft materials, while the Cordones are more of a traditional canvas-style sneaker with laces. In addition, the children’s line includes Velcro Alpargatas. TOMS has also created other varieties of shoes, such as Vegan TOMS and the wedding collection. Vegan TOMS are comprised of 70 percent recycled plastic bottles and 30 percent hemp. Hemp is an extremely sustainable product that outlasts organic cotton. TOMS is committed to creating more products that are better for the environment. Not all of the shoes that are available for purchase are donated to children. Primarily, the shoe that is bestowed on children is the canvas Alpargata with modifications to suit local residents. With each new community that TOMS enters, research is conducted to learn about the environment and terrain. TOMS alters its shoes to fit the children’s lives. For example, in some of the regions that experience monsoons, the shoes include more of a ridged, thicker rubber sole. The shoes are typically black because that is the required shoe color to attend school in several countries. TOMS has also developed a wider shoe because children living barefoot for the majority of their lives tend to have wider feet. After distributing their one-millionth pair of shoes, TOMS began to consider other products that could be used in the One for One model. Mycoskie explained, “When I thought about launching another product with the TOMS model, vision seemed the most obvious choice.” Because 80 percent of vision impairment in developing countries is preventable or curable, TOMS decided that for every pair of eyewear it sold, the company would provide treatment or prescription glasses for those in need. TOMS chose Nepal as the first country in which to apply its One for One model for eyewear. In 2011, TOMS launched TOMS Eyewear, which has helped provide prescription eyewear to more than 780,000 people in need. The company works in 14 countries to provide prescription glasses, medical treatments, and even sight-saving surgery with each purchase of eyewear. Along with restoring sight, TOMS Eyewear supports community-based eye care programs, the creation of professional jobs, and training for local health volunteers and teachers. TOMS Eyewear purchases provide economic opportunities, gender equality, access to education, and restored independence. In 2014, TOMS expanded the One for One model into the coffee industry and started TOMS Roasting Co. Each purchase of a bag of TOMS Roasting Co. coffee provides an entire week’s supply of safe drinking water to a person in need. More than 785 million people don’t have access to safe water systems. TOMS works with Giving Partners that have expertise in water, sanitation, and hygiene to help create sustainable water systems in seven countries, from the same regions where coffee beans are sourced. Since launching in 2014, TOMS has helped provide 722,000 weeks of
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clean water. By supporting and working to provide sustainable water systems, TOMS is helping to provide communities with access to safe water, which has a clear trickle-down effect. With safer water comes improved health, increased economic productivity, job creation, and better access to education. TOMS has also applied the One for One model to a number of other areas in the past such as safe births, bullying prevention and response, and solar light. From 2015 to 2018, TOMS invested in the health care of mothers and babies in need by distributing birthing kits. TOMS Bag Collection was founded in 2015 with a mission to provide training for skilled birth attendants and to distribute birth kits containing items that help a woman deliver her baby safely. TOMS distributed more than 345,000 safe birth kids and training in Bangladesh, Ethiopia, Haiti, and India. In 2015 TOMS also first introduced the High Road Backpack, which helps fund the training of school staff and crisis counselors to prevent and respond to the widespread problem of bullying in schools. From 2015 to 2018, TOMS served 168,700 children through the program. Additionally, from 2016 to 2018, TOMS provided 151,200 years of solar light in Malawi, Nigeria, Tanzania, Uganda, and Zambia, supported by the purchase of the TOMS band for the Apple Watch.
C16.5 CORPORATE CULTURE When the business first started, TOMS did not have a lot of money to pay individuals. The company instead focused on hiring individuals who were passionate about its mission instead of being passionate about money. Due to the lack of finances, Mycoskie hired recent college graduates and even high school graduates. Despite their youth and inexperience, the employees consistently rose to the occasion. Because TOMS did not initially engage in traditional advertising, it was important to have enthusiastic employees willing to spread the word about the organization. TOMS soon realized that full-time employees were not the only ones willing to help the company achieve its mission. The company also relies on interns to spread the word and support its endeavors. Employees and interns alike know that their work is supporting a good cause, and many even get to participate in their own call-to-action by participating in shoe drops.
C16.5a Internships The company got its start with Mycoskie and two interns who managed to propel TOMS into a successful business. The success of those two initial interns has prompted the company to hire interns each year through the nine-week, full-time TOMS Internship Program at the TOMS headquarters. TOMS provides its interns with a high degree of responsibility in the individual’s chosen discipline, whether it’s online marketing, retail marketing, or operations. Intern classes include 8 to 10 college seniors and recent graduates. The number-one criterion that TOMS looks for in the applicants is that the individuals truly believe and are enthusiastic about what TOMS stands for. According to TOMS, the company would not be where it is today if it were not for the hard work of their diverse team of interns. When an internship ends, a TOMS intern coordinator works with the intern to strengthen the intern’s resume with an updated work summary of the experience gained at TOMS. The intern coordinator also provides guidance on the future development of career goals.
C16.5b One Day Without Shoes Perhaps the most popular event promoting TOMS is the One Day Without Shoes campaign. This campaign was started in 2008 to raise public awareness about the impact that a pair of shoes can have on a child’s life. It asks the average individual to go one day without shoes. Going without shoes engages individuals to see how it feels to be in these children’s situations. The premise is to instill a sense of appreciation for what a difference a pair of shoes can make. Furthermore, the sight of a large group of barefoot individuals walking around makes an impression on others. In both cases, the TOMS mission and brand are spread to those that otherwise may not have known
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Case 16: TOMS Kicks the One for One Model to the Curb 457
about it. The success of this campaign, which continues to grow every year, is largely due to college students and Campus Clubs nationwide. Participants have included Kristen Bell, Charlize Theron, the Dallas Cowboys Cheerleaders, Nordstrom, and Microsoft.
C16.5c Social Media TOMS has effectively used social media to spread the word about the company and its mission, a method that is less costly than traditional advertising and creates unity among the individuals that promote TOMS. TOMS has used viral videos, blogs, Facebook, and Twitter to spread the message about its cause. Their approach has allowed TOMS to reach a vast audience worldwide. Also, many consumers create their own digital content regarding their experiences with TOMS. By encouraging events and word-of-mouth communication, TOMS is allowing consumers to do much of the marketing for the company.
C16.6 IMPACT During its first year in business, TOMS managed to donate 10,000 shoes to children living in Argentina. Since then, TOMS has expanded to distribute shoes to other regions of the world. Now, TOMS has given more than 100 million pairs of new shoes worldwide. TOMS gives in more than 80 nations around the world including Argentina, Peru, Ethiopia, Rwanda, and South Africa. In addition, TOMS has donated $6.5 million in impact grants to 14 partner organizations in the areas of physical safety, mental health, and equal access. Under Mycoskie’s inspirational leadership, the company’s One for One concept has inspired other firms—such as eyeglass retailer Warby Parker—to adopt similar models as a way to give back to society. Rather than feel threatened, Mycoskie is funding social entrepreneurship firms with similar missions. However, Mycoskie’s revolutionary idea might be difficult to replicate in other fields. The One for One concept must be embedded in the business strategy. The business must also be sustainable on its own, which is difficult to achieve for many nonprofits that depend on fundraising. The product and mission must be something that people will care about. For the movement to work effectively, the product should be tangible and identifiable. Product differentiation is an important component for success, as consumers appear less able to identify with commodity products. Mycoskie offers additional advice to entrepreneurs who want to create a business that will make a difference in the world. He advises businesses to look at their strengths and comprehend how those strengths can be used to help those who need them the most. For instance, TOMS shoes and its Giving Partners study the communities before dropping off the shoes to ensure that the shoes will make a positive difference in children’s lives. They pick out the communities that appear to have the most need for their products. According to Mycoskie, companies with a philanthropic focus must allow their products to speak for themselves. The products should be able to impress consumers, prompting them to spread the word to others without constant marketing from the company. Not many businesses have attempted to replicate the One for One movement in terms of incorporating it into their business models. Two companies that have created businesses around this concept include a bedding and mattress organization, which donates one bed to those in need for every product bought, and an apparel store, which will match customers’ purchases by giving clothes to those in disadvantaged areas. Time will tell whether these companies and additional organizations will succeed to the extent of TOMS.
C16.6a Evolving the Mission Social issues such as bullying, gender equality, inclusion, and homelessness have been key areas of philanthropy for TOMS. However, in 2018 Mycoskie boldly introduced the End Gun Violence Together initiative as the company’s primary focus. To kick off the initiative, consumers could visit
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the TOMS website to deliver postcards supporting gun safety laws to government representatives. The postcard initiative attracted 700,000 participants. Mycoskie appeared on The Tonight Show multiple times to champion the cause and has hosted rallies in Washington, D.C., to support the Bipartisan Background Checks Act of 2019, which was passed in February of that year. In the face of slowing sales, Mycoskie said he believed that the TOMS business formula only works “if it’s fresh, provocative, radical, and somewhat newsworthy.” Though TOMS has donated more than 100 million pairs of shoes, Mycoskie says their record-breaking growth occurred during its first six years before the brand became mainstream. The brand has struggled with debt over the past five years, and growth has stalled. TOMS attempted to stay relevant by creating new product lines. However, despite the introduction of eyewear, coffee, and bags, footwear is still at the core of its business, making up 90 percent of sales. Product innovation held the company back instead of moving it forward. Now, instead of evolving its products, the company is evolving its mission. Though gun violence is a divisive issue, Mycoskie chose this social issue as the company’s next mission after a mass shooting at a bar in Thousand Oaks, California, hit close to home. By measuring social media sentiment around universal background checks, he discovered that 75 percent of people reacted extremely positively to the concept, regardless of political beliefs. To date, its gun violence platform has resulted in 59 billion media impressions and new account opening growth of 20 percent year over year. Mycoskie hopes this positive growth will continue.
C16.6b Changing the Giving Model Shortly after introducing the End Gun Violence Together initiative, TOMS made another decision that would change the company’s business model forever. In an effort to adapt to changing attitudes toward social issues, TOMS announced its bold decision to disrupt its own One for One business model, giving customers more control. For a time, TOMS customers were empowered to make their own decisions about how their dollar was best spent and allowed them to pick issues of personal importance. Customers were instructed to “pick your stand” when they shopped online. The move allowed TOMS to capitalize on hot social issues that resonated with consumers such as shoe giving, safe water, ending gun violence, homelessness, mental health, or equality. Now, TOMS has adjusted this strategy once more by instead committing to contribute at least one-third of net annual profits to a giving fund that will be used for shoes and grants. TOMS Giving Partners are involved in creating an annual investment plan for the funds. This move means the customer’s dollar supports a wider range of initiatives, which allows resources to go where they are needed most. The continual evolution of the giving model stands to keep the brand relevant to its existing customers while attracting new customers.
C16.7 CHALLENGES Most people might find it hard to understand why anyone would criticize TOMS. As a successful philanthropic for-profit company, TOMS has been able to help children in need all over the world. However, criticisms about the company’s model do exist, many of which come from philanthropists. Probably the biggest criticism is that TOMS makes people in poor countries dependent on the goodwill of others rather than creating opportunities for them to better themselves. Though TOMS conducted its own studies that show the company has not had a negative impact on local economies from shoe donation, many social entrepreneurs and philanthropists of today believe that the best way to create sustainable change is through education and job creation. In response, TOMS began manufacturing shoes within some of the communities that it supports in order to build on the local economies. Another criticism has been the fact that TOMS has manufacturing locations in China—a country that has received much scrutiny for factory abuse. One could successfully argue that as a
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Case 16: TOMS Kicks the One for One Model to the Curb 459
business, it is advantageous to manufacture products in countries where labor costs are lower in order to keep prices reasonable. Supporters also point out that TOMS factories are creating jobs in disadvantaged countries such as Ethiopia. As a for-profit business, TOM Shoes will constantly have to balance the financial aspects of their for-profit business with the humanitarian elements of their philanthropic organization. Since TOMS is for-profit, the company faces the same risks as other for-profit companies. Ethical lapses can occur just as easily in philanthropic organizations as they can in large corporations, particularly as it relates to the supply chain. TOMS must monitor business activities such as factory compliance, sustainability, finances, and even their shoe drop operations to maintain appropriate business conduct. TOMS must never be complacent regarding these risks simply because they have built philanthropy into their business. The company must also innovate constantly. Although consumers tend to like purchasing from a philanthropic organization, they appear to be more financially supportive when they get something in return. In the case of TOMS, it is a pair of unique shoes. However, with consumer tastes constantly changing, TOMS must remain vigilant regarding new designs and products and find ways to stay current with its social missions. TOMS must remain proactive in managing these risks to maintain its current success rate.
C16.8 THE FUTURE OF TOMS Mycoskie revolutionized social entrepreneurship by introducing his One for One movement. An emphasis on social entrepreneurship has been sweeping the nation, supported by high-profile individuals such as former presidents Barack Obama and Bill Clinton. Many questioned whether or not the One for One business model was sustainable, so the recent evolution of its giving model indicates that there is an even bigger question at hand: “How can TOMS continue to adapt to be sustainable for the future?” Moving forward, TOMS will need to keep an eye on risks that affect both for-profit and nonprofit organizations. Mycoskie’s combination of these two business models has limited certain industry-specific risks. For instance, the for-profit business supports the nonprofit component, which means TOMS does not have to rely on donations. On the other hand, the model has also introduced additional risks. Because TOMS sells a tangible product, it requires a supply chain that must be constantly monitored for compliance. The company also must manage criticism of its philanthropic endeavors, an issue not as common among corporations where philanthropy is a secondary activity. It’s also apparent that continuous monitoring and improvement of the company’s giving model could be critical to long-term financial success as TOMS fights to stay relevant. Despite these challenges, the future of TOMS looks bright. The excitement over the introduction of Stand for Tomorrow demonstrates that consumers remain enthusiastic about the brand. With careful risk management, strong mission and values, and successful promotional campaigns, TOMS will likely remain a sustainable business for years to come.
QUESTIONS
SOURCES
1. What are strengths and weaknesses for TOMS in its strategy going forward? 2. How has TOMS positioned its products in a highly competitive market? 3. Given the adjustments to the TOMS business model, is the One for One movement business model appropriate for any other businesses?
Adele Peters, “Toms Made Buy-One, Give-One Famous. Now It’s Updating the Model,” Fast Company, May 7, 2019, https://www.fastcompany.com/90344987/toms-made -buy-one-give-one-famous-now-its-updating-the-model (accessed October 24, 2019); Athima Chansanchai, “Happy Feet: Buy a Pair of TOMS Shoes and a Pair Will Be Donated to a Poor Child Abroad,” Seattle Pi, June 11, 2007,
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http://www.seattlepi.com/default/article/Happy-feet-Buy -a-pair-of-TOMS-shoes-and-a-pair-1240201.php (accessed June 3, 2011); Booth Moore, “Toms Shoes’ Model Is Sell a Pair, Give a Pair Away,” Los Angeles Times, April 19, 2009, http://www.latimes.com/features/image/la-ig-greentoms19 -2009apr19,0,3694310.story (accessed June 9, 2011); Cathleen McGuigan, “Designed to Help: A Pair for You, a Pair for the Needy,” Newsweek, October 19, 2007, http://www .newsweek.com/2007/10/18/toms-shoes-wins-design-award .html (accessed June 3, 2011); Craig Sharkton, “Toms Shoes – Philanthropy as a Business Model,” sufac.com, August 23, 2008, http://sufac.com/2008/08/toms-shoesphilanthropy-as -a-business-model/ (accessed June 3, 2011); Emily Lerman, “PhiLAnthropist Interview: TOMS Shoes Founder Blake Mycoskie Plans to Give Away 300,000 Pairs in 2009,” Laist, April 15, 2009, http://laist.com/2009/04/15/what_happens_ when_you_travel.php (accessed June 3, 2011); Erin Alberts, “COLUMN: TOMS’ Business Model a Self-Sustaining Charity,” The Volante, April 12, 2011, http://www.volanteonline .com/opinion/column-toms-business-model-a-self-sustaining -charity-1.2540233 (accessed June 3, 2011); Erin Kutz, “Consumers Like It When Their Purchases Help Charities,” USA Today, December 23, 2010, http://www.usatoday.com/money /industries/retail/2010-12-23-retailcharity23_ST_N.htm (accessed June 2, 2011); Gretchen Fogelstrom, “Another Business Giving One for One!” Global Endeavors, April 13, 2011, http://globalendeavors.com/2011/04/13/another-business -going-one-for-one/ (accessed June 3, 2011); Jeff Rosenthal, “Products With Purpose Will Change the World,” Huffington Post, January 27, 2010, http://www.huffingtonpost .com/jeffrosenthal/products-with-purpose-wil_b_437917 .html (accessed June 3, 2011); Katie Abel, “Can Blake Mycoskie’s Bold New Social Agenda Reboot Toms?” Footwear News, March 25, 2019, https://footwearnews.com/2019 /business/retail/toms-blake-mycoskie-interview-business -sales-mission-1202764082/ (accessed October 24, 2019); Kelsey Timmerman, “The Problem With TOMS Shoes and Its Critics,” Where Am I Wearing, http://whereamiwearing .com/2011/04/06/toms-shoes/ (accessed June 3, 2011);
Linda Miller, “Shoes Offer a Better Tomorrow,” NewsOK, April 5, 2009, http://newsok.com/shoes-offer-a-bettertomorrow /article/3358735 (accessed June 3, 2011); M.J. Prest, “The Other Shoe Drops,” Ethical Style, March 26, 2009, http:// ethicalstyle.com/issue-12/the-other-shoe-drops/ (accessed June 3, 2011); Michelle Prasad, “TOMS Shoes Always Feels Good,” KENTON Magazine, March 19, 2011, http://kentonmagazine .com/toms-shoesalways-feel-good/ (accessed June 3, 2011); Mike Zimmerman, “The Business of Giving: TOMS Shoes,” Success Magazine, September 30, 2009, http://www .successmagazine.com/the-business-of-giving/PARAMS/article /852 (accessed June 3, 2011); Patricia Sellers, “Power Point: Be the Change,” CNNMoney, October 11, 2008, http://postcards .blogs.fortune.cnn.com/2008/10/11/power-point-be -the-change/ (accessed June 3, 2011); Patrick Cole, “Toms Free Shoe Plan, Boosted by Clinton, Reaches Million Mark,” Bloomberg, September 15, 2010, http://www.bloomberg.com /news/2010-09-16/toms-shoe-giveaway-for-kids-boosted -by-bill-clinton-reaches-millionmark.html (accessed June 2, 2011); Simon Mainwaring, “Purpose at Work: How TOMS Is Evolving Its Brand to Scale Its Impact,” Forbes, June 12, 2019, https://www.forbes.com/sites/simonmainwaring /2019/06/12/purpose-at-work-how-toms-is-evolving-its -brand-to-scale-its-impact/#6006029a1485 (accessed August 9, 2019); Stacy Perman, “Making a Do-Gooder’s Business Model Work,” Bloomberg Businessweek, January 23, 2009, http://www.businessweek.com/smallbiz/content/jan2009 /sb20090123_264702.htm (accessed June 3, 2011); TOMS, “[Y]our Impact: TOMS 2019 Global Impact Report,” 2019 https://media01.toms.com/static/www/images/landingpages /TOMS_Impact/TOMS_2019_Global_Impact_Report.pdf (accessed June 3, 2020); TOMS, “Intern,” https://www.toms .com/intern (accessed June 3, 2020); TOMS, “End Gun Violence Together,” https://stories.toms.com/EGV-Giving/index .html (accessed August 9, 2019); TOMS, “One Day Without Shoes,” http://www.onedaywithoutshoes.com/ (accessed June 3, 2011); World Clothes Line, http://www.worldclothesline .com/ (accessed June 3, 2011).
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CASE 17 Herbalife Manages Risks for Long-Term Success* SYNOPSIS: Herbalife Nutrition Ltd., a nutritional health company, is one of the top direct selling companies in the world. However, despite Herbalife’s longterm success, there have been concerns over its direct-selling business model. This case provides insight into the opportunities for success and the need to manage risks associated with direct marketing using a multilevel compensation system. Specifically, we explore the involvement of the regulatory and political system in addressing charges of misconduct in the context of William Ackman and Pershing Square Capital Management’s attack on Herbalife and how Herbalife managed this conflict. The investigation into the operations of Herbalife improved the understanding of how direct selling can be an effective business model that provides benefits to all stakeholders. THEMES: Nontraditional channels, direct selling, multilevel marketing, product strategy, customer engagement, social responsibility, marketing strategy, self-regulation
H
erbalife is a leading nutritional health company that has had a successful and sustainable business model over the last 40 years. In 2018, Herbalife Ltd. changed its name to Herbalife Nutrition Ltd. The name change was a strategic decision that represented Herbalife’s commitment to making the world a healthier place and its strategic transformation into a leader in the nutrition industry. However, despite Herbalife’s long-term success, there have been concerns
*This case was developed by O.C. Ferrell, Auburn University; Bryan Hochstein, University of Alabama; and Linda Ferrell, Auburn University, © 2022. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.
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over its direct-selling business model. The objective of this case is to provide insight into the opportunities for success and the need to manage risks associated with direct marketing using a multilevel compensation system. The involvement of the regulatory and political system in addressing charges of misconduct and the efficacy of the direct selling business model is examined in the context of William Ackman and Pershing Square Capital Management’s attack on Herbalife. How Herbalife managed this conflict including the negative publicity by news media demonstrates the importance of understanding, documenting, and successfully defending the operations of a business. The investigation into the operations of Herbalife opens the door to an improved understanding of how direct selling can be an effective business model that provides benefits to all stakeholders. Before presenting the Herbalife story, we first explore the direct selling business model that the firm uses to distribute its products. This business model is often misunderstood and questioned as being unsustainable. While there is the opportunity for misconduct in all business models, misconduct in direct selling is often associated with the entire industry rather than the firm that perpetrated the misconduct.
c17.1 THE DIRECT SELLING CHANNEL Before discussing the direct sales channel, it is important to note that all products are “sold” to consumers. Many products are sold at retail stores or through online sources. Some are sold via salespeople, either at a retail location or directly to the consumer. Specific to this case, direct selling is defined as the marketing of products to end consumers through person-to-person sales presentations at non-retail locations such as consumer homes, the workplace, or online. The practice of direct selling should not be confused with more traditional onsite selling, such as at car dealerships, where customers come to the salesperson. With direct selling, salespeople seek out the consumer (at their home, job, or socially) to sell the product, rather than the consumer coming to them. Direct selling is not a new channel; in fact, it is one of the oldest ways to distribute products. In the nineteenth century, it was a widespread method because many consumers did not have access to retail stores. In addition, direct sellers are generally not employees of the companies they represent but rather autonomous individuals who enter into independent contractor agreements with a company to sell its products. Thus, for the remainder of this case, think of a direct seller as one that sells products such as Avon, Juice Plus+, and Herbalife Nutrition.
C17.1a Single and Multilevel Direct Selling Direct selling has two compensation methods. There are single and multilevel compensation models of direct selling. Single-level marketing occurs when direct sellers only earn commissions for sales they make themselves. Multilevel marketing is when direct sellers earn income from their own sales of products as well as commissions from sales made by those they have recruited to sell the product. Forms of multilevel direct selling operate in nearly all countries, but the practice is often strictly regulated and/or closely scrutinized due to pyramid schemes that have given this form of direct selling a negative connotation. In most cases, multilevel marketing companies are legitimate because they sell products to consumers and do not require direct sellers to recruit others in order to earn a profit. Thus, properly monitored and managed multilevel direct selling models are not pyramid schemes, as they offer companies a sustainable way to directly sell their products through a hardworking salesforce of individuals that believe in the products they sell. In fact, most direct selling representatives are champions for the products and often become independent contractors to get discounts and provide the products to friends and neighbors. The vast majority are involved part-time and are not trying to earn a living. Many well-established companies operate using a multilevel direct sales model (see Table 1 for the top 10 global direct selling companies based on annual revenue).
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Case 17: Herbalife Manages Risks for Long-Term Success 463
T able 1 Top 10 Direct Selling Companies Company Name
Product Types
Annual Revenue (USD Billions)
1
Amway
Nutrition, Beauty, Bath and Body, Home, Jewelry, Food and Beverage, Fragrances
$8.40
2
Herbalife
Nutrition, Weight Loss Management, Personal Care
$4.90
3
Avon
Cosmetics, Skin Care, Fragrance, Personal Care, Hair Care, Jewelry, Gifts
$4.76
4
Vorwerk
Household Appliances and Cosmetics
$4.23
5
Natura
Cosmetics
$3.66
6
Coway
Air Filtration Systems
$2.59
7
Nu Skin
Cosmetics
$2.40
8
Tupperware
Food Storage and Preparation, Cookware, $1.80 Serving Items, Cosmetics, Beauty Products
9
Oriflame
Cosmetics, Personal Care, Wellness
$1.47
10
Ambit Energy
Electricity and Natural Gas
$1.31
Source: “2020 DSN Global 100 List,” Direct Selling News, 2020, https://www.directsellingnews.com/dsn-announces-2020-global-100 -list/ (accessed July 29, 2020).
C17.1b Pyramid Schemes A major concern that has plagued multilevel direct selling is that it can be used to develop fraudulent pyramid schemes. Any business model such as direct marketing can be used to conduct fraud. Some store retailers can also engage in consumer fraud. A pyramid scheme is a fraudulent business model that eventually collapses, with the vast majority of participants losing their investments. Pyramid schemes can develop from multilevel sales models as well as other schemes that take money with the promise of large gains, but in reality, there is no legitimate product. The only way to keep the scheme going is to find new investors. The four defining characteristics of a pyramid scheme are laid out by the Koscot Test, which is used to determine whether a business is a pyramid scheme. These characteristics are (1) people pay the company to participate; (2) in return, they gain the right to sell a product or service; (3) they are compensated for recruiting others; and (4) this compensation is unrelated to whether or not any of the product or service is actually sold. In other words, participants in pyramid schemes have little or no incentive to sell products, but rather have the incentive to aggressively recruit others into the scheme. Each person recruited pays an up-front fee (usually expensive), and these fees trickle up the pyramid to be collected by leaders at the top. These schemes become problematic because newcomers are promised large profits for buying in and continuing to recruit others. As the network grows, the ability to deliver payment for recruitment becomes impossible and the scheme fails, leaving most in the network in a position where they lose their initial investment. The Federal Bureau of Investigation (FBI) warns of pyramid schemes that come in the form of marketing and investment opportunities where the individual is offered a contractorship or franchise to market a product. The key is where the real profit is earned; if it is not by actual product sales but by sales of new contractorships, it is likely a pyramid scheme.
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Therefore, a pyramid scheme is not sustainable in the long run. Multilevel direct selling companies that sell quality products to consumers and have existed for decades are not pyramid schemes. Pyramid schemes can be hard to identify clearly, but the Federal Trade Commission (FTC) has warned consumers about two red flags. The first is inventory loading, which is when a new participant purchases a large amount of nonrefundable inventory of products; this is a requirement and not a choice like with internal consumption (sellers using the products). If the product is of low quality, it is clear how this requirement invites fraud. As such, inventory loading is an illegal requirement, so legitimate firms follow the Direct Selling Association’s Code of Ethics (see Table 2) by offering a refund policy and buy back process for a contractor that no longer wants to sell. The second warning sign of a pyramid scheme is a lack of sales external to the selling network. If the only people buying the product are the ones selling it, there is a clear problem with the business. Businesses that require inventory loading and don’t rely on external sales are likely to be pyramid schemes.
C17.1c Self-Regulation of Direct Selling To overcome the concerns of multilevel marketing, most firms choose to self-regulate their multilevel direct sales practices. For example, many firms follow the principles of the World Federation of Direct Selling Association (WFDSA) and the Direct Selling Association (DSA) in the United States. The WFDSA promotes ethical practices in direct selling globally through advocacy and strong relationships with the government, consumers, and academia. The DSA also emphasizes ethical practices and requires that members such as Herbalife adhere to the DSA’s code of ethics (see Table 2). This code of ethics recognizes the importance of a fair and responsible approach to direct selling since direct selling requires sensitive and personal one-on-one interaction that can lead to undue pressure placed on consumers. The code (1) has no tolerance for deceptive or unlawful practices regarding recruits and customers; (2) requires that direct sellers provide accurate and truthful information about the price, quality, promotion, etc. of the products; (3) illuminates and enforces the need for a clear record of the sales made by contractors; (4) necessitates that warranties be fully acknowledged; (5) requires sellers to clearly identify themselves to customers and maintain the confidential information of their customers; (6) prohibits signature pyramid scheme practices; and (7) provides guidelines on inventory purchases, earnings reporting, inventory loading, fee payments, and training practices. The DSA and the Council for Better Business Bureaus (CBBB), the network hub for BBBs in the United States, Canada, and Mexico, have created a third party, self-regulatory program for the direct selling industry launched in January 2019. This program monitors the entire direct selling channel, including DSA member companies and nonmembers. The new, third party, self-regulatory organization monitors the entire U.S. direct selling industry and embodies the following principles: ●● ●● ●● ●●
Clear industry standards on issues such as product and earning representations Identification of relevant best practices from other self-regulatory models Creation of a process that both monitors and enforces strict business principles Enacts measures to raise the bar of excellence for DSA members and the entire direct selling channel
Herbalife is a leading supporter of the new DSA/CBBB initiative. This demonstrates its commitment to ethical conduct.
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Case 17: Herbalife Manages Risks for Long-Term Success 465
T able 2 Direct Selling Association Code of Ethics (Summary Version) As a consumer, you should expect salespeople to: • Tell you who they are, why they’re approaching you, and what products they are selling. • Promptly end a demonstration or presentation at your request. • Provide a receipt with a clearly stated cooling off period permitting the consumer to withdraw from a purchase order within a minimum of three days from the date of the purchase transaction and receive a full refund of the purchase price. • Explain how to return a product or cancel an order. • Provide you with promotional materials that contain the address and telephone number of the direct selling company. • Provide a written receipt that identifies the company and salesperson, including contact information for either. • Respect your privacy by calling at a time that is convenient for you. • Safeguard your private information. • Provide accurate and truthful information regarding the price, quality, quantity, performance, and availability of their product or service. • Offer a written receipt in language you can understand. • Offer a complete description of any warranty or guarantee. As a salesperson, you should expect a DSA member company to: • Provide you with accurate information about the company’s compensation plan, products, and sales methods. • Describe the relationship between you and the company in writing. • Be accurate in any comparisons about products, services, or opportunities. • Refrain from any unlawful or unethical recruiting practice and exorbitant entrance or training fees. • Ensure that you are not just buying products solely to qualify for downline commissions. • Ensure that any materials marketed to you by others in the salesforce are consistent with the company’s policies, are reasonably priced, and have the same return policy as the company’s. • Require you to abide by the requirements of the Code of Ethics. • Safeguard your private information. • Provide adequate training to help you operate ethically. • Base all actual and potential sales and earnings claims on documented facts. • Encourage you to purchase only the inventory you can sell in a reasonable amount of time. • Repurchase marketable inventory and sales aids you have purchased within the past 12 months at 90 percent or more of your original cost if you decide to leave the business. • Explain the repurchase option in writing. • Have reasonable startup fees and costs. Source: Direct Selling Association, Consumer Protection Toolkit, http://www.dsef.org/wp-content/uploads/2015/03/DSEF-Consumer -Protection-Toolkit.pdf (accessed October 8, 2020).
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c17.2 HERBALIFE NUTRITION Herbalife Nutrition Ltd. is the second-largest multilevel marketing company in the world. The story of Herbalife includes direct selling, but the company’s success has come through acceptance of its products by consumers, much like any other company. A difference between Herbalife and most companies is that its products are not sold in retail stores; rather, consumers interact with independent sellers to order products. Herbalife is a publicly traded company headquartered in Los Angeles, California, that has loyal customers and also many critics. Herbalife is a company that focuses on nutrition, weight management, and personal care products with independent contractors selling in more than 90 countries. Mark Hughes founded the company in 1980 out of a desire to create a safe alternative to other weight loss products. Herbalife’s first sales were conducted from the trunk of Hughes’s car in Los Angeles, California. Two years later the company reached $2 million in sales. Herbalife became a publicly traded company in 1986 when it joined the NASDAQ stock exchange. Since then, Herbalife has become a sustainable multi-billion-dollar global company. Throughout its growth, Herbalife has experienced many changes to its leadership and ownership structure.
C17.2a Foundational Products Herbalife sells products for weight management, nutrition, energy, fitness, and personal care that support a healthy lifestyle. The weight management line consists of Formula 1 protein shakes, supplements, weight loss enhancers, protein bars, and snacks, all serving the purpose of helping customers to attain their weight goals. For instance, the Personalized Protein Powder and the Protein Drink Mix offerings provide an alternative to traditional meals while supplying energy and curbing hunger cravings, whether consumers want to lose or maintain their weight or build muscle mass. Targeted nutrition products include dietary and nutritional supplements that contain herbs, vitamins, minerals, and other natural ingredients to strengthen specific areas of the body that tend to be problematic for many people. For example, Tri-Shield helps the heart stay healthy by maintaining good cholesterol levels and providing antioxidants, while Ocular Defense Formula and Joint Support Advanced offer nutritional aid for the eyes and joints of aging adults. The energy and fitness product options are designed for those engaged in sports and wellbeing activities. Customers can choose from drink mix-ins such as the H3O Fitness Drink, which enhances clarity and rehydrates the body, or utilize supplements such as N-R-G Nature’s Raw Guarana Tablets, which also promote mental clarity. Herbalife’s personal care products include skin cleansers, moisturizers, lotions, shampoos, and conditioners. In this product line, Herbalife offers program sets called Herbalife SKIN, containing groups of cleansers, moisturizers, and creams customized for different types of skin from dry to oily. Overall, Herbalife follows a strategy of producing high-quality products that enhance customer health and well-being.
C17.2b Herbalife’s Implementation of the Direct Selling Model People are attracted to becoming direct sellers for many reasons. Some are passionate about a product and want to promote the company. Others want to receive a discount on their personal orders, a common benefit of being a direct seller. Many find working as a direct seller to be a flexible, part-time opportunity for extra income. There are 2.3 million independent contractor direct sellers of Herbalife products. Most, if not all, of them personally use these products. Direct sellers are attracted to the low startup cost of selling Herbalife. The Mini Herbalife Member Pack includes forms, applications, a tote bag, and samples of various Herbalife products. The pack includes informational and training materials that educate the new seller on using and retailing the products, business basics, and how to build a sales and marketing plan. Once the new distributor starts selling, the distributor begins to purchase inventory, but a member kit is the only purchase required to become an Herbalife network member and seller. Herbalife distances itself from a pyramid scheme as there is no “fee” to join, and the only up-front money spent represents the true value of the kit. The cost to become a distributor is $94. Herbalife also offers the
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Case 17: Herbalife Manages Risks for Long-Term Success 467
opportunity to not sell products and be a preferred customer for $35. Preferred customers receive a 20 to 30 percent discount along with sample products. As soon as sellers join Herbalife, they receive benefits. Sellers enjoy discounts on products ranging from 25 to 50 percent depending on the level of contractorship (contractors move up levels by achieving certain sales and recruitment goals). Herbalife sellers usually purchase inventory themselves and then resell it to buyers; however, it is possible for the distributor to make the sale and then have Herbalife ship the product directly to the buyer. Contractors can sell products at any price they set and make decisions on how they want to position and sell their Herbalife inventory (within legal and company guidelines). The more successful an Herbalife seller, the greater the discounts and commissions on product sales. In the event that a contractor no longer wants to sell Herbalife products, the company will buy back any inventory of the seller. In fact, Herbalife goes beyond the Direct Selling Association’s ethical guidelines for buying back products by reimbursing distributors for everything they initially purchased (100 percent buyback policy). The company also limits the amount of inventory a seller can initially purchase in order to avoid association with illegal pyramid scheme inventory loading. To remain a seller, each year contractors are required to pay an affordable $10 membership fee to Herbalife. Herbalife’s membership structure is designed to clearly differentiate its legitimate multilevel marketing model from fraudulent schemes. The Herbalife business model has succeeded due to the company’s products and support. Most Herbalife distributors do not have a physical store location, as they practice direct selling from home. However, there are strict company policies and legal requirements that regulate product information, sales techniques, advertising, lead generation, social media, and related issues. For instance, in response to regulatory scrutiny into its distributors’ online marketing statements, Herbalife disallowed independent online selling. In turn, it created a centralized e-commerce section on its website that, when a customer places an order, randomly connects the customer to a suitable distributor to complete the sale and follow up with the classic person-to-person interaction of direct selling. Contractors are also not permitted to resell products in retail stores (other than in China, where retail store sales are permitted). Thus, direct sellers are independent, yet they are required to represent Herbalife through ethical business practices.
C17.2c Herbalife Customer Base Herbalife serves a broad external customer base. To illustrate, an independent survey conducted by Nielsen, a global information and measurement company, sampled 10,525 consumers and indicated that 3.3 percent of the general U.S. population made an Herbalife purchase sometime within a three-month period (approximately 7.9 million customers). The external sales volume is a good indicator of the strength and legitimacy of the company’s model, as pyramid schemes generally do not make significant sales outside of their own networks. Additionally, the study showed that those who had made a purchase in the last three months were loyal and tended to make purchases approximately every two months. A strength of Herbalife over its long history as a company is a sustained customer base that uses and repurchases its products based on the quality and usefulness of the products and the value they provide.
c17.3 CHALLENGES TO HERBALIFE’S MULTILEVEL MODEL Herbalife, like many multilevel marketing companies, has been accused of being a pyramid scheme. However, considering the firm’s long and successful history, these claims were not taken seriously until 2012 when prominent hedge fund manager and billionaire investor William Ackman announced that he and his company, Pershing Square Capital Management, had spent a year studying Herbalife and concluded it was an elaborate pyramid scheme. Ackman is known as an “activist investor” and claimed it was his civic duty to expose Herbalife as
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fraudulent. Of note, Ackman’s company also stood to profit heavily, having invested $1 billion in a short sale of Herbalife’s stock (a complex investment strategy that earns money if the stock price falls, rather than rises). Ackman’s target stock price for Herbalife was $0. In other words, he believed the company should and would fail. Ackman continued to campaign and advocate against Herbalife, which plunged Herbalife into a controversy over its legitimacy as a business. The investment community and mass media did not understand a sustainable direct selling business model. The focus was on the low income of independent contractors. Most of Herbalife’s independent contractors were consumers that were just trying to earn a living. Ackman’s accusations against Herbalife were the result of months of research and analysis by his team. The accusations included the following: (1) the majority of contractors for Herbalife lose money, (2) Herbalife pays more for recruiting new contractors than selling actual products, and (3) only the top one percent of contractors earn most of the money. Ackman argued that Herbalife recruits contractors under false pretenses by unrealistically suggesting they can earn a large income. Furthermore, he alleged that the real money in Herbalife comes not from selling products but from recruiting other contractors, as all the top earners make the vast majority of their income through down line commissions from the sales of those in their recruiting chain. Although Herbalife has published results showing that the majority of its profit is made through product sales, Ackman believed this information to be false and misleading, as he estimated sales to be only 3 percent of Herbalife’s revenue, with the rest made via recruiting. Herbalife does not charge a fee for becoming an independent contractor and earns its profits from selling products. Herbalife has also been accused of issuing false accounting statements, although there has never been any official legal claim brought about its accounting records. According to allegations, all products sold to contractors are shown as retail sales, without tracking whether the contractor consumes the products (internal consumption) or to whom the contractor sold the products. Critics believe the company should not record sales revenue for internal consumption but only from sales made to end users. This argument falls into the larger backdrop of the legitimacy of internal consumption and its relationship to illegal pyramid schemes. Ackman and other critics have used these arguments to emphasize that the majority of Herbalife contractors are not successful in selling their products (other than to themselves). Herbalife’s records show that only one percent of its registered contractors will make $100,000 or more from the business in their lifetime. This statistic is surprising but shows that many who try direct selling are either not willing or lack the business knowledge to put in sufficient effort to make a living. In most cases, those who sell Herbalife do so as a side job and only work part-time, depending on how much extra money they want to make. Ackman’s allegations launched an unprecedented storm of controversy for Herbalife. Four days after Ackman’s initial presentation, the company’s stock fell 43 percent. Ackman launched a well-financed mass media and publicity campaign and engaged in political lobbying to drive down the price of the stock. The debate over the company became polarized, with prominent investors, analysts, public interest groups, and loyalists presenting heated arguments both for and against Herbalife’s legitimacy. Recognizing the seriousness of the situation, Herbalife responded in force, including hiring a lobbying team and launching one of the largest marketing campaigns in its history to bolster and reemphasize its brand. Over the length of the dispute, both Ackman and Herbalife spent multiple millions of dollars supporting their positions and attacking each other. The media showcased the Ackman and Herbalife conflict.
C17.3a FTC Investigation and Settlement of Claims In March of 2014, FTC opened a civil investigation of Herbalife. The investigation was prompted by Ackman’s reports to the public and lobbying efforts that brought the “pyramid scheme” message to Congress. Ackman made political contributions to legislators who advocated for his position. Ackman believed the FTC would rule against the company and force it to cease operations. However, Herbalife welcomed the investigation and was very cooperative with the
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FTC. At the onset of the investigation, Herbalife stated it was confident in its compliance with laws, its financial stability, and its success as a company over the past 34 years. In 2016, the FTC settled its case with Herbalife, with the FTC dismissing the accusation of Herbalife being a pyramid scheme. Nevertheless, the settlement did result in major changes for Herbalife. The FTC mandated a restructuring of Herbalife’s business practices, affecting how the company reports sales of members (consumers) and independent contractors selling to retail consumers. Changes were made to the involvement participants are allowed to have in selling products. For example, Herbalife must differentiate members who join to buy products at a discount from those who are joining for the business opportunity. So-called discount buyers are not eligible to sell products or earn rewards. Additionally, the rewards Herbalife offers to participants now must be largely driven by verified retail sales. The FTC’s goal was to encourage Herbalife to heavily focus on the business of selling products rather than a structure that emphasized recruiting and increasing independent contractors. Another aspect of the settlement is a mandate that Herbalife must derive 80 percent of sales from legitimate end-user purchases to maintain its distributor compensation program. In addition, Herbalife must now prohibit participants from leasing or purchasing properties to sell Herbalife products until they have completed a year as a distributor and completed a business training program. This aspect of the settlement was instituted to reduce the losses that some sellers incurred from new Herbalife programs, such as Nutrition Clubs (discussed later in the case). The FTC also required Herbalife to pay $200 million to individuals that had lost money through involvement in selling Herbalife products. It was deemed that Herbalife’s use of advertising through testimonials had misled potential participants about the realities of financial success through involvement with Herbalife. For example, a glowing testimonial message featured participants claiming they previously worked in factories with very low income, but thanks to Herbalife, they can take their grandchildren on lavish vacations. The settlement requires Herbalife to make truthful claims about how much people are likely to make and ensure the claims are backed by facts. The company was able to comply with the FTC order. In 2017, Herbalife exceeded the settlement guidelines, proving 90 percent of sales were documented sales by consumers outside the distribution network. Additionally, Herbalife proved 400,000 discount buyer or “preferred” members were not pursuing the business opportunity, thus were simply customers of Herbalife through retail sales. These successes counteract Ackman’s claims of Herbalife having no “real” consumers. Investor Carl Icahn, a supporter of Herbalife throughout the controversy, stated, “I think it’s ironic, but factual, that as a result of the propaganda against the company that it now has a much better idea of who their customers are and it opens the door for Herbalife to greatly benefit.” By 2019, Herbalife fully emerged from the FTC investigation. The company achieved a stock price of $59 in January 2019, from a low of $15 in 2015. Overall, Herbalife learned several lessons throughout the investigation and has improved business practices as a result of the FTC settlement. The investigation confirmed that Herbalife has maintained a 40-year sustainable business model.
C17.3b Impact of FTC Settlement on Pershing Capital The end of Pershing Capital’s crusade against Herbalife came to a “bruising defeat” as described by The Wall Street Journal. Ackman’s hedge fund management company Pershing Square Capital lost hundreds of millions of dollars over his five-year bet against Herbalife. While disappointed that the pyramid scheme accusation was found to be false, Ackman contended that several of his claims were confirmed in the FTC case. Since the settlement, Pershing Capital reported losses for three years (as of April 2018). As such, a large number of Pershing Capital’s largest investors have left the fund, and Ackman has reduced its staff to return the firm to its roots as a smaller organization. Ackman has publicly admitted to making mistakes in his bets with Herbalife but states confidence in his portfolio and the future of Pershing Capital.
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c17.4 NEW OPPORTUNITIES: CONSUMER MEGATRENDS Herbalife has overcome many challenges throughout its history. In addition to the FTC settlement and general societal misconceptions about multilevel marketing, Herbalife has always had to adapt to changes in consumer preferences. It is no secret that today’s consumers spend more time shopping for and researching products online and less time shopping in stores or interacting with salespeople than in the past. In addition, the digitization of society has led consumers that have greater demands that infringe on their personal life. Fortunately, for Herbalife, solutions that address many societal changes—termed megatrends—are well aligned with the company’s products. According to a recent investor’s presentation, Herbalife leadership views the trends of (1) increasing obesity of the population, (2) aging of the population, (3) increasing health care costs, and (4) expanding interest in entrepreneurship as opportunities that position the company for long-term success. In addition, as consumers become more dependent on social recommendations, Herbalife expects its model of individual and social exchange (i.e., direct selling consultation) to help consumers looking for coaching and experience that helps them in making decisions related to personal well-being. Specifically, the societal megatrends largely relate to a need for better nutrition, well-being, and fulfillment across society. Concerns over obesity and health care costs affect both older consumers and younger ones. In both cases, recovery and prevention are important ingredients to enjoying a fulfilling life. Older adults need options to help offset health problems, and younger adults are increasingly interested in preventing the problems that they see in older generations. Thus, Herbalife’s strategy to rebrand itself as a nutrition company that develops, manufactures, and delivers products of unquestioning quality fits closely to consumer segments responding to alarming societal trends. These consumers are also well informed and willing to invest time and energy to make sure they are purchasing products that will actually deliver on claims. Herbalife is embracing these trends by building on its direct sales model through social media and new initiatives that position direct sellers to serve as trusted consultants that connect people who learn from and support each other. In addition, Herbalife’s well-established direct selling model fits well with consumer interest in entrepreneurship. Similar to Uber, Lyft, and other “gig” opportunities, direct selling allows an individual to work at their own schedule and with the intensity they desire. Pairing high-quality products with flexible, self-driven earning opportunities positions Herbalife well to respond to changing consumer markets. The following sections outline selected specifics of Herbalife’s (1) product quality strategy and (2) new engagement strategy termed “nutrition clubs,” and (3) commitment to social responsibility through its mission to encourage nutrition and well-being to external and internal communities.
C17.4a Product Quality Strategy To ensure quality, Herbalife invests in continuous research and development of its product lines. For example, the use of genetic technology advances allows Herbalife to confirm quality raw materials for the manufacture of its products. Steven Newmaster, Ph.D. and trained ethnobotanist, speaks on behalf of the DNA testing Herbalife uses to ensure the quality of plants they use. Newmaster states the natural supply chain they use has been tested from the producer to the manufacturer. Through DNA barcode technology, Herbalife can confirm the ingredients used in its products are authentic, healing, and nutritious. DNA testing is conducted by raw ingredients being matched to a comprehensive library of thousands of botanical species around the globe to determine high DNA-level quality. Herbalife is undertaking these changes in its product development because consumers desire transparency of product origins prior to purchase.
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To support consistent product quality through technology, Herbalife has six research and development facilities and seven labs that test for quality. Herbalife has a global operations team of almost 2,000 people, including more than 300 research scientists, that support its products. This team sets the uniform global standard for quality and oversees all elements of product development and production. Herbalife’s ISO 17025 accreditation indicates adherence to strict standards in technical competency of laboratory personnel, accuracy of testing methods, use of proper equipment, and it assures consumers that the tests are trustworthy. To further ensure product quality, Herbalife closely controls its supply chain through its “Seed to Feed” strategy. Since 2009, Herbalife has invested $250 million in vertical manufacturing and infrastructure to increase the in-house production of key product units from less than 5 to 70 percent, in essence, managing products from raw seed to feed the manufacturing process. Chief operating officer David Pezzullo elaborates on the strategy, “We use a stagegate product development process with hundreds of steps and more than 60 sign-offs along the way to ensure that every aspect of the product, from quality assurance, safety, science and regulatory to sensory and label design, conforms to our specifications.” This process can take up to 18 months to complete and involves the work of more than 300 technical employees. Across manufacturing facilities, whether in the United States or abroad, all must comply with FDA regulations for manufacturing practices, which specify in-depth how production facilities in food, dietary supplements, and acidified foods must operate. Herbalife undertakes all of these steps as it strives for “best in class” regarding product excellence.
C17.4b Engagement Strategy Herbalife has achieved success through direct and personal attention to consumer needs, and nutrition clubs build on this through support communities. The first Herbalife Nutrition Club opened in Mexico in 2004. The Nutrition Club was formed to bring together people interested in nutrition and the support of a like-minded community. Originally, the club served as a physical location where the community could meet and purchase the products they needed in cost-effective portions that were more convenient than bulk purchasing. In addition to convenience, the club also provides a connection to enjoy and learn about the products in the company of other people with similar goals in their weight loss journey. Over time, Nutrition Clubs have also incorporated fitness classes to address a healthy lifestyle. Herbalife has embraced the Nutrition Club concept as an answer to societal megatrends and as a differentiator from others in their industry. Nutrition Clubs allow independent distributors to provide personalized nutrition plans, motivation, and accountability to customers. Since 2004, the concept has thrived, with Herbalife supporting 5,900 Nutrition Clubs in the United States and more than 90,000 worldwide. Research shows that healthy habits form best in a social setting that offers support, advice, and reinforcement of the habits. Members who attend the clubs can receive nutrition and fitness tips and encouragement from the independent distributors running the establishments. An Herbalife executive vice president explains, “The Nutrition Club owners typically charge an attendance fee on a daily, weekly or monthly basis. Invited members can enjoy shakes, teas, and aloe and participate in activities like group workouts, fitness walks, and weight-loss challenges.” Nutrition Clubs are the perfect solution to those seeking influence in their nutrition lifestyle while also giving them community support in a positive environment. To ensure quality and consistency, Nutrition Club operators (independent Herbalife distributors) must undergo extensive training before commencing operations. Herbalife’s training for operators enables them with the resources and education for creating a budget and business plan and learning the local laws. Additionally, Herbalife compliance staff monitors and performs site visits regularly to ensure regulations are upheld. Overall, the Nutrition Club strategy has enhanced Herbalife’s direct selling model and has been instrumental in gaining consumer trust in the company’s product line and its informed and helpful resellers.
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C17.4c Social Responsibility Herbalife takes its responsibility as a corporation seriously. The company summarizes its values through a commitment to doing “the right, honest, and ethical thing.” More specifically, former CEO Michael Johnson stated that the “company’s reputation is its greatest asset,” so much emphasis is placed on ethical business conduct. According to Herbalife’s Corporate Code of Business Conduct and Ethics, employees must engage in fair interaction with everyone associated with the company, including external stakeholders. The code has guidelines in place as to how contractors and employees of Herbalife should interact with suppliers, competitors, business partners, and regulatory authorities. It discourages conflict of interest situations and offers three methods of reporting unethical behavior: through its company hotline, its website, or by contacting the general counsel. Those who violate these standards are disciplined, suspended, or terminated, which demonstrates Herbalife’s commitment to its ethical code. Herbalife is committed to its external and internal community. To the external community, the Herbalife Family Foundation (HFF) and the Casa Herbalife program provide funds and volunteerism to charities committed to supporting at-risk children. HFF also provides support to nutrition initiatives and disaster relief. For instance, Herbalife’s partnership with the Global Alliance for Improved Nutrition (GAIN) focuses on providing essential nutrients to improve the health of women and children worldwide. To its internal community, Herbalife proactively embraces employee wellness and eco-friendly initiatives. The company incentivizes employees to be healthy and participate in fitness activities. Such incentives include providing complimentary products and reduction of individual health insurance costs. As such, the company has been recognized by Men’s Fitness magazine as “One of the 15 Fittest Companies in America.” In terms of being environmentally conscious, Herbalife’s headquarters have received accolades for its LEED certification and environmentally friendly design. It also encourages distributors to increase their own sustainability activities.
c17.5 CONCLUSION Herbalife Nutrition has navigated many challenges and capitalized on many opportunities since its formation in 1980. Important to this case is Herbalife’s direct sales, multilevel model. This model is responsible for Herbalife’s exceptional growth and success, as committed and engaged sellers have delivered value through products and expertise to the company’s large customer base. However, the same model has led to longstanding concerns over the stability and sustainability of the company, as some have assumed its operations to be a pyramid scheme destined to fail. Despite Herbalife’s investigation and resulting restructuring, the company has emerged strong and well-positioned to continue its success by aligning core competencies of its products and business model with changing consumer preferences and needs. This case illustrates that referring to direct selling firms as pyramid schemes is a misrepresentation of a highly effective sustainable business model that has existed for hundreds of years. Herbalife will face the same challenges other members of the retail industry must address in the future. Internet sales are now 10 percent of retail sales and Amazon has more than 50 percent of the online retail market. Herbalife may be positioned better to face this competition because it does not have the overhead of expensive retail stores. The need for assistance and consultation in buying nutritional products provides the opportunity for person-to-person interaction. Maintaining a strong ethical culture and building trust with consumers is the glue that holds relationships together. The multilevel compensation method in the direct selling business model will continue to be debated and scrutinized. The fact that Herbalife preferred customers do not sell to others provides proof of the value of its products and a customer-centric business model. Herbalife provides a strong example of how this system can benefit all stakeholders.
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Case 17: Herbalife Manages Risks for Long-Term Success 473
QUESTIONS 1. Describe the differences between a legitimate direct selling business model and a pyramid scheme. 2. Evaluate how Herbalife managed its public relations risks. 3. Why has Herbalife continued to be successful after the attack by Ackman and an FTC investigation?
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for Rest of Firm,” Los Angeles Times, February 3, 2007, http:// articles.latimes.com/2007/feb/03/business/fi-herbalife3 (accessed May 25, 2017); Devika Krishna Kumar, “This Is Not What Bill Ackman Needed for Herbalife,” Business Insider, October 31, 2014, http://www.businessinsider.com/r-herbalife -to-pay-15-million-to-settle-class-action-lawsuit-2014-10 (accessed May 25, 2017); “Direct Selling Methods: Single Level and Multilevel Marketing,” More Business, March 26, 2007, http://www.morebusiness.com/running_your_business /management/Direct-Sales.brc (accessed May 25, 2017); Duane D. Stanford and Kelly Bit, “Herbalife Drops after Ackman Says He’s Shorting Shares,” Bloomberg, December 20, 2012, http://www.bloomberg.com/news/2012-12-19/herbalife -drops-after-cnbc-says-ackman-is-short-company.html (accessed June 16, 2015); Economist staff, “The House of Cards Put,” The Economist, March 15, 2014, http://www.economist .com/news/finance-and-economics/21599055-activist -investing-meets-activist-government-house-cards-put (accessed May 25, 2017); Facts about Herbalife website, http:// www.factsaboutherbalife.com/ (accessed May 25, 2017); Federal Trade Commission, “FTC Action Leads to Court Order Shutting Down Pyramid Scam Thousands of Consumers Burned by BurnLounge,” March 14, 2012, http://www.ftc.gov /news-events/press-releases/2012/03/ftc-action-leads-court -order-shutting-down-pyramid-scamthousands (accessed May 25, 2017); “Frauds of the Century,” in O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 10th ed. (Mason, OH: South-Western Cengage Learning, 2015); Herbalife, “Herbalife Ltd. Announces Record Fourth Quarter 2013 and Record Full Year Results, and Raises 2014 Earnings Guidance,” February 18, 2014, http://ir.herbalife.com/releasedetail.cfm?ReleaseID=826429 (accessed May 25, 2017); Herbalife, “Herbalife Partners With Global Health Strategies Institute to Improve Children’s Nutrition in India,” April 7, 2015, http://ir.herbalife.com /releasedetail.cfm?ReleaseID=905163 (accessed May 25, 2017); Herbalife, “I Am Herbalife FAQs,” http://iamherbalife .com/faq/ (accessed May 25, 2017); Herbalife, “Product Catalogue,” http://catalog.herbalife.com/Catalog/en-US (accessed June 16, 2015); Herbalife, “Social Responsibility,” http://company.herbalife.com/social-responsibilty (accessed May 25, 2017); Herbalife, “Statement of Average Gross Compensation Paid by Herbalife to United States Contractors in 2013,” http:// opportunity.herbalife.com/Content/en-US/pdf/business -opportunity/statement_average_gross_usen.pdf (accessed May 25, 2017); Herbalife, Sales & Marketing Plan and Business Rules, 2013, https://www.myherbalife.com/Content/en-US /pdf/distributorForms/Book4_SalesandMarketing.pdf (accessed May 25, 2017); Herbalife, The Real Bill Ackman website, http://www.therealbillackman.com/ (accessed May 25, 2017); Herbalife, United States—Official Site, http://www .herbalife.com/ (accessed May 25, 2017); “Herbalife Announces Results of Study on Contractors and End Users in the U.S.,” Yahoo! Finance, June 11, 2013, http://finance.yahoo.com
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474 Part 5: Cases
/news/herbalife-announces-results-study-contractors -214500826.html (accessed June 12, 2013); “Herbalife Ltd.,” Hoover’s Company Records—In-depth Records, April 17, 2013; “Herbalife Review,” Vital Health Partners RSS, Web, April 23, 2013; “Herbalife Says Survey Indicates 7.9M Customers in the U.S.,” Yahoo! Finance, June 12, 2013, http:// finance.yahoo.com/news/herbalife-says-survey-indicates -7-103428808.html (accessed June 16, 2015); Investopedia staff, “Short Selling: What Is Short Selling?” Investopedia, http://www.investopedia.com/terms/s/shortselling.asp (accessed May 25, 2017); Javier E. David, “Herbalife CEO Casts Doubt on Ackman’s Motives in Shorting Stock,” CNBC, January 10, 2013, http://www.cnbc.com/id/100369698 (accessed July 25, 2013); Jen Wieczner, “Why Herbalife’s CEO Says He’s Done With Bill Ackman’s ‘Hogwash’,” Fortune, February 24, 2017, http://fortune.com/2017/02/24/herbalife -stock-earnings-bill-ackman/ (accessed May 25, 2017); Joe Nocera, “For Better or Worse, Ackman’s Still Betting Against Herbalife,” Bloomberg, March 1, 2017, https://www .bloomberg.com/view/articles/2017-03-01/for-better-and -worse-ackman-s-still-betting-against-herbalife (accessed May 25, 2017); Julia La Roche, “California Congresswoman Asks the FTC to Investigate Herbalife,” Business Insider, June 13, 2013, http : / / w w w. bus i ne ss i ns i d e r. c om / s anche z - ask s - f tc -to-probe-herbalife-2013-6 (accessed May 25, 2017); Juliet Chung, “In Herbalife Fight, Both Sides Prevail,” The Wall Street Journal, March 31, 2013, https://www.wsj.com/articles /SB10001424127887323361804578388682197247250 (accessed May 25, 2017); Kaja Whitehouse, “Bill Ackman’s Herbalife Short Is Backfiring—Again,” USA Today, March 23, 2015, http://americasmarkets.usatoday.com/2015/03/23/bill -ackmans-herbalife-short-is-backfiring-again/ (accessed June 16, 2015); Karen Gullo, “BurnLounge Ruling in FTC Case Seen as Good for Herbalife,” Bloomberg, June 2, 2014, http://www .bloomberg.com/news/2014-06-02/burnlounge -shutdown-by-ftc-upheld-by-federal-appeals-court-1-.html (accessed June 3, 2014); Kevin Thompson, “Inventory Loading: When Does a Company Cross the Line?” Thompsonburton.com, March 20, 2010, https://thompsonburton.com /mlmattorney/2010/03/20/inventory-loading-when-does-a -company-cross-the-line/ (accessed May 25, 2017); Kevin Thompson, “The BurnLounge Court Decision Clears the Air on Many Issues,” Direct Selling News, August 2014: 64-66; Lehman, Lee, and Xu. “Direct Sale,” Lehman Law, http://www .lehmanlaw.com/practices/direct-sale.html (accessed May 25, 2017); Linette Lopez, “REPORT: The FBI Is Interviewing People and Asking for Documents About Bill Ackman and Herbalife,” Business Insider, March 12, 2015, http://www.businessinsider .com/the-fbi-is-investigating-bill-ackman-over-herbalife -2015-3 (accessed May 25, 2017); Martin Russell, “Herbalife Scam: Let’s Review the Claims,” Careful Cash RSS, March 4, 2011, http://www.carefulcash.com/herbalife-scam-lets -review-the-claims/ (accessed May 25, 2017); Martinne Geller, “Group Says Herbalife Products Have Too Much Lead,” Reuters,
May 19, 2008, http://www.reuters.com/article/us-this -hold-toni-herbalife-idUSN1955645920080520 (accessed May 25, 2017); Michael S. Schmidt, Eric Lipton, and Alexandra Stevenson, “After Big Bet, Hedge Fund Pulls the Levers of Power,” The New York Times, March 9, 2014, http://www .nytimes.com/2014/03/10/business/staking-1-billion-that -herbalife-will-fail-then-ackman-lobbying-to-bring-it-down .html?_r=0 (accessed May 25, 2017); Michelle Celarier, “BurnLounge Shutdown Has Implications for Herbalife,” New York Post, June 2, 2014, http://nypost.com/2014/06/02/burnlounge -shutdown-has-implications-for-herbalife/ (accessed May 25, 2017); Michelle Celarier, “Little-Known Deal Could Be the Downfall of Herbalife,” The New York Post, February 6, 2015, http://nypost.com/2015/02/06/little-known -deal-could-be-the-downfall-of-herbalife/ (accessed May 25, 2017); Michelle Celarier, “NYC Pol: It’s Herb-sploitation,” New York Post, June 14, 2013, http://www.nypost.com/p/news /business/nyc_pol_it_herb_sploitation_zr63x783q4Yqv SA3hReQEM (accessed May 25, 2017); Michelle Urban and Jennifer Sawayda, “The Network Marketing Controversy,” Daniels Fund Ethics Initiative website, 2013, https:// danielsethics.mgt.unm.edu/pdf/network-marketing-di.pdf (accessed May 25, 2017); Miles Weiss, “Icahn Says No Respect for Bill Ackman After Herbalife Bet,” Bloomberg, January 25, 2013, http://www.bloomberg.com/news/2013-01-24/icahn -says-no-respect-for-bill-ackman-after-herbalife-bet.html (accessed May 25, 2017); Nathalie Tadena, “Ackman: Herbalife Should Come Clean on Surveys,” The Wall Street Journal, June 18, 2013, http://blogs.wsj.com/moneybeat/2013/06/18 /ackman-herbalife-should-come-clean-onsurveys/?mod =yahoo_hs (accessed May 25, 2017); Nathan Bomey, “Herbalife Agrees to $200M Settlement,” USA Today, July 15, 2016, https://www.usatoday.com/story/money/2016/07/15/federal -trade-commission-herbalife/87119208/ (accessed May 25, 2017); Nathan Vardi, “Carl Icahn and Herbalife Are Crushing Bill Ackman,” Forbes, May 21, 2013, http://www.forbes.com /sites/nathanvardi/2013/05/21/carl-icahn-and-herbalife-are -crushing-bill-ackman/ (accessed May 25, 2017); “New Pyramid Scheme Allegations Against Herbalife That Might Just Stick,” Shortzilla LLC, April 11, 2013, http://www.shortzilla .com/new-pyramid-scheme-allegations-against-herbalife -that-might-just-stick/ (accessed July 25, 2013); O. C. Ferrell and Linda Ferrell, “Defining a Pyramid Scheme,” PowerPoint presentation, University of New Mexico, 2013; Paul R. La Monica, “Herbalife Stock Is Having an INSANE Month,” CNN Money, March 24, 2015, http://money.cnn.com/2015/03/24 /investing/herbalife-stock-bill-ackman-carl-icahn/ (accessed May 25, 2017); Pyramid Scheme Alert, “China Leads the World in Fighting the Global Scourge of Pyramid Schemes,” September 2009, http://pyramidschemealert.org/PSAMain /news/ChinaLeadsPyramidFight.html (accessed May 25, 2017); Pyramid Scheme, “Funk & Wagnalls New World Encyclopedia,” EBSCOhost (accessed April 20, 2013); Rebecca McClay, “Herbalife Strikes Back at Ackman amid Reports of
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Case 17: Herbalife Manages Risks for Long-Term Success 475
Federal Investigation,” TheStreet, April 6, 2015, http://www .thestreet.com/stor y/13102435/1/herbalife-strikes -back-at-ackman-amid-at-reports-of-federal-investigation .html (accessed May 25, 2017); Reuters and Fortune Editors, “Ackman Renews Attacks on Herbalife, Says It Will Be Gone Within a Year,” Fortune, January 13, 2015, http://fortune .com/2015/01/13/ackman-renews-attacks-on-herbalife-says -it-will-be-gone-within-a-year/ (accessed May 25, 2017); Richard Lee and Jason D. Schloetzer, “The Activism of Carl Icahn and Bill Ackman,” Director Notes: The Conference Board, May 2014, No. DN-V6N10; Scott Warren, “MLM Laws in China,” Wellman & Warren Attorneys at Law, February 3, 2014, http://w-wlaw.com/mlm-laws-in-china/ (accessed May 25, 2017); Steve Schaefer, “Ackman Takes Ax to Herbalife, Company Says It Is ‘Not an Illegal Pyramid Scheme’,” Forbes, 2012, 4; Steve Schaefer, “Herbalife Posts Record Results, Raises Guidance,” Forbes, April 29, 2013, http://www.forbes.com /sites/steveschaefer/2013/04/29/herbalife-posts-record -results-raises-guidance/ (accessed May 25, 2017); Steven Pfeifer, “Latinos Crucial to Herbalife’s Financial Health,” Los Angeles Times, February 15, 2013, http://articles.latimes .com/2013/feb/15/business/la-fi-herbalife-latino-20130216 (accessed May 25, 2017); Stuart Pfeifer, “Herbalife Now Making Its Products Available Through Company Website,” Los Angeles Times, April 6, 2015, http://www.latimes.com/business /la-fi-herbalife-online-20150407-story.html (accessed May 25, 2017); Stuart Pfeifer, “Herbalife Shares Surge Past Price When Ackman Made Allegations,” Los Angeles Times, May 6, 2013, http://articles.latimes.com/2013/may/06/business/la-fi -mo-herbalife-stock-price-20130506 (accessed May 25, 2017); Stuart Pfiefer, “Consumer Group Urges FTC to Investigate
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CASE 18 Walmart Dominates With World-Class Supply Chain* SYNOPSIS: Walmart, the world’s largest retailer, has a competitive advantage with its robust supply chain and everyday low prices. However, e-commerce giant Amazon poses a major threat. Walmart must closely evaluate its marketing program and enhance its distribution strategy to address changing consumer shopping habits and preferences. THEMES: Ethics, sustainability, distribution strategy, supply chain management, pricing strategy, competitive advantage, value-based pricing (EDLP)
W
almart is an icon of American business. With net sales of more than $514 billion and more than 2.2 million employees, the world’s largest retailer must protect its leading retail position. The company’s stated mission is to help people save money and live better. This case begins by briefly examining the growth of Walmart. Next, it discusses the company’s pricing and distribution strategies as well as what the company is doing to fend off competition from Amazon. Additionally, we address the ethics issues including accusations of discrimination, leadership misconduct, bribery, and unsafe working conditions. We discuss how Walmart has dealt with these concerns, as well as some of the company’s endeavors in sustainability and social responsibility. The analysis concludes by examining what Walmart is doing to increase its competitive advantage.
*This case was prepared by Kelsey Reddick, Jennifer Sawayda, Sarah Sawayda, and Michelle Urban under the direction of O.C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material and the Walmart website.
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478 Part 5: Cases
C18.1 THE HISTORY OF WALMART The story of Walmart begins in 1962 when founder Sam Walton opened the first Walmart Discount Store in Rogers, Arkansas. Although its growth was initially slow, the company now serves almost 265 million customers weekly at more than 11,500 locations in 27 countries. Much of Walmart’s success can be attributed to the company’s founder. A shrewd businessman, Walton believed in customer satisfaction and hard work. He convinced many of his associates to abide by the “10-foot rule,” whereby employees pledged that whenever a customer came within 10 feet of them, they would look the customer in the eye, greet the customer, and ask if the customer needed assistance. Walton’s famous mantra, known as the “sundown rule,” was: “Why put off until tomorrow what you can do today?” Due to this staunch work ethic and dedication to customer care, Walmart claimed early on that a formal ethics program was unnecessary because the company had Mr. Walton’s ethics to follow.
C18.2 PRICING AND DISTRIBUTION Walmart’s success is due in large part to its everyday low price (EDLP) strategy. Firms that use a value-based pricing approach set reasonably low prices while still offering quality products. Walmart acknowledged that for a time they strayed from Sam Walton’s original vision of “everyday low prices” in order to court higher-income customers. Several initiatives, such as Walmart’s adoption of organic food and trendy clothes, did not achieve much success with discount shoppers. Walmart also underwent a renovation effort that cut certain products, such as fishing tackle, from their stores. These actions alienated Walmart’s original customer base. Households earning less than $70,000 annually defected to discounters such as Dollar Tree and Family Dollar. Analysts believe Walmart’s mistake was trying to be everything to everyone, along with copying their more “chic” rivals like Target. Because of these blunders, in addition to external pressures such as market saturation and strong competition from other retail giants, Walmart faced a sales slump. As a result, Walmart returned to Sam Walton’s original vision and its previous “everyday low prices” mantra. Walmart’s pricing and distribution strategies go hand-in-hand. Walmart achieves EDLPs by streamlining the company. Well known for operational excellence in its ability to handle, move, and track merchandise, Walmart expects suppliers to continually improve their systems as well. Walmart typically works with suppliers to reduce packaging and shipping costs, which lowers prices for consumers. The company employs thousands of Walmart trucks to go to the suppliers rather than the suppliers coming to the store, cutting down on cost. Walmart takes supply chain management very seriously, as evidenced by its constant evaluation of how suppliers’ products are doing in stores. Walmart holds suppliers to high standards, especially when it comes to the delivery of products that customers order online. Recently, Walmart revamped its rules to require suppliers to obtain an 87 percent success rate of delivering full trucks of products over two days. For partially full trucks, the success rate of on-time delivery went from 50 percent to 70 percent, indicating the more stringent standards for suppliers are working. Additionally, Walmart and The Sustainability Consortium—a nonprofit that focuses on sustainability of the consumer goods industry— created Project Gigaton, a sustainability effort to eliminate one billion tons of greenhouse gas from Walmart’s global supply chain before 2030. With the help of vendors, Walmart has made great progress toward its goal. Suppliers also receive better ratings from Walmart for providing environmentally friendly products, an incentive that has paid off so far. Since 2009 the company has worked with The Sustainability Consortium to develop a measurement and reporting system known as the Walmart Sustainability Index. The Sustainability Index is essentially an attempt to rate and categorize all of Walmart’s products and suppliers on a variety of sustainability-related issues. Between 2009 and 2012, Walmart worked with researchers to
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Case 18: Walmart Dominates With World-Class Supply Chain 479
develop the basic categories and determine what information would be required for the index to work. Then, starting in 2012, Walmart began sending out requests for this information to its suppliers. For example, suppliers of products that contain wheat, such as cakes, cookies, and bread, were asked to provide detailed information about the sourcing of that wheat, from fertilizer use tracking, to soil fertility monitoring, to biodiversity management. Computer and jewelry suppliers were asked about the mining practices used to extract their materials; toymakers about the chemicals used in their manufacturing processes; and so on. Walmart uses this information to rank its suppliers from best to worst on the Sustainability Index and then gives that information to those in charge of making Walmart purchasing decisions to use in determining which suppliers to buy from. Presumably, the result is that more sustainable products end up on Walmart shelves, and suppliers are incentivized to improve their practices to better compete with others on the index. Walmart’s industry power is so great that a successful implementation could truly drive change throughout entire supplier industries and chains. Walmart purchases more than 70 percent of goods from suppliers participating in the index. Some critics of Walmart’s approach note that pressure to achieve its standards will shift more of the cost burden onto suppliers. When a supplier does not meet Walmart’s demands, the company may cease to carry that supplier’s product or, often, will be able to find another willing supplier of the product at the desired price. Walmart’s power over suppliers stems from the company’s size and the volume of products they require. Many companies depend on Walmart for much of their business. This type of relationship allows Walmart to significantly influence terms with its vendors. For example, Walmart generally refuses to sign long-term supply contracts, giving the company the power to easily and quickly change suppliers at its own discretion. Despite this, suppliers will invest significantly in long-term strategic and business commitments to meet Walmart demands, even without any guarantee that Walmart will continue to buy from them. Despite these criticisms, there are corresponding benefits to being a Walmart supplier. By having to become more efficient and streamlined for Walmart, companies develop competitive advantages and can serve their other customers better as well. For example, as Walmart worked with IBM to develop a blockchain solution to food safety, Walmart began requiring all suppliers of green leafy vegetables to use the blockchain database. Though blockchain technology makes Walmart’s supply chain more traceable and transparent, this requirement is a financial and technical burden for many companies. However, as these companies adapt with the help of IBM’s onboarding system, they will be better prepared to use blockchain technology in their own businesses.
C18.3 COMPETITION WITH AMAZON HEATS UP Though many consider Target to be Walmart’s primary competitor, Amazon is the real threat. Walmart is the largest retailer in the world, and Amazon is the second-largest retailer. However, when it comes to e-commerce, Amazon is in the lead. While customers still flock to the physical Walmart locations to buy groceries, clothing, and a variety of household items, establishing a greater online presence to compete with digital retailers has been a major goal for Walmart over the past several years. Walmart and Amazon compete not only on online shopping but also on same-day delivery.
C18.3a Grocery Amazon’s desire to take a larger portion of grocery business should be a concern for Walmart. Amazon has focused on expanding brick-and-mortar grocery stores as well as grocery delivery. Amazon—which has tested several grocery store and convenience store locations—has plans to open thousands more brick-and-mortar stores featuring automated checkout. The stores make use of cameras and sensors that bill shoppers through an app, eliminating the checkout line. Though Walmart does not currently use automated checkout technology, the company relies heavily on
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self-checkout registers. Additionally, Walmart implemented a Check Out With Me program that allows store associates to check out shoppers wherever they are in the store. Seemingly, Walmart is a step behind Amazon when it comes to brick-and-mortar technology. Walmart has been ramping up grocery delivery and pickup for more than five years, much longer than many other grocery stores. In 2020, Walmart experienced a surge in pickup orders amid the COVID-19 (coronavirus) pandemic while many consumers avoided person-toperson contact and limited trips outside of the home. At one point, Walmart experienced 300 percent growth rates with online grocery pickup. COVID-19 greatly affected complex supply chain systems, but omnichannel retailers such as Walmart had the resources to adapt. Omnichannel, which integrates all the places and ways consumers and retail firms manage the flow of communications and products, proved to be a winning strategy. As online-only retailers faced inventory stockouts, brick-and-mortar retailers could tap into store inventory. Case in point, Walmart’s brick-and-mortar presence was a strength during the pandemic, allowing the company to use 2,400 stores as distribution centers to ship out online orders. Building off of this momentum and taking advantage in the rapid shift in consumer behavior will be key in taking on Amazon in the online market long-term.
C18.3b Subscription Service To become more competitive with online retailers, Walmart has focused on its online presence. Walmart partnered with Microsoft to boost its digital transformation, using a range of Microsoft cloud solutions and collaborating on innovative projects. However, Walmart’s current financial losses from digital investments are estimated to be as high as $1 billion. In 2020, Walmart introduced its Walmart+ subscription service to directly compete with Amazon Prime. Staying in line with its EDLP pricing strategy, Walmart+ is less expensive than an Amazon Prime membership. Perks include same-day delivery for groceries, fuel discounts, and access to exclusive product deals. Until Walmart+, Amazon Prime did not have any competitors with the same level of selection and convenience. Additionally, if Walmart+ is executed well, Walmart’s omnichannel retailing could serve to elevate the offering above Amazon Prime.
C18.3c Third-Party Retailers One advantage Amazon has over Walmart is its abundance of third-party sellers who contribute to Amazon’s seemingly endless product selection. To better compete, Walmart rapidly added more third-party retailers to its online store. Additionally, Walmart has elevated its sellers in the same way it elevates its suppliers. For example, many third-party sellers are eligible for Walmart’s free two-day shipping program as well as in-store returns. Similar to Amazon, Walmart introduced fulfillment services (i.e., storing, packing, and shipping) for retailers. To accelerate the onboarding of new retailers, Walmart struck a key deal with Shopify, a multinational e-commerce platform for more than 1.4 million online stores. The contract opened Walmart’s online marketplace to Shopify’s small business sellers, effectively speeding up retailer recruitment.
C18.4 THE WALMART EFFECT Possibly the greatest complaint against Walmart is that it puts other companies out of business. With its low prices, Walmart makes it harder for local stores to compete. Walmart is often accused of being responsible for the downward pressure on wages and benefits in towns where the company locates. Some businesses have filed lawsuits against Walmart, claiming the company uses unfair predatory pricing to put competing stores out of business. Walmart has countered by defending its pricing, asserting that they are competing fairly and that the company’s purpose is to provide quality, low-cost products to the average consumer. Yet, while Walmart has saved consumers millions of dollars and is a popular shopping spot for many, there is no denying that many competing stores go out of business once Walmart comes to town.
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To compete against the retail giant, other stores must reduce wages. Studies show that overall payroll wages, including Walmart wages, decline by 5 percent after Walmart enters a new market. The impact of Walmart moving into the neighborhood has been coined the “Walmart Effect,” a negative connotation that represents all the hardship incurred on smaller businesses. As a result, some activist groups and citizens have refused to allow Walmart to take up residence in their areas. This, in turn, brings up another social responsibility issue: What methods of protest may stakeholders reasonably use, and how should Walmart respond to such actions? While it is acceptable for stakeholder activists to protest the building of a Walmart store in their area, other actions may be questionable, especially when the government gets involved. When Walmart announced plans to open stores in Washington, D.C., for instance, a chairperson of the D.C. City Council introduced a law that required non-unionized retail companies with more than $1 billion in total sales and stores that occupy more than 75,000 square feet to pay their employees a minimum of $12.50 per hour—in contrast to the city’s $8.25 an hour minimum wage at the time. The terms of the law made it essentially apply only to Walmart and a few other large chains such as Home Depot and Costco. While supporters of the law argued that it is difficult to live on a wage of $8.25 an hour, critics stated that the proposal gave employees at large retailers an unjustified benefit over those working comparable jobs at small retailers. Perhaps the most scathing criticism was that Walmart and other big-box retailers were being unfairly targeted by a governmental entity. Walmart also responded directly, threatening to cancel its expansion into D.C. if the law passed and emphasizing the economic and development benefits the city would lose out on. The D.C. City Council eventually passed the law, but it was vetoed by the city mayor. There are now several Walmart stores in D.C. As with most issues, determining the most socially responsible decision that benefits the most stakeholders is a complex issue not easily resolved.
C18.5 REPUTATION ISSUES Despite past controversies, Walmart has attempted to restore its image with an emphasis on diversity, charitable giving, support for nutrition, and sustainability. The company, along with the Walmart Foundation, has donated more than $1.4 billion in cash and in-kind contributions. Walmart often tops the list of U.S. donors to charities, donating tens of millions of dollars toward charitable grants to help with community projects and organizations. However, issues such as bribery accusations in Mexico, Brazil, China, and India have created significant ethics and compliance challenges that Walmart is addressing in its quest to become a socially responsible retailer.
C18.5a Employee Benefits A criticism levied against Walmart is that it is decreasing its workforce. For example, Walmart is testing staffing fewer midlevel, in-store managers to improve labor costs, increase wages, and attract higher quality employees. Walmart has insisted this is not a cost-saving measure but rather another way to compete with online retailers. Arguably, with fewer employees, it is harder to provide quality customer service. In the American Customer Satisfaction Index, Walmart is one of the lowest among department and discount stores. Walmart claims the dissatisfaction expressed by some customers is not reflective of the shopping experience of customers as a whole. Additionally, many fear robots and artificial intelligence (AI) will eliminate jobs. Walmart has invested in robots to clean the store and scan inventory, among other functions. Despite this move toward robotics, Walmart says its employees are the key to their success and that they will work to re-skill associates to work alongside new technology. Though the company has received criticism over employee wages, Walmart pays greater than minimum wage in 47 states, and 75 percent of its managers are promoted from within. In addition to fair wages, Walmart incentivizes employees to stay with the company longer by rewarding them based on years of employment. Bonuses range from $200 to $1,000 depending on how long the employee has worked for Walmart. Also, Walmart extended its maternity and parental leave to a combined 16 weeks for full-time hourly workers.
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C18.5b Bribery A major blow to Walmart’s reputation was the uncovering of a large-scale bribery scandal within its Mexican arm, Walmex. Walmex executives allegedly paid millions in bribes to obtain licensing and zoning permits for store locations. The Mexican approval process for zoning licenses often takes longer than it would in the United States; therefore, paying bribes to speed up the process is advantageous for Walmart but places competing retailers who do not offer bribes at a disadvantage. Walmex even used bribes to have zoning maps changed or certain areas rezoned to build stores in more ideal locations, as well as to overcome environmental or other concerns. The Walmex executives covered their tracks with fraudulent reporting methods. Bribery has become a hot button issue for the U.S. government, which has levied substantial fines and penalties against firms found guilty of bribery. It is not unusual for large firms with operations in many countries to face bribery allegations at some point considering the size of their operations and the diversity of cultures of the locations in which they do business. However, Walmart’s bribery scandal in Mexico was exacerbated by two major considerations. First, the evidence indicated that the top executives at Walmart, not just Walmex, knew about the bribery and turned a blind eye to it. Second, the evidence gave weight to concerns that bribery by Walmart in foreign countries was widespread and acceptable in the company’s culture. Walmart reported to the U.S. Justice Department that it was launching an internal investigation of suspected bribery at its Mexico stores but only after Walmart learned The New York Times was conducting an independent investigation. The New York Times’ final report revealed that top leaders at Walmart had been alerted to the possibility of bribery as early as 2005. That year, Walmart received an e-mail warning of the bribery from a former Walmex executive who claimed he had been involved. The e-mail included cold, hard facts, such as names, dates, bribery amounts, and other information. Walmart sent investigators to Mexico City, who corroborated much of the informant’s allegations and discovered evidence that approximately $24 million in bribes had been paid to public officials to get necessary building permits. Walmex’s top executives, including the subsidiary’s CEO and general counsel, were implicated in the scheme. However, when the investigators reported their preliminary findings to Walmart’s top executives, including then-CEO Lee Scott, the executives were reluctant to report the bribery because they knew it would be a serious blow to the firm’s reputation, which was already suffering due to other issues. The prospect of revealing the scandal was especially bitter because Walmart had been drawing media and investor attention for its explosive growth in Mexico as a shining success story. Admitting that this growth had been significantly fueled by bribery would look very bad for the company. The scandal’s impact on Walmart was significant. Shortly after the New York Times’ investigation was published, the stock lost $1 billion in value, and shareholders began filing lawsuits against the company and the company’s executives. In addition, Walmart had to pay for its own internal probe and hire a number of lawyers to represent the company and the company’s top management as well as advisors and consultants to help restructure their internal ethics and compliance systems. Walmart spent approximately $900 million in legal fees and investigations, plus the company will pay millions in fines. Walmart’s internal probe revealed the likelihood of bribery going on in other countries as well. The company, therefore, expanded the investigation to include its operations in China, India, and Brazil. For example, at its Indian branch, Walmart suspended some key executives who were believed to have engaged in bribery. This investigation halted Walmart’s expansion in the country. Indian authorities began investigating Walmart and its joint venture partner at the time, Bharti Enterprises, to determine if they attempted to circumvent Indian laws on foreign investment. Foreign retailers like Walmart are allowed to partner with local businesses and open stores in the country so long as they do not own a majority stake in the venture (less than 51 percent ownership). It is alleged that Walmart offered Bharti an interest-free $100 million loan that would later enable them to gain a majority stake in the company. Both companies deny they tried to violate foreign investment rules and have since broken off their partnership. Such accusations not only have serious consequences for Walmart but also for other foreign retailers in
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India. Many Indian political officials were against allowing foreign retailers to open stores in the country at all. This alleged misconduct has added fuel for their opposition. Hence, the operation of other foreign retailers may be threatened. This situation demonstrates how the misconduct of one or two companies can impact entire industries. In Brazil, permits were obtained illegally, and land was obtained illegally in China by bribing landlords and officials. An unidentified individual in Brazil charged about $400,000 to facilitate the process of getting building permits. Walmart took minimal action to address employee tips about bribery occurring in new stores. The Securities and Exchange Commission (SEC) charged the retailer with “[allowing] subsidiaries in Brazil, China, India, and Mexico to employ thirdparty intermediaries who made payments to foreign government officials without reasonable assurances that they complied with the FCPA [(Foreign Corruption Practices Act)].” In the wake of the scandals, many Walmart shareholders demanded, among other things, disciplinary action and compensation cuts against those involved. Shareholders demanded that the leaders of Walmart continue to improve transparency and compliance standards. As part of its compliance overhaul, Walmart announced it would begin tying some executive compensation to compliance efforts. Though federal prosecutors and regulators initially sought $600 million in fines, Walmart paid just $282 million to settle the charges. In addition, Walmart was subject to monitoring and compliance guidelines of both the Department of Justice and the SEC for several years. One major reason Walmart may have not faced higher fines and more serious consequences is because of the company’s attempts to reform, spending nearly $1 billion to improve prior to the settlement.
C18.5c Safety Issues Walmart’s far-reaching supply chain is both an asset and a liability to the company. For instance, many of its suppliers, both inside the United States and in other countries, employ subcontractors to manufacture certain products. This makes the supply chain complex, and retailers like Walmart are forced to exert more oversight to ensure their suppliers meet compliance standards. Citing safety concerns or telling a supplier not to work with a certain subcontractor is not enough without enforcement. Walmart has global hotlines for employees to report abuse; however, international employees may not be aware of this resource. For example, Global Labor Justice, Asia Floor Wage Alliance, and other groups shared research showing violence and harassment against women in Asia. Interestingly, none of the workers who talked to these organizations were aware of Walmart’s hotlines. Walmart has also faced criticism on the home front, with safety violations being a common complaint. Workers at warehouses in the United States that do business with Walmart have complained about harsh working conditions and violations of labor laws. Walmart actively engages in audits and investigations, but critics say the company’s efforts are insufficient considering the scale of Walmart’s supply chain. The 150 employees in its responsible sourcing unit must consider more than 100,000 suppliers. To do this, the unit focuses on countries where risk of abuse is higher. According to Walmart’s audits, 63 percent of suppliers were generally compliant but failed at least one important requirement. In the past 10 years, Walmart has stopped doing business with only 30 suppliers, suggesting Walmart’s standards could be stricter.
C18.6 WALMART TODAY Walmart remains the preferred shopping destination for many consumers. Although Walmart prospered during the Great Recession as well as the COVID-19 pandemic while other retailers suffered, the company has faced stagnating sales in many established markets. Walmart is known for its ability to adapt quickly to different environments, but even this large-scale retailer has
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484 Part 5: Cases
experienced trouble. For instance, it was forced to withdraw completely from Germany and South Korea after failing to interest the local populations. In addition, Walmart sold 80 percent of its Brazilian operations in an effort to pull away focus from poorly performing markets. Walmart has also struggled in India, one of the world’s largest markets, after failing to find a way to navigate the country’s complex regulatory environment for foreign retailers in order to sell directly to the public. Walmart acquired a majority stake in a massive Indian e-commerce company, Flipkart, to better compete in the country. Flipkart introduced a streaming service to compete with Amazon Prime and Netflix. The more Walmart expands internationally, the more the company must decide what concessions it is willing to make to enter certain markets. Despite the difficulties of operating globally, Walmart has a significant presence in many countries such as the U.K., Canada, and Mexico. The company’s focus on expanding its operations in India and further developing its presence in China could also pay off for the retailer. Though the company will likely experience several bumps in the road, several of its international markets appear to offer strong growth potential.
C18.7 THE FUTURE OF WALMART Walmart, with its robust supply chain and everyday low prices, must not only defend its top spot as the world’s largest retailer but also fight to improve its e-commerce performance. Walmart has invested significantly in e-commerce as an untapped area of growth in the hopes of competing directly with Amazon and other e-commerce retailers that have drawn away some of their customer base. While Amazon poses a major threat to Walmart, expansion in e-commerce is a valuable opportunity for the company. Additionally, Walmart’s established brick-and-mortar presence is a strength that Amazon can’t match. Walmart has outpaced Amazon’s growth in recent years. Though Amazon has attracted many investors as a fast-growing stock, Walmart surprised many with its growth after a period of declining sales. Walmart can be viewed through two different lenses. Some think the company represents all that is wrong with America, while others love the retailer. In response to criticism, and in an attempt to initiate goodwill with consumers, the company has continued to improve stakeholder relationships and made efforts to demonstrate that it is an ethically responsible company. Although it has faced controversy regarding competition, suppliers, employees, and global corruption, among other things, it has also demonstrated concern for sustainability initiatives and social responsibility. Walmart’s goals of decreasing waste and carbon emissions and its Sustainability Index extend to all facets of its operations, including suppliers. These efforts demonstrate Walmart’s desire (whether through genuine concern for the environment or for its own bottom-line profits) to become a more sustainable company. Similarly, Walmart’s creation of a sophisticated global ethics and compliance program shows that it has come a long way since its beginning when formal ethics programs were deemed unnecessary.
QUESTIONS
SOURCES
1. Do you think Walmart will be able to catch up to Amazon in online sales? 2. Describe the advantages and disadvantages of being a supplier for Walmart. 3. How can Walmart’s physical stores serve as an advantage when competing in e-commerce?
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Case 18: Walmart Dominates With World-Class Supply Chain 485
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CASE 19 E-commerce Soars With Shopify* SYNOPSIS: S hopify, a Canadian e-commerce company, is used by more than 1 million businesses worldwide. Instead of marketing itself as an e-commerce platform, Shopify positions itself as an all-in-one service with a variety of tools to help business owners start, run, and grow a business. Shopify believes that investing in the planet, local communities, customers, and employees will bring the company long-term success. THEMES: E-commerce, product strategy, supply chain management, product strategy, product mix, pricing strategy, distribution, competitive advantage, strategic partnerships, social responsibility
T
he idea for Shopify, a Canadian e-commerce platform, surfaced in 2004 after Tobias Lütke, Daniel Weinand, and Scott Lake attempted to open Snowdevil, an online store for snowboarding equipment. Dissatisfied with the existing e-commerce products on the market, Lütke, a computer programmer by trade, instead built his own. Two years later, the platform hosting Snowdevil was launched as Shopify. Since the company filed its initial public offering (IPO) in 2015, Shopify has skyrocketed from 162,000 merchants to more than 1 million worldwide. Additionally, the company’s revenue has grown more than tenfold. Instead of marketing itself as an e-commerce platform, Shopify positions itself as an all-in-one service with a variety of tools to help business owners start, run, and grow a business. The company eliminates the need for many third-party tools and resources, such as e-mail marketing services and third-party logistics management, with its products. This case also explores Shopify’s pricing strategy, the competition it faces from other e-commerce platforms, and Shopify’s commitment to social responsibility. The company believes that investing in the planet, local communities, customers, and employees will bring the company long-term success.
*Kelsey Reddick, Crawford Rummel, and Carrie Holt prepared this case under the direction of O. C. Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management.
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C19.1 THE PRODUCT MIX Rather than offering a basic shopping cart solution or an open-source platform that requires coding knowledge, Shopify serves as a one-stop shop for all e-commerce needs. Shopify focuses on satisfying multiple customer needs: the need for an online store, the need for customer support, the need for order fulfillment, the need for payment transaction tools, and more. The company achieves this with a wide product mix, from its base e-commerce platform to cash advance programs. Many e-commerce retailers use separate tools and services to run their business (e.g., web host, e-mail marketing platform, third-party logistics provider), but Shopify has solidified its lead over the competition by identifying common struggles e-commerce retailers face and creating tailored solutions within the Shopify ecosystem. This likely reduces customer churn—the percentage of customers that stop using a product in a specific time period—because as customers use more and more Shopify products, switching costs may become too high. In this case we highlight a small selection of Shopify’s products.
C19.1a E-commerce Platform At the core of Shopify’s product mix is its all-in-one e-commerce platform. Users pay a monthly fee for their online store, which includes secure hosting. Additionally, Shopify customers can sell on other channels such as social media and online marketplaces. Multichannel selling allows retailers to efficiently exchange products with consumers. What attracts many sellers to Shopify is its customizable themes and drag-and-drop store builder tool that eliminates the need for coding and design skills. Merchants can add functionality to their stores with third-party apps or additional Shopify products. For instance, Shopify also offers a third-party app integration with Etsy—an online marketplace for sellers of handmade product, vintage items, and digital download products—created by CedCommerce. The paid app offers bulk product uploads, real-time ordering, pricing, and inventory syncing, centralized control, and premade templates for shipping, pricing, and inventory.
C19.1b Shopify POS Shopify’s platform is complemented by its point-of-sale solution, Shopify POS Lite, which allows users to accept in-person payments for on-the-go sales (e.g., at markets, pop-up events, and fairs) and keep their business streamlined. Business owners that have storefronts and desire omnichannel retailing features to sync up their online and in-store sales can pay an additional monthly fee for Shopify POS Pro. Omnichannel integrates all the places and ways consumers and retail firms manage the flow of communications and products. For example, the Pro tool enables stores to offer online ordering with in-store pickup and in-store returns for online orders. These features are powerful for small to medium-sized businesses, allowing them to compete more fiercely with large companies.
C19.1c Shop App Recently, Shopify introduced the Shop app, a consumer-facing mobile app that allows users to track packages, browse from Shopify’s retailers, and make one-click purchases. This is one way Shopify is working to improve the visibility and searchability of its retailers. Shopify recognized that consumers shop from a limited selection of native apps, which can be a challenge for independent brands. The app addresses the needs of both consumers and retailers. For the consumer, Shop offers the ability to easily discover independent businesses, receive relevant product recommendations, check out effortlessly, and track all of their online orders. For retailers, it allows them to directly compete with Amazon. Rather than operating as a shopping search engine as Amazon does, Shop takes a store-first approach where users follow stores. Additionally, unlike Amazon, Shopify doesn’t compete with the companies that use its platform.
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C19.1d Shopify Email During the COVID-19 (coronavirus) pandemic in 2020, which caused a boom in e-commerce, Shopify launched a new e-mail product globally, making it easier to reach customers. Shopify Email integrates with the merchant’s website to automatically pull in logos, products, descriptions, prices, and more from their stores. Not only is the integration attractive, but the pricing structure—which allows for a set number of free e-mails per month and a fee per thousand emails thereafter—stands to be significantly more affordable than using third-party e-mail platforms such as Mailchimp. In contrast, Mailchimp, an e-mail marketing automation platform, charges users based on the size of their entire distribution list rather than the number of e-mails sent per month. If Shopify can offer the same features to merchants using a more advantageous price structure, the company stands to take a larger slice of the pie from e-mail marketing platforms such as Constant Contact, Mailchimp, and ConvertKit.
C19.1e Shopify Fulfillment Network Distribution is an important element of the marketing mix. Retailers must consider how to get their products into the hands of the end-user. Shopify further ingrains itself into its retailer’s operations with the Shopify Fulfillment Network. Merchants send Shopify their products, and Shopify suggests where inventory should be stored using smart recommendations to keep products close to customers. Orders are shipped and packed to improve speed and accuracy during fulfillment. The tool alerts merchants when inventory is getting low so sales can be maximized. Fulfillment services are priced based on each merchant’s needs and how much space their products occupy in Shopify’s warehouses. Fulfillment services are incredibly valuable for sellers whose inventory levels require efficient storing, packing, and shipping. Additionally, this product pits Shopify against third-party logistics companies (3PLs) as well as online marketplaces such as Amazon. With Shopify, merchants must drive traffic to their website and products rather than appearing in an Amazon search, but Shopify’s Shop app addresses this issue.
C19.1f Shopify Payments Shopify Payments integrates payment processing so merchants don’t have to rely on third-party tools such as PayPal, Stripe, or Authorize.net. With seamless integration into the merchant’s dashboards and websites, a reduction in transaction fees, and real-time sales tracking, Shopify effectively cuts out the intermediary. Most impressive is that Shopify’s move to replace traditional payment gateways sets it apart from other e-commerce platforms that have failed to do the same.
C19.1g Shopify Capital In addition to offering e-commerce-based extensions to enhance promotion strategies and website functionality, Shopify provides resources that any business owner—both online and offline—will find valuable. For instance, through Shopify Capital, the company offers two types of financing for eligible Shopify merchants: merchant cash advances and business loans. Merchants can secure funding between $200 and $1,000,000 with a flat fee and zero interest. Compared to other financial providers, there is minimal paperwork and no credit check. One reason for this is because Shopify can assess a company’s potential through its platform based on the shop’s activity, allowing merchants to gain access to funds based on proven sales rather than relying on credit scores.
C19.2 PRICING STRATEGY Shopify uses a subscription pricing model with tiered pricing options for its platform. The Basic Shopify package offers all of the essentials for operating an online store while the Shopify and
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Advanced Shopify packages include premium features such as advanced reporting and higher shipping discounts. Add-on services, such as Shopify Email and Shopify Fulfillment Network, grow with transaction volumes while others are a flat monthly fee. One concern about this pricing model is that Shopify users could easily find themselves with a large bill by registering for too many à la carte applications to extend the functionality of their websites. Rival e-commerce companies, such as BigCommerce, claim to offer more value with their core platform. Subscription services such as Shopify often suffer from customer churn, which is when subscriptions are not renewed because the customer stops using it and no longer sees value in the service. This pricing problem can be magnified when companies use so-called freemium pricing—which attracts new customers with a free or discounted trial period—but lose the customer when the price increases. Shopify offers a 14-day free trial to new customers, so customer churn and customer acquisition costs are important key performance indicators for the company to monitor. During the COVID-19 pandemic, Shopify enticed new signups by extending its 14-day free trial to 90 days for a limited time on select plans. In the second quarter of 2020 alone, Shopify saw a 71 percent increase in new stores, including free trials, over the same period of the previous year. Extending the free trial gave customers more time to determine if Shopify was the right platform for them with less pressure to make a payment. Shopify likely hoped its easy-to-use interface and ecosystem of products would sell themselves; however, the company stated that stores created with the extended free trial converted to paid subscriptions at a lower rate than customers on the 14-day free trial. While this could be a side effect of financial hardships businesses faced during the pandemic, it could suggest an extended free trial is not a sustainable solution to growing the business.
C19.3 COMPETITION Shopify faces a variety of competitors in the e-commerce space, each with a unique marketing program. E-commerce platform competitors include Adobe’s Magento, BigCommerce, WooCommerce, and Wix, among others. Shopify, which powers one million businesses and has more than $1.5 billion in annual revenue, has a significant lead over these competitors; however, Shopify must keep an eye on innovative ways to support business owners to maintain its top spot. Additionally, as Shopify introduces more marketplace functionality to promote its sellers, it becomes a greater competitive threat to Amazon.
C19.3a Magento Magento, an open-source e-commerce platform, was first introduced in 2008. Because of its opensource nature, which makes it unique from other platforms such as Shopify and BigCommerce, it quickly became popular. In 2011, eBay, an online marketplace, acquired Magento. At the time, eBay was the parent company of PayPal, an online payment system, leading to the integration of PayPal and the Magento platform. This enhanced the customer experience because it introduced new ways for customers to pay at checkout. In 2015, Magento was spun-off as an independent company but was acquired in 2018 by Adobe for $1.68 billion. Seemingly, Magento and Shopify appeal to a very different customer base. Shopify offers simple, user-friendly e-commerce tools while Magento is more likely to appeal to PHP web developers who have coding knowledge and want more control. Magento continues to be one of the most popular e-commerce platforms on the market because of its highly customizable nature. Additionally, users can now sync their stores with Amazon and integrate their catalogs with Google Merchant Center, helping customers increase their reach. Adobe, a multinational computer software company, is uniquely poised to propel Magento forward. Magento’s annual revenue is more than $186 million.
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C19.3b BigCommerce BigCommerce is an e-commerce company based in Austin, Texas, with annual revenue of $112 million. BigCommerce has grown slower than Shopify and is deeper in debt than many software as a service (SaaS) companies. However, the company filed to go public in 2020, attracting interest from the tech industry. In addition to its e-commerce platform, the company offers enterprise services such as data migration, implementation project management, technical account management, and growth coaching. The company’s footprint is growing, serving 60,000 online stores in more than 120 countries. Big-name customers include Ben & Jerry’s, SC Johnson, and Sony. According to BigCommerce, the company offers more features and customization options than Shopify, making its platform—which is similarly priced—a better value. Big Commerce also includes certain perks “out-of-the-box,” such as gift cards, reviews, and ratings that would require a package upgrade on Shopify. Since BigCommerce has fewer clients and more app flexibility, it may have the advantage of offering more personalized care than a larger platform. Shopify must consider ways to add value and maintain a personal touch as it continues to scale.
C19.3c WooCommerce WooCommerce, similar to Magento, is an open-source e-commerce platform; however, WooCommerce is specifically designed as a plugin for WordPress rather than a standalone e-commerce solution. This means people who already run and operate websites on the WordPress content management system can easily install the WooCommerce plugin to extend the functionality of their existing websites. WooCommerce’s annual revenue is $12 million. What sets WooCommerce apart from other e-commerce platforms like Shopify is its pricing strategy: WooCommerce is free. While the base platform is free, WooCommerce makes money by selling extensions that often require subscriptions, and users will also incur outside expenses such as web hosting fees. WooCommerce is attractive to cost-conscious, do-it-yourself business owners, and—as is the case with Magento—WooCommerce can be appealing to coders and web developers. To attract would-be WooCommerce customers, Shopify can point to its all-in-one, template-based platform as a point of differentiation for clients who are willing to pay a monthly premium for convenience, customer support, and easy-to-use features.
C19.3d Wix Wix, an Israeli cloud-based web development service, is considered one of the best all-around e-commerce platforms with annual revenue of $761 million and more than 500,000 online stores. While Wix is positioned as a website building platform rather than an online store platform, the company offers a variety of e-commerce functionality such as secure checkout, inventory management, and advanced marketing tools. Wix heavily targets beginners with its simple editing interface and affordable subscription packages. According to the company, more than half of small business owners don’t have a website, and Wix aims to make website startup easy. One weakness is that in comparison to Shopify, Wix has fewer sales features, app integrations to choose from, and built-in analytics features. Wix has recognized this as an opportunity, however, acquiring InkFrog, a tool for eBay and marketplace sellers to expand its capabilities. The company introduced new e-commerce solutions to help merchants with multichannel selling, dropshipping, and more. While both Shopify and Wix offer third-party apps to merchants, Wix more heavily relies on partner apps, such as Modalyst, Printful and Printify, Shippo, and ShipBob to achieve the same results as Shopify’s extensive product mix.
C19.3e Amazon Though Amazon and Shopify are different types of businesses, they offer different products that address a similar basic need: the ability to list and sell products. The main difference is Shopify
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allows merchants to create their own store on a domain they own, while Amazon is simply a marketplace to sell goods through. A major perk of listing products on Amazon is the massive built-in customer base. In this regard, Amazon functions as a search engine for products and businesses. However, this comes at a price as Amazon’s monthly fee is more expensive than Shopify’s. Amazon’s Professional Selling plan is $39.99 per month, which doesn’t include additional selling fees. There is also an Individual Selling Plan, which is only $0.99 per item sold, which is geared more to individual sellers and very small businesses. Ultimately, Amazon ends up being more expensive than Shopify unless the business is small. As Shopify introduces more marketplace functionality, such as its Shop app or its integration with Walmart—discussed later in this case—Shopify poses a greater threat to Amazon’s e-commerce dominance.
C19.4 STRATEGIC PARTNERSHIPS Shopify’s extensive product mix is just one of many reasons the company stands out from its competition. While many Shopify products largely eliminate the need for third-party tools and services, the e-commerce platform still sees value in strategic partnerships. By working with other companies, such as Walmart, Facebook, and Pinterest, Shopify stands to add value for its merchants and attract new clients.
C19.4a Walmart Walmart and Shopify struck a deal that opens Walmart’s online marketplace, a storefront for third-party sellers, to Shopify merchants. This is mutually beneficial for Walmart and Shopify because it better positions Walmart to compete against Amazon, and it gives greater reach and visibility to Shopify sellers. Like Shopify’s other services, this integration is seamless for its merchants, allowing them to manage product listing and inventory within their Shopify dashboard. Shopify now competes alongside Walmart rather than against it. This seems to be part of a greater long-term strategy to increase the reach of merchants and provide additional channels for them to sell goods.
C19.4b Facebook To support multichannel selling, Shopify partnered with Facebook to help merchants create Facebook Shops. Facebook Shops is a free tool that allows business owners to create branded storefronts for Facebook and Instagram. The partnership is seamless for both merchants and shoppers. Merchants can automatically connect their Shopify website to Facebook, so they don’t have to manage separate storefronts or inventory, and customers get a native experience no matter how they choose to shop. When the partnership was announced, Shopify’s stock price rose more than 2 percent, which signifies investors believe this could be a profitable partnership and lead to solid growth for Shopify. Between the Shop app and strategic partnerships with Walmart and Facebook, Shopify is greatly elevating its merchants by increasing their reach.
C19.4c Pinterest Shopify partnered with Pinterest, a visual search engine and bookmarking tool, to launch a new channel allowing merchants to target the platform’s 350 million monthly active users. The integration allows merchants to easily create “Product Pins” on the platform based on store inventory as well as add a shopping tab on their Pinterest profiles. Since Pinterest users have a high shopping intent—with more than 80 percent of weekly pinners making purchases based on liked content— this is an advantageous match.
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C19.4d Affirm Affirm, an alternative consumer credit start-up, partnered with Shopify to provide an interest-free, zero-fee online shopping option. The feature allows consumers to split purchases across four equal, bi-weekly payments. These installments lower the barriers to purchase for consumers that are worried about high upfront prices. Buy now, pay later platforms such as Afterpay, Klarna, and Affirm have grown in popularity among Gen Z and millennial shoppers. Affirm has more than 4.5 million users, which could benefit Shopify merchants as millions are already familiar with how the system works.
C19.5 SOCIAL RESPONSIBILITY Shopify believes it is important to invest in the planet, local communities, customers, and employees, and that doing so will bring the company long-term success. Shopify releases an annual economic impact report to highlight efforts to support businesses globally as well as a sustainability report to measure its impact on its people, partners, and communities.
C19.5a Economic Impact Shopify powers more than 1 million businesses that employ more than 2.1 million full-time people. In addition, Shopify has more than 5,000 full-time employees. Shopify aims to support entrepreneurs with its wide product mix to reduce barriers and enhance the world’s economic prosperity. The platform services business owners in more than 175 countries, and in 52 of those, businesses on Shopify supported more than $100 million in economic activity. Spotify views its efforts as a push to democratize technology, making it accessible and affordable for businesses of all sizes. As Shopify continues to scale internationally, it must consider local regulations and consumer expectations, which vary from country to country.
C19.5b Supporting Entrepreneurs As an all-in-one platform that’s easy to use, Shopify recognizes that its merchants may need access to additional resources for long-term success. Shopify supports its merchants with educational tools including online and local educational content, one-on-one coaching, learning programs for students, and more. These types of resources not only engage customers but they can also lead to an increase in value and satisfaction. After all, Shopify is only as successful as its clients. Customer service and educational support for entrepreneurs act as post-sales support that can increase customer value realization over time. This prevents customer churn, keeping customer acquisition costs lower and increasing customer lifetime value.
C19.5c Community It’s estimated that, by 2036, more than 42 percent of jobs in Canada will be impacted by automation via artificial intelligence and robotics. To support the workforce of tomorrow, Shopify created Dev Discover, a computer education outreach program that teaches Science, Technology, Engineering, Art, and Math (STEAM) concepts to its participants. In one year, more than 2,200 youth and educators participated in Shopify’s programs. Additionally, Shopify attempts to re-skill tech professionals who have taken time off from work with its Welcome Back program. Helping future tech professionals to develop skills and assisting software developers to update their knowledge is a long-term win for Shopify because it gives the company a broader pool of talent to select from and endears the company to potential customers.
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C19.5d Climate Change Through the Shopify Sustainability Fund, Shopify commits at least $5 million each year to support sustainability initiatives that fight climate change and $1 million each year to reduce and offset their carbon emissions, provide opportunities for merchants to reduce their emissions, and invest in sustainable packaging solutions. The company purchased enough carbon offsets to cover all of its historical emissions, including corporate travel, all the way back to 2004 before Shopify had even been introduced as an e-commerce platform. Additionally, more than half of Shopify’s offices are LEED-certified or equivalent, meaning they are incredibly energy and resource-efficient.
C19.5e Diversity Shopify employees a diverse group of people from a variety of backgrounds to build a global culture of belonging. In a global company such as Shopify, diversity is particularly important because it welcomes a variety of perspectives, often leading to an increase in innovation, creativity, and problem solving. Shopify has a variety of internal initiatives to support diversity and belonging, including compensation fairness reviews, talent acquisition audits, and employee resource groups. Additionally, Shopify issues an annual diversity survey to collect voluntary data on gender, race and ethnicity, age, and disability. While Shopify’s transparency is admirable, it has a long way to go in race/ethnicity diversity. For instance, of the employees that participated in the annual survey, only 2.8 percent identified as Latinx, and only 1.7 percent identified Black. Focusing on diversity is a major opportunity for Shopify.
C19.6 THE FUTURE FOR SHOPIFY Looking to the future, Shopify will have to protect its top spot as the number-one e-commerce platform. E-commerce across the board was boosted by the shift to online shopping during the COVID-19 pandemic, and Shopify certainly benefited with revenue nearly doubling in the second quarter of 2020 alone. While an ongoing recessionary environment could result in more business owners turning to e-commerce, Shopify must find ways to build on this momentum longterm. The company implemented several new tools and features during the global pandemic to add value for customers and extended free trials to attract new business, but it may not be enough to sustain that kind of growth. Shopify must keep customer churn from free trials to a minimum while focusing on the long-term satisfaction of subscribed clients. The company, which has found success as an all-in-one platform, will have to continue to identify customer needs as e-commerce evolves and develop solutions to address those needs. While many e-commerce platforms likely consider other e-commerce platforms to be their primary competition, Shopify’s diverse product portfolio has positioned it against e-mail marketing companies, 3PLs, banks, and even Amazon. Shopify’s ecosystem is its main competitive advantage. However, this attempt to be all things to its merchants could prove to be challenging. While Shopify has made an effort to eliminate many third-party service providers, Shopify may find arenas in which it is not fit to compete. Strategic partnerships could be incredibly valuable as roadblocks arise.
QUESTIONS
SOURCES
1. How is Shopify different from other e-commerce platforms? 2. Describe Shopify’s product strategy. 3. What are Shopify’s strengths? Weaknesses?
Alex Wilhelm “BigCommerce Files to Go Public,” TechCrunch, July 13, 2020, https://techcrunch.com/2020/07/13 /bigcommerce-files-to-go-public/ (accessed July 30, 2020); Anthony Ha, “Shopify Launches Shop, a New Mobile
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App,” TechCrunch, April 28, 2020, https://techcrunch. com/2020/04/28/shopify-launches-shop-a-new-mobile -shopping-app/ (accessed July 30, 2020); BigCommerce, “BigCommerce vs. Shopify,” https://www.bigcommerce .com/shopify/ (accessed July 30, 2020); BigCommerce, “What We Do Best,” https://www.bigcommerce.com/company/ (accessed July 30, 2020); Charlie Carmichael, “Wix vs Shopify: Which Should You Choose to Sell Online?” Website Builder Expert, June 2019, 2020, https://www .websitebuilderexpert.com/ecommerce-website-builders /comparisons/wix-vs-shopify/ (accessed July 31, 2020); Danny Vena, “Shopify Rival BigCommerce Files for IPO to Get in on the Rally,” The Motley Fool, July 15, 2020, https:// www.fool.com/investing/2020/07/15/shopify-rival-big -commerce-files-for-ipo-to-get-in.aspx (accessed July 30, 2020); Dori Zinn, “Affirm, Klarna, AfterPay and More: Online Installment Plans, Explained,” CNET, April 29, 2020, https://www.cnet.com/personal-finance/affirm-klarna -afterpay-and-more-online-installment-plans-explained/ (accessed July 31, 2020); Ina Steiner, “Wix Acquires InkFrog as It Prioritizes Ecommerce,” eCommerce Bytes, July 11, 2020, https://www.ecommercebytes.com/2020/07/11/wix -acquires-inkfrog-as-it-prioritizes-ecommerce/ (accessed July 31, 2020); Jen Merritt, “Shopify’s Success Story: The Start, the Growth, and the Impact,” Full Fat Commerce, March 24, 2020, https://fullfatcommerce.com/blog/a-history-of-shopify (accessed July 30, 2020); Jeremy Wong, “Shopify Payments – No More Fumbling With Payment Gateways,” Website Builder Expert, February 28, 2020, https://www.websitebuilderexpert .com/ecommerce-website-builders/shopify/payments/ (accessed July 30, 2020); Justin Nassie, “A Brief History of Magento: 2007 – 2020,” Brandastic, January 13, 2020, https:// brandastic.com/blog/a-brief-history-of-magento/ (accessed July 30, 2020); Laura Forman, “Shopify’s Blurred Lines Are Hard to Hate,” The Wall Street Journal, May 26, 2020, https:// www.wsj.com/articles/shopifys-blurred-lines-are-hard-to -hate-11590487200 (accessed July 31, 2020); Laura Forman, “Shopify’s Business Sells Itself, for Now,” The Wall Street Journal, July 29, 2020, https://www.wsj.com/articles/shopifys -business-sells-itself-for-now-11596041071 (accessed June 31, 2020); Lucy Carney, “Shopify vs Amazon: Which Platform Should You Use?” Website Builder Expert, June 10, 2020, https://www.websitebuilderexpert.com/ecommerce-website -builders/comparisons/shopify-vs-amazon/ (accessed July 31, 2020); Matt Grossman and Kimberly Chin, “Shopify’s Revenue Nearly Doubles as Covid-19 Pushes Shopping Online,” The Wall Street Journal, July 30, 2020, https://www .wsj.com/articles/shopifys-revenue-nearly-doubles-as -covid-19-pushes-shopping-online-11596057094 (accessed
July 31, 2020); Matthew Frankel, “If You Invested $10,000 in Shopify’s IPO, This Is How Much Money You’d Have Now,” The Motley Fool, February 10, 2020, https://www.fool.com /investing/2020/02/05/if-you-invested-10000-in-shopifys -ipo-this-is-how.aspx (accessed July 30, 2020); Rebekah Carter, “Shopify Capital Review 2020: Everything You Need to Know About Shopify Capital,” Ecommerce Platforms, June 29, 2020, https://ecommerce-platforms.com/articles /shopify-capital-review (accessed July 30, 2020); Riley de León, “Affirm, Shopify Partner for New Interest-Free, ZeroFee Online Shopping Option,” CNBC, July 22, 2020, https:// www.cnbc.com/2020/07/22/affirm-shopify-partner-on -interest-free-zero-fee-online-shopping.html (accessed July 31, 2020); Sarah Perez, “Walmart Partners With Shopify to Expand Its Online Marketplace,” TechCrunch, June 15, 2020, https://techcrunch.com/2020/06/15/walmart-partners -with-shopify-to-expand-its-online-marketplace/ (accessed July 30, 2020); Shopify, “About Us,” https://www.shopify .com/about (accessed July 30, 2020); Shopify, “Shopify and Pinterest Launch New Channel Allowing Merchants to Target Platform’s 350m+ Monthly Users,” May 7, 2020, https://news.shopify.com/shopify-and-pinterest-launch -new-channel-allowing-merchants-to-target-platforms -350m-monthly-users (accessed July 30, 2020); Shopify, “Shopify Fulfillment Network,” https://www.shopify.com /fulfillment (accessed July 30, 2020); Shopify, “Shopify Launches New Email Product Globally, Making It Easier to Reach Customers During COVID-19,” April 14, 2020, https://news.shopify.com/shopify-launches-new-email -product-globally-making-it-easier-to-reach-customers -during-covid-19 (accessed July 30, 2020); Shopify, “Shopify Partners With Facebook to Help Businesses Launch Branded Facebook Shops,” May 19, 2020, https://news.shopify .com/shopify-partners-with-facebook-to-help-businesses -launch-branded-facebook-shops (accessed July 30, 2020); Shopify, “Shopify’s 2019 Sustainability Report,” 2019, https:// cdn.shopify.com/static/sustainability-report/2019%20 Shopify%20Sustainability%20Report.pdf (accessed July 30, 2020); Shopify, “Shopify’s Global Economic Impact Report,” 2019, https://cdn.shopify.com/static/impact-report/shopify -global-economic-impact-report-summary.pdf (accessed July 30, 2020); Victoria Sullivan, “Shopify Capital and Shopify Capital Alternatives,” nChannel Blog, March 25, 2020, https:// www.nchannel.com/blog/shopify-capital-and-alternatives/ (accessed July 30, 2020); Wix, “Ecommerce Website Builder,” https://www.wix.com/ecommerce/website (accessed July 31, 2020); WooCommerce, “About Us,” https://woocommerce .com/about/ (accessed July 30, 2020).
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CASE 20 | Mini Case Cutting Edge Quality at Cutco* SYNOPSIS: T his case provides an overview of Cutco, a company that has sold cutlery and accessories through direct sales for more than 70 years. The case explores Cutco’s direct selling distribution models and its foray into retail as well as the company’s commitment to quality and social responsibility. THEMES: Direct selling, customer relationships, social responsibility, marketing strategy
W
hat if you could have a high-quality kitchen knife that would last forever? Look no further than Cutco. In 1949, Cutco began manufacturing knives in Olean, New York, when Alcoa Corp and Case Cutlery formed a joint venture to begin creating highquality cutlery. Since then, the company has grown to become a nationally recognized brand known for its high-quality, American-made products. All Cutco knives come with a “Forever Guarantee” that allows customers to have their knives serviced for free, regardless of when the knives were purchased, so the knives can be passed from generation to generation.
*This case was prepared by O. C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management.
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C20.1 DIRECT SELLING Since 1949, Cutco has used a direct sales channel. In 1985, Vector Marketing was acquired to be the direct sales organization for the company. It has grown to more than 250 independently run district sales offices in the United States, Canada, and Puerto Rico. Cutco’s direct sales force, largely college students looking to make extra money during the summer, learn how to manage their time, how to interface with others, and how to express unique product attributes that set Cutco apart from the competition. Sales representatives and managers gain skills needed for their future careers. The management team at Vector started as sales representatives of Cutco products to learn valuable lessons in selling the product. There are two models of direct selling compensation: multilevel and single-level marketing. Multilevel compensation means direct sellers earn a commission from their own sales as well as commissions from those they have recruited and trained. Cutco uses a single-level method of compensation, which means the sales representatives earn commission on the sales they make and are not compensated for creating a “downline” or sales organization of other sales representatives. Salespeople for Cutco are given the responsibility to choose how they want to sell products. They earn a commission based on the dollar amount of products they sell. If a salesperson sells $1,000, they will earn a 10 percent commission. However, salespeople can earn as much as 30 percent by selling more than $20,000 of products. Along with this, expenses for salespeople are relatively low. Expenses can include products or other items used to showcase the quality of the knives. In 2020, Cutco sales reps adapted to changes in the marketing environment by converting to virtual presentations, which are conducted without leaving their home. College students make up the majority of Cutco’s sales force with more than 40,000 college students selling for Cutco each year. The sales force for Cutco typically starts by selling knives to their friends and family and then building a network of clients based on referrals rather than going door-to-door. This method, often referred to as “warm lists,” is frequently used by insurance and investment agents. Demonstration sessions can last anywhere from 45 minutes to 90 minutes where salespeople explain how the knives are made, along with the “forever guarantee,” and demonstrate the effectiveness of Cutco knives. While the commission earned by selling Cutco products can be very lucrative, the selling experience gained is invaluable. College students who work for Cutco must learn about the product they are selling and master how to communicate with potential buyers in order to be an effective seller. This kind of selling experience is a perfect resume item and a great step for aspiring entrepreneurs. Additionally, salespeople get the luxury of choosing their own schedules. In a typical sales job, employees must work a set number of hours. However, Cutco representatives work on their own time and earn commissions for whatever they are able to sell.
C20.2 CUSTOMER RELATIONSHIPS While the driver of the Cutco distribution model is direct selling, it has begun to experiment with different sales methods. For example, Cutco has opened 15 retail locations since 2005 to give existing customers a place to service their knives while allowing potential customers a place to view and handle its products. These stores are focused on giving a “Cutco experience” where customers can try out knives or take classes on cooking, floral arrangements, gardening, and more. The stores also offer more than 100 kinds of kitchen cutlery products in addition to knives such as utensils, kitchen shears, flatware, cookware, and a full line of sporting knives. The stores also carry products from other brands in order to broaden the offering. Items are used for giveaways to enhance the incentive for customers to attend events.
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Cutco’s retail stores were designed to help Cutco maintain long-term relationships with customers. The sales force for Cutco consists of mainly college students who stop selling after a year or two, therefore it’s easy for customers to lose contact with Cutco. Through its retail stores, Cutco maintains better customer relationships and a visible presence on the retail front. In addition to opening retail stores, Cutco sells its products online, directly to customers. Cutco has also entered into a relationship with Costco Warehouse where Cutco products are being sold in their roadshow program. These alternative distribution initiatives that Cutco has implemented allow consumers to have more exposure to Cutco products and are governed in a way to work synergistically with Cutco’s direct sales model. These channels act as advertisements and endorsements of the products, raising awareness and increasing brand recognition.
C20.3 A COMMITMENT TO QUALITY Cutco is proud of its history and heritage as an American knife manufacturer. Quality and fair treatment of employees and the community are the first and foremost priorities for the company. In the company’s 70-year history, more than 1 million people have sold Cutco knives. Cutco’s knife blades are made from a high carbon stainless steel, which goes through a 3-stage heat treatment process to ensure that blades can take a sharp edge, maximize their resistance to corrosion, and won’t snap under pressure. All knives have “full-tang construction,” which means that the blade’s metal extends all the way through the handle of the knife to create stability. The handles are made from an acetal copolymer thermo-resin, which gives the handles high strength, toughness, and resistance to abrasion. Rivets that hold the handle together are made of a nickel-silver alloy that doesn’t expand or contract from heat. This process creates a high-quality knife that is built to last. However, wear and tear are inevitable, so customers can get their knives serviced at any time. Cutco is now one of the few American cutlery companies to keep their manufacturing in the United States, demonstrating an unparalleled commitment to American jobs and American made products. Cutco’s American manufacturing is a big part of their branding and company image, and the company takes pride in the town of Olean. James Stitt, executive chairman, came to Olean in 1975 to work for Cutco. His son, James Stitt Jr., joined the company in 1997 and is currently the president and CEO. The family is committed to the town of Olean, where they have around 650 full-time employees. The town of Olean remains important to the Stitt family, and before his son took over the company, Stitt Sr. ensured that his son remained committed to Olean. The town relies heavily on Cutco since they employ many of Olean’s citizens. Corey Wiktor, the executive director of the Cattaraugus County Industrial Development Agency, described Cutco as “the lifeblood of Cattaraugus County and the Southern Tier.”
C20.4 CUTCO AND VECTOR ADAPT TO CHANGE Amid the COVID-19 (coronavirus) pandemic in 2020, Cutco and Vector demonstrated an ability to adapt quickly and efficiently. Before the pandemic even prompted shutdowns and stay-athome orders, Cutco and Vector were already in action. In February 2020, a group of sales support team members convened a committee to proactively make plans. As schools and nonessential businesses shut down in March, the company made the move to go virtual. Though the company already had virtual programs in place, they weren’t built for the entire company to run remotely. To adapt, Vector developed a new interviewing platform, adjusted to videoconference training, made all demonstrations virtual, and reduced the breadth of its product offering to maximize factory production. By going virtual, the company was able to shift its business model to meet the needs of the changing landscape.
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Vector’s online interviewing platform proved to be a success for the company. With the applicant’s interviewing experience in mind, Vector developed a secure corporate video conferencing software in just three weeks. Virtual interviewing allows Vector to use several different mediums, including video, presentations, and one-on-one breakout meetings, to connect with candidates. Vector found that both interviewer and applicant preferred this informational exchange over the traditional and transactional feel of a face-to-face interview. Additionally, the new approach allowed the company to redirect its efforts to higher priorities such as competence discovery and interpersonal connection. Similarly, Vector switched to videoconference training and stopped in-home sales presentations. Salespeople for Cutco began conducting appointments over Zoom, Skype, FaceTime, and phone calls with the aid of prepared product slides. This meant less travel for sales reps and time spent more efficiently. As COVID-19 wreaked havoc on global supply chains, Cutco made a critical adjustment by temporarily scaling back the company’s product offering. The reduction in the breadth of Cutco’s product line allowed for manufacturing to focus on the core products, cutting back on distractions and costs associated with trying to make everything and keep all products in stock. By focusing on core products, putting into place Sunday overtime, and closing return/repair operations, Cutco increased daily piece production by 33 percent over pre-pandemic levels, thereby reducing delays in shipping. By maintaining positive relationships with its suppliers, Cutco was able to work alongside them during the pandemic to keep inventory in stock even as sales grew rapidly over the summer months. Cutco’s ability to swiftly adapt to changing environmental forces shows that the company is built for longevity. By creating a new interviewing platform, switching to videoconference training, adjusting sales procedures, and reducing its product offering, the company thrived at a time when many businesses, including direct sales businesses, struggled to find their footing. Virtualizing every aspect of recruiting and sales management helped keep Cutco nimble and proved that adaptability is a core competency for the company.
C20.5 SOCIAL RESPONSIBILITY AT CUTCO Cutco believes in social responsibility and making a positive difference, particularly in its hometown community. The Cutco Foundation was founded in 1996 with the mission to contribute to the growth and betterment of the Olean community. The foundation focuses its charitable work in the areas of education, quality of life improvement, and support of key organizations. These organizations range from the local hospital and university to the small nonprofits that make a difference for the less fortunate. For more than 20 years, employees at Cutco have volunteered hundreds of hours annually during the holiday season to support the Red Kettle Campaign for the Salvation Army. Cutco employees also participate in an annual toy drive for underprivileged children, an annual food drive for the local food pantries, and various charity walks. In addition, the company contributes outside of Olean in support of disaster relief and many other organizations embraced by members of its sales force.
C20.6 LOOKING TO THE FUTURE Thanks to Cutco’s high-quality products and unique business model, it is a nationally recognized brand for cutlery that is synonymous with quality. Cutco continues to expand its product offerings and has begun complementing its direct sales distribution with retail and Internet sales. Even with its evolving marketing strategy, the high quality of its knives and its commitment to direct sales have remained constant since Cutco began in 1949.
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QUESTIONS 1. How has Cutco used quality to differentiate its products? 2. How does Cutco add value to its products through the “Forever Guarantee”? 3. Does the direct selling channel help position Cutco’s high-quality knives in the marketplace?
SOURCES Barbara E. Stefano, “Spotlight: Cutco Cutlery,” Feast, December 4, 2013, http://www.feastmagazine.com/dine-out/spot-light /article_7814337e-5d39-11e3-909b-0019bb30f31a.html (accessed August 1, 2018); Bob Clark, “New, Former Cutco Heads Look to the Future,” Olean Times Herald, December 3, 2017, http://www.oleantimesherald.com/news/new-former -cutco-heads-look-to-the-future/article_a7675356-d7d6 -11e7-82da-3b9402086723.html (accessed August 1, 2018); Cutco, “The Cutco Story,” https://www.cutco.com/ (accessed June 8, 2020); Dan Miner, “Long an Olean Anchor, Cutco Corp. Keeps Growing,” Buffalo Business First, May 4, 2018,
https://www.bizjournals.com/buffalo/news/2018/05/04/long -an-olean-anchor-cutco-corp-keeps-growing.html (accessed June 8, 2020); John S. McClenahen, “The Cutting Edge: Cutco Cutlery Corp. Manufactures Knives in the United States to Maintain Quality and Flexibility,” Industry Week, 255(4), p. 11, April 2006, http://link.galegroup.com/apps/doc/A145161140 /ITOF?u=naal_aub&sid=ITOF&xid=6eb7ea52 (accessed August 1, 2018); Kavita Kumar, “Cutco Sharpens Its Business by Adding Retail Stores,” St. Louis Post-Dispatch, April 27, 2012, https://www.stltoday.com/business/local/cutco-sharpens -its-business-by-adding-retail-stores/article_707e846c-8fbc -11e1-a44a-0019bb30f31a.html (accessed August 1, 2018); Karen Dybis, “Knife Seller Aims to Keep an Edge,” The Detroit News, April 12, 2013, https://advance.lexis.com/document /index?crid=fd685b54-4284-47df-bb22-421d70cc90a1&pd permalink=45f47ae0-2d07-4192-8256-e49ea25f4f1b&pdmfid =1516831&pdisurlapi=true (accessed August 1, 2018); Mark Abadi, “Successful People Credit Cutco, The Company That Recruits College Kids to Sell Knives, With Teaching Them Business Lessons That Last for Life,” Business Insider, January 31, 2019, https://www.businessinsider.com/cutco-knives -famous-successful-alumni-2019-1 (accessed June 8, 2020).
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CASE 21 | Mini Case The Cocoa Exchange Finds a Sweet Spot in the Supply Chain* SYNOPSIS: The Cocoa Exchange, a subsidiary of Mars, Incorporated (makers of products such as M&M, Snickers, and Twix) sells exclusive and premium chocolate products directly to consumers through a commission-based sales force under four product lines: Pod & Bean, Dove Signature, Pure Dark, and VITALIZE. By leveraging supply chain efficiencies and utilizing direct marketing channels, The Cocoa Exchange creates incremental, non-cannibalizing growth for Mars. THEMES: Direct selling, marketing channels, customer relationships, supply chain management, product strategy, sustainability, social responsibility
I
n May of 2017, Mars, Incorporated, the world’s largest chocolate company, announced the launch of a stand-alone subsidiary called The Cocoa Exchange. While Mars focuses on mass-producing products such as Snickers and M&M’S that are available in all distribution channels, The Cocoa Exchange sells exclusive and premium chocolate products directly to consumers through a commission-based sales force under four product lines: Pod & Bean, Dove Signature, Pure Dark, and VITALIZE. The Cocoa Exchange’s mission is to create incremental, non-cannibalizing growth for Mars through niche products targeting individual consumers rather than the mass market. The company accomplishes this by creating supply chain efficiencies, thanks to its parent company, and using direct marketing channels with its direct selling business model.
*This case was prepared by O. C. Ferrell and Linda Ferrell, © 2022. It was prepared for classroom discussion rather than to illustrate effective or ineffective handling of administrative, ethical, or legal decisions by management.
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504 Part 5: Cases
c21.1 SUPPLY CHAIN Procurement is one of the most important, mutually beneficial aspects of the Mars and Cocoa Exchange relationship. Chocolate is made from cocoa, which can only be grown in a few places around the world. The Cocoa Exchange sources most of its cocoa from farmers in developing countries such as the Ivory Coast and Ghana in West Africa. Most of these farms are family-run with the women of the family doing most of the work. Harvesting cocoa begins by removing ripened pods from the trunk and branches of a cocoa tree. Next, the pods are opened and cocoa beans are removed. Afterward, beans are fermented and dried before they can be processed into chocolate. The Cocoa Exchange has the benefit of using Mars’ robust supply chain. The Cocoa Exchange is able to source its cocoa beans directly from farmers, just like Mars. The direct selling model that The Cocoa Exchange uses is different from Mars, which uses marketing intermediaries such as wholesalers and retailers. The Cocoa Exchange’s goal is to make specialty chocolate products, such as Pod & Bean White Chocolate Raspberry Honey Mustard or Dove Signature Dark Chocolate Espresso Bites, that appeal to a more targeted slice of the market. Having less-intense market coverage adds to the exclusivity of the company’s premium products and contributes allure to the luxury brand.
c21.2 DIRECT SELLING Direct selling is the marketing and selling of products to consumers through direct sales contact locations such as homes, workplaces, or online other than retail store locations. Direct sellers are not actually employees of the companies they work for, but instead, they are independent contractors selling the company’s products. Individuals are interested in becoming direct sellers for many reasons, some of which include the perks, flexibility, and a passion for the products they are selling. It can be a more relational, customized form of selling and allows for even greater market reach and segmentation than other forms of retailing. Direct selling is also a great part-time job opportunity. The Cocoa Exchange has created a commission-based independent contractor labor force called “curators” to sell its products through in-house parties. Party attendees can sample a range of products from The Cocoa Exchange and purchase the products they like through their curator’s online store. Curators receive 25 to 40 percent commission on goods sold from their individual online store and gain access to exclusive discounts of up to 50 percent depending on performance. The Cocoa Exchange provides starter kits that cost curators $49 to $129. Within 1–2 parties, the curators can expect to recover the cost of the starter kit. Curators provide free shipping on the items ordered. Additionally, as curator sales grow, curators earn credits they can use to shop. The company also ships products directly to the consumer, so curators aren’t burdened with inventory management. Premium chocolates and other Cocoa Exchange products are carefully handled so that they arrive fresh and in “mint” condition. Direct selling encourages an entrepreneurial spirit in their chocolate sellers, allows The Cocoa Exchange to find new customers, and helps the company to maintain a robust and efficient supply chain.
c21.3 SUSTAINABILITY Businesses are continually putting a bigger focus on environmental issues, and The Cocoa Exchange is no exception. The company believes that sustainability has to be at the heart of everything it does, especially since it is invested in the agricultural industry. Demand continues to grow
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Case 21: The Cocoa Exchange Finds a Sweet Spot in the Supply Chain 505
for chocolate, especially in developing parts of the world such as India. However, sourcing cocoa sustainably is limited since the crop can only grow in certain areas near the equator. Because of these challenges, The Cocoa Exchange aims to improve conditions for farmers so that they can create a larger supply of cocoa. Cocoa certification has become an important process since 2010. An organization called UTZ investigates cocoa farms to ensure that they are being run sustainably. Mars and The Cocoa Exchange have committed to certifying 100 percent of its cocoa. Due to the large amount of cocoa that Mars and The Cocoa Exchange buys, the certification standards can make a big environmental difference. Mars has also established a research center called the Mars Center for Cocoa Science to study how to increase yields and sustainability. Cacao (the actual name of cocoa beans) farmers only produce 10 percent of the output that they could under perfect conditions, so Mars has made efforts to increase yields through their research and by helping individual farms. The research facility located in Bahia, Brazil, has created a genome project to better understand cocoa and to develop new techniques that would increase yields. Another part of the sustainability effort was to create the Sustainable Cocoa Initiative (SCI). This program aims to raise productivity and improve farming communities in their main production areas such as West Africa and Asia. Part of this process is to empower women financially and socially.
c21.4 SOCIAL RESPONSIBILITY Mars and The Cocoa Exchange emphasized empowering women in all steps of the cocoa production process. Women make up around 45 percent of the labor force in the cocoa supply chain. However, women are not given access to the same level of training and resources, and women on family farms are often paid substantially less or not at all. Mars and The Cocoa Exchange have created a demonstration project that they call Vision for Change (V4C) to help train women in farming practices, financial literacy, and leadership skills. As part of the V4C program, Mars has set up Cocoa Development Centers that are used as distribution and training hubs. These hubs train workers in agricultural practices and provide supplies like fertilizers and pesticides. Research by Farming First has shown that women farmers’ yields are 20–30 percent lower than men due to a lack of access to resources such as fertilizers and plants. The V4C program’s goal is to reduce this gap. Training centers are built to accommodate hundreds of women where they are taught important financial literacy skills like signing up for a savings and loan organization, planning and marketing, and basic accounting skills. Through a partnership with the CARE organization, Village Savings and Loan Associations have been established in 25 cocoa communities to provide funding for women to grow their cocoa production. Mars and The Cocoa Exchange have also partnered with the International Center for Research on Women (ICRW), which studies what helps to empower women economically, mainly in agricultural supply chains. ICRW helps establish methods to empower women cocoa farmers as well as monitoring progress on women’s empowerment in the program. By partnering with the humanitarian group CARE, whose goal is to end global poverty, The Cocoa Exchange aims to establish Savings & Loan Associations in West African villages to give farmers more access to capital and the ability to improve their business skills. Additionally, Mars has made a commitment to only using certified sources of cocoa. By investing in the suppliers from which The Cocoa Exchange sources and purchases its chocolate, the company has greater influence over the sustainability of its supply chain. The direct selling channel provides the opportunity for consumers to learn about the Cocoa Exchange, its high-quality products, and its commitment to social responsibility.
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506 Part 5: Cases
c21.5 CONCLUSION The Cocoa Exchange is a unique company designed to sell premium and exclusive products directly to customers. As a subsidiary of Mars, Incorporated, The Cocoa Exchange benefits from an established supply chain where it can gather all the materials needed to create its chocolate products. This chocolate is then sold through their direct selling model where curators work off of commission to sell products directly to customers. The Cocoa Exchange also puts a strong emphasis on the sustainability of cocoa as well as social responsibility issues within the supply chain. By partnering with the Care organization and helping rural farmers set up loans and build capital, The Cocoa Exchange helps to increase the supply of cocoa and improve sustainability.
QUESTIONS 1. How is The Cocoa Exchange different than its parent company? 2. What are the benefits of direct selling? How does this impact the supply chain? 3. How are The Cocoa Exchange’s sustainability efforts impactful?
SOURCES Ashley Beyer, “The Cocoa Exchange Visits Fresh Living,” KUTV, May 31, 2018, http://kutv.com/features/fresh-living /the-cocoa-exchange-visits-fresh-living (accessed July 31, 2020); Bernie Pacyniak, “One-on-One: Berta de Pablos-Barbier, President of Mars Wrigley Confectionery U.S.,” Candy Industry, November 1, 2017, https://www
.candyindustry.com/articles/87940-one-on-one-berta-de -pablos-barbier-president-of-mars-wrigley-confectionery -us (accessed July 31, 2020); International Cocoa Organization, “How Exactly Is Cocoa Harvested?” May 26, 1998, https://www.icco.org/faq/58-cocoa-harvesting/130-how -exactly-is-cocoa-harvested.html (accessed July 31, 2020); Keith Loria, “Candy Maker Mars Gets Into the Party Business,” Food Dive, May 10, 2017, https://www.fooddive .com/news/candy-maker-mars-gets-into-the-party-business /442160/ (accessed July 31, 2020); Oliver Nieburg, “‘The Cocoa Exchange’: Mars Sets Up E-Commerce Party Program for Chocolate,” Confectionary News, May 16, 2017, https:// www.confectionerynews.com/Article/2017/05/15/Cocoa -Exchange-Mars-sets-up-e-commerce-party-program-for -chocolate (accessed July 31, 2020); The Cocoa Exchange, “Sustainable and Responsibly-Sourced Cocoa,” http://www .mytcesite.com/pws/homeoffice/tabs/sustainable-cocoa.aspx (accessed July 31, 2020).
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APPENDIX
Marketing Plan Worksheets These worksheets will assist you in writing a formal marketing plan. Worksheets are a useful planning tool because they help to ensure that important information is not omitted from the marketing plan. Answering the questions on these worksheets will enable you to: 1. Organize and structure the data and information you collect during the situation analysis. 2. Use this information to better understand a firm’s strengths and weaknesses, and to recognize
the opportunities and threats that exist in the marketing environment.
3. Develop goals and objectives that capitalize on strengths. 4. Develop a marketing strategy that creates competitive advantages. 5. Outline a plan for implementing the marketing strategy.
In addition to our presentation here, these worksheets are available in electronic format on our text’s website at www.cengage.com. By downloading these worksheets, you will be able to change the outline or add additional information that is relevant to your situation. Remember that there is no one best way to organize a marketing plan. We designed our outline to serve as a starting point and to be flexible enough to accommodate the unique characteristics of your situation. As you complete the worksheets, it might be useful to refer back to the text of the chapters. When completing the situation analysis section, be sure to be as comprehensive as possible. The viability of your SWOT (strengths, weaknesses, opportunities, threats) analysis depends on how well you have identified all of the relevant environmental issues. Likewise, as you complete the SWOT analysis, you should be honest about the firm’s characteristics. Do not depend on strengths that the firm really does not possess. Honesty is also important as you list weaknesses. I. Executive Summary
The executive summary is a synopsis of the overall marketing plan. It should provide an overview of the major aspects of the entire plan including goals/objectives, strategy elements, implementation issues, and expected outcomes. The executive summary should be the last part of the marketing plan that you write. II. Situation Analysis A. The Internal Environment (refer to Exhibit 3.3)
Review of marketing goals and objectives Identify the firm’s current marketing goals and objectives.
Explain how these goals and objectives are being achieved. Explain how these goals and objectives are consistent or inconsistent with the firm’s mission, recent trends in the external environment, and recent trends in the customer environment. Review of current marketing strategy and performance Describe the firm’s current marketing strategy with respect to products, pricing, distribution, and promotion. Which elements of the strategy are working well? Which elements are not?
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Describe the firm’s current performance (sales volume, market share, profitability, awareness, brand preference) compared to other firms in the industry. Is the performance of the industry as a whole improving or declining? Why? If the firm’s performance is declining, what is the most likely cause (e.g., market disruption, environmental changes, flawed strategy)? Review of current and anticipated organizational resources Describe the current state of the firm’s organizational resources (e.g., financial, capital, human, experience, technology, relationships with key suppliers or customers). How are the levels of these resources likely to change in the future? If resource levels are expected to change, how can the firm leverage additional resources to meet customer needs better than competitors? If additional resources are not available, how can the firm compensate for future resource constraints (lack of resources)? Review of current and anticipated cultural and structural issues In terms of marketing strategy development and implementation, describe the positive and negative aspects of the current and anticipated culture of the firm. Examples could include: The firm’s overall customer orientation (or lack thereof) The firm’s emphasis on short-term versus long-term planning The willingness of the firm’s culture to embrace change Internal politics and power struggles The overall position and importance of the marketing function Changes in key executive positions General employee satisfaction and morale Explain whether the firm’s structure is supportive of the current marketing strategy. B. The Customer Environment (refer to Exhibit 3.4) Who are the firm’s current and potential customers? Describe the important identifying characteristics of the firm’s current and potential customers with respect to demographics, geographic location, psychographic profiles, values/lifestyles, and product usage characteristics (heavy vs. light users). Identify the important players in the purchase process for the firm’s products. These might include purchasers (actual act of purchase), users (actual product user), purchase influencers (influence the decision, make recommendations), and the bearer of financial responsibility (who pays the bill?). What do customers do with the firm’s products? How are the firm’s products connected to customer needs? What are the basic benefits provided by the firm’s products? How are the firm’s products purchased (quantities and combinations)? Is the product purchased as a part of a solution or alongside complementary products? How are the firm’s products consumed or used? Are there special consumption situations that influence purchase behavior? Can customers easily understand and incorporate product changes, or do they need help to be successful? Are there issues related to the disposition of the firm’s products, such as waste (garbage) or recycling, which must be addressed by the firm? Where do customers purchase the firm’s products? Identify the merchants (intermediaries) where the firm’s products are purchased (e.g., store-based retailers, e-commerce, digital fulfillment, vending, wholesale outlets, direct from the firm).
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Identify any trends in purchase patterns across these outlets (e.g., how has e-commerce changed the way the firm’s products are purchased?). When do customers purchase the firm’s products? How does purchase behavior vary based on different promotional events (communication and price changes) or customer services (hours of operation, online/mobile applications, delivery speed/cost)? How does purchase behavior vary based on uncontrollable influences such as seasonal demand patterns, time-based demand patterns, physical/social surroundings, or competitive activities? Why (and how) do customers select the firm’s products? Describe the advantages of the firm’s products relative to competing products. How well do the firm’s products fulfill customers’ needs relative to competing products? What products have emerged as new competition? Describe how issues such as brand loyalty, value, commoditization, and relational exchange processes affect customers’ purchase behaviors. Describe how credit or financing is used in purchasing the firm’s products. Also, do customers seek long-term relationships with the firm, or do they buy in a transactional fashion (based primarily on price)? Is the product sold via a subscription model, or should it be? Why do potential customers not purchase the firm’s products? Identify the needs, preferences, and requirements of noncustomers that are not being met by the firm’s products. Have disruptions to the market changed how the product is viewed by consumers relative to new offerings? What are the features, benefits, and advantages of competing products that cause noncustomers to choose them over the firm’s products? Explain how the firm’s pricing, distribution, and/or promotion are out of sync with noncustomers. Outside of the product, what causes noncustomers to look elsewhere? Describe the potential for converting noncustomers into customers. Can a past customer be “won back” via freemium offers? C. The External Environment (refer to Exhibit 3.5) Competition Identify the firm’s major competitors (brand, product, generic, and total budget). Identify the characteristics of the firm’s major competitors with respect to size, growth, profitability, target markets, products, and marketing capabilities (production, distribution, promotion, pricing). What other major strengths and weaknesses do these competitors possess? List any potential future competitors not identified above. What disruptions might occur that pose new competitors not currently identified? Economic Growth and Stability Identify the general economic conditions of the country, region, state, or local area where the firm’s target customers are located. How are these economic conditions related to customers’ ability to purchase the firm’s products? Describe the economics of the industry within which the firm operates. These issues might include the cost of raw materials, patents, merger/acquisition trends, sales trends, supply/demand issues, marketing challenges, and industry growth/decline. What potential market disruptions should be included in planning?
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Political Trends Identify any political activities affecting the firm or the industry with respect to changes in elected officials (domestic or foreign), potential regulations favored by elected officials, industry (lobbying) groups or political action committees, and consumer advocacy groups.
What are the current and potential hot button political or policy issues at the national, regional, or local level that may affect the firm’s marketing activities? Legal and Regulatory Issues Identify any changes in international, federal, state, or local laws and regulations affecting the firm’s or industry’s marketing activities with respect to recent court decisions, recent rulings of federal, state, or local government entities, recent decisions by regulatory and self-regulatory agencies, and changes in global trade agreements or trade law. Technological Advancements How have recent technological advances affected the firm’s customers with respect to needs/wants/preferences, access to information, the timing and location of purchase decisions, the ability to compare competing product offerings, or the ability to conduct transactions more effectively and efficiently? Have customers embraced or rejected these technological advances? How is this issue related to customers’ concerns over privacy and security? How have recent technological advances affected the firm or the industry with respect to manufacturing, process efficiency, distribution, supply chain effectiveness, promotion, cost-reduction, or customer relationship management? What future technologies offer important opportunities for the firm? Identify any future technologies that may threaten the firm’s viability or its marketing efforts. Sociocultural Trends With respect to the firm’s target customers, identify changes in society’s demographics, values, and lifestyles that affect the firm or the industry. Explain how these changes are affecting (or may affect) the firm’s products (features, benefits, branding), pricing (value), distribution and supply chain (convenience, efficiency), promotion (message content, delivery, feedback), and people (human resource issues). Identify the ethical and social responsibility issues that the firm or industry faces. How do these issues affect the firm’s customers? How are these issues expected to change in the future? III. SWOT Analysis (refer to Exhibit 4.5) A. Strengths
Strength 1: Strength 2: (Repeat as needed to develop a complete list of strengths.) How do these strengths enable the firm to meet customers’ needs?
How do these strengths differentiate the firm from its competitors? B. Weaknesses Weakness 1: Weakness 2: (Repeat as needed to develop a complete list of weaknesses.) How do these weaknesses prevent the firm from meeting customers’ needs? How do these weaknesses negatively differentiate the firm from its competitors?
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C. Opportunities (external situations independent of the firm—not strategic options)
Opportunity 1: Opportunity 2: (Repeat as needed to develop a complete list of opportunities.) How are these opportunities related to serving customers’ needs?
What is the time horizon of each opportunity? D. Threats (external situations independent of the firm)
Threat 1: Threat 2: (Repeat as needed to develop a complete list of threats.) How are these threats related to serving customers’ needs?
What is the time horizon of each threat? E. The SWOT Matrix (refer to Exhibit 4.7 and Exhibit 4.8) Strengths:
Opportunities:
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Weaknesses:
Threats:
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F. Developing Competitive Advantages (refer to Exhibit 4.9)
Describe ways that the firm can match its strengths to its opportunities to create capabilities in serving customers’ needs. Are these capabilities and competitive advantages grounded in the basic principles of operational excellence, product leadership, and/or customer intimacy? If so, how are these capabilities and advantages made apparent to customers? Can the firm convert its weaknesses into strengths or its threats into opportunities? If not, how can the firm minimize or avoid its weaknesses and threats? Does the firm possess any major liabilities (unconverted weaknesses that match unconverted threats) or limitations (unconverted weaknesses or threats that match opportunities)? If so, are these liabilities and limitations apparent to customers? Can the firm do anything about its liabilities or limitations, especially those that impact the firm’s ability to serve customers’ needs? Is it likely that market disruptions will transform strengths into weaknesses and weaknesses into strengths (i.e., upside-down thinking)? Can opportunities and threats become new competitive advantages through internal disruption that takes advantage of competitor situations (i.e., outside-in thinking)? G. Developing a Strategic Focus
What is the overall strategic focus of the marketing plan? Does the strategic focus follow any particular direction, such as aggressiveness, diversification, turnaround, defensiveness, or niche marketing? Describe the firm’s strategic focus in terms of a strategy canvas. How does the firm’s strategic thrust provide sufficient focus and divergence from other firms in the industry?
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512 Appendix: Marketing Plan Worksheets
IV. Marketing Goals and Objectives A. Marketing Goal A:
(should be broad, motivational, and somewhat vague) Objective A1: (must contain a specific and measurable outcome, a time frame for completion, and identify the person/unit responsible for achieving the objective) Objective A2: (must contain a specific and measurable outcome, a time frame for completion, and identify the person/unit responsible for achieving the objective) B. Marketing Goal B: (should be broad, motivational, and somewhat vague) Objective B1: (must contain a specific and measurable outcome, a time frame for completion, and identify the person/unit responsible for achieving the objective) Objective B2: (must contain a specific and measurable outcome, a time frame for completion, and identify the person/unit responsible for achieving the objective) (Can be repeated as needed to develop a complete list of goals and objectives. However, having one goal and two or three objectives is advisable to greatly reduce the complexity of the marketing strategy.) V. Marketing Strategy A. Primary (and Secondary) Target Market
Primary target market Identifying characteristics (demographics, geography, values, psychographics):
Basic needs, wants, preferences, or requirements: Buying habits and preferences: Consumption/disposition characteristics: Secondary target market (optional) Identifying characteristics (demographics, geography, values, psychographics): Basic needs, wants, preferences, or requirements: Buying habits and preferences: Consumption/disposition characteristics: B. Product Strategy Brand name, packaging, and logo design: Major features and benefits: Differentiation/positioning strategy: Supplemental products (including customer service strategy): Connection to value (core, supplemental, experiential/symbolic attributes): C. Pricing Strategy Overall pricing strategy and pricing objectives: Price comparison to competition: Connection to differentiation/positioning strategy: Connection to value (monetary costs): Profit margin and breakeven: Specific pricing tactics (discounts, incentives, financing, etc.):
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D. Distribution/Supply Chain Strategy
Overall supply chain strategy (including distribution intensity): Channels and intermediaries to be used: Connection to differentiation/positioning strategy: Connection to value (nonmonetary costs): Strategies to ensure channel support (slotting fees, guarantees, etc.): Tactics designed to increase time, place, and possession utility: E. Promotion Strategy Overall promotion strategy, promotion objectives, and budget: Consumer promotion elements Advertising strategy: Public relations/publicity strategy: Personal selling strategy: Consumer sales promotion (pull) strategy: Trade (channel) promotion elements Advertising strategy: Public relations/publicity strategy: Personal selling strategy: Trade sales promotion (push) strategy: VI. Marketing Implementation A. Structural Issues
Describe the overall approach to implementing the marketing strategy. Describe any changes to the firm’s structure needed to implement the marketing strategy (e.g., add/delete positions, change lines of authority, change reporting relationships). Describe any necessary internal marketing activities in the following areas: employee training, employee buy-in and motivation to implement the marketing strategy, overcoming resistance to change, internal communication and promotion of the marketing strategy, and coordination with other functional areas. B. Tactical Marketing Activities (be very specific—this lays out the details of the marketing strategy and how it will be executed) Specific Tactical Activities
Person/Department Responsible
Required Budget
Completion Date
Product Activities 1. 2. 3. Pricing Activities 1. 2. 3. Distribution/Supply Chain Activities 1. 2. 3. Promotion Activities 1. 2. 3.
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514 Appendix: Marketing Plan Worksheets
VII. Evaluation and Control (refer to Exhibit 9.5) A. Formal Controls
Describe the types of input controls that must be in place before the marketing plan can be implemented. Examples include financial resources, capital expenditures, additional research and development, and additional human resources. Describe the types of process controls that will be needed during the execution of the marketing plan. Examples include management training, management commitment to the plan and to employees, revised employee evaluation/compensation systems, enhanced employee authority, and internal communication activities. Describe the types of output controls that will be used to measure marketing performance and compare it to stated marketing objectives during and after the execution of the marketing plan. Overall performance standards (these will vary based on the goals and objectives of the marketing plan). Examples include dollar sales, sales volume, market share, recurring revenue from subscriptions, share of customer, profitability, customer satisfaction, customer retention, or other customer-related metrics.
Product performance standards (these are optional and will vary based on the product strategy). Examples include product specifications, core product quality, supplemental product quality, experiential quality, new product innovation, branding, and positioning. Price performance standards (these are optional and will vary based on the pricing strategy). Examples include revenue targets, supply/demand balance, price elasticity, yield management, or metrics based on specific price adjustments. Distribution performance standards (these are optional and will vary based on the distribution strategy). Examples include distribution effectiveness/efficiency, supply chain integration, value (time, place, and possession utility), relationship maintenance (collaboration, conflict), outsourcing, or direct distribution performance. Promotion performance standards (these are optional and will vary based on the promotion strategy). Examples include communication objectives; brand awareness, recognition, or recall; campaign reach, frequency, and impressions; purchase intentions; and public relations, sales, and sales promotion effectiveness. B. Informal Controls Describe issues related to employee self-control that can influence the implementation of the marketing strategy. Examples include employee satisfaction, employee commitment (to the firm and the marketing plan), and employee confidence in their skills. If any of these controls are lacking, how can they be enhanced to support the implementation of the marketing plan? Describe issues related to employee social control that can influence the implementation of the marketing strategy. Examples include shared organizational values, workgroup relationships, and social or behavioral norms. If any of these controls are lacking, how can they be enhanced to support the implementation of the marketing plan? Describe issues related to cultural control that can influence the implementation of the marketing strategy. Examples include organizational culture and organizational rituals. If any of these controls are lacking, how can they be enhanced to support the implementation of the marketing plan? C. Marketing Audits (refer to Exhibit 9.6) Explain how marketing activities will be monitored. What are the specific profit- and time-based measures that will be used to monitor marketing activities? Describe the marketing audit to be performed, including the person(s) responsible for conducting the audit.
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If it is determined that the marketing strategy does not meet expectations, what corrective actions might be taken to improve performance (overall or within any element of the marketing program)? If the marketing plan, as currently designed, shows little likelihood of meeting the marketing objectives, which elements of the plan should be reconsidered and revised? D. Implementation Schedule and Timeline (refer to Exhibit 9.7) Month Activities
Week
1
2
3
4
1
2
3
4
1
2
Product Activities
Pricing Activities
Distribution Activities
Promotion Activities
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3
4
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glossary A Advertising Paid, nonpersonal communication transmitted through media such as television, radio, magazines, newspapers, direct mail, outdoor displays, the Internet, and mobile devices. AIDA Model The classic model for outlining promotional goals and achieving this ultimate outcome based on attention, interest, desire, and action. Analytics The discovery of trends and patterns within the data via analysis techniques. Assortment The depth of each product line.
B Backstage Technology Technological advances that are not necessarily apparent to customers. Behavioral Segmentation The use of actual consumer behavior or product usage to make distinctions among market segments. Big Data Extremely large data sets from structured and unstructured sources. Brand A combination of name, symbol, term, or design that identifies a specific product. Brand Associations The brand’s image, attributes, or benefits that either directly or indirectly give the brand a certain personality. Brand Competitors Companies that market products with similar features and benefits to the same customers at similar prices. Brand Equity The value of a brand to the firm. Brand Licensing A contractual agreement where a company permits an organization to use its brand on non-competing products in exchange for a licensing fee. Brand Loyalty A positive attitude toward a brand that causes customers to have a consistent preference for that brand over all other competing brands in a product category. Brand Mark The part of a brand that cannot be spoken, including symbols, figures, or a design. Brand Name The part of a brand that can be spoken, including words, letters, and numbers.
Breakeven Pricing The price point at which the costs of producing a product equal the revenue made from selling the product. Bribery When an incentive (usually money or expensive gifts) is offered in exchange for an illicit advantage. Business Products Products purchased for resale, to make other products, or for use in a firm’s operations. Buying Center The group of people responsible for making purchase decisions.
C Capability When strengths serve to satisfy a customer need. Cause-Related Marketing When firms link products to a particular social cause on an ongoing or short-term basis. Co-Branding The use of two or more brands within one product to capitalize on the equity of each brand. Codes of Ethics Codes of conduct that consist of formalized rules and standards that describe what the company expects of its employees. Competitive Advantage (Differential Advantage) A firm’s capabilities that allow it to serve customers’ needs better than the competition. Competitive Intelligence Analysis of the competitive environment that involves analyzing the capabilities, vulnerabilities, and intentions of competing businesses. Consumer Products Products used for personal use and enjoyment. Contact Efficiency Where channels reduce the number of contacts necessary to exchange products. Continuity Planning The strategies, systems, and procedures that help ensure that a firm’s policies are in place and operating (with all necessary redundancies, backup checks and balances, safeguards, monitoring, etc.). Core Product The heart of the firm’s product offering. 517
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518 Glossary
Cost-Plus Pricing Adding a percentage of the manufacturer’s total cost to the total cost to establish the price of a custom-made product. Crisis Management The process of handling a high-impact event characterized by ambiguity and the need for swift action to access and respond to potential damage. Cultural Values The commonly agreed upon guiding principles of everyday life in a society or community. Customer Advocacy Action on behalf of the customer to spread either positive or negative information about a company across their social media and online rating platforms. Customer Churn When subscriptions are not renewed because the customer stops using it and no longer sees value in the service. Customer Intimacy A strategy that focuses on working to know your customers and understand their needs better than the competition to develop capabilities and competitive advantages. Customer Relationship Management (CRM) A business philosophy aimed at defining and increasing customer value in ways that motivate customers to remain loyal. Customer Satisfaction The degree to which a product meets or exceeds the customer’s expectations about that product. Customer Success Efforts to help customers to gain more value from products and utilize new features, services, and additional, complementary products that provide added value to the customer.
D Dashboard A visual representation of real-time results for each metric across multiple levels and markets. Data The facts and details of customers, product use, and/or user inputs. Decline Stage The final stage of the product life cycle characterized by a persistent decline in revenue. Demographic Segmentation Dividing markets into segments using demographic factors such as gender, age, income, and education. Derived Demand When the demand for one product depends on (is derived from) the demand of another product. Development Stage The first stage in the product life cycle; begins with a concept, which has
several components: (1) an understanding of the specific uses and benefits that target customers seek in a new product; (2) a description of the product, including its potential uses and benefits; (3) the potential for creating a complete product line that can create synergy in sales, distribution, and promotion; and (4) an analysis of the feasibility of the product concept, including such issues as anticipated sales, required return on investment, time of market introduction, and length of time to recoup the investment. Differentiation Creating differences in the firm’s product offering that set it apart from competing offerings. Direct Observation Where the researcher records the overt behaviors of customers, competitors, or suppliers in natural settings. Disruption Reinventing business processes, collaborating and integrating within the firm, investing in new technology, and creating entirely new markets to meet untapped customers’ needs. Divesting Withdrawing all marketing support from the product.
E Environmental Scanning Analysis of the external environment that involves the analysis of economic, political, legal, technological, and cultural events and trends that may affect the future of the organization and its marketing efforts. Ethical Issue An identifiable problem, situation, or opportunity that requires an individual or organization to choose from among several actions that must be evaluated as right or wrong, ethical or unethical. Evoked Set A list of potential product choices that has been narrowed by the customer to only a few products or brands that can meet their needs. Exchange The process of obtaining something of value from someone by offering something in return. Exclusive Distribution Giving one merchant or outlet the sole right to sell a product within a defined geographic region. Executive Summary A synopsis of the overall marketing plan, with an outline that conveys the main thrust of the marketing strategy and its execution. Experiments Where the researcher selects matched subjects and exposes them to different treatments while controlling for extraneous variables to arrive at casual insights.
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Glossary 519
F Family Branding When a firm uses the same name or part of the brand name on every product. 5W Model A method that managers can use to collect information in assessing the firm’s target markets and attempting to understand all relevant buyer behavior and product usage characteristics by asking who, what, where, when, and why. Focus Groups Where the researcher moderates a panel discussion among a gathering of 6 to 10 people who openly discuss a specific subject. Formal Marketing Controls Activities, mechanisms, or processes designed by the firm to help ensure the successful implementation of the marketing strategy. Frontstage Technology Technological advances that are most noticeable to customers.
G Generic Competitors Companies that market very different products that solve the same problem or satisfy the same basic customer need. Geodemographic Segmentation Dividing markets into segments by neighborhood profiles based on demographic, geographic, and lifestyle segmentation variables; also know as geoclustering. Goals Broad, simple statements of what will be accomplished through the marketing strategy. Greenwashing Misleading a consumer into thinking that a good or service is more environmentally friendly than it actually is. Growth Stage The stage in the product life cycle that begins after introduction; characterized by an upward sales curve and rapidly increasing profits following by decline toward the end of the stage.
H Hard Costs Include monetary price and associated purchase costs such as shipping and installation. Harvesting A gradual reduction in marketing expenditures and uses a less resource-intensive marketing mix.
I Implementation as Organizational Culture An approach to implementing marketing strategies and motivating employees to perform implementation
activities in which marketing strategy and its implementation become extensions of the firm’s mission, vision, and organizational culture. Implementation by Command An approach to implementing marketing strategies and motivating employees to perform implementation activities in which the firm’s top executives develop and select the marketing strategies, which are transmitted to lower levels where frontline managers and employees implement them. Implementation through Change An approach to implementing marketing strategies and motivating employees to perform implementation activities in which the basic goal is to modify the firm in ways that will ensure the successful implementation of the chosen marketing strategy. Implementation through Consensus An approach to implementing marketing strategies and motivating employees to perform implementation activities in which some of the decision-making authority is moved closer to the frontline of the firm. Individual Branding When a firm gives each of its product offerings a different brand name. Informal Marketing Controls Unwritten, employee-based mechanisms that subtly affect the behaviors of employees, both as individuals and in groups. Insights The value of data and analytics, as these outcomes identify useable information that helps to improve operations and performance of marketing activity. Integrated Marketing Communication (IMC) The coordination of all promotional activities (e.g., media advertising, social media, direct mail, personal selling, sales promotion, public relations, packaging, store displays, website design, personnel) to produce a unified, customer-focused message. Intended Marketing Strategy What the firm wants to happen—it is the firm’s planned strategic choices that appear in the marketing plan itself. Intensive Distribution Making a product available in the maximum number of merchants or outlets in each area to gain as much exposure and as many sales opportunities as possible. Internal Analysis The objective review of internal information pertaining to the firm’s current strategy and performance, as well as the current and future availability of resources.
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520 Glossary
Internal Distribution The internal interactions that disseminate the marketing strategy throughout the firm. Internal Environment Refers to an organization’s objectives, strategy, and performance, the availability of resources, and organizational culture and structure. Internal Marketing The use of a marketing-like approach to motivate, coordinate, and integrate employees toward the implementation of the firm’s marketing strategy. Internal Prices The increased effort and changes that employees must exhibit in implementing the strategy. Internal Products Marketing strategies that must be “sold” internally. Internal Promotion All communication aimed at informing and persuading employees about the merits of the marketing strategy. Introduction Stage The stage in the product life cycle that begins when development is complete and ends when sales indicate that target customers widely accept the product.
K Key Performance Indicators (KPIs) Measures of performance to evaluate success.
L Life Cycle Costs Any additional costs that customers will incur over the life of the product, such as the costs of consumable supplies, maintenance, and repairs.
M Manufacturer Brands Name brand products produced by a manufacturer. Market A collection of buyers and sellers that have similar needs that can be met by a particular product. Market Concentration A focus on a single market segment. Market Segmentation Dividing the total market into smaller, relatively homogeneous groups or segments that share similar needs, wants, or characteristics. Market Specialization Offering customized marketing programs that not only deliver needed products but also provide needed solutions to customers’ problems.
Marketing The activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. Marketing Analytics The use of big data and measurement methods enabled by technology to interpret the effectiveness of a firm’s marketing strategy. Marketing Control Establishing performance standards, assessing actual performance by comparing it with these standards, and taking corrective action if necessary to reduce discrepancies between desired and actual performance. Marketing Ethics Principles and standards that define acceptable marketing conduct as determined by the public, government regulators, private-interest groups, competitors, and the firm itself. Marketing Implementation The process of executing the marketing strategy by creating and performing specific actions that will ensure the achievement of the firm’s marketing objectives. Marketing Objectives Specific marketing goals stated in quantitative terms to permit reasonably precise measurement. Marketing Plan A written document that provides the blueprint or outline of the organization’s marketing activities, including the implementation, evaluation, and control of those activities. Marketing Program The strategic combination of the four basic marketing mix elements, commonly known as the 4Ps: product, price, place (distribution), and promotion. Marketing Structure The methods of organizing a firm’s marketing activities. Marketplace The location where buyers and sellers meet to conduct transactions. Marketspace Electronic marketplaces unbound by time or space. Mass Customization Providing unique products and solutions to individual customers on a mass scale. Mass Market Targeting The development of multiple marketing programs to serve all customer segments simultaneously. Mass Marketing An undifferentiated approach that assumes that all customers in the market have similar needs and wants that can be reasonably satisfied with a single marketing program.
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Glossary 521
Maturity Stage The stage in the product life cycle that begins after the growth stage when sales plateau; characterized by four general goals: (1) generating cash flow; (2) holding market share; (3) stealing market share; and (4) increasing share of customer. Metrics Measurable indicators of company objectives, such as sales performance, market share, and/or growth rate. Mission (Mission Statement) A clear and concise statement that explains the organization’s reason for existence. Multisegment Approach Seeking to attract buyers in more than one market segment by offering a variety of products that appeal to different needs.
N Need When an individual’s current level of satisfaction does not equal their desired level of satisfaction. Niche Market A small, well-defined market segment. Nonmonetary Costs The time and effort customers expend to find and purchase goods and services.
O Objectives Specific and quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals. Omnichannel The concept of bringing together communication, products and services, supply chain management, payment options and terms, customer service, and more into a seamless experience for consumers. One-to-One Marketing When a company creates an entirely unique product or marketing program for each customer in the target segment. Operational Excellence A strategy that focuses on efficiency of operations and processes to develop capabilities and competitive advantages. Opportunities Favorable conditions in the external environment that could produce rewards for the organization if acted upon. Outside-In Thinking Looking at competitor strengths and weaknesses with a goal of identifying areas where competitive advantage can be gained by flipping the strengths and weaknesses of others.
P Perceptual Map A spatial representation of customer perceptions and preferences by means of a visual display. Permission Marketing When customers give companies permission to specifically target them in their marketing efforts. Personal Selling Paid personal communication that attempts to inform customers about products and persuade them to purchase those products. Positioning Creating a mental image of the product offering and its differentiating features in the minds of the target market. Predatory Pricing When a firm charges very low prices for a product with the intent of driving competition out of business or out of a specific market. Predictive Analytics The use of historical data inputs to predict future outcomes. Price Discrimination When firms charge different prices to different customers. Price Elasticity Customers’ responsiveness or sensitivity to changes in price. Price Fixing When rival firms collaborate to set prices. Private-Label Brands Brands owned by the merchants that sell them. Product Something that can be acquired via exchange to satisfy a need or a want. Product Competitors Companies that compete in the same product class, but with products that are different in features, benefits, and price. Product Leadership A strategy that focuses on technology and product development to develop capabilities and competitive advantages. Product Line A group of closely related product items. Product Mix (Product Portfolio) The total group of products offered by the company. Product Positioning Establishing a mental image, or position, of the product offering relative to competing offerings in the minds of target buyers. Product Specialization Adapting product specifications to match the different needs of individual customer groups. Psychographic Segmentation Dividing markets into segments based on state-of-mind issues such as motives, attitudes, opinions, values, lifestyles, interests, and personality.
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522 Glossary
Public Relations Tracking public attitudes, identifying issues that may elicit public concern, and developing programs to create and maintain positive relationships between a firm and its stakeholders. Pull Strategy When a firm focuses promotional efforts toward stimulating demand among final customers, who then exert pressure on the supply chain to carry the product. Push Strategy When a firm focuses promotional efforts on members of the supply chain, such as wholesalers and retailers, to motivate them to spend extra time and effort on selling the product.
Q Quality The degree of superiority of a firm’s goods or services.
R Realized Marketing Strategy The strategy that actually takes place. Relationship Capital A key asset that stems from the value generated by the trust, commitment, cooperation, and interdependence among relationship partners. Right-Side-Up Thinking The current state of business based on known facts and information; in essence the basis of SWOT analysis.
S Sales Promotion Activities that create buyer incentives to purchase a product or that add value for the buyer or the trade. Selective Distribution Giving several merchants or outlets the right to sell a product in a defined geographic region. Selective Targeting When a firm cherry picks the most attractive market segment opportunities and the firm has multiple capabilities in many different product categories. Share of Customer Increasing transactions to focus on more fully serving the needs of current customers. Shared Goals and Values A shared set of guiding principles that bind the entire organization together as a single, functioning unit. Single Segment Targeting When firms target a single segment because their capabilities are intrinsically tied to the needs of a specific market segment.
Situation Analysis The overall process of collecting and interpreting internal, competitive, and environmental information. Slotting Allowances Fees paid by manufacturers to get a product placed on store shelves or featured as a “choice” product on e-commerce sites. Social Entrepreneurship When an entrepreneur founds an organization that strives to create social value rather than simply earn profits. Social Responsibility An organization’s obligation to maximize its positive impact on society, while minimizing its negative impact. Soft Costs Include downtime, opportunity costs, and human resource costs associated with the compatibility of systems, in the buying decision. Stakeholder Orientation The degree to which a firm understands and addresses stakeholder demands. Strategic Competitive Advantage When a marketing manager develops marketing strategies that leverage a firm’s capabilities. Strategic Focus The overall concept or model that guides the firm as it weaves various marketing elements together into a coherent strategy. Strategic Philanthropy The synergistic use of organizational core competencies and resources to address key stakeholders’ interests and achieve both organizational and social benefits. Strategy Outlines the organization’s game plan for success. Strategy Canvas A tool for visualizing a firm’s strategy relative to other firms in a given industry; the horizontal axis identifies the key factors that the industry competes on with the products that are offered to customers; the vertical axis indicates the offering level that firms offer to buyers across these factors; the central portion of the strategy canvas is the value curve, or the graphic representation of the firm’s relative performance across its industry’s factors. Strengths What the firm can do well due to resources possessed by the firm or the nature of the relationships between the firm and its customers, its employees, or outside organizations (e.g., supply chain partners, suppliers, lending institutions, government agencies, etc.). Superficial Discounting When a firm advertises a sale price as a reduction below the normal price when it is not the case.
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Glossary 523
Supplemental Products Goods or services that add value to the core product, thereby differentiating the core product from competing product offerings. Supply Chain The connection and integration of all members of the marketing channel. Supply Chain Management The coordination of activities related to the flow and transformation of supplies, products, and information throughout the supply chain to the ultimate consumer, integrating the functions of operations management, logistics management, procurement, and marketing channel management. Surveys Where the researcher asks respondents to answer a series of questions on a particular topic. Sustainability The assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles—all while maintaining the natural environment. SWOT Analysis Focuses on the internal factors (strengths and weaknesses) and external factors (opportunities and threats) that give the firm certain advantages and disadvantages in satisfying the needs of its target market(s). SWOT Matrix A four-cell array that can be used to visually evaluate each element of a SWOT analysis (strengths, weaknesses, opportunities, threats). Symbolic and Experiential Attributes Features, such as image, prestige, and brand, that are created primarily through the product and promotional elements of the marketing program. Synthetic Customer Vision How marketers see their products from the virtual eyes of the customer by analyzing multiple data sources to create a holistic view of customer perceptions and use of products.
T Tactical Planning Addresses specific markets or market segments and the development of marketing programs that will fulfill the needs of customers in those markets. Target Markets One or more segments of individuals, businesses, or institutions toward which the firm’s marketing efforts will be directed.
Threats Barriers in the external environment that could prevent the company from reaching its objectives. Total Budget Competitors Companies that compete for the limited financial resources of the same customers. Transactional Costs The immediate financial outlay or commitment that must be made to purchase the product.
U Upside-Down Thinking An assessment of what could change in the environment that might transform current strengths into weaknesses and current weaknesses into strengths. Utility The ability of a product to satisfy a customer’s desires.
V Value A customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. Value Consumption Gap Occurs when the value of a product changes after the customer makes a purchase, but the customer is unaware of or even confused by the changing product. Variety The number of product lines to offer; also known as width. Vision (Vision Statement) A future-oriented statement that seeks to answer the question “What do we want to become?”
W Want A consumer’s desire for a specific product that will satisfy the need. Weaknesses Deficiencies of a firm due to a lack of resources by the firm or the nature of the relationships between the firm and its customers, its employees, or outside organizations (e.g., supply chain partners, suppliers, lending institutions, government agencies, etc.).
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Index A academic journals, 77 achievers, 137 action (AIDA model), 172 advertising cooperative, 181 defined, 173 direct-to-consumer, 66 expenditure in United States, 173 Google, 383 integrated marketing communications and, 173–175 Internet, 173 advocacy, 266, 267 Affirm, partnership with Shopify, 493 aggressiveness, 102–103 AIDA model, 172 airline industry, 94 Alliance for Audited Media, 78 alliances, 193 allowances, 162 slotting, 167 Amazon, 491–492 Amazon, Walmart’s competition with, 479–480 American Customer Satisfaction Index, 22 American Girl, 411 analytics, 56 Android, 384–385 Apple, 319–330 Apple Watch, 322 App Store, 322 corporate culture, 324 future of, 329–330 history of, 320–321 impact on marketing, 329 iPad, 322 iPhone, 321 Mac, 321 marketing challenges, 325–329 marketing strategies, 323–324 products of, 321–323 services, 322–323 artificial intelligence (AI), 86, 169, 258, 274–275 assessment, competitive analysis stage, 69 assortment, 148 attainability, marketing goals/objectives, 107, 108 attention (AIDA model), 172 audience, and media fragmentation, 5 automotive industry, 68–69 Average Order Value (AOV), 285 awareness, 267
B backstage technology, 72 balanced strategic planning, 47–48 Baldrige performance framework, 109
Barbie, 410–411 barter, 162 base pricing adjusting, 161–162 strategies, 160–161 Bayer, 355–363 corporate responsibility at, 362–363 ethical issues, 360–362 future of, 363 legal issues, 361–362 patent issues, 360–361 philanthropy, 362–363 sustainability of, 362 behavioral segmentation, 135 believers, 137 Better Business Bureau (BBB), 226 beverage industry, 133 bids, 127 BigCommerce, 491 big data, 53, 54, 76, 115 biotechnology Monsanto and, 357–360 Blue Ocean approach, 105–106 book and periodical sources, 76–77 brand associations, 194 brand/branding alliances, 193 attributes of, 189 cobranding, 193 corporate, 189, 190 decisions for, 190–193 defined, 187 family, 192–193 individual, 192 insistence, 193 labeling and, 195–196 loyalty, 193–194, 282 management of, 201–207 manufacturer, 191–192 marketing strategy decisions on, 18 packaging and, 195–196 and positioning, 187–207 preference, 193 private-label, 191–192 rebranding, 206 recognition, 193 strategic issues in, 189–196 technical aspects of, 187–188 values, 193–195 world’s most valuable, 194 brand competitors, 68 brand equity, 194 brand licensing, 193 brand mark, 187 brand name, 187 breakeven pricing, 154
525 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
526 Index bribery, 225, 482–483 business buying process, 126–127 stages of, 127 business markets/marketing buyer behavior in, 124–127 characteristics of, 125–126 customer relationships in, 269–270 segmentation of, 138–139 business models of TOMS, 453 of Zappos, 432–434 business partners, with Mattel, 412–413 business products, 147 business publications, 77 business sales promotion, 180–181 business-unit strategy, 33–34 buyer behavior in business markets, 124–127 in consumer markets, 115–124 buying center, 125
C capabilities, 69, 94 cash flow, 156, 205 cause-related marketing, 215 channel management, 163 characteristics, competitive analysis stage, 69 Children’s Online Privacy Protection Act (COPPA), 7 clearance pricing, 153 client, 267 client-based relationships, 150 cloud-based marketing information systems, 56 cobranding, 193 Cocoa Exchange, 503–505 direct selling, 504 history of, 503 social responsibility, 505 supply chain, 504 sustainability, 504–505 codes of conduct, 227–228 coercive power, 167 cognitive dissonance, 121 collaboration, 87–88, 164 commercial markets, 124 commercial sources, 78 commoditization, 28–29 communication during exchange, 10 social, 286 community customer relationship management within, 267 extended enterprise in, 164 Starbucks, 425 comparison shopping, 191 competition, 1 with Apple, 325 in external environment, 68–69 with Gillette, 443–444 for IndyCar, 400–401 with Netflix, 370–371 with Shopify, 490–492 SWOT analysis and, 87 types of, 68 competitive advantage, 28, 34
defined, 16, 33, 99 developing/leveraging, 16, 98–102 sources of, 98–99 strategic focus and, 83–110 strategies, core competencies necessary for, 101 competitive intelligence, 15 competitive matching, 156, 160 competitors Gillette, 443–444 Netflix, 370–371 types of, 68 complementary products, 157 comprehensiveness, marketing goals, 107 connectivity, 164 Conservation Alliance, 378 consistency, marketing goals, 107 consumer behavior, during COVID-19 pandemic, 302 consumer markets buyer behavior in, 115–124 customer relationships in, 266–268 segmentation. See segmenting consumer markets consumer products, 147 consumer purchase decision journey, 115–124 active evaluation, 120 factors affecting, 122–124 initial consideration set, 119–120 moment of purchase, 120–121 need recognition trigger, 118–119 post-purchase experience, 121–122 stages and issues of, 116 consumer sales promotion, 179–180 contact efficiency, 164 contests, 180 continuity, marketing objective, 108–109 continuity planning, 43 control cultural, 253, 258 input, 253, 254 marketing. See marketing controls and marketing implementation. See marketing implementation and marketing plan/planning, 36, 41–42 output, 253, 254–257 process, 253, 254 social, 253, 257–258 cooperative advertising, 181 COPPA. See Children’s Online Privacy Protection Act (COPPA) core product, 270–271, 276 coronavirus pandemic. See COVID-19 (coronavirus) pandemic corporate branding, 189, 190 corporate codes of ethics, 228 corporate culture of Apple, 324 of Google, 382 of Starbucks, 422–423 of TOMS, 456–457 of Zappos, 434–435 corporate philanthropy, 215, 216 corporate responsibility, at Bayer, 362–363 corporate social mission, Starbucks, 423–425 corporate social responsibility (CSR) at Bayer, 362–363 at Patagonia, 378–379
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Index 527 pyramid of, 213 at Tesla, 296–298 of Zappos, 436 corporate strategy, 33–34 cost-plus pricing, 154 cost structure of firm, 207 countertrade, 162 coupons, 179 COVID-19 (coronavirus) pandemic, 84, 100, 215, 229, 239, 433 and e-commerce boom, 168 and entertainment industry, 95, 372 grocery delivery during, 102 impact on business, 302–304 impact on economy, 43, 301–308 labeling during, 188 and new normal, 308 online shopping during, 494 preparedness for, 307–308 and product strategies, 305 recession caused by, 6 risks during, 170 supply chain during, 126, 162–163, 170, 305–306, 500 technological improvements during, 168, 169 and virtual technologies, 66, 68 and workforce reduction, 297 crisis management, 43 cultural controls, 253, 258 cultural values, 74 customer advocacy, 266 customer churn, 158 customer focus competitive advantage and, 105–110 SWOT analysis and, 87 customer-focused mission statement, 32–33 customer-focused planning, 45–47 customer relationship management (CRM), 265, 266 customer relationships. See also customer satisfaction in business markets, 269–270 in consumer markets, 266–268 at Cutco, 498–499 developing/maintaining, 263–286 introduction to, 263–264 managing, 265–270 in marketing, 20 quality and, 270–274 strategies for enhancing and maintaining, 268 value and, 270, 274–278 customers, 265 acquisition/retention costs, 285 churn rate, 286 conversion rate, 286 current, 61 delight, 121, 279 dissatisfaction of, 279 environment, 61–66 expectations of, 273, 278–281 intimacy, 100 potential, 61 power shift to, 3 privacy of, 325–326 recovery rate, 286 repeat, 267 retention rate, 286 satisfaction of. See customer satisfaction
share of, 205, 266 Starbucks, 425 customer satisfaction, 121 customer expectations and, 278–281 and customer retention, 278–286 defined, 278 guarantees, 283, 284 measurement, 284–286 quality/value vs., 281–282 customer service, at Zappos, 433–434 customer success, 269 customer success manager (CSM), 312, 313–314 customer success orientation, 60 customer support services, 199–200 Cutco, 497–500 adapt to change, 498–499 commitment to quality, 499 customer relationships, 498–499 direct selling, 498 future of, 500 history of, 497 social responsibility at, 500
D dashboard, 59 data, 56 data collection overcoming problems in, 79 primary, 78–79 data saturation, 56 data warehouses, 56 decisions/decision-making process for branding, 190–193 complexity of, 122 marketing and, 14–20 in marketing program, 17–18 supply chain, 17 decline stage, product life cycle, 205–207 defensive, 103 demand, patterns of, 6–7 demographic segmentation, 136 derived demand, 63 desirable exchange, 10–11 desire (AIDA model), 172 development stage, product life cycle, 201, 202–203 differential advantage, 33 differentiated marketing, 130 differentiation bases for, 198–200 defined, 196 positioning and, 196–201 digital advertising revenues, 174 spending, 173 digital-first strategy, 4 digital products, 11 digital services, 158 direct mail, 180 direct observation, 78 direct selling, 462–465, 498 Cocoa Exchange, 504 multilevel compensation model, 462 pyramid schemes, 463–464 self-regulation of, 464–465 single compensation model, 462
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528 Index Direct Selling Association (DSA), 464 code of ethics, 465 direct-to-consumer (DTC) advertising, 66 discounts/discounting, 153, 161, 162 superficial, 223 trade, 162 disruption, 84, 170–171 disruptive mindset, and SWOT analysis, 91–92 dissatisfaction, 121, 122 distribution of Apple, 324 exclusive, 166 intensive, 166 of Netflix, 369 selective, 166 of Starbucks, 420 of Uber Technologies, Inc., 335–336 Walmart, 478–479 diversification/diversity, 103 at Tesla, 298 divesting option, 206 Dollar Shave Club, 444 drones, 72
E e-commerce, 9–10, 165 boom during COVID-19 pandemic, 168 economic growth, in external environment, 69–70 economic mission statement, 33 economic responsibilities, 213–214 economic stability, in external environment, 69–70 Edgar Database, 76 elected officials, 70 employee relations, 176 employees, 265 benefits, at Walmart, 481 commitment of, 244 compensation for, 244 evaluation of, 244 motivation, 244 satisfaction, 244 selection of, 244 self-control, 253, 257 at Starbucks, 424 at Tesla, 297–298 training of, 244 environment customer, 61–66 external. See external environment internal, 58–60 environmental scanning, 15 ESG framework, 47–48 ethical concerns, 7 ethical issues, 221–225 defined, 221 managing/controlling, 226–229 pricing-related, 222–223 product-related, 222 promotion-related, 225 supply chain–related, 224–225 ethical leadership, 228–229 ethical responsibilities, 214 ethics business practices and, 413 challenges of, 219–221
incorporation into strategic planning, 231–232 marketing, 18 in marketing strategy, 213–221 Mattel’s commitment to, 412–414 social responsibility and, 18 sustainability and, 216–217 and technology, 227 events, as products, 11–12 event sponsorship, 176 evoked set, 120 evolution, 240 e-waste, 65 exchange communication during, 10 conditions for, 10–11 defined, 10–11 desirable, 10–11 rejection of, 10 two-party, 10 value of, 10 exclusive distribution, 166 executive summary, 38 expectations, of customers, 273, 278–281 experiencers, 137 experiences, as products, 11–12 experiential attributes, 273 experiments, 79 extended enterprise, 164 external environment, 66–75 economic growth and stability, 69–70 framework for analyzing, 67 legal and regulatory issues, 70–71 political trends, 70 sociocultural trends, 72–75 technological advancements, 71–72 external stakeholders, 265
F Facebook, partnership with Shopify, 492 family branding, 192–193 feature articles/content, 176 Federal Trade Commission, 76 Federal Trade Commission (FTC), 188 financial performance, marketing and, 229–231 financial property, as products, 12 financial resources, 90 Fisher-Price, 412 fitness industry, COVID-19 pandemic and, 303 5W Model, for customer analysis, 61, 62 focus groups, 78 Food Allergy Labeling and Consumer Protection Act of 2004, 196 Formal marketing controls, 253–257 Formula 1, 401 form utility, 12–13 Fortune’s best companies, 19 four actions framework., 105–106 free merchandise, 181 freemium pricing, 160 frontstage technology, 72
G Gainsight, 311–316 addressing market need, 313–314
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Index 529 event marketing program, 315–316 growth challenges, 315 historical overview, 312 impact of COVID-19 pandemic, 316 need for market disruption, 313 transition process, 316 values, 314–315 general business publications, 77 generalizations, 269 Generation Z, 74 generic competitors, 68 geodemographic segmentation, 138 geographic pricing, 162 geographic segmentation, 136–138 Gillette, 441–447 competitors, 443–444 future of, 447 global expansion, 446 history of innovation at, 442–443 marketing strategies, 445–446 pricing strategy, 446 Gmail, 384 goals, marketing, 8 attainability, 107 comprehensiveness, 107 consistency, 107 defined, 40, 106 developing, 105–110 intangibility, 107 and marketing plan/planning, 40 goods, as products, 11 Google, 381–394 advertising, 383 Android, 384–385 in China, 392–393 corporate culture, 382 ethical issues, 381–382 Gmail, 384 Google Analytics, 385 Google Chrome, 383–384 Google.org, 386–387 government response to privacy issue, 393–394 GV, 386 initiatives, 386–387 privacy, 387–393 privacy audits, 390 product mix, 385 products, 382–385 “right to be forgotten” process, 391–392 search engine, 382–383 single privacy policy, 390–391 storage of users’ search terms, 388 sustainability, 386 user tracking, 388–390 YouTube, 384 Google Analytics, 385 Google Chrome, 383–384 Google.org, 386–387 government markets, 124 government sources, 75, 76 Great Recession, 3, 6 green products, 217 greenwashing, 216, 217 growth stage, product life cycle, 201, 204 guarantees, customer satisfaction, 283, 284
H hard costs, 125–126 Harry’s, 444 harvesting approach, 206 Herbalife Nutrition Ltd., 461–472 challenges to, 467–469 consumer megatrends, 470–472 customer base, 467 direct selling, 462–465 history of, 461–462 implementation of direct selling model, 466–467 products, 466 heterogeneity, of service, 150 home delivery, 165 Hot Wheels, 411–412 human element, situation analysis, 55–56 human resources, 90, 244–245 hybrid cloud, 312
I ideas, as products, 11 identification, competitive analysis stage, 69 IMC. See integrated marketing communication (IMC) implementation as organizational culture, 248, 249 implementation by command, 245–246, 249 implementation through change, 246–247, 249 implementation through consensus, 247–248, 249 individual branding, 192 individual influences, 122–123 IndyCar, 399–405 competition for, 400–401 marketing strategy, 404–405 new business opportunities, 403 reunification, 401–402 U.S. open-wheel racing, 400 influencer marketing, 174 informal marketing controls, 253, 257–258 information marketing. See marketing information as products, 11 secondary sources, 75–78 informational resources, 90 information power, 167 initial purchase, 267 innovation, 84 at Gillette, 442–443 innovators, 137 input controls, 253, 254 insight resources, 90 insights, 56 institutional markets, 124 intangibility, marketing goals, 107 intangibility, of service, 150 integrated marketing communication (IMC), 18, 171–176 advantages of, 172 advertising, 173–175 defined, 171 public relations, 175–176 strategic issues in, 172–173 intellectual property, 326–327 intellectual resources, 90 intended marketing strategy, 239 intensive distribution, 166 interdependency, 239–240
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530 Index interest (AIDA model), 172 internal analysis, 15 internal data sources, 75 internal distribution, 251 internal environment defined, 58 framework for analyzing, 58 marketing objectives/strategy/performance, 59 organizational culture and structure, 60 resources, availability of, 59–60 internal marketing approach, 250 defined, 250 process of, 250–252 internal prices, 251 internal products, 250 internal promotion, 251 Internet, advent of, 3 Internet advertising, 173 introduction stage, product life cycle, 201, 203 IRi, 78
K key performance indicators (KPIs), 36, 255
L labeling, 188, 195–196 leadership, 100, 245 ethical, 228–229 at Mattel, 410 at Patagonia, 377 at Zappos, 437 Leadership in Energy and Environmental Design (LEED) standards, 216 legal business practices, 413 legal issues Bayer/Monsanto, 361–362 in external environment, 70–71 legal jurisdiction, 8 legal resources, 90 legal responsibilities, 213–214 legitimate power, 167 life cycle costs, 277 lifetime value of customer (LTV), 285 logistics management, 163 loyalty brand, 193–194, 282 product, 191 loyalty programs, 180
M Magento, 490 makers, 137 management style, Patagonia, 377 manufacturer brands, 191–192 market defined, 9–10 demand, as pricing objective, 156 deterioration of, 207 four Ps, 8 needs, addressing, 313–314 specialization, 140 market concentration approach, 130
market disruption, need for, 313 marketing, 1–23 as business function, 8 cause-related, 215 challenges of, 3–8 concepts of, 8–10 decision-making and, 14–20 defined, 8–9 differentiated, 130 and financial performance, 229–231 fundamental changes to, 3–8 future of, 2–3 goals. See goals, marketing influencer, 174 internal. See internal marketing mass, 128–129 multicultural, 129 niche, 130 one-to-one, 131 opportunities of, 3–8 overview of, 1–2 permission, 131–132 strategic planning and, 13–14 strategies. See marketing strategies traditional view of, 211–212 marketing activities and decisions, 14–20 planning of, 13 scheduling, 258–260 strategic, 13 marketing analytics, 255 marketing audit, 255–257 marketing challenges of Apple, 325–329 marketing channels functions, 164–166 structure of, 166 marketing controls formal, 253–257 framework for, 253 informal, 253, 257–258 marketing ethics, 18, 214 regulating, 226–227 and strategy, 218–219 marketing goals. See goals, marketing marketing implementation. See also marketing activities approaches to. See marketing implementation approaches control and, 19, 237–260 defined, 19, 237 elements of, 241–245 of functional strategies, 35 internal marketing and, 250–252 marketing plan/planning and, 40–41 planning and, 239–241 strategic issues in, 239–245 marketing implementation approaches advantages and disadvantages of, 249 implementation as organizational culture, 248, 249 implementation by command, 245–246, 249 implementation through change, 246–247, 249 implementation through consensus, 247–248, 249 marketing information, 53–79 collecting, 75–79 customer environment, 61–66 internal environment, 58–60
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Index 531 overview, 53–55 situational analysis, 55–57 marketing mix, 8 Tesla, 292–296 marketing objectives. See objectives, marketing marketing plan/planning, 27–48 balanced strategic, 47–48 comprehension of, 38 consistency of, 38 control of, 36, 41–42 corporate/business-unit strategy for, 33–34 customer-focused, 45–47 defined, 15, 30 development of, 15 evaluation of, 36, 41–42 executive summary and, 38 flexibility of, 38 functional goals and objectives for, 35 functional strategy for, 35 logical manner of, 38 marketing goals and, 40 marketing implementation and, 35, 239–241 marketing objectives and, 40 mission statement and, 30–33 organizational aspects of, 44 overview, 27–28 process, 27, 29–36 purposes of, 44 significance of, 44 situation analysis of, 38–39 structure of, 37–43 SWOT analysis and, 39–40 tactical, 15 vision statement and, 30 marketing program, 145–181 decisions, 17–18 defined, 145 ethical issues in. See ethical issues integrated marketing communications. See integrated marketing communications (IMC) introduction, 145–146 pricing strategy in. See pricing strategy product strategy in. See product strategy supply chain strategy in, 162–171 Uber’s, 335–336 value and, 276 marketing strategies, 1, 211–232 Amazon’s, 14 challenges of, 21–23 decisions about, 16–18 ethics in, 213–221 Gillette, 445–446 IndyCar, 404–405 intended, 239 introduction, 211–212 marketing plan/planning and, 40 market specialization as, 140 mass market targeting as, 140 Netflix, 371–372 people-driven, 21 product specialization as, 140 realized, 239 selective targeting as, 139–140 single segment targeting as, 139 social responsibility in, 213–221
marketing structure, 243 marketplace, 9 market segmentation, 16–17, 113–114, 128–132 consumer. See segmenting consumer markets criteria for successful, 132 defined, 16, 128 identification of, 133–139 individualized approaches, 130–132 potential of, 207 target marketing and, 16–17 traditional approaches to, 128–130 market share, 156, 205 marketspace, 9 market specialization, 140 Mars, Incorporated, 503–505 mass marketing, 128–129 mass market targeting, 140 Mattel, 409–416 business partners, 412–413 ethical responsibilities of, 412–414 future of, 416 Global Manufacturing Principles, 414 leadership at, 410 privacy and online technology, 412 product recalls faced by, 414–415 products, 410–412 social responsibility of, 412–414 vs. MGA Entertainment, Inc., 415 Mattel, Inc., 196 Mattel Children’s Foundation, 413–414 maturity stage, product life cycle, 205 media audiences, 5 time spent with, 5 usage, changes in, 5 media fragmentation, 5 metrics, 59 Microsoft, 246 mission stability, 32 mission statement customer-focused, 32–33 defined, 30 elements of, 30–31 examples, 31 width and stability, 31–32 mobile technology, 4–5 monetary costs, 277 Monsanto, 355–363 and biotechnology, 357–360 environmental concerns, 359–360 ethical issues, 360–362 history of, 356–357 legal issues, 361–362 patent issues, 360–361 safety concerns, 358–359 multicultural marketing, 129 multilevel compensation model of direct selling, 462 multisegment approach, 130 mutual dependence, 126
N NAFTA. See North American Free Trade Agreement (NAFTA) NASCAR, 401
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532 Index National Quality Research Center at the University of Michigan, 22 need defined, 118 recognition trigger, 118–119 Netflix, 367–372 business model, 369 competitors, 370–371 distribution centers, 369 future of, 372 global expansion, 369–370 history of, 368–370 marketing strategy, 371–372 strategy, 368–369 New Belgium Brewing, 345–352 history of, 346–348 social responsibility of, 348–351 success of, 351–352 news releases, 175–176 New-to-the-world products, 151 niche marketing, 130 The Nielsen Company, 78 nonmonetary costs, 277 non-price strategies, 160–161 North American Free Trade Agreement (NAFTA), 71 NPD Group, 78 Nutritional Labeling and Education Act of 1990, 196
O objectives, marketing assignment of responsibility, 110 attainability, 108 continuity, 108–109 defined, 40, 108 developing, 108–110 and marketing plan/planning, 40 time frame, 109–110 odd pricing, 161 omnichannel, 166 1-800-Flowers, 263, 264 1% for the Planet, 377–378 one-time purchases, 177 one-to-one marketing, 131 online platforms, 77–78 operational excellence, 100 operations management, 163 opinion leaders, 123 order processing, 127 organizational characteristics, 138 organizational mission. See mission statement organizational resources, 90 availability of, 59–60 organizational systems and processes, 243 organizations as products, 12 types of, 138 output controls, 253, 254–257 outside-in thinking, 91, 92 outsourcing, 170
P packaging, 195–196 Patagonia, 375–379 BLUESIGN system, 378
Conservation Alliance, 378 core values, 376 corporate social responsibility, 378–379 environmental initiatives, 377–378 future of, 379 history of, 376 leadership and management style, 377 1% for the Planet, 377–378 Worn Wear initiative, 378 patents, 361–362 people, 244–245 as products, 11 people-driven marketing strategies, 21 perceived necessities, 157 perceived value, 154–155 perceptual map, 197 periodical sources, 76–77 perishability, of service, 150 permission marketing, 131–132 personal characteristics, 138 personal selling, 176–181 pharmaceutical industry, COVID-19 pandemic and, 304 philanthropic responsibilities, 215–216 philanthropy Bayer, 362–363 corporate, 215, 216 strategic, 215 Pinterest, partnership with Shopify, 492 piracy, 8 places, as products, 11 place utility, 13 point-of-purchase (POP) promotion, 180 political trends, in external environment, 70 portfolio, products, 147–149 positioning branding and, 187–207 defined, 196–197 differentiation and, 196–201 steps to create favorable, 197 strategies, 200–201 possession utility, 13 post-purchase doubt, 121 predatory pricing, 223 predictive analytics, 59–60 premiums, 180 press conferences, 176 press releases, 175–176 prestige, as pricing objective, 156 prestige pricing, 160 price discrimination, 223 price elasticity, 156–159 price fixing, 223 price lining, 161 price penetration, 160 price skimming, 160 prices/pricing Apple products, 323, 326 breakeven, 154 bundling, 161 clearance, 153 cost-plus, 154 decisions, 17 differences, 157 and ethical issues, 222–223 firm’s, 207
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Index 533 freemium, 160 geographic, 162 objectives, 155–156 odd, 161 predatory, 223 prestige, 160 reference, 161 and revenue, 155 service products, 158–159 strategy. See pricing strategy tiered, 161–162 transfer, 162 value-based, 160 pricing-related ethical issues, 222–223 pricing strategy, 152–162 base, 160–162 Gillette, 446 key issues in, 153–159 service products, 158–159 Shopify, 489–490 Tesla, 293 Uber Technologies, Inc., 336 Walmart, 478–479 primary data collection, 78–79 privacy, 7 Google, 387–393 Mattel, 412 private cloud, 312 private-label brands, 191–192 PRIZM segmentation system, 138 problem recognition, 127 process controls, 253, 254 procurement management, 163 product competitors, 68 product descriptors, 198–199 product leadership, 100 product life cycle, 201–202 decline stage, 205–207 development stage, 201, 202–203 growth stage, 201, 204 introduction stage, 201, 203 maturity stage, 205 product line, 147, 151 product mission statement, 33 product mix, 147 product-related ethical issues, 222 products acceptance, 191 advantages, 199 awareness, 191 business, 147 changes, 4–5 classification of, 11–12 complementary, 157 consumer, 147 core, 270–271, 276 defined, 11, 147 differentiation, 157–158 digital, 11 and ethical issues, 222 events as, 11–12 existing, revisions of, 151 experiences as, 11–12 features, 198–199 goods as, 11
Google, 382–385 green, 217 Herbalife Nutrition Ltd., 466 ideas as, 11 identification, 191 information as, 11 internal, 250 labeling, 195–196 life cycle. See product life cycle loyalty, enhancing, 191 market position of, 207 Mattel, 410–412 new, development of, 151–152 new-to-the-world, 151 organizations as, 12 packaging, 195–196 people as, 11 perceived benefits, 157 places as, 11 portfolio for, 147–149 positioning of, 18 purchasing, 63–64 real/financial property as, 12 selection of, 4–5, 64–66 services as, 11 Shopify, 488–489 specialization, 140 specifications for, 127 strategy. See product strategy supplemental, 272, 276 Uber Technologies, Inc., 335 usage of, 61, 63 utilities of, 12–13 product specialization, 140 product strategy, 147–152 during COVID-19 pandemic, 305 for new products development, 151–152 for product portfolio, 147–149 for service products, 149–151 Starbucks, 420–421 Tesla, 292–293 profit-oriented, pricing objective, 156 promotion Apple products, 323 ethical issues related to, 225 internal, 251 Uber Technologies, Inc., 336 promotion-related ethical issues, 225 proposals, 127 psychographic segmentation, 136 psychological characteristics, 138 psychological utility, 13 public cloud, 312 public relations, 175–176 pull strategy, 173 push strategy, 173 pyramid of corporate social responsibility, 213 pyramid schemes, direct selling, 463–464
Q quality defined, 270 role of, 270–273 satisfaction/value vs., 281–282
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534 Index quality (Continued) standards, 273–274 superior, delivering, 273–274
R RACI (Responsible, Accountable, Consulted, Informed) Chart, 41 radio frequency identification (RFID), 72, 168 reality, 200 realized marketing strategy, 239 real necessities, 157 real property, as products, 12 rebates, 179 rebranding, 206 reciprocity, 126 recruitment, of salespeople, 178 reference groups, 123 reference pricing, 161 referent power, 167 referrals, customers, 286 regulatory issues, in external environment, 70–71 relational resources, 90 relationship capital, 265 relationship marketing, 20 relationships client-based, 150 intensity of, 138 repeat customer, 267 repositioning strategy, 152 reputational resources, 90 research and analysis, 15 reseller markets, 124 resources, of firm, 243 response, competitive analysis stage, 69 restaurant industry, COVID-19 pandemic and, 303 revenue, price and, 155 reward power, 167 RFID. See radio frequency identification (RFID) right-side-up thinking, 91, 92 “right to be forgotten” process, Google, 391–392 risks culture, 238 reduction, 191
S sales force compensation methods, 178 controlling and evaluating, 178 objectives, 177 size of, 178 sales incentives, 181 sales management, 176–181 sales promotions, 179–181 business/trade, 180–181 consumer, 179–180 defined, 179 samples, 180 Sarbanes-Oxley Act 2002, 71 Schick, 443–444 search engine, Google, 382–383 secondary information sources, 75–78 book and periodical sources, 76–77 commercial sources, 78 government sources, 75, 76
internal data sources, 75 social media and online platforms, 77–78 security, 7 segmenting consumer markets, 134–138 behavioral segmentation, 135 demographic segmentation, 136 geographic segmentation, 136–138 psychographic segmentation, 136 selective distribution, 166 selective targeting, 139–140 self-image, enhancing, 191 self-regulatory programs, 226–227 separation, 241 services, as products, 11 shared goals and values, 241–242 share of customer, 266 Shopify, 487–494 competitors, 490–492 future for, 494 history of, 487 partnerships, 492–493 pricing strategy, 489–490 product mix, 488–489 social responsibility, 493–494 single compensation model of direct selling, 462 single privacy policy, Google, 390–391 single segment targeting, 139 situational influences, 123–124, 157 situation analysis, 15, 29, 53 conducting, 55–57 customer environment, 61–66 human element, 55–56 internal environment, 58–60 issues in, 55 of marketing plan/planning, 38–39 and SWOT analysis, 83 usage of, 56–57 slotting allowances, 167 smartphones, 4–5 social communication, 286 social control, 253, 257–258 social entrepreneurship, 216 social influences, 123 social media, 77–78, 115 segmentation of, 114 social mission statement, 33 social responsibility challenges of, 219–221 Cocoa Exchange, 505 at Cutco, 500 defined, 213 dimensions of, 213–216 ethics and, 18 incorporation into strategic planning, 231–232 in marketing strategies, 213–221 of Mattel, 412–414 of New Belgium Brewing, 348–351 Shopify, 493–494 sustainability and, 216–217 sociocultural trends, in external environment, 72–75 soft costs, 125–126 stakeholder orientation, 230 standard of living, 8 Starbucks, 419–427 challenges, 425–426
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Index 535 communities, 425 corporate social mission, 423–425 culture, 422–423 customers, 425 distribution strategy, 420 employees, 424 environmental mission statement, 423–424 future for, 427 history of, 419 product strategy, 420–421 success of, 425–426 suppliers, 424–425 technology, 422 status quo, as pricing objective, 156 strategic focus defined, 102 establishment of, 102–105 strategic marketing planning. See marketing plan/planning strategic philanthropy, 215 strategic planning incorporating ethics and social responsibility into, 231–232 marketing and, 13–14 opportunities, 94–95 strengths, 93–94 SWOT analysis and, 92–98 SWOT matrix and, 95–98 threats, 94–95 weaknesses, 93–94 strategy defined, 13 marketing ethics and, 218–219 pricing. See pricing strategy product. See product strategy supply chain, 162–171 strategy canvas, 104–106, 198 strivers, 137 subscription services, 77 success, customer relationship development, 267 superficial discounting, 223 supplemental products, 272, 276 suppliers, 424–425 supply chain Cocoa Exchange, 504 during COVID-19 pandemic, 126, 162–163, 170, 305–306 decisions, 17 defined, 164 disruption, 170–171 and ethical issues, 224–225 functions, risks and benefits of, 170 management of, 162–163 power in, 166–167 TOMS, 453–455 supply chain management, 29, 327–328 defined, 162 key areas, 163 supply chain partners, 265 supply chain–related ethical issues, 224–225 supply chain strategy, 162–171 issues, 164–167 trends in, 167–171 surveys, 78–79 survivors, 137 sustainability of Apple, 328–329
of Bayer, 362 Cocoa Exchange, 504–505 ethics and, 216–217 of Google, 386 sweepstakes, 180 SWOT analysis, 108 benefits of, 85 and collaboration, 87–88 and competition, 87 criticisms against, 85 and customer focus, 87 defined, 83 directives for, 86 disruptive mindset, adoption, 91–92 effectiveness of, 83, 85 internal vs. external issues, 90–91 issues from customers’ perspective, 88–89 marketing plan/planning and, 39–40 potential issues to consider in, 93 productive, 86–92 relevance of, 86 situational analysis and, 83 strategic planning and, 92–98 SWOT matrix, 95–98 quantitative assessment of, 97 strategy canvas and, 105 symbolic attributes, 273 synthetic customer vision, 47
T tactical planning, 15 target markets defined, 16 market segmentation and, 16–17 strategies, 139–140 technology ethics dilemmas related to, 227 at Starbucks, 422 Tesla, 291–298 consumer safety, focus on, 296–297 contribution to education, 298 corporate social responsibility at, 296–298 distribution strategy, 294 diversity at, 298 employee safety at, 297 future for, 298 importance of employees at, 297–298 marketing mix, 292–296 marketing strategy, 146 pricing strategy, 293 product strategy, 292–293 promotion strategy, 294–296 sustainable products, 296 thinkers, 137 tiered pricing, 161–162 time frame, marketing objectives, 109–110 time utility, 13 TOMS, 451–459 business model, 453 challenges, 458–459 corporate culture, 456–457 future of, 459 history of, 452 mission of, 457–458
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536 Index TOMS (Continued) product line, 455–456 supply chain, 453–455 total budget competitors, 68 total expenditure, 156 trade allowances, 180 trade associations, 77 trade discounts, 162 trade sales promotion, 180–181 traditional advertising, spending of, 173 training assistance, 181 salespeople, 178 transactional costs, 277 transactional marketing, 20 transfer pricing, 162 travel and tourism industries, COVID-19 pandemic and, 303–304 turnaround, 103 two-party exchange, 10
values brand, 193–195 competing on, 277–278 cultural, 74 defined, 154, 274 of exchange, 10 Gainsight, 314–315 and marketing program, 276 Patagonia, 376 perceived, 154–155 role of, 274, 275–277 satisfaction/quality vs., 281–282 shared goals and, 241–242 variety, of product mix, 147–148 Vector, adapt to change, 498–499 vendors, 127 vision statement, 30 volume-oriented, pricing objective, 156
U
Walmart, 477–484 competition with Amazon, 479–480 distribution, 478–479 future of, 484 history of, 478 partnership with Shopify, 492 present scenario, 483–484 pricing strategy, 478–479 reputation issues, 481–483 safety issues, 483 Walmart Effect, 480–481 want, 118, 119 webinars, 176 white papers, 176 Wix, 491 WooCommerce, 491 work environment, of Zappos, 434–435 World Federation of Direct Selling Association (WFDSA), 464 Worn Wear initiative, 378
Uber Technologies, Inc., 333–341 background of, 334 challenges faced by, 336–341 controversies, 337–338 distribution, 335–336 driver satisfaction at, 338 in France, 340 in Germany, 340 global expansion, 339–341 in India, 340 in London, 340–341 marketing program, 335–336 pricing strategy, 336 products, 335 promotional activities, 336 in Spain, 339 worker classification, 339 United States-Mexico-Canada Agreement (USMCA), 71 upside-down thinking, 91, 92 U.S. Small Business Administration, 76 utility defined, 12 form, 12–13 place, 13 possession, 13 psychological, 13 time, 13
V VALS framework, 136, 137 value-based pricing (EDLP), 160 value consumption gap, 278 value outcomes over experience, 126 value propositions, 6
W
Y yield management, 159 YouTube, 384
Z Zappos, 431–438 business model of, 432–434 corporate culture of, 434–435 corporate social responsibility of, 436 future of, 437–438 history of, 432 operating philosophy, 432–434 structure of, 436–437 work environment of, 434–435 zone of tolerance, 279–281
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